Renewable energy's outlook looks bright, but check for clouds too
renewable power by 2030 has set the ball rolling for the domestic energy sector. Of this, over 172 GW has been commissioned, leaving a big opportunity for the remainder of the decade. While this looks like an attractive proposition, finding the right investment involves weighing several factors.
Renewable energy installed capacity has increased 11% annually in the last eight years, while total fossil fuel capacity grew by 3.2%.
So far, despite a promising future for the segment, investor experience has not been impressive.
A key reason is regular disruption in business models due to innovation, oversupply and policy changes. This has resulted in a steady decline in tariffs. The levelised cost of electricity generated by solar power dropped to Rs 2.5 per unit from the peak of Rs 17 per unit a decade ago.
Consequently, several distribution companies had to renege on long-term power purchase agreements (PPAs) signed at higher tariffs.
This turned the banking channel risk averse, which wasn’t good for the sector, given that over 75-80% of the capital cost is funded by debt. Also, the removal of generation-based incentives and accelerated depreciation compressed the prospective return from setting up a wind power plant.
A silver lining is emerging due to a few changes in the business environment. First, renewable power-generating companies sign PPAs with distribution companies before approaching banks, which improves the comfort level of lenders.
