Overcoming Cost and Execution Challenges: The Crucial Role of Round-the-Clock Renewable Energy for Grid Stability

India’s renewable energy (RE) capacity, excluding hydro energy, is set to witness a significant surge, reaching approximately 170 gigawatts (GW) by March 2025, up from 135 GW recorded in December 2023, according to the credit rating agency ICRA. This growth trajectory is supported by a considerable increase in tendering activity during the current fiscal year, with over 16 GW of projects already bid out and an additional 17 GW of bids underway by Central nodal agencies. This aligns with the Government of India’s announcement in March 2023, targeting an annual bidding trajectory of 50 GW.

ICRA projects that the expansion in RE capacity over the next five to six years will significantly enhance the share of RE, along with large hydro, in India’s total electricity generation mix, increasing from about 23% in the fiscal year 2024 to roughly 40% by 2030. However, the intermittent nature of RE generation underscores the importance of ensuring round-the-clock (RTC) supply from RE sources. This can be achieved through a combination of wind and solar power projects, supplemented by energy storage systems.

Girishkumar Kadam, Senior Vice President & Group Head – Corporate Ratings at ICRA, pointed out that the tariffs for RE-RTC projects tend to be higher compared to standalone solar and wind projects. Recent RTC bid tariffs have been observed in the range of Rs. 4.0-4.5 per unit, attributed mainly to the costs associated with storage components and a higher share of wind energy. Despite the higher costs, the viability of RTC projects appears more favorable with pumped hydro storage (PSP) projects compared to battery energy storage systems (BESS), although wind energy segment’s supply chain issues could present execution challenges.

Moreover, the decline in solar photovoltaic (PV) cell and module prices, combined with the temporary suspension of the Approved List of Module Manufacturers (ALMM) order until March 2024 and extensions granted for solar and hybrid project timelines, is expected to boost RE capacity additions to 18-20 GW in fiscal year 2024, up from 15 GW in the previous year. This upward trend is likely to continue, with capacity additions projected to reach 23-25 GW in fiscal year 2025, primarily driven by solar energy. Nevertheless, challenges such as delays in land acquisition and transmission connectivity remain, potentially impacting these growth prospects.

Kadam further noted the significant decrease in solar PV cell and module prices by 65% and 50%, respectively, over the past year, has improved the debt service coverage ratio (DSCR) for upcoming solar projects. This improvement is particularly notable for projects with a bid tariff of Rs. 2.5 per unit and sourcing modules from domestic manufacturers using imported PV cells, where the average DSCR has increased by over 35 basis points. While this presents a short-term advantage, developers still face risks related to fluctuations in imported solar PV cell and wafer prices, pending the establishment of fully integrated module manufacturing units in India.

Lastly, state distribution utilities (discoms) have demonstrated improved payment discipline to power generators, including RE independent power producers (IPPs), following the implementation of late payment surcharge (LPS) rules in June 2022. In most key states, discoms have been settling dues within three months from the billing date for the past 15 months, with past dues being cleared in installments under the LPS scheme. The continuation of this trend is contingent upon further improvements in the financial health of discoms, which is linked to the execution of reform measures by the states.