DELHI — India has big ambitions for renewable energy. The rapidly evolving country of nearly 1.4 billion people is in the midst of an energy transition that is key to achieving global decarbonization. But that transition now faces setbacks stemming from the coronavirus pandemic.
While India’s power grid is still dominated by coal, the country has been deploying wind and solar at a rapid pace to meet Prime Minister Narendra Modi’s targets of 175 gigawatts of renewable energy capacity by 2022, and 450 gigawatts of non-fossil sources by 2030. As of December 2019, India’s total on-grid renewable energy capacity stood at nearly 85 gigawatts, with another 64 gigawatts of wind and solar under construction or tendered out.
Speaking at a sustainable development conference in Delhi in January, Shri Prakash Javadekar, union minister for environment, forest and climate change, argued the 175-gigawatt goal by 2022 was within reach, pointing to recent strides the country has made.
Then the pandemic hit.
In late March, the Modi government put the country under a strict 21-day lockdown ending April 14, 2020. The lockdown has since been extended to May 3.
Reaching India’s renewable energy target was going to be a challenge before the coronavirus. Now, the market faces significant delays as project developers cope with supply-chain disruptions and construction complexities. India’s renewable energy sector may also suffer from reduced power demand and the deteriorating financial health of the distribution companies that purchase power from wind and solar producers.
Industry stakeholders say the national government has been supportive amid the crisis and remain confident that India’s clean-energy ambitions won’t be dampened in the longer term. But the pace and scale of renewable energy growth in the country could be stifled by the outbreak of COVID-19, slowing India’s shift away from coal.
2022 target may be out of reach
“At the start of this year, it actually kind of looked possible,” said Kanika Chawla, senior program lead at the Council on Energy, Environment and Water (CEEW), a Delhi-based think tank, on achieving India’s 175-gigawatt target by 2022. The Modi government's goal is to deploy 100 gigawatts of solar, including 40 gigawatts of rooftop solar, as well as 60 gigawatts of wind, 10 gigawatts of biomass and 5 gigawatts of small hydro.
“I didn't think that all of that capacity would be operational, but [I expected] that all of that capacity definitely would have been tendered out,” she said.
Tenders typically operate on 18- to 24-month cycles, which could push project installation beyond the government’s original timeline. But Chawla argued that the completion date is less relevant than the industry’s overall progress.
"From my point of view, it was less important whether we got there in 2022 or 2023. It was much more a function of how rapidly the market was evolving and how much interest there was from developers,” she said. “But I think that the outlook looks very different now.”
Wood Mackenzie Power & Renewables projects that India will see more than 3 gigawatts of solar photovoltaic and wind installations delayed as a result of the country’s 21-day lockdown. The research firm revised its full-year solar projection down by 25 percent to 8.9 gigawatts of solar PV installations in 2020. The wind projection was revised down by 11 percent to 3.1 gigawatts for the year.
These forecasts may need to be downgraded further in light of the lockdown extension, said Robert Liew, principal analyst at WoodMac. India’s entire 64-gigawatt pipeline of wind and solar projects could experience some degree of delay, depending on how severe of an impact the virus has on public health and the economy.
“For now, it will be a challenge to meet the 2022 target,” Liew wrote in an email.
Construction "on pause"
Renewable energy industry leaders acknowledge that they’re facing near-term issues.
The sector stands to benefit from deadline extensions for project commissioning and exemptions that allow for construction to resume. The Indian government has designated renewable energy project development as an “essential service,” which has allowed plant operation and maintenance to continue.
But there will still be setbacks as companies get back up to speed while following safe distancing rules and keeping workers healthy.
“There has been severe disruption in the global supply chain over the past three months,” Sunil Jain, CEO of Hero Future Energies, wrote in an email. “We believe that the renewable industry in India is likely to see significant delays in commissioning of projects [that] rely heavily on imports of critical equipment and material, which [may be] either unable to come from China or...stuck in transit.”
Cost overruns in the sector look “inevitable,” according to Jain. As a result, banks will have to extend support for projects currently under construction and waiting in the pipeline, he said. And to the extent that there are liquidity issues in the banking sector stemming from a prolonged economic downturn, renewable energy projects may be further delayed.
SoftBank’s Delhi-based energy unit — which has 2 gigawatts of renewable energy operating in India and another 2 gigawatts under construction — is looking at a delay of several months on current installations due to coronavirus-related issues, according to CEO Raman Nanda.
“Construction is on pause,” Nanda told GTM. “I'd say we expect a two- to three-month delay based on what's going on right now and our assessment of how this will play out over the next two quarters.”
Shaky power distribution companies
Supply-chain and construction disruptions are painful but will likely be short-lived. Experts say the greater threat to India’s renewable energy agenda is the massive decline in power demand stemming from the pandemic, which has put additional strain on the country’s financially distressed power distribution companies, or DISCOMs.
“In the short run, it’s [going to be] a lot of firefighting to make sure that there’s no immediate impact on our business,” said Sumant Sinha, chairman and managing director of ReNew Power, currently India's largest clean energy company. “The bigger issue is what happens in the medium term.”
