Shift of renewables to the east by QVARTZ

Shift of renewables to the East A growing business opportunity in India and China Abstract Eastern energy markets are growing rapidly, which presents a big business opportunity for foreign companies. It is therefore crucial for energy companies to ensure their presence in the region in the next five years to become global business leaders

QVARTZ and MEC Intelligence

Contents List of figures .....................................................................................................................................2 Executive summary ...........................................................................................................................3 1.

The need for cleaner energy continues to dominate decisions on fuel in power generation despite the falling fossil fuel costs ............................................................................4 Despite oil prices declining since 2014, there is minimal impact on renewables ..............................4 For gas, the price has declined, and its share in the electricity generation mix has increased since 2012 complementing renewables in terms of reliability ...........................................................4 Coal is losing its status as the primary fuel for electricity generation and giving way to renewables 5

Renewables are here to stay with number of installations increasing towards 2020 ..............7 By 2020, renewables will contribute 14% to the total installed capacity compared to 6% in 2010 ...7 Most additions towards 2020 will come from the existing top-20 installing countries .......................8 Top-20 installers continue to accelerate installation towards 2020 ..................................................9

The renewable energy cluster is moving from the West to the East .......................................11 China and India will have 47% of the global renewable energy capacity by 2020 .........................11 The declining renewable energy costs will support the shift of the cleantech cluster after 2020 ...12 Post 2020, the cleantech shift will be reinforced as more capacity is added in the East ................14

India â&#x20AC;&#x201C; the next big renewable energy destination ....................................................................15 Despite fast-paced growth in the past five years, renewable energy only has a ~2% share in the energy consumption mix ...........................................................................................................15 India aims to install an additional 144 GW renewable energy capacity by 2022 as costs decline .15 The Indian government is implementing structured policies to support the large renewable energy capacity targets ...................................................................................................................18 Developing a robust grid and a demand induced by the RPO mechanisms ensures the integration of the renewable energy capacity into the national electricity system ..........................22 India â&#x20AC;&#x201C; the renewable energy contender in the decade ahead .......................................................24

List of figures Figure no.

Description

Page no.

Figure 1.1

Growth of natural gas demand in power generation

Figure 1.2

Outcome of coal-fired capacity in the development pipeline since January 2010

Figure 2.1

Global renewable energy growth by sources

Figure 2.2

Global renewables growth – countries with renewable energy installed capacity above 1 GW (2014)

Figure 2.3

Top 20 renewable energy installers – 2014 capacity ( GW) and% of 2020 target achieved

Figure 3.1

Geographical comparison of renewables growth in 2010-2014 and 20152020

Figure 3.2

Wind and solar energy new capacity to be installed in four regions between 2015-2020

Figure 3.3

LCOE comparison of solar PV and onshore wind energy with fossil fuel generation

Figure 3.4

Total energy Consumption 2015-2035

Figure 4.1

Cumulative renewable energy installed capacity in India from 2010 to 2015 and targets for 2022

