Crashing prices, low demand to hit India’s solar power ambitions

New SECI auction sees bids at record low prices

Environment

November 24, 2020

/ By / New Delhi

Crashing prices, low demand to hit India’s solar power ambitions

Collapse in power demand due to Covid-19 has cooled off solar power producers' enthusiasm

Latest round of auctions for solar power generation projects sees further collapse in bid prices. It may spell trouble for producers, consumers as well as India’s renewable energy targets.

At the latest round of auctions of solar power projects held by the Solar Energy Corporation of India, record lows were touched as bidders tried to grab the projects of 1070 mw that were up for the taking. Two international bidders, one each from Saudi Arabia and Singapore, quoted INR 2.00 per unit for projects of 200 mw and 400 mw respectively. India’s biggest utility, the National Thermal Power Corporation (NTPC) was not far behind with a bid of INR 2.01 per unit.

These prices are the lowest ever recorded in India and beat the previous low bid of INR 2.36 by a Spanish producer for a 300mw power plant in the auction held in June 2020. The lowest bid until then had been INR 2.44 per unit that was set by ACME Solar for a 600mw project in Rajasthan in 2018. However, this project has been delayed as ACME Solar is trying to negotiate an exit from it.

Some analysts believe that the low prices in the latest round of auctions are mainly due to the fact that power purchase agreement has been signed with the state of Rajasthan for the new projects and this gives a great degree of certitude of purchase for the producer. Another reason being cited is that these power plants would have solar cells made with new technology enabling higher efficiency of power generation.

Clouds of uncertainty over power sector

Despite the success of the latest round of auctions, the situation of India’s power sector remains gloomy, mainly due to the uncertainty surrounding the power demand as well as the fate of delayed renewable power projects.

In 2017, Indian Prime Minister Narendra Modi had declared that the country would raise its renewable energy production capacity to 175 GW of which 100 GW would come from the solar energy. Though there was a sharp spike in new solar power projects in the first couple of years, the pace has decelerated dramatically since then and India looks almost certain to miss both the targets. Currently, India’s total renewable energy capacity is 65 GW and is unlikely to cross the 100 GW mark by end of 2022.

This is mainly due to a major slowdown in new projects getting off the block in the past two years. The slowdown itself is due to several factors including lack of available land for setting up power plant, delays in negotiation of Power Purchase Agreements or PPAs as well as complications in arranging bank finance or credit for the projects. But one of biggest reasons behind the slowdown is unviability of several projects due to very low power prices in the energy market due to a slowing economy.

Even before it was crushed beyond recognition by the ongoing Covid-19 pandemic, the Indian economy had registered a steep fall in the growth rates and this had led to curtailment in demand and the subsequent fall in prices. This has led many project developers to go slow on implementation of their projects. But the arrival of the pandemic and the prolonged lockdown announced on March 25 have led to a total collapse in power demand across the country. According to the International Energy Agency, IEA, a body of the Organisation of Economic Cooperation and Development, India registered one of the largest electricity demand destructions globally as Covid-19 caused power demand to fall by 28 pc up to the end of March 2020.

“Under the conditions of the strict lockdown which started on March 25, 2020, power demand from hospitals, essential services and the residential sector was on the rise, while industrial demand and commercial activity dropped substantially. By the end of August 2020, total power demand in India had not recovered to previous levels prior to Covid-19,” says a report by the IEA.

“The pandemic has also affected the generation mix. Thermal power plants are running at low capacity in the absence of industrial demand, while the share of renewables on the grid has been increasing, mostly because of their “must‑run” status. In some states, India’s system operators are already running a power system with very high shares of renewables. This situation is likely to continue into 2020/21, when older power plants will need to close down for maintenance and refurbishment to meet new environmental requirements,” the IEA goes on to say.

However, a TERI report says that the pre-pandemic projections for demand growth in India’s power sector could be impacted by 7-17 pc for the next five years. The pandemic may have also put paid to the projections of the rise in the share of renewable power in India’s energy mix.

Headed to partial solar eclipse

In August, the Central Electricity Authority indicated in a report the serious situation of the renewable energy sector, notably the solar energy. According to the CEA report, capacity of 39.4 GW in over 90 renewable energy projects, will facing serious delays on account of different factors. Of these, over 28GW relates to solar power projects that are running behind schedule. Of these 8GW projects have not even broken ground yet since their PPAs have not yet been signed. Many others have not had their financial closure or land acquisition done.

Moreover, some companies, notably in the state of Andhra Pradesh face a Hobson’s choice as the state government has told power producers in the state to either cut the tariffs that they had agreed to in the PPA or shut down their plants altogether.

For India to catch up on its commitment of giving renewable energy a proper place in its energy mix, a couple of tricks may yet remain. One would be to shut down older power plants, especially the coal fired ones, due to their much higher pollution levels. In the three years to May 2019, the CEA had already retired or decommissioned 30 power projects based on coal and lignite with total generation capacity of 8.5GW.

But even if decommissioning of thermal power projects picked up pace, it may not be enough. Nearly 60GW of new thermal power projects are on the planning stage and the recent opening up densest of Indian forests for coal mining is likely to provide a further boost to the thermal power generation.

Another reason why thermal power in India refuses to bow down to renewable is the large role it has in the fate of India’s troubled banking sector. A total of INR 1.8 trillion (USD 25 billion) in stressed assets or bad loans currently sits on the books of various Indian banks that are reluctant to see them being phased out as it would also extinguish any hopes of them recovering any of the loans.

Over the past couple of years, 33 thermal power projects, with total capacity of 40GW, that have run into severe financial difficulties have been taken up for resolution. Of these 14 were said to have been resolved, but even now these 14 are struggling to meet debt servicing obligations due to inadequate cash generation, caused by both low offtake and delayed discom payments. This has led to the banks as well as the utilities running these projects seek extension of their PPAs as well as retention of their high prices in order for the banks to have some hopes of salvaging even the smallest share of their loans to these power companies.

With the Indian economy likely to remain in doldrums for at least another year, demand for power is almost certain to stay far below the expected levels and this will keep pricing pressure on all generators. While some of the older thermal producers may be able to handle the crisis as their plants have already been paid for, the renewable energy projects, especially those yet to be commissioned or still in planning stage may find that a dark future awaits them.

The news comes at a bad time for India as the country lags behind several other nations, notably Germany and China, in enhancing its renewable energy production capacity. It will also show India in a bad light as several countries like Japan, New Zealand, Canada and United Kingdom have already said that their economies would go to zero net emissions by 2050, India, the leader of the International Solar Alliance is missing out on its lofty and oft-stated goals.

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