India’s National Solar Mission has been a huge success and has achieved the goal of reaching grid parity six years ahead of the scheduled year of 2022. The sector has however become a victim of it’s own success. The severe competition amongst the investor-developers for getting the project has resulted in low tariff levels resulting in the equity IRRs never exceeding 15% and more often at 12% level which is only slightly more than what the banks get. The investments into solar module manufacturing has also not fared much better. Because of a constant pressure from low cost Chinese module suppliers, the margins of the domestic module manufacturers have also been restricted.
Risks associated with investment in RE projects in India
Government of India has launched an ambitious program of achieving 175 GW thru Renewable Energy Sources by 2022. While the plan is laudable and well intentioned, however, there are significant risks associated with the future renewable energy projects which the prospective investors & developers need to be aware of. The key risks are highlighted below:
India is Power Surplus
This statement may come as a surprise to most people since what has been projected frequently is that there is no access to electricity in India for a large percentage of the population. This has been the premise which had been driving investments in power sector. However, there has been a significant change in the last 10 years in the power sector in India with the power generation capacity getting doubled to 303 GW while the peak demand presently is only 150 GW. This is also reflected in the average power tariff in the power exchange, which has not exceeded Rs 3 / KWhr for the last 3 years and is currently at Rs 2.50/KWhr level.
Availability of surplus power at a much lower tariff than the RE power tariff will always pose a threat to the RE power generator since the Discoms, because of their stressed financial condition, and difficulty in passing on the higher power purchase cost to consumers, are likely to prefer the lower cost alternative.
Availability of power at variable cost from Coal based power generators.
Perceiving a steady growth in power demand, the Discoms had signed long term Power Purchase agreement on two part tariff system with number of power generators. However, availability of low cost power from the power exchanges and captive solar generation, causing customers to shift from the distribution companies and inadequate growth in power demand has resulted in a low power demand situation, forcing discoms to seek the coal based power generators to back down. Though the generator may not be supplying power, during these period of backing down, however, as per the contract terms, the discoms have to service the fixed capacity charges of these generators. Having paid for the capacity charge, the discoms have a right to the power from these generators at the variable cost which is generally less than Rs 2.50 / KWhr. Since the RE power is generally at a higher tariff of about Rs 4.50 / KWhr, and no charges are payable to RE in case the discom does not take power from RE, there is always a risk of the discoms preferring the lower cost coal based power to that of the RE power.
Risk of disruption in offtake of the RE power
With the addition of large number of RE projects, because of the intermittent nature of the power supply from the RE projects, and lack of sufficient grid capacity to absorb the sudden surges of the RE plants, the State Load Despatch centers are forced to resort to disconnection of the RE plant, in order to avoid grid instability. The grid stability consideration overrides the must run status accorded to the RE projects. Under such events, the RE generator does not get compensated for loss of generation.
Scheduling of RE projects
Central Electricity regulatory commission has introduced mandatory scheduling of the large RE projects in case the RE power is contracted between inter-state entities. The difficulties associated with prediction of solar irradiation levels & the wind velocities on a 15 minute interval is likely to lead to higher than allowable deviations which in turn will result in penalties for deviation. Factoring this uncertainty during the developer selection thru tariff based competitive bidding process is very difficult.
Risk of non-payment and lack of alternate buyer for the RE power
It is worth mentioning here that one of the major reason for the failure of IPP sector in the nineties was the fact that it used to be a single buyer model and with the inability of the Discoms to provide Escrow, the FIs refused to lend to the power projects. Only after the enactment of the Electricity Act 2003, and a enabling provision for sale to inter-state / third parties , the power projects got funded. The comfort for the FIs came from the fact that if the discoms were to commit a default in payment, since the coal power cost would be low, finding an alternate buyer will not be difficult . In the case of RE power, since the tariffs are higher, it will be difficult to get an alternate buyer in the case of default, specifically in case of solar, where the tariffs from the current projects are lower than the tariffs of the earlier projects.
Electric Mobility Venture
Given the various risk factors as enumerated above, it may be worth examining whether it is prudent to invest into the RE projects given the power surplus situation or should the prospective investors evaluate options where the use of low cost surplus power can provide a higher return. Amongst the various cleantech investment options, electric mobility solutions is a fast emerging sec tor ideally suited for India which combines the benefit of use of low cost surplus domestic power for replacing the high cost imported oil and also provides an emission free mobility solution.
Within the electric mobility options ranging from bicycles & scooters to cars, vans & buses, the electric bus venture is the best choice to get into. Two factors which favour the electric bus are a) the bus follows a set pattern which enables customized design of the battery capacity and charging locations b) Buses generally operate for about 200 Kms a day which helps to bring down the capacity charge of the electric bus and addresses the higher capex of the bus. Over 80,000 electric buses are operating in China as of 2014. It is understood that the market for E-bus is growing rapidly at a CAGR of 27%.
Electric Bus EPC ( Engineering, Procurement & Construction )
Solar power sector has spawned a large number of EPC companies who have the skill sets needed for E-bus integration. Electric bus integration is far simpler than integration of a solar or a wind power plant. Unlike other automotive vehicles like scooters & cars which have to be manufactured in high volume to be competitive and require substantial investments, buses are generally custom built and does not need high degree of automation or high investments. There are number of chassis manufacturers and over 200 accredited bus body builders in India. The process is similar to an EPC contractor assembling a power plant.
Need for Emission-free Electric Bus
Unlike the power sector, there is a huge shortage of buses for public transportation in the country. Against the standard norm of 400 buses per 10 lakh population, there are some states which have only 2 bus per 10 lakh population. Augmentation of the public transportation system with either diesel or CNG fuelled buses will not only add to the high pollution levels but also pose a serious health hazard. WHO has already classified diesel exhaust emission to be carcinogenic, and a recent CSIR study has also raised concerns regarding the nano carbon particle emissions from CNG buses to be a possible cause for respiratory diseases.
India has a large number of two wheeler commuters. With increasing traffic volume, congestion in all urban areas has gone up rapidly and commuting time has doubled and the two wheeler commuters in metros are exposed to 3hours / day to the vehicle exhaust emissions. This level of exposure to the exhaust emission has perhaps the same effect as that of cigarette smoking. It is unfortunate that while we have recognized the harmful effects of cigarette smoking and have brought in law banning smoking in public places, however, no significant step has been taken for arresting the increasing level of exposure from exhaust emissions. The recent orders of the Supreme court banning registration of larger diesel vehicles and the odd-even policy experiments by the Delhi government have brought about awareness of the pollution problem and it is understood that Government of India is drafting a Viability Gap Funding policy for hiring of electric buses by various State Transport Undertakings.
The combination of availability of low cost surplus power, an urgent need to curtail the rise in diesel consumption and oil imports, immediate action to curb rising congestion and pollution levels, availability of government subsidies and import duty concessions coupled with huge shortage of public transportation make a perfect case for venturing into E-bus integration and operation.
E-Transportation business – Emerging opportunity for Power Companies
The E-bus integration is not merely building a bus – it is integration of the power sector with the transport sector. Before the discovery of IC engine & cheap oil, since the vehicles were powered by electricity, transportation business was also with the electric companies . The famous BEST is a classic example of electric company with transportation business.
The time has come for the power companies to once again get back into the transport game and cut into the oil pie instead of having an in-fighting between the coal based power and renewable based power. In order to achieve optimised power cost, transport companies like Delhi Metro, Indian Railways, Transport for London are getting into power generation . If transport companies can get into power generation, there is no reason why power companies cannot get into E-bus ventures. Entry of professional power companies into mass transportation would change the face of public bus transportation business.
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