Figure 4.2

Electricity generation cost from different sources in India in 2013-14

Figure 4.3

LCOE projections till 2020 for India

Figure 4.4

India solar energy – supply-side parameters

Figure 4.5

India wind energy – supply-side parameters

Figure 4.6

Renewables in India – demand-side parameters

Executive summary Renewable energy in the world has gone through a major transformation in the past five years. In the current decade, renewables are set to establish a firm foothold in the global energy generation sphere. The rising concerns on fossil fuel use and the global efforts to tackle climate change are pushing nations towards adopting cleaner sources of energy in their electricity generation mix. The year 2013 marked a turning point in new global power capacity additions when more renewable energy installations (143 GW) were seen compared to conventional sources (141 GW). This positive trend will continue as the share of renewables in the globally installed base is expected to grow from 6% in 2010 to 14% in 2020, signifying the fact that they are here to stay. More and more countries are coming up with new renewable energy installations, which is evident from the fact that the number of countries with renewables in their power generation mix has gone up from 117 in 2010 to 133 in 2014. Interestingly, 90% of the current global capacity remains concentrated among the top-20 countries. The developed nations of Western Europe are moving towards advanced technologies like offshore wind energy while the developing economies like China and India will accelerate developments in proven technologies like onshore wind and solar energy. These countries will drive the accelerated growth of renewables towards 2020 based on their national targets and climate change obligations. Historically, the initial growth in renewable energy was primarily significant in the "western cluster" comprising Europe and North America. However, in the past five years, the "eastern cluster" comprising China and India has carried out new capacity installations with greater momentum than the western cluster. With recently revised national renewable energy targets of the two nations, 405 GW of China (by 2020) and 175 GW of India (by 2022), their combined installations are expected to increase by 160% in the 2014-2020 period. It is estimated that China and India combined will have a 47% share of the global renewable energy installed capacity by the end of the decade, up from 30% in 2014. This large-scale development is expected to have a positive impact on the cost of energy, which is expected to decrease due to factors like technology maturity, supply chain efficiency and evolving policy support schemes. Post 2020, as renewables become a cheaper alternative to conventional coal and fossil fuels, this shift of the cleantech cluster from west to east will be reinforced as installations gain further momentum. This report pays special attention to assessing the Indian renewables market as the next big investment destination for global players. India has recently increased its targets for solar energy to 100 GW by 2022 from 4 GW by 2017; and concerning wind energy, the target has been raised to 60 GW by 2022, up from 27.3 GW by 2017. With a cumulative renewable energy capacity target of 175 GW by 2022, India has a massive development potential of 144 GW, from the 31 GW of total installed capacity in 2014. In addition, with decreasing costs of electricity generation from renewables and increasing support from the government, India will become the hotspot for renewable energy investments in the next five to seven years. Technologies like rooftop solar PV energy and onshore wind energy are expected to achieve grid parity levels before the end of the decade. The government is also building policy-based support at various levels of manufacturing, financing, project development, T&D infrastructure and demand generation to accelerate renewable energy project development. This report also offers a thorough evaluation of the demand and supply scenario and financing developments for new solar and wind energy project realisation in the country.

Thomas G. Arentsen Partner, QVARTZ

Ander Roed Bruhn Partner, QVARTZ

Sidharth Jain Managing Director, MEC Intelligence

1. The need for cleaner energy continues to dominate decisions on fuel in power generation despite the falling fossil fuel costs Despite oil prices declining since 2014, there is minimal impact on renewables Today, oil contributes to less than 5%1 in the current world power generation mix, as opposed to approximately 25% in 1973. This share is expected to shrink to less than 1% towards 2030, according to IEA estimates. Oil and renewables essentially operate in non-overlapping markets, i.e. while oil is majorly consumed in the transportation sector, renewables are primarily used to generate electricity. Even in areas like the Middle East, Africa and Japan, where diesel still contributes to the electricity mix, solar and wind energy are becoming more competitive. In conclusion, oil may be on a downward trend for now, but this is not bad news for renewables. Following four years of relative price stability around USD 105 per barrel2, oil prices have declined steeply since last year. The oil price dropped from around USD 115 per barrel in June 2014 to USD 43 per barrel3 in August the same year. This plunge in oil prices is primarily driven by the weakening global demand combined with change in the geopolitical scenario. It has created an oversupply in the market, which is expected to remain until 2016.4 The price pressure is already building up and oil-exporting economies like Russia, Iraq, Nigeria and Venezuela have seen economic turmoil.5 Even Iran has started showing signs of an economic crunch. Under such circumstances, it is evident that oil will bounce back once the supply is rationalised for higher demand. Low oil prices are not ominous to the future of renewables as they operate in different markets.

For gas, the price has declined, and its share in the electricity generation mix has increased since 2012 complementing renewables in terms of reliability Increasing installation of gas-based power plants is expected to complement the growth of renewables. Natural gas is replacing the retiring coal plants across the globe and supporting renewables with a reliable and cleaner base load. The consumption of gas in the power sector is expected to increase in both developed and developing countries until 20196 though it is expected to grow at a faster rate in the developing countries given the fact that these are powerhungry countries with growing economies.

Energy & Climate Change Report, IEA, 2015 The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses, World Bank 2015 3 Bloomberg Brent Crude Commodity Prices, 2015 4 IEA, 2014-2015 5 From Venezuela to Iraq to Russia, Oil Price Drops Raise Fears of Unrest, The New York Times, 2015 6 Gas Medium Term Report, IEA, 2014 2

Figure 1.1 shows the historical and forecasted consumption of natural gas in the power sector in the OECD and nonOECD countries.

This increase in the use of natural gas is expected to be spurred on by a decline in natural gas prices. The US Henry Hub gas prices declined from an average of USD 4.57 per MMBtu in June 2014 to USD 3.43 per MMBtu in December 20147. Prices averaged at USD 2.77/MMBtu8 in June this year, and it is expected that gas prices will stabilise next year and rebalance at USD 3.90/MMBtu 9 on average in 2016. Much like for oil, the current downfall in gas prices is caused by an oversupply in the industry due to a dwindling demand from Europe and China along-with the increased production from the US shale gas boom. This drop in gas prices is not expected to slow down or knock out renewables. This is because gas will replace the polluting coal capacities in most countries due to cheaper prices and environmental obligations. In fact, cheap gas will complement the intermittent supply from renewables which can be balanced by a consistent source to supply the base load.

