The Implications: A Relook At Where To Invest In Renewable Energy

Industry Insights

Subsidy dependence vs grid parity 

The prospects of renewable energy are arguably the best in regions where subsidy support is minimal and where it sells into a commercial market on an equal footing. 


The subsidy support in European jurisdictions ranges between 11-84 EUR per MWh for onshore wind and between 11-448 EUR per MWh for solar projects. The average for the EU is about 111 EUR per MWh (2013). As discussed, many countries are re- evaluating the support level and moving towards auctions and market driven pricing. 

In India, the support is minimal and renewable energy tariffs are comparable with that seen in the auction of coal-fired base load power. The table below compares conventional power tariffs discovered in the last 12 months and the current renewable FIT.

A part of the reason for higher subsidy support for renewables in Europe is readily explained. In onshore wind, the capacity  factors, on an average, are comparable in Europe (26%) and in India (23%), and so the higher level of support is mainly towards higher capital and operating costs. In solar, lower resource potential (average PLF in Europe of 15%, against 21% in India) necessitates higher support. It must also cover higher capital cost (Europe 1,400-2,200 USD per kW against India 1,294 USD per kW) and higher operating costs (Europe 20-25 USD per kW against India 10-20 USD per kW). 

Extracting value

However, resources factors and cost structure do not tell the full story. The shift to auctions and market pricing in EU/OECD countries suggests that India now presents a more attractive region for financing renewable projects. This can be studied in a hypothetical case. Consider a typical solar project in India with capex of 1 million USD per MW financed at long term bank debt of 12% and earning a tariff of 8.50 USD cents (5.50 INR) per kWh. The project will fetch equity IRR of about 15%. If overseas debt is applied at rates prevalent in European markets for renewable, viz. 300-400 bps spread over 10 year USD Government Bond yield, and rupee depreciation of 3-4% is added (25-30 year trend), the equity IRR comes to around 16-17%, which is well above the expectation of equity investors in European electricity markets (5-7%, as per CEER). Furthermore, for a given capital outlay, given the lower capital costs in India compared to EU/OECD countries, an investor can fund more projects, thereby diversifying risks. International investors investing in India will also help expand and secure the market. We can see this by extending the hypothetical case mentioned above. For the above mentioned solar project in India (capex of 1 million USD per MW, rupee debt at 12%, equity IRR of 15%), a typical bidder is likely to quote 5,400 INR per MWh (73.5 EUR per MWh) in a generic auction. However, with international funding on terms described earlier, factoring in long-term Rupee depreciation, a bidder can quote 5,060 INR per MWh (68.5 EUR per MWh).

Lower tariffs will encourage power utilities to procure more from renewable energy sources, thus expanding the market. Moreover, utilities are likely to service these contracts better as they contain no fuel risk, do not impose take-or-pay commitments and are comparable in price to other long-term marginal sources. 


India presents a reliable, fast growing, well-diversified, and profitable market opportunity for renewable energy. 

Market opportunity 

The imperative to add substantial new generation capacity to meet social and economic needs is helping India reshape its energy mix towards renewable quicker than other regions. Power utilities and retail consumers alike are contracting with large-scale renewable energy suppliers to meet their basic energy needs. India’s per capita energy consumption is very low, in fact, it is about one-third of the world’s average and below other comparable developing countries. The growth picked up in recent years rising from 612 kWh to 1,010 kWh over last decade (2005-2015)—a growth of 5.1% per annum. Rural electrification and provision of 24X7 power supply is a key priority for the government. Based on available statistics 19,706 

Villages lack access (2015), and a large proportion of households (33%) do not own an electricity connection (2010 Census). In most states rural power supply is intermittent and of poor quality. New generation capacity must be built, and given the affordability and concerns of marginal consumers, renewable with minimal cost inflation suit it best. Urban centres, too, have grown rapidly and India, which is relatively less urbanised with only 31% of population in cities, is moving in the direction of other developing nations such as China (50% urban population) and Brazil (87%). Urban areas are significantly more energy intensive and constitute a key driver of demand growth.

Policy support 

Energy security is a prominent policy concern. Primary fuels are India’s single largest import, accounting for 37-40% (2013-2015) of total imports and periods of high commodity prices have resulted in constrained supplies, budgetary deficits, and fuelled inflation. Climate change is a key consideration too with coal responsible for 76% of electricity produced. The government’s drive to build 175 GW of renewable energy by 2022 will help achieve energy security and reform energy mix. The policy proposes to use RPO and RGO targets to develop this, and regulators are seen to take steps to improve enforcement. The government has set in place a robust procurement model in the form of auctions and standard bidding documents (RFQ, RFP, PPA) to facilitate a quick, harmonised, and transparent bidding process for solar power development. 

