A robust institutional architecture for renewables

The National Investment and Infrastructure Fund could shape a transformational platform

Do we need an NHAI (National Highways Authority of India) for the solar sector?

India’s power industry is today faced with the deep irony that one of the cleanest sources of power, solar, faces almost exactly the same set of problems that have plagued the dirtiest source of power, coal. If these problems are not fixed, India’s ambition of building 100 Gw of solar power capacity by 2022 (currently it is 8.5 Gw) could remain only a visionary aspiration.

Long-term foreign institutional investors — from the Middle East, Canada, the US and Europe — are ready to put in billions of green dollars into this sector. Such investments are sorely needed; India requires $200 billion to meet its solar power and wind energy (60 Gw) capacity targets for 2022.

To attempt to achieve these targets, the government has put in place a broad framework of support with the aim of helping the sector become viable and competitive vis-à-vis more traditional sources of power. It was the National Solar Mission in 2010, which kick-started solar capacity addition in the country through initiatives such as setting up of solar parks and subsidies, including viability gap funding (VGF).

In February 2016, the government introduced the third VGF scheme with an outlay of Rs 5,050 crore, to be implemented by the Solar Energy Corporation of India (Seci), renamed the Renewable Energy Corporation of India. This VGF scheme will aim to set up 5,000 Mw of capacity, taking the total volume of capacity set up by the three such VGF schemes to 7,750 Mw.

Seci signs the power purchase agreement (PPA) with the developer and signs back-to-back power sales agreements (PSA) with utilities or bulk buyers. For Seci, the VGF is provided under the Budget by the government and the tariff payments are based on collections from the utilities and bulk buyers.

Institutionally, Seci has seen changes, in moving from a “not-for-profit” organisation to a corporation permitted to make profits, and now allowed to provide services ranging from consulting to turnkey services.

But a large number of solar projects face the risk of being unviable given the extremely low tariffs that developers have bid to win these contracts even keeping in mind the fact that the actual capex cost of solar power has fallen dramatically in recent years. The result of such aggressive bidding has been tariffs that imply a rate of return over the life of the project that are deeply unattractive to investors, leading to serious problems in achieving financial closure. Add to this the problem that the main customers of power — the discoms — are often unable to make timely and regular payments to developers, on top of reneging on committed off-takes in many cases. Issues around land acquisition and evacuation add to the mélange of problems. Little wonder that even as solar power tariffs have fallen, bankers and investors have turned increasingly jittery over the viability of many solar power projects.

 

The cornerstone of long-term sustainability should be to create a detailed plan of capacity addition under the National Solar Mission with clear goals for public-private partnership projects and government projects. Perhaps, the best example here is the roads sector and the National Highways Development Programme with its multi-year targets and multiple formats for road capacity addition. Even diehard critics would not deny that the creation of NHAI set the stage for a massive and much-needed expansion of India’s road network.

But such a programme for solar and renewables will not work without a similar institution that functions as a nodal authority for the sector. For the solar energy sector, Seci could perform that role.

Seci should be made the main operational and financial pivot in the renewables sector, and be converted into a stand-alone financial and developmental institution. It could be capitalised by the National Investment and Infrastructure Fund (NIIF), which, with its Rs 20,000 crore corpus (projected to grow to Rs 40,000 crore and much more over time through substantive leveraging) is ideally suited for the purpose. NIIF could become a significant shareholder of Seci, and a co-pilot in its cockpit.

The second step is to ensure a dedicated, ring-fenced and sustained source of funding for this proposed NIIF + Seci platform, independent of budgetary support. Here, the entire clean environment cess, levied on each tonne of coal produced and estimated to be around Rs 24,000 crore in 2016-17, can be channelled as a source of recurring capital. Other “green cesses” can be identified in the future. This funding system is similar to trends the world over, where taxes are imposed on dirty fuels and used to cross-subsidise investment in clean fuel.

India’s solar initiative has garnered praise around the world, with increased capacities getting commissioned. It is time to strengthen the mechanism into a self-sustainable model that proactively makes the target of 100 Gw by 2022 achievable rather than aspirational.

The author is chairman, Feedback Infra. vinayak.chatterjee@feedbackinfra.com; Twitter: @Infra_VinayakCh