Coal is losing its status as the primary fuel for electricity generation and giving way to renewables Coal is the most prominent source of energy and is highly polluting as well. Renewables are therefore being trusted increasingly to replace coal in the energy system. Globally, the impetus seems to have shifted from installation of coal-fired power stations to their retirement. This trend can primarily be attributed to environmental obligations and programmes in different countries. Ageing coal capacity facilities are being shut down across the globe, while several planned plants are either being stalled or halted. Several countries are stressing the retirement of their inefficient and ageing coal capacities in order to fulfil their environmental obligations. To mention a few, the US plans to retire nearly 12.9 GW10 of coal-based capacity in 2015 with further plans of closing 90 GW11 of coal-fired power plants (in base policy case scenario) by the year 2040 under 7

BP Statistics, 2015 Index Mundi â&#x20AC;&#x201C; Commodity US Natural Gas 9 Bank of America â&#x20AC;&#x201C; Merrill Lynch Report 10 Scheduled 2015 capacity additions mostly wind and natural gas; retirements mostly coal, EIA, 2015 11 Proposed Clean Power Plan would accelerate renewable additions and coal plant retirements, EIA, 2015 8

its clean power projects programme. China has also shut 3.3 GW12 of coal-fired capacity in 2014 with plans to close another 60 GW between 2016 and 2020. The UK has an even more ambitious target of closing all of its coal plants except three by 2023, and has already retired nearly 8.2 GW of coal-fired capacity since December 201213. Other nations like Germany14, Australia15 and New-Zealand16 also plan to discontinue the use of coal. However, the bigger concern for coal is not the closing of the aged plants, but the stalling of plants in the pipeline in a majority of the regions of the world17 Figure 1.2 illustrates the status of coal power project pipelines in the regions of the world, which shows that coal project pipelines are stalled across regions.

Retirement of coal-based capacity on such a large scale and the stalling of pipelines will create a wide energy supply gap, which is expected to be filled in by a mix of natural gas and renewables. Though natural gas will be used to supply large portions of base loads, renewables will complement them by supplying peak loads along-with a part of the base load. Therefore, more renewable energy capacities are required globally for a cleaner energy mix.

China National Bureau of Statistics UK coal-fired power plants face closure, World Coal, 2014 and Most U.K. Coal Power Plants Seen Shut by 2023 on Climate Rules, Bloomberg Business, 2014 14 Germany to shut down coal-fired plants, extend power grid: sources, Reuters, 2015 15 South Australia could be 1st mainland state to 100% renewables, RenewEconomy, 2014 16 New Zealand Pledges An End To Coal By 2018, Climate Progress, 2015 17 Boom and Bust â&#x20AC;&#x201C; TRACKING THE GLOBAL COAL PLANT PIPELINE, 2015 13

2. Renewables are here to stay with number of installations increasing towards 2020 By 2020, renewables will contribute 14% to the total installed capacity compared to 6% in 2010 In 2010, renewables contributed nearly 6% of the cumulative global installations. The number of global renewable energy installations grew at a CAGR of 18% between 2010 and 2014, with 2013 turning out be a remarkable year for renewables. This year, for the first time, the annual renewable energy installation (143 GW) exceeded that from conventional sources (141 GW)18. The year marked the beginning of an era where renewables would become the preferred fuel choice for developers. By the end of 2014, the contribution of renewables to the global power generation mix reached 11%, almost double up from 2010. Wind and solar PV energy dominate renewable energy installations across the world with share of 80% in the global renewable energy capacity installed. The combined capacity for solar PV and wind energy grew at a CAGR of 18% in the 2010-2014 period.19 Figure 2.1 below shows the historical and forecasted shares of different renewable energy sources in the globally installed power generation capacities.