Electricity is heavily subsidized for residential and agricultural customers in India, causing the state-owned DISCOMs to rely disproportionately on power purchases from commercial and industrial customers. With offices, shops and factories closed due to the pandemic, commercial and industrial power demand has cratered, putting a new strain on the power companies’ financial well-being.
During the first week of India’s mandatory lockdown, daily power demand plummeted by 28 percent on a year-over-year basis and remained low in the following weeks, according to CEEW. The think tank calculated that the reduction in power sales between March 25 and April 14 amounted to a revenue loss of nearly 150 billion rupees ($1.97 billion).
Subsidized power sales, a sluggish economy and meager demand growth were already hurting Indian distribution companies prior to the pandemic. The DISCOMs are saddled with debts totaling 4.3 trillion rupees ($56.4 billion), according to a January report by the Asian Development Bank Institute.
If power demand remains low, there’s a risk that at some point the DISCOMs will announce they no longer need the power that renewable energy companies produce, said Sinha. “Or they will say, ‘Look, we want to pay you; we simply don’t have the funds because our customers are not paying us,’” he said. “And that will start putting some serious pressure on renewable energy companies.”
Because renewable energy still represents a small fraction of India’s power mix (just 10 percent), the government has given these power plants “must-run” status during the lockdown. The designation means that there can be no curtailment of generation from renewable energy sources unless it’s done for grid safety. The DISCOMs are also required to make prompt payments to renewable energy generators.
The Indian government has said that ensuring the financial viability of the DISCOMs is a top priority, but industry figures and analysts remain skeptical.
"Financial health of DISCOMs will continue to be a problem so long as politicians keep promising low power prices even though higher prices are needed to fund grid infrastructure upgrades," said WoodMac's Liew. "[The government] is attracted to renewables due to low prices, but DISCOMs need to invest in the grid to integrate more renewables."
Renewables executives say they continue to receive utility payments, but the situation could worsen if the Indian economy doesn’t pick up.
“I think the question really is: What happens if this carries on for a full year? That’s where you start seeing some medium-term stresses and strains,” said Sinha.
Banks struggle, developers scramble
Weak distribution companies aren’t the only threat to renewable energy developers’ income. If the coronavirus situation worsens, bank loans for new projects could “slow to a trickle,” according to WoodMac analysts. Access to low-cost funding is critical for Indian developers.
“Banks are under pressure due to the coronavirus,” said Liew. “How long it will last depends on how long the coronavirus situation remains and if the government will provide more financial assistance to the sector.”
Some lenders may struggle to provide working capital to renewables projects, said Sinha at ReNew Power. But he's confident that wind and solar will remain attractive to many investors and become an even more appealing destination for investor dollars in today’s volatile economy.
“I think we are actually in a good defensive place for a lot of investors,” he said. Because renewable energy projects are typically backed by long-term contracts and sales are insulated from fluctuations in consumer demand, wind and solar could emerge as a “safe haven” for investors in India.
Competition with coal
As the dominant source of electricity, thermal power generation (predominantly coal, but also diesel and gas) has taken the biggest hit from the decline in India’s power demand. But fossil fuels have the benefit of substantial government subsidies and could receive additional policy support in light of the pandemic.
State-run Coal India, which mines roughly 80 percent of the coal in the country, has already agreed to provide coal to power producers based on letters of credit instead of asking for payment in advance. This move gives generators more time to settle up.
An economic downturn will have a negative impact on financing costs for both coal and renewable energy technologies, WoodMac senior analyst Rishab Shrestha wrote in an email. As for how this will affect India’s energy mix: “We’ll have to wait and see how the government prioritizes its recovery to see how the competition plays out.”
Falling prices for solar and wind projects have put these resources in a favorable position relative to coal. With better scheduling and renewable energy forecasting, renewables have moved closer to dispatchable power. But without additional support from the Indian government, renewable energy developers "are likely to suffer," said Jain.
While the next few years are likely to be chaotic for the industry, several stakeholders said they believe India will soon get back on track to achieving its renewable energy targets.
“I'm still quite hopeful. I think that the clean energy transition in India is robust,” said Chawla. “I do also think that some of the dynamism…that we've been seeing in the recent past may slow down but only to recover.”
Sinha believes India’s goal of deploying 450 gigawatts of non-fossil fuel resources by 2030 will be “back-ended,” but ultimately achieved. In the meantime, he hopes that the fresher air and clearer views resulting from the lockdown and reduced coal pollution will help keep the momentum building around India’s energy transition.
“I hope that people are able to see the merit and benefit of having clearer skies and cleaner air,” he said. “Once this pandemic passes, hopefully there [will be] a bigger effort of moving in that direction, of making sure that pollution levels remain low.”
Travel to India for portions of this story was supported by SED Fund, which supports a range of activities related to sustainability. All content is editorially independent, with no influence or input from the philanthropy. The views expressed in this article do not necessarily reflect the views of SED Fund or any of its affiliates.