Public interest and local development 

Public opinion has been supportive of sustainable energy in India, and this has helped states maintain a positive and stable policy environment over the years. On similar lines, a number of private companies are setting up renewable energy projects for their own use, or have committed to source 100% of their consumption from green sources. State-owned organisations are tasked with establishing 10 GW solar projects. The courts too have taken a positive view. The Supreme Court of India recently (May 2015) ruled that renewable obligations are in larger public interest and can be imposed on captive users and open access consumers.

Renewable energy projects are often located in distant and remote areas and in some cases in arid lands. Employment, even in limited numbers, improves social and economic prospects of 

the region. Decentralised energy initiatives such as roof-top solar power plant and solar powered agriculture pump sets offer scope to generate electricity at the tail end of the grid, and potentially where net metering policies are in place thus offering a modest source of income. 

Economics and profitability

Renewable energy build, as described earlier, is increasingly competitive with electricity from mainstream fossil fuels such as coal and natural gas. This is driven both by a variety of global factors (e.g., technology, module prices, and optimisation) and local factors (competition in capital goods and EPC, financial engineering, new entrants, and captive users).The competition is a strong force. India has about 20 wind turbine manufacturers with an annual production capacity of 11 GW. A majority of these (Suzlon, WindWorld, Inox Wind, Regen Powertech, Gamesa) offer a complete turnkey solution whilst others (GE and Vestas) focus on products. The supply of solar modules is predominantly from imports whilst the balance of plant and inverters are locally sourced. The solar EPC market is also very heavily contested offering competitive pricing and turnkey solutions to developers. The state electricity regulators maintain a provision of post-tax return of 14-16% in tariff determination for relevant renewable energy technologies such as wind, biomass, waste-to-energy or small hydro. Where auctions are held, such as in solar, project developers make their judgement on return expectations, and winning bids in general have been in the low-teens.

Resource base

A number of studies suggest that India’s renewable energy resource base is several times higher than the earlier estimates. A Berkeley lab study reckons India’s wind potential to range between 2,006 GW and 3,121 GW (for different mast height and site conditions) which is several times the earlier official resource assessment of 48.5 GW. 

Furthermore, regulators in some states are offering differentiated FIT to tap low wind zones. The government is exploring options to incentivise repowering. All these steps expand the market potential for renewable energy. Likewise, solar energy potential estimated by the National Institute of Solar Energy is about 749 GW. This is spread across a wider number of states, viz. Rajasthan (142 GW), Jammu and Kashmir (111 GW), Maharashtra (64 GW), Madhya Pradesh (61 GW), Andhra Pradesh (38 GW) and Gujarat (35 GW).Offshore wind is another prospect. It is novel elsewhere too (global offshore wind is 8.7 GW) but the industry expects it to grow (180 GW by 2035, IEA forecasts). India seeks to tap its long coastline of 7,600 km for offshore wind, but current candidates are the western coast of Gujarat and southern tip from Rameshwaram to Kanyakumari in Tamil Nadu. The government has approved a National Offshore Wind Energy Policy which tasks MNRE and NIWE to develop the potential in India’s exclusive economic zone. A pilot project of 100 MW is to be set up by select state-owned companies and Suzlon announced a 300 MW offshore wind project in Gujarat. Global players such as Areva, Siemens and GE have voiced plans to explore India’s offshore wind power opportunity. A considerable preparatory work remains—to study the wind patterns and sea bed, maritime activities, logistics support, and sea-seismic studies. 

Business models

As discussed earlier, India’s power market offers renewable energy generators a wide range of options for sale of power—feed-in tariffs, renewable energy certificates, captive and open access sales. This means a wide range of investors can be pursued who then can structure sale contracts that are best suited to their risk-return profile. The regulatory terms for open access (costs of transmission charges, banking, and cross-subsidy recovery) are pro-renewable and offer a strong cost advantage to benefit generators and buyers of renewable energy. The revised grid arrangements for forecasting and scheduling and levy of imbalance cost provide a clear and realistic path for the development of the renewable industry.

Industry response

The government’s market outreach programme—the first Renewable Energy Global Investors Meet and Expo (RE Invest 2015)—attracted wide interest. Domestic private investors expressed interest to develop a total of 190 GW of renewable energy projects, while the state-owned entities committed to develop 18 GW and overseas investors committed to set-up 58 GW. On the manufacturing front, 41 GW of renewable OEM facilities have been proposed. Financial institutions including banks expressed intent to fund renewable energy projects of 72 GW. The government has now initiated consultations with state agencies and the private sector to help translate these active investments. This promises to be an exciting and profitable time to invest in India’s renewable energy story. 


PWC 2015 Report, "Renewable energy's transformation of the Indian electricity landscape"



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