Approaching 2020, global power capacity installations will continue to see renewable energy additions owing to regional as well as country targets. Globally, renewables are expected to steadily increase their share in the total global power generation mix by growing at a CAGR of 7%, compared to conventional sources which are expected to grow at a low CAGR of 1% until 2020. Going by the current installation rate, renewables are expected to contribute 14% to the global electricity generation mix with wind and solar PV energy taking the lion's share of 82% in the total renewable energy capacity by 2020.20

BNEF 2014, Stated renewable energy capacity including hydro energy IEA World Energy Outlook 2013 20 IEA World Energy Outlook 2013 19

Most additions towards 2020 will come from the existing top-20 installing countries The total global renewable energy installed capacity almost doubled from 350.6 GW to 684.3 GW in 2010-2014, growing at a CAGR of 18%. Furthermore, in the same period, a number of countries with renewable energy installations increased from 117 in 2010 to 133 in 2014.21 However, the distribution of renewable energy installations is highly skewed as merely 38 of these 133 countries account for 97% of the cumulative renewable energy installation in 2014. Among these 38 countries, 21 countries are in Europe, 11 are in Asia, 5 in the Americas and 1 in Africa. At the end of 2014, the top-20 nations in renewable energy installations contributed around 90% of the global installed capacity base. The top-5 renewable energy installers – China, the United States, Germany, Italy and Spain – collectively account for 63% of the total capacity. Their installed capacity base increased from 225.1 GW in 2010 to 428.6 GW in 2014 at a CAGR of 17%. Figure 2.2 below shows the growth of renewables in countries with more than 1 GW renewable energy capacity installed by 2014.

Much like the global distribution of renewable energy installations, renewables are concentrated among a few countries within regions as well In Europe, the top-5 installers – Germany, Italy, Spain, the UK and France – had collectively installed 190.4 GW by the end of 2014, contributing 73% of the European renewable energy installed capacity. In Asia, China, India and Japan are among the global top-20 countries with renewable energy installations. Collectively, their total installed capacity increased from 103.3 GW in 2010 to 237.7 GW in 2014. Four new countries – the UAE, Qatar, Laos and Kazakhstan – contributed non-hydro renewable energy installations to the continent during the 2010-2014 period. The US increased its capacity base from 56.7 GW in 2010 to 100.1 GW in 2014, riding on onshore wind and solar PV developments. Africa saw the maximum number of new entrants to the global league of renewable energy installers with ten countries initiating small-scale renewable energy developments in the 2010-2014 period, while their total capacity addition was only 0.2 GW. 21

Large-medium and pumped hydro energy not included.

Top-20 installers continue to accelerate installation towards 2020 While most of the leading countries from the EU, Asia and the US have set renewable energy targets towards 2020, countries like Brazil and Canada are likely to double the renewable energy capacity towards 2020 without fixed targets. Figure 2.3 shows the 2014 status of the total amount of renewable energy installations and the relative achievement of the top-20 countries' 2020 targets.

Based on the analysis of the figure above, it is evident that nearly half of the countries have achieved less than 60% of their 2020 target. It signifies potential for the growth of renewables in these nations in the years towards 2020. The largest among these countries, based on consumption and installed capacity of renewables, are China, the US, India and the UK. These countries are expected to contribute more than 85% of the total capacity addition during 20152020. Following closely are Germany and France. The remaining countries in the top-20 installers are countries like Brazil, Canada and the EU nations of the Netherlands, Greece, Poland and Belgium. Their achievement of the 2020 target varies between 25% and 60% as they are comparably newer in the renewable energy arena. Prominent among the developing countries are China and India as they have recently raised their 2020/22 renewable energy capacity targets to 405 GW and 175 GW respectively. They are implementing measures to attract investments into their renewable energy sector by clearing policy bottlenecks. These nations currently aim to ramp up the scale in mature technologies to bring down the overall cost of energy from renewables. In the US, it is interesting to see that the government is supporting the plan to double the current installed capacity of renewables by 2020 despite the availability of cheap shale gas for electricity production.22 This is likely to address the climate change resolution on emission reduction targets for 2020 and beyond.23 Like in Asia, the momentum is expected to remain in onshore wind and solar PV energy in the US as well. It is important to note that this development of the renewable energy capacity will be at two levels of maturity, and this probably signals how the diffusion of renewable energy technologies will happen globally.

The Shale Gas and Tight Oil Boom: U.S. States' Economic Gains and Vulnerabilities, Council on Foreign Relations, 2013 23 USA, Climate Action Tracker, 2015

