Hybrid projects, round-the-clock (RTC) power, peak power supply and battery storage projects are all being developed in India at some pace. By Prasad Hegde, managing director, Project & Export Finance & Regional Head South Asia, and Kunal Agrawal, director, Project & Export Finance, Standard Chartered Bank.
Renewable Energy (RE) has witnessed rapid growth in capacity addition over the last decade: RE as a percentage of total installed capacity in India increased from 10.6% (18GW1) in 2010/11 to 26.8% (106GW, excluding hydro2) in February 2022. The installed RE capacity as of February 2022 comprised 40GW of wind projects, 51GW of solar projects and the balance is small hydro and bio power. However, due to its intermittent and infirm nature, output from RE sources is not predictable compared with competing sources of power such as coal and gas-fired plants, making them unsuitable for supplying continuous and uninterrupted power.
A recent study by the Ministry of Power noted that the net load, total demand minus RE generation, decreases in the afternoon due to moderate demand and higher output from solar plants. As output from solar capacity drops during the late evening, a steep ramp up in generation is required to meet the peak demand, and this is usually met by power distribution companies (discoms) from conventional sources at a significantly higher cost.
India’s peak power deficit was 2.9GW in the financial year ending March 31 2022, against a deficit of 1.4GW over the last three to four years and it may reach 30GW–40GW in the next five years3. This increasing peak power deficit will lead to increasing volatility in hourly prices of traded power. One of the primary factors is also the exponential growth of RE power, coupled with a slowing down of conventional energy capacity additions. To address these shortcomings of RE, there has been a subtle but noticeable shift towards trends such as hybrid projects, round-the-clock (RTC) power, peak power supply and battery storage projects.
A hybrid system involving solar and wind power is currently being evaluated by most developers, which results in cost savings due to sharing of evacuation infrastructure, and operations and maintenance (O&M) costs where such projects are co-located. Adding an energy storage system (ESS) to a hybrid project addresses any intermittency issues associated with RE power and ensures a near-continuous availability of power, especially during periods of peak consumption. The ESS may include, but is not limited to, battery energy storage systems, pumped hydro storage systems, mechanical and chemical systems, or a combination of these systems.
While the addition of storage will lead to higher project costs, stationary storage system costs are coming down rapidly in tandem with the reduction in battery prices. During the last decade, global battery prices have dropped by around 87%4 and Bloomberg NEF estimates battery prices to come down by a further 35% over the next three years, though higher raw material prices of nickel and lithium, exacerbated by recent geopolitical events, could result in an increase in prices in the near term. It is expected that lithium-ion battery and pumped hydro systems will play a major role in ESS projects in the years to come.
Since the adoption of the Wind-Solar Hybrid Policy, the Ministry of New & Renewable Energy (MNRE) has encouraged the development of large grid-connected hybrid projects, with Solar Energy Corporation of India (SECI) coming out with multiple wind-solar hybrid tenders; this trend is expected to continue over the next two to three years. While the initial response to these tenders was lukewarm, with most of the tenders seeing undersubscription, the level of interest in subsequent bids has increased significantly, especially for hybrid auctions with a storage component such as the recent 1.2GW peak power solar-wind-storage hybrid tender and the 400MW RTC tender.
Both tenders were oversubscribed, with almost all major developers active in the Indian market evincing interest. SECI has issued tenders for 10GW5 of hybrid/RTC/Peak Power capacity until the end of 2021, of which 50%5 has already been awarded. In the RTC/Peak Power tenders allocated so far, the tariffs have been higher than the stand-alone solar and wind bids in recent times, although it is expected that these will reduce over the long term given the expected fall in battery costs.
In October 2021, SECI had invited expressions of interest to install 500MW/1,000MWh stand-alone battery energy storage systems. This was followed in January 2022 by NTPC’s green arm inviting bids to set up 500MW/3,000MWh of inter-state transmission system (ISTS) connected energy storage systems to meet its round-the-clock RE requirements. Recently, the Ministry of Power also waived ISTS charges for battery systems commissioned by June 30 2025, provided that 70% of their power requirement is met from solar and/or wind power.
The setting up of large-scale hybrid systems may cause frequency and voltage disturbances leading to grid instability. With India’s growth plans for ramping up RE capacity (500GW by 2030) and energy storage capacity, significant investments would be needed to augment the transmission and distribution network over the next five to seven years.
Infrastructure development initiatives such as transmission system expansions, green energy corridors, sub-station improvements, controlling line losses and smart grid systems to address technical challenges of power evacuation will be vital for this model to deliver effective results. While lenders have so far financed wind-solar hybrid projects, the financing of hybrid projects with energy storage systems will require additional due diligence on the battery quality, costs, useful life, degradation levels, maintenance requirements, warranties, replacement capex and cost of disposal. With a limited operating track record of these energy storage systems, it is essential for lenders to have the support of high-quality technical consultants to assess these crucial risks and negotiate suitable mitigants for such project financing.
The commercial and industrial segment
With an ever-increasing focus on sustainability, green initiatives, and net zero commitments made by the corporate sector to decarbonise their businesses, the commercial and industrial (C&I) RE segment is expected to witness robust demand and growth over the next few years. C&I consumers account for a 40%–50%6 share of India’s total energy demand, with most currently procuring power from the grid or captive thermal power plants. These players are now shifting to RE to meet their energy requirements – it is estimated that the C&I RE segment has a potential of more than 40GW–50GW of RE capacity in India alone over the next few years.
