The United States president Donald Trump was quick to hit out at India when he announced an exit from the Paris climate change deal.
He accused India of being “allowed to double its coal production by 2020” and claimed that it was receiving “billions and billions of dollars in foreign aid” from other countries for signing the Paris climate change agreement.
India’s response has been to reject these statements and it has said that it will plough ahead with its ambitious renewable energy targets. The Indian prime minister Narendra Modi is striving for the country to generate 40 per cent of its energy from renewables sources by 2030 in an effort to help tackle climate change. India is the third largest carbon emitter after the US and China.
But its renewable energy sector is facing significant hurdles.
“Challenges faced by the renewable energy sector include high costs of land acquisition, high cost of debt, delays in environmental clearances and other regulatory approvals, fragmentation of the industry and dependence on imported components and technology,” says Aaron Solomon, a partner at Solomon & Co, a law firm based in Mumbai.
He adds that Mr Trump’s decision could have a knock-on effect on overseas funding flows into the industry.
“International financing and investment to Indian renewable energy projects could be affected,” he says.
“Financing of renewable energy projects is also affected by the continuing uncertainty related to the trading of carbon credits in India, the weak financial position of power distribution companies and delay in payments by distributors, and difficulties in forecasting energy generation from renewable energy sources such as wind and solar.”
But otherwise, “Trump’s withdrawal from the Paris climate deal is unlikely to impact India’s renewable energy sector, since the emphasis and growth for renewable energy in India is based on fundamentals that exist in India and not on international treaty commitments”, Mr Solomon adds.
“There is a significant power deficit in India and most parts of India have year-round sunlight. India has limited fossil fuel resources and the need to protect the environment is ingrained in Indian spirituality and religion. For these reasons, I believe that the Modi-led government emphasis on renewable energy will not decelerate as a consequence of Trump’s withdrawal from the Paris climate deal.”
India’s energy needs are rising rapidly and as the country strives to reduce its carbon footprint, developing cleaner power sources will be critical. There is a power shortfall in the country, with many people left without regular access to electricity. About 60 per cent of India’s power needs are currently served by coal power plants, which generate high levels of pollution. Urbanisation, a rapidly expanding economy and the country’s plans to grow its manufacturing sector are all factors that are contributing to India’s surging appetite for energy.
India’s external affairs minister Sushma Swaraj told reporters on Tuesday: “India signed the Paris agreement not because of pressure from any country nor greed. We signed the agreement because of our commitment to protecting the environment.”
Companies in the sector highlight some of the obstacles that renewables firms face in India.
“There’s a lack of smart, affordable finance for the entire renewable energy ecosystem,” says Pritam Doshi a director at PAE Renewables, a solar installation company based in Mumbai. “For a small to medium-sized business in solar, for example, the lack of understanding by traditional banks is frustrating to an entrepreneur. Banks need to look at cash flows versus fixed assets to offer loans and working capital facilities. The sooner India moves to an efficient financing model the more rapidly we will witness the growth.”
Meanwhile, Reuters has reported that some of India’s largest solar equipment manufacturers are on the brink of going out of business because their prices are being undercut by their Chinese competitors who are exporting their solar product to India – to the extent that Chinese firms account for 85 per cent of the solar module market in India. The government is eager to make power as cheap as possible for its population as it boldly pushes ahead with its renewables targets. Solar is the primary focus of India’s efforts to move away from fossil fuels.
“It’s not a case of one company – we have the largest cell operating capacity – everybody below us will shut down one after another,” Dhruv Sharma, the chief executive of Jupiter Solar, based in Himachal Pradesh in north India, told the newswire.
Even within the industry in India, there is plenty of competition.
“Due to relatively high interest costs, and fragmented market, there are large number of engineering, procurement and construction [EPC] players and developers, causing the industry to be hyper-competitive,” says Mr Doshi. “This is good for the consumer at the end of the day, but if some of the [EPC] players don’t survive then it’s not good for the developer or consumer in terms of the guarantees given.”
Renewable energy companies are also sometimes hindered by the amount of red tape they deal with, Mr Doshi says.
“The government still has support programs for the underserved markets. We believe that these programs are counter-productive as they require immense paperwork, are time-consuming, and involve much bureaucracy.”
There are also issues when it comes to the different state governments and the central governments.
“This makes it very cumbersome for a developer to roll out a rooftop solar implementation across India. This needs to be streamlined. One nation should have one national policy that fits all state requirements.”
The fact that India’s solar power prices have been hitting record lows, coming in cheaper than fossil fuel prices, bodes well for India meeting its renewables targets. Wind power tariffs in India have also tumbled to record lows.
In a recent report Crisil Research, which is part of Standard & Poor’s, highlighted that competition was gathering pace in the wind power segment of the market in India, which would bring tariffs down – but this would also come as a blow to some wind power companies.
“To compete in bids, developers are likely to put pressure on wind power original equipment manufacturers, denting their profitability,” according to Crisil. “Also, gradually, developers would go for the self-development model, piling more pressure on manufacturers’ margins as the premium charged for value-added services like clearances, wind resource assessment and grid connectivity would come down. But manufacturers that have land banks with high wind potential and proximity to the central transmission utility will be less impacted because these would fetch a premium.”
Despite the challenges, Mr Doshi firmly believes that “India is likely to meet its ambitious targets”.
There are significant elements working in the favour of renewables. With India aiming to produce 175GW of energy from renewable sources by 2022, the opportunities are substantial.
“Most of the renewable capacities installed recently and going forward are all market-driven,” he says. “That is to say, it makes good business sense to invest in renewable energy in India.”
He explains that investors in solar power can make a 10 to 12 per cent internal rate of return over 20 years.
In his opinion, Mr Trump is not going to darken the way when it comes to India pushing forward with its renewable energy plans.
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