Ahead on the maturity curve are the Western European countries, who have been the frontrunners in bringing renewable energy capacity to the market. They will lead the development of advanced technologies such as offshore wind energy and carry out research and development on newer sources such as geothermal, wave and tidal energy. For example, in offshore wind energy, Europe currently contributes around 92% of the global installed capacity, with the UK, Denmark and Germany contributing a combined share of 85% in 2014. The developments are set to accelerate until 2020 due to factors like advanced technical expertise, supply chain efficiency and increasing national efforts to tackle climate change. While doing this, the Western European countries will formulate new business models and bring advancements to the renewable energy technologies, which will consequently diffuse to other countries. Following Western Europe on the maturity curve are the Central European, Asian and American countries. Their primary focus is on scaling capacities within mature renewable energy technologies on which they have developed technical knowledge. These countries could also be seen venturing into newer technologies like offshore wind energy, as knowledge from Western Europe transfers across the world. It is also interesting to note that China, India and the US, have all shown an interest in piloting offshore wind energy projects without committing to a very highscale target.24 As these technologies scale up, new markets like those in Africa are likely to experience a knock-on effect as private investors and supply chain players will step in to scale proven technologies in the renewable energy business. In Africa, even though there are no defined targets, private investors are already lining up new solar power investments. To mention a few, SkyPower, a private investor, has signed deals worth USD 5 billion to build a 3 GW solar energy plant (at a cost of USD 1.6 million per MW) in Nigeria and has tabled contracts worth USD 7.2 billion to develop solar energy plants in Kenya, Egypt and the Middle East.25 In addition, a new USD 1.9 billion pan-African renewable energy generation platform called Lekela Power aims to develop new wind and solar energy plants in the region with a total capacity of 0.7-0.9 GW by 2018.26 Therefore, it is evident that in the next five years, the larger part of the renewable energy additions will be in four regions: the EU and the US in the West and China and India in the East.

Except China who has reduced its 30 GW by 2020 target to 10 GW while less than 1 GW is currently installed Lehman survivor wants to build a $12 billion solar empire, Business Standard, 2015 26 New African platform to boost investment in renewable power generation, Out-Law, 2015 25

3. The renewable energy cluster is moving from the West to the East China and India will have 47% of the global renewable energy capacity by 2020 In 2014, the cumulative renewable energy installation output in China and India combined was 184 GW compared to 262 GW in Europe and 106 GW in the US. By 2020, the relative positions of these regions are likely to have changed. In 2014, Europe led the renewable energy installations with a 38% share of the global capacity. However, it is expected to drop by 8% in the next six years to reach 30% in 2020. The US' cumulative share is also expected to decline marginally from 15% to 14% in the same period. This is mainly due to large renewable energy capacity additions in the East. It is estimated that China and India combined will increase their contribution to the global renewable energy capacity installed from 30% in 2014 to 47% in 2020. This shift of the renewable energy centre is characterised by three factors: ď&#x201A;ˇ ď&#x201A;ˇ

ď&#x201A;ˇ

Both China and India revised their 2020 renewable energy targets upwards in 2014 after achieving their previous targets. EU has achieved 15% of its 2020 targets and is expected to meet its 2020 targets easily at the current rate. No upward changes have been made to the targets. The countries are, in fact, withdrawing incentive support as it has led to an added financial pressure on their governments. Much like the EU, no upward revision of targets has been observed in the US. Their immediate focus remains on developing relatively cleaner domestic shale gas and phasing out polluting coal stations. Uncertainty regarding support policies and incentives like the Production Tax Credit for renewables in the past couple of years has undermined the investors' confidence in the country.

Figure 3.1 below compares the renewable energy growth in different regions in two periods indicating a clear shift of renewable energy capacity from west to east.

Mature wind and solar PV energy technologies will continue to contribute most of the new additions towards 2020. The capacity from wind energy installations in China and India is expected to grow at a rate of 10% and 18% respectively until 2020 as compared to merely 4% in both the EU and the US during the same period (Figure 3.2). Solar PV energy installations in the East are expected to gain greater impetus and grow at a faster pace. China and India are together expected to install more than four times the solar PV and wind energy capacity to be installed in the EU and the US combined, until 2020 (Figure 3.2). These trends in wind and solar PV energy indicate a clear shift of the cleantech cluster towards the East.

The declining renewable energy costs will support the shift of the cleantech cluster after 2020 Before 2010, a major global concern in connection with renewable energy installation was the high cost of energy. All the renewable energy technologies, except hydro, were more expensive by folds than conventional coal, oil and gas. However, the cost of energy from renewables has dropped significantly between 2010 and 2014. With renewables gaining cost competitiveness with conventional sources in the last five years, there is a major boost in the confidence of investors to support the development of nearly 690 GW of non-hydro renewable energy developments globally. The further drop in the solar PV energy LCOE is expected to be higher in China and India than in the EU and the US. Meanwhile, in wind energy, the LCOE is expected to drop at the same time in all four regions.

Figure 3.3 below compares the LCOE projections for onshore wind and solar PV energy with fossil fuel generation until 2020 in four regions.

