Commodities 2022: India's renewable capacity growth poised to fall short of ambitious 2030 trajectory

India needs to add at least 40 GW/year of renewables capacity to 2030 to achieve a target of 500 GW as pledged at the COP26 climate change conference. But 2022 is likely to see just a fraction of that added, with rising costs, delayed receivables and surplus thermal generation combining to cap green power growth.

India has been noted for growing its renewables sector quickly to today's 104 GW installed, but thermal generation still dominates the electricity mix both in terms of capacity and output. In contrast, India's renewables represented 11% of the generation mix in 2020-21.

At the same time, the power sector is running to catch up with galloping demand, forecast to double to 2030 from 1,381.69 TWh in 2020-21.

INDIA: ELECTRICITY GENERATION MIX (TWh)

*to Sept 2021

Source: India's Central Electricity Authority

Coal factor

"It is very difficult for India to transition because demand growth is so significant, even if renewables are outpacing coal power in capacity additions," said Abhishek Dangra, sector lead for Infrastructure at S&P Global Ratings.

"While 44 GW may sound like a real stretch target for 2022, it might be difficult for India to meet that kind of a target for a few years," Dangra added.

One reason for this is that India's huge coal generation fleet has plenty of under-utilized capacity, making it economic for this dispatchable plant to step up and meet the country's new demand.

Thermal plant capacity factors were at 54.25% as of September 2021, compared with 55.57% in September 2020, data from Central Electricity Authority showed.

The factors are expected to rise in 2022 as the economy continues to bounce back, with GDP growth projected at 9%-10%, leading to a similar rise in electricity demand.

In anticipation, India's Coal Ministry has been scrambling to boost coal availability.

In October, with coal prices (CFR India East) spiking to close to $180/mt, Indian importers reduced purchases, leading to a shortage of inventories at thermal generation sites.

Since then, coal stocks have started to recover, reaching 17.29 million mt (sufficient for nine days) as of Nov. 29, according to Minister of Coal and Mines Pralhad Joshi.

"Coal India Ltd has dispatched 291.72 million mt coal during this period (April--October 2021), against 237.75 million mt during the same period of last fiscal. Thus, there is no shortage of coal in the thermal power plants in the country," the minister said Dec. 6 in a written reply to a parliamentary question.

Cost disincentive

While coal input costs have been in decline, booming global demand for raw materials has lifted capital costs for solar and wind projects.

This has blunted any appetite to lift the rate of renewable capacity additions in India, while the country is also on a mission to reduce its dependence on Chinese imports of solar PV modules and wafers.

The government has recently announced a Rupee 45 billion ($594.32 million) Production-Linked Incentive scheme for local manufacturers, with a parallel action to lift duty to 25% on imported solar cells and 40% on imported solar modules from April 1, 2022.

There is another factor at play. India's long-term power purchase agreements are structured to deliver a stable pricing regime. A sudden influx of extra capacity would undermine sector economics to the detriment of future investment.

"Power demand did not grow much owing to COVID-19 and next year, as demand re-emerges, idle capacities can easily be stepped up," said Vaibhav Pratap Singh, program lead at the Council on Energy, Environment and Water.

Renewable capacity additions of 8 GW-10 GW a year had been the recent trend, and Singh said this would likely be similar in 2022.

As such, India's short-term RES target of 175 GW for 2022 was likely to be missed, the analyst said. And for India's energy transition to pick up pace, the country needs to retire old coal-fired plants to tighten the market and create a supportive pricing regime for new renewables.

Heads up on 2022

S&P Global Rating's Dangra said things to watch for next year will be any progress on hybrid renewable/storage projects providing baseload profiles, and on innovation in power purchase agreements.

Next year should also see reforms under the Electricity (Amendment) Bill, 2021 come to the aid of India's ailing distribution companies.

"Even though 2022 might not be as visible a year (for the transition), people are banking on 2024-25 as the period when there might be battery storage solutions which are viable at a commercial scale," Dangra said. "That's when transition can happen at a much faster pace."