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The Rising Sun and the occasional cloud

Countries across the globe are increasing focusing on renewable energy to sustainably fuel their growth plans, which as yet have heavily relied on fast depleting and often polluting carbon fuel. India, too, has taken ambitious strides in leveraging its geographic advantage that offers abundant sunshine over vast areas for most of the year.

India installed 8.3GW of solar capacity in 2018 and that formed roughly 8% of global installations (104 GW). While the number may first seem impressive, it gets dwarfed when compared to China’s installation of 44.3GW.

India’s per capita power consumption (0.6 tons oil equivalent per year) is low in its peer group of BRIC countries (China leads the pack at about 2.6 tons oil equivalent per year) and that emphasises the potential energy-requirement for the future. India is hoping to achieve most of that energy requirement from its ambitious plan of 100GW of solar energy by 2022.

The opportunities and challenges that await India as it readies to accomplish the mission are many and all the key stakeholders, the Government of India (GoI) through MNRE (Ministry of New and Renewable Energy), the SECI (Solar Energy Corporation of India), IPPs (Independent Power Producers), DISCOMs (Distribution Companies), financers and the risk management community, have an all-important role to play.

As per the GoI’s stated objective, about 40% of the installed capacity by 2022 needs to come from solar parks. Considering the challenges and sensitivities around land acquisition and infrastructural requirement for power evacuation, solar parks provide a comparatively hassle-free solution. While the intention is well-founded, execution remains a challenge and delay in commissioning dates is leading to cost escalations.

Compared to 2017, there was an approximate 11% drop in fresh capacity addition in 2018 as far as PV installation is concerned. While demanding lower solar tariffs, the policy making machinery would be well advised to take a holistic view of the surrounding complex situation. This includes a combination of factors like auction cancellations, safeguard duty on imported panels, GST implications and the volatile rupee – all shrinking the profit margins of IPPs.

Compared to 2017, there was an approximate 11% drop in fresh capacity addition in 2018 as far as PV installation is concerned. While demanding lower solar tariffs, the policy making machinery would be well advised to take a holistic view of the surrounding complex situation. This includes a combination of factors like auction cancellations, safeguard duty on imported panels, GST implications and the volatile rupee – all shrinking the profit margins of IPPs.

With more than 88% of panels still being imported from China and Malaysia, we still have a long way to go as far as the “Make in India” drive is concerned. The scale and expertise achieved by large-scale Chinese players still eludes local panel producers.

The apprehensions of IPPs regarding Indian panel producers need to be allayed by offering quality products backed by long term panel warranties, as is the case with Chinese imports. Likewise, Risk Managers and Insurers need to be closely involved right from the conceptualisation stage to ensure technical and financial viability while at the same time develop products that will instill confidence and facilitate enterprise level risk-taking.

On one hand, IPPs cite hyper competitive pricing as a major impediment for investments in comprehensive risk management, and on the other, insurers remain cautious of offering long-term insurance products. Given the nature of contracts that need to provide cover for as long as 25 years, the risks are many, including radiation changes over the years, panel performance, power evacuation on a committed basis and timely payouts. Other factors such as the recent NBFC financial situation, auction cancellation of PV projects in Gujarat (which incidentally adopted a renewal energy policy quite early), Karnataka stopping any new solar energy projects, have all further exacerbated the challenge for IPPs. It is no wonder that new capacity additions is almost flattened in 2018 giving the policy makers jitters.

Policy making and regulatory framework

The SECI, entrusted as the custodian of the solar mission in India, holds the key to developing a fertile ground for solar projects to sustain and thrive. While attractive pricing will provide financial incentives for solar power generation, hyper competition introduced by way of maximum ceiling price-driven tenders are detrimental to all. Panel standardisation and approval should be the starting point to bring homogeneity in the entire eco-system. The role of MNRE could also evolve on the lines of SEBI or TRAI with an increased impetus towards setting standards, best practice implementation, governance and compliance. The certification of panels is an immediate concern and it is alarming that the backbone on which solar expects to build, i.e. the solar panels, are devoid of any certification besides the basic ones by IEC (International Electrotechnical Commission, a global standards body for solar panels).

The government, also needs to do its bit in ensuring grid-stability as increasingly, this is getting tested against sporadic power production. Smart grid still remains a challenge and there needs to be a long term commitment to address issues around balancing.

 

Risk management framework

Whether it be dependency, asset idling during night time, large scale land requirement, cut- throat bidding or long tail nature of PPAs, the solar energy space is as perilous as it is prized. Given the long term nature of PPAs, it is imperative that key risks like cost risks, schedule risks, performance risks and operational risks are all identified and mitigated.

While the lack of actuarial data in a nascent industry, such as solar, makes it challenging to structure and/or price risks, a well detailed risk mitigation framework can be a first crucial step towards addressing this issue. This, however, calls for a paradigm shift in the mindset while dealing with solar projects, which only have a fixed cost and practically non-existent variable cost. Borrowing solutions from other power generation channels like thermal or hydro power will not be suitable in this case.

The role of risk management, therefore, over the large cycle of 25 years becomes very important. Well considered safeguards need to be incorporated at the drawing-board stage itself. Besides the obvious risks of property damage caused by natural and man-made perils, the projects should be able to cope with and respond to deteriorating power generation caused by excessive panel degradation and lower than expected radiation.

 

The way forward

The success of solar relies heavily on visioning goals that encourage stable and sustainable long term development.

Although power primarily remains as a state subject, increased collaboration and coordination between the center and state will be crucial to improve efficiencies while also articulating a clearer industry roadmap.

Similarly, industry associations need to work in tandem with policy makers and risk managers to create a knowledge repository and leverage data more effectively to better understand and mitigate risk. This will improve the long term project sustainability and financial viability for all involved stakeholders.

Renewable energy has the potential to create many employment opportunities, especially in rural areas. Apart from providing energy security, the large savings generated can also be better utilised in a fast developing country.

India is slowly but surely gaining global prominence in the generation of solar power and the rising sun bears testimony to it.

 

                   SUMIT DUTT

Head – Property and Casualty,

Willis Towers Watson India Insurance Brokers

                                                                                               

     

          SAURABH VERMA

Executive Vice President–Property & Casualty,

Willis Towers Watson India Insurance Brokers

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