In the past five years, the LCOE for solar PV and wind energy has dropped in all regions. Despite the decline, there is a wide difference in the current global LCOE range, which is USD 80-350 per MWh as it is highly dependent on the solar PV energy resources. When the current solar PV energy LCOE is compared across the regions of the US, the EU, China and India, it is interesting to note that India has the lowest solar energy LCOE, which is below USD 100 per MWh. The solar PV energy LCOE in India experienced a drop of more than 50% in the 2011-2014 period. The nation has outperformed its counterparts due to the better solar irradiance, low-cost competitive manufacturing and improved investments through new funding mechanisms. India is expected to achieve grid parity in the utility-scale solar PV energy LCOE27 before the end of the decade, outpacing the other mentioned regions. On the other hand, China and the US are expected to meet grid parity for solar PV energy early in the next decade. Comparatively, in wind energy, the global average LCOE has a smaller range of USD 60-90 per MWh, which is becoming competitive to fossil fuel generation costs at USD 40-140 per MWh. This decreased cost of generation from wind energy is the fundamental driver behind large-scale installations across the world. It is expected that onshore wind energy will reach grid parity in all regions around the same time in the next decade. Onshore wind energy is a preferred choice to replace the old and polluting coal powered plants in China after natural gas. The technology will become self-sufficient in the next decade, and until then it will continue to remain an incentive- and policy-driven market.

Comparing the utility-scale cost of energy to the wholesale electricity price

Post 2020, the cleantech shift will be reinforced as more capacity is added in the East Today, China and India collectively represent 28% of the global energy demand. Continuous developments in both the growing economies are expected to further increase their energy demands towards 2035. The countries will together account for 31% of the global energy demand in 2020, which will increase to 34% in 2035.28 On the other hand, the EU is expected to decrease its energy demands by 0.3% by 2020 through energy efficiency endeavours while the US is expected to have an increase of 3.5% in the energy demand by 2020. Figure 3.4 below shows the total energy consumption projections indicating the increasing demand in China and India.

In order to support the growing energy demand in China and India, it is now becoming imperative for these countries to diversify their power generation mix and integrate renewables as mainstream sources for electricity generation. The movement of renewable energy up the merit order curve will be supported by two major factors: The first will be the phasing out of coal due to its polluting nature, which is continuously vexing governments regarding environmental obligations, and the second will be the decrease of the cost of electricity generation from solar PV and wind energy, which will increase their role in the generation mix. However, it must be kept in mind that wind and solar energy are essentially intermittent in nature. They require support from reliable conventional sources which wary across regions and depend on the availability of resources and plant capacity factors.

BP Energy Outlook 2035

4. India â&#x20AC;&#x201C; the next big renewable energy destination Despite fast-paced growth in the past five years, renewable energy only has a ~2% share in the energy consumption mix By 2014, India had installed renewable energy capacity of around 31 GW29. That is 11% of the country's total electricity generation capacity of approximately 260 GW. Since 2009, there has been a 128% increase in the total renewable energy capacity at a CAGR of 18%, at par with the global level. This growth has primarily been driven by renewable energy targets set in 2010, in which India had pledged to install 27.3 GW wind energy, 4 GW solar PV energy, 5 GW small hydro and approximately 5 GW bio-waste/biofuels between 2011 and 2017.30 With the attractive policies, strong incentives and resource-rich sites, India had already installed approximately 24 GW wind energy, 4 GW solar PV energy, 4.1 GW small hydro and 4.5 GW biomass by the end of 2014 and is thus very close to achieving its targets. The current share of renewables in the primary energy consumption mix is only 2.2% 31 (i.e. 14 Mtoe out of the total 638 Mtoe in 2014). Renewable energy consumption grew at a CAGR of nearly 18% as compared to the total primary energy consumption, which grew at a CAGR of 6.8% in the five-year period from 2010 to 2014. Therefore, there is a vast potential for growth of renewables and a decrease of the fossil fuel dependency in the country.

India aims to install an additional 144 GW renewable energy capacity by 2022 as costs decline Based on India's vast untapped renewable energy potential of 900 GW32 and positive performance on 2017 targets, the new government formed in May 2014 set new targets and revised the renewable energy policies. The new target is to achieve an installed base of 175 GW by 2022 of which 60 GW is wind energy, 40 GW is utility-scale solar PV energy, 40 GW is rooftop solar PV energy, 20 GW is solar PV energy from an innovative, employment-generating entrepreneurial scheme (details under consideration), 10 GW is small hydro and 5 GW is biomass-based power projects. Thus, solar PV and wind energy will be the major contributors with around 133 GW expected capacity installation in the next decade.