There are multiple factors contributing to strong tailwinds for this sector:
* Improved tariff competitiveness – With the cost of RE power coming down over the last few years, C&I consumers have been able to source RE power at a higher discount to grid tariffs through the open access route, even after factoring in the additional open access charges. C&I consumers are generally charged more by discoms to compensate for supplying subsidised power to agricultural and low-income groups. The grid tariffs have also increased over the years, thereby making procurement of power from RE sources as the most cost-effective solution for C&I consumers.
* Strong government policy thrust – Draft Electricity (Promoting Renewable Energy through Green Energy Open Access) Rules, 2021 (Draft Rules) are a step in the right direction. They include provisions that, if implemented efficiently, can help to resolve some of the key issues faced by this sector. Some of the key provisions include:
i) Establishment of a central nodal agency to provide single window clearance and streamline the approval process.
ii) Limiting the increase of cross-subsidy surcharges as well as the removal of additional surcharges on third-party open access C&I RE projects to ensure the predictability of project cashflows and increase their bankability.
iii) A uniform Renewable Purchase Obligation on distribution licensees, open access consumers and captive consumers, or obligated entities.
In December 2021, the Ministry of Power also extended the waiver for ISTS charges and losses to open access projects, both third party and captive, for projects completed by June 30 2025. This would allow open access projects in one state to sell power to C&I consumers in a different state at competitive rates.
Various state governments are also coming up with favourable policies to boost the growth of C&I projects, providing benefits such as waivers on wheeling charges, reductions in cross subsidies and additional surcharges for third-party open access projects, as well as waivers of electricity duty. The government’s push towards "Make in India" and "Atmanirbhar Bharat" is also expected to drive electricity demand for industrial customers, which are the largest consumers of electricity, thereby leading to large-scale C&I RE deployment.
* Push towards sustainability/Net zero commitments – Leading corporates are increasingly setting long-term sustainability goals and net zero commitments for their own production and across their value chain. In fact, the global list of RE 100 companies also features eight Indian companies7. As a result, C&I corporates are looking for direct procurement of RE, which not only helps them reduce costs, but also to cut their carbon footprints (Scope 1, 2 emissions) and aid their sustainability agenda.
* Evolving power sale options – The introduction of exclusive green market options such as the green term-ahead market and the green day-ahead market have provided new avenues to RE generators to sell RE power, and for obligated entities to purchase RE power and fulfil their renewable purchase obligations.
Over the years the C&I market in India has also evolved, with power purchase agreements (PPAs) now going up to 20 to 25 years, longer lock-in periods of seven to 15 years, and tariffs getting competitive with falling RE tariffs. Lenders are also now getting more comfortable with the regulatory framework in states with favourable policies, PPA clauses such as take-or-pay and termination provisions, creditworthy C&I customers, leading to certainty of cashflows.
As a result, this sector is now witnessing the entry of large and established RE developers, oil & gas majors and platforms backed by financial investors, as well as infrastructure/pension funds, several of which have plans to build sizeable C&I portfolios in India over the next few years. With the advent of battery storage coupled with wind solar hybrid projects and the waiver of ISTS charges for the C&I RE segment, industrial houses with large-scale manufacturing and continuous process facilities are also planning to shift their power consumption from old captive conventional power plants to C&I RE.
Lenders have been selectively financing the C&I RE sector in India, restricting themselves to projects set up in states with favourable policies and under the group-captive framework. Some of the key challenges that lenders have been facing in this sector are shorter lock-in periods, offtaker credit quality (especially on unrated offtakers), regulatory risk in terms of imposition of additional open access charges, and unavailability of long-term open access approvals prior to drawdowns.
With electricity being a concurrent subject, both the central and state governments need to work in tandem to resolve these bottlenecks and facilitate growth of C&I RE. The state discoms need to be adequately compensated for their real losses due to the migration of these high-paying C&I customers. Also, as each state has its own open access policy, there is a need for a more uniform and consistent policy framework to resolve some of these challenges that are being faced by lenders and developers to achieve the target of large-scale C&I RE adoption.
Conclusion
The global hybrid energy market, including energy storage, is projected to reach US$40bn8 by 2025. Storage-based renewable projects will play a critical role in addressing the issues relating to the intermittent nature of RE power and its mass scale integration with the grid. For C&I projects, factors such as government policy support, cost-effective RE power over grid and increasing push towards sustainability and net zero commitments will provide the necessary thrust for growth.
With large-scale adoption and cost competitiveness of hybrid energy storage projects, energy intensive industries will gradually make a shift towards C&I RE. Both hybrid battery energy storage systems and C&I RE capacity additions are critical for meeting the ambitious target set (500GW by 2030) by the government for RE installation in India. For these capacity addition targets to be achieved, developers will need access to liquidity pools across domestic and international debt markets.
Multiple financing avenues including green bonds, infrastructure investment trusts and infrastructure debt funds would be necessary to churn and redeploy project finance debt capital provided by banks and enable lenders to operate within the sector and client group prudential exposure limits. Last but not the least, government support in the form of a conducive, transparent, and consistent policy and regulatory framework is a must for driving investments in the RE sector.
Footnotes
1 - Indian Renewable Energy Status Report – NREL – October 2010
2 - Central Electricity Authority (CEA) Installed Capacity Report dated 28.02.2022
3 - CEA, BRIDGE TO INDIA
4 - Bloomberg NEF
5 - https://www.psuconnect.in/news/national-wind-solar-hybrid-policy/30305
6 - ICRA Limited
7 - https://www.there100.org/re100-members
8 - pv magazine, June 2020
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