Power generation in India: The answer is blowing in the wind

By PwC
Updated: May 24, 2016 11:31:34 AM UTC
wind
As wind power is based on a natural resource, much like hydro, developers must identify sites and assess resource availability over a period (Shutterstock.com)

Solar energy stole much of the spotlight in renewable energy’s most recent boom and a bust. The larger share of investment, however, breezed into wind power. In fact, 2015-16 saw its best year yet, with over 3300 MW commissioned. The total installed capacity of 27 GW (63% share of India’s renewable energy) is targeted to double to 60 GW by 2022.

The Power Minister termed the government’s focus on renewables an ‘article of faith’ but it is as much rooted in logic. India will add 2.5 to 3 times more capacity by 2030, even under moderate growth scenarios, to keep up with structural shifts in demand, driven by rural electrification, urbanization, and infrastructure build.

There are several reasons to move from carbon to cleaner sources: power generation will need lesser coal and water. Tariff can be controlled as real costs of renewable energy are largely flat over project life. The costs are declining and are comparable to other new power plants.

But it will take some work to deliver the goals, as renewables form just 6.5% of power generated today. I list below some structural actions necessary for renewable energy to truly come of age.

1. Establish a viable feed-in tariff and a national market As wind power is based on a natural resource, much like hydro, developers must identify sites and assess resource availability over a period. To support this, states offer a regulated feed-in tariff. But states also tend to switch off, leaving potential untapped, when their needs are met.

Tamil Nadu, an early mover and the first to achieve its target, left feed-in tariffs low causing investment to dry up (it add a paltry 200 MW p.a.). Madhya Pradesh, the latest kid on the block, topped investment last year (with 1290 MW) thanks to an attractive tariff. Since then, the two states respectively increased and cut back tariffs by 20% making it hard for investors to plan ahead. The government must drive to create a national market through renewable procurement obligations (RPO), and regulators must offer a stable tariff regime, making provision for risks, from global such as the El Nino effect to local such as curtailment (temporary lack of grid to deliver power).

2. Using hydro power for system balancing on commercial basis
The natural conditions driving renewable energy are not predictable and require balancing by others, often coal power plants, to ensure grid stability. This worsens as renewable energy grows in proportion and more nimble market-driven balancing arrangements are needed.

Denmark sources as much as 42% of its electricity from wind supported by real-time balancing by Norwegian hydro power plants. Similarly, Canadian hydro plants offer “insurance” to wind farms in the USA by compensating for seasonal and real-time mismatch. India must rope in hydro power plants from the Himalayan belt, including the surplus from Bhutan hydro projects, on a commercial basis to support growth of its renewable energy by cleaner means.

3. Replace subsidies with market pricing reflecting real-time use
Governments, in many parts of the world, are weaning off renewable energy from subsidies. In India too, the recent budget reduces tax benefits by half. At the same time, renewable producers are being offered more freedom in pricing. In India this is fragmented and left to open access and power exchanges. We do not have a market price that reflects time-of-generation.

So, while solar power generates its bulk of its output in a few hours around mid-day when the demand is lean, a wind farm’s output is spread around the clock, and in season it contributes to a city’s evening peak load. Our regulatory policies need to evolve to reflect such benefits in the prices.

4. Provide connecting infrastructure to enhance investment capacity
Technical developments over the years means wind power equipment extract more energy now. The wind farms are now larger in size and deploy higher towers and bigger turbines. This led to our wind potential getting significantly enhanced, by 5 to 10 times over previous estimates.

The governments must support in provision of road access to convey these large equipment to site, and invest in transmission connectivity. This is often undertaken by developers today, which cuts into money they can spend on projects.

5. Improve conditions for localization to reduce costs
The local cost of manufacturing of wind power equipment is significantly lower than imports, ranging from 25% to 72% for different components. While localization has improved for several components (e.g., towers, generators, blades), sizeable imports remain, including those that are largely imported (e.g., large bearings, gearbox). Such imports are expensive and also increase financing cost due to rupee depreciation. Governments can do more to improve investment climate to take advantage of lower production costs.

In conclusion
For many years, the governments have supported growth of renewable energy. But in recent era, developments in specific technologies, grid integration, and power markets have outpaced policy and regulation. This means governments have a new set of promotion tools to ensure our energy supplies are clean and secure.

- By Kameswara Rao, Partner & Leader – Energy & Utilities, PwC India

The thoughts and opinions shared here are of the author.

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