Renewable energyâ&#x20AC;&#x201D;India's sunrise sector, Livemint, 2015 STRATEGIC PLAN FOR NEW AND RENEWABLE ENERGY SECTOR FOR THE PERIOD 2011-17, MNRE, 2011 31 BP statistical review 2015, not including hydro power 32 Green energy potential remains untapped: Ministry, The Hindu Business Line, 2015 30

Figure 4.1 below shows the growth of renewables by source in India until 2014, expectations for 2015 and the 2022 targets.

The current targets are ambitious compared to the existing installed base. However, they are essential to support the rapid renewable energy development in the country. The primary aim with the targets is to reduce the cost of the renewables through economies of scale. For example, domestic manufacturing of renewable wind energy products instead of imports at high costs has played a crucial role in making wind energy competitive to power plants fuelled by imported coal. Similarly, for solar PV, the energy current cost of USD 0.9 million per MW can be reduced to USD 0.6 million per MW based on economies of scale.33 Therefore, the 2022 target plans are to install 20 solar energy parks with capacities of 500 MW and above.34 India already has the advantage of the average LCOE for both solar PV and wind energy being below or on par with the global levels (see figure 3.3). In coastal states like Tamil Nadu, which have good wind resources, the LCOE has reached grid parity without subsidies. Solar PV has also become a competitive source as its LCOE is at grid-tariff parity for commercial and industrial consumers. However, the national average LCOE for both wind and solar PV energy has yet to reach grid parity.

33 34

India plans to award 15,000 MW of solar projects this year, Livemint, 2015 Bridge to India, Solar Opportunity Report, 2015

Figure 4.2 below shows the comparison of the LCOE from different energy sources with grid parity and tariffs in India.

Several projections for the renewable energy LCOE have assessed that utility-scale PV and onshore wind energy in India are likely to reach grid parity between 2019 and 2022 as the cost of energy generation from coal increases and the cost of renewable energy declines.35 The large-scale installations, domestic R&D, manufacturing and assembly and improving finances all contribute to lowering the cost of energy. In terms of achieving grid parity, onshore wind and solar PV energy can be expected to see substantial growth due to their lower cost compared to conventional alternatives. The government subsidies and support can then gradually be declined in a self-sufficient industry. In addition, if these targets are to be achieved, the supply chain will be in place within the country for further development beyond the 2022 targets. Figure 4.3 below shows the LCOE projections for coal and renewables until 2020.

Solar Energy Corporation of India, KPMG, 2014

The Indian government is implementing structured policies to support the large renewable energy capacity targets As renewables move into the larger scale of implementation, the government has revised and introduced policies to drive momentum in growth. This section of the report analyses the supply chain and the related policies in India for both solar PV and wind energy, which are in place to meet the ambitious targets. It also maps the measures taken by the Indian government, the investments happening in the supply chain and the potential bottlenecks in growth in the country.

Solar PV The Indian solar energy sector is in a major transformational phase with the updating of capacity targets from 20 GW to 100 GW by 2022. Policies have been revised, and new incentive mechanisms are being followed in order to make the industry lucrative. Therefore, the sector is attracting significant national and global attention. Figure 4.4 below summarises the government policies catering to the supply side of solar energy project realisation in India.

Panels will primarily be imported, although domestic manufacturing has begun to attract foreign investments The panel supply in India is currently met through the import of multi-crystalline panels and thin film panels. Around 65% of the current projects under the National Solar Mission (NSM) 36 and 35% of the non-NSM projects have deployed thin film panels. The remaining have used multi-crystalline panels. These imported panels are procured through low-interest loans, which the international developers generally obtain from their home banks like the US EXIM bank and the Overseas Private Investment Corporation (OPIC), who impose obligations on the developers to buy panels manufactured in their home country.37

NSM (or Jawaharlal Nehru National Solar Mission) is a solar programme run by the Indian government to promote solar energy in the country through phase-wise capacity installation until 2022 37 Speed, scale, skillâ&#x20AC;Ś solar?, Council on Energy, Environment and Water, 2015

Comparatively, the current domestic solar energy equipment manufacturing capacity is estimated at 700-800 MW per year and is insufficient to meet the national requirements.38 In addition, the manufacturing costs are higher than the global averages due to the lack of scale and insufficient government support. (An imported multi-crystalline panel costs around USD 0.55 per Watt compared to a locally manufactured panel that costs around USD 0.70 per Watt). As a result, the solar energy manufacturing sector has seen 40% of the Indian manufacturers exit the market, resulting in a low industry utilisation rate of 21%. In order to facilitate investments in domestic manufacturing, the union minister for new and renewable energy recently proposed initiatives like a reduction/exemption of customs and excise duties on input raw materials, although no policy-based decisions have yet been made.39 Capitalising on the increasing demand, leading global panel manufacturers are showing an interest in developing critical scale in India. In 2015, US-based SunEdison, the largest renewable energy developer in world, and India's Adani enterprises, one of the largest Indian business conglomerates and potential developers, signed a Memorandum of Understanding to set up a joint venture to build a PV manufacturing facility in India with an investment of up to USD 4 billion.40 In addition, Trina Solar, the global leader in panel manufacturing from China, has shown an interest in building a 2 GW panel manufacturing facility in collaboration with Welspun renewables, one of India's largest renewable energy developers.41 The manufacturing scale-up will reduce the cost of panels, and as such, the supply-side is not likely to be a bottleneck in construction towards the 2020 target as imported panels can satisfy the demand. New innovative schemes are bringing in finances; however, more scale is required to achieve the targets An expected investment of USD 100 billion is required to develop India's 100 GW solar energy target by 2022.42 In the past few years, most of the banks have seemingly exhausted their lending cap to the power sector, and the country's corporate debt market is small (14% of the GDP in India compared to 40-70% in developed countries). This presents a financing gap for the solar energy sector, which the non-bank financial companies (NBFCs) seek to fill.43 However, the debt interest rates are as high as 11-13%. Even though the NBFCs charge higher interest rates on loans than banks, they offer faster financial closure, which is attractive for renewable energy project developers. In order to resolve the need for financing, the government has taken three steps. First, the government has set up companies that finance projects at lower rates. In 2013, the Indian Renewable Energy Development Agency (IREDA) in collaboration with the National Clean Energy Fund (NCEF) announced a refinancing scheme for a five-year period under which as much as 30% of the clean energy loans issued by commercial banks could be re-financed at 2%.44 In addition, the IREDA launched its first green bond in February 2014 in order to support renewable energy projects with an aggregated amount of USD 75.8 million.45 In 2015, the IREDA also launched a new loan scheme at 9.9-10.75% interest rates for system aggregators and developers to support rooftop PV projects.46 Second, the government has allowed 100% foreign direct investment in the renewable energy sector and invited foreign players to invest in India in 2015, which has successfully resulted in new investment plans worth USD 20 billion47 announced by several foreign companies. Third, in July 2015, the government announced its plans to introduce a dollar-denominated tariff scheme to allow state power distribution companies (discoms) to quote their price in dollars while signing 25-year power purchase agreement (PPA) contracts for solar power. This is likely to result in on-grid 1 GW capacity at USD 0.050.07 per unit. With technology achieving grid parity, it could thus potentially lead to rapid capacity development.48

Government drops anti-dumping duty on solar panel imports from US, China, Business Standard, 2014 About 63% of solar panels are imported from China, says government, DNA, 2015 40 SunEdison and Adani to build largest solar manufacturing facility in India with $4 billion investment, SunEdison, 2015 41 Why Trina Solar Is Building 2 GW Solar Manufacturing Capacity In India, Clean Technica, 2015 42 Re-Invest 2015 Investors guide, PwC, 2015 43 NBFCs to prosper as credit requirement for clean energy projects poised to increase six-fold, The Economic Times, 2015 44 IREDA-NCEF REFINANCE SCHEME, MNRE 45 Green Banks & Green Bonds â&#x20AC;&#x201C; All about the new financial instrument in India, Headway Solar, 2015 46 IREDA launches loan scheme for rooftop solar power projects, Business Standard, 2015 47 SoftBank, partners eye $20 billion investment in Indian solar projects, Reuters, 2015 48 Goyal eyes bidding in dollar to cut solar tariff, The Times of India, 2015 39

These initiatives are attracting a lot of interest from various investors, and they need to be continuously fostered and supported by sufficient scaling-up capacity.

Wind energy The favourable policies developed for supply in the wind energy sector are attracting investments from across the globe With approximately 24 GW of onshore installations, India ranks among the top-5 wind energy producing countries. The government has further plans to increase this to 60 GW by 2022. With the new targets, the outlook for the domestic wind energy industry is optimistic. The relevant government bodies, including the Ministry of New and Renewable Energy (MNRE), the IREDA, the National Institute of Wind Energy (NIWE) and Indian Wind Turbine Manufacturers Association (IWTMA), have policies and mechanisms in place to support investors across the value chain and thereby boost the growth of the Indian wind energy market. Figure 4.5 below presents a summary of the government policies catering to the supply side of wind energy project realisation in India.

India is a global player in wind energy manufacturing â&#x20AC;&#x201C; improved national policies support its growth in the global landscape India's current annual wind energy manufacturing capacity is 10 GW49 with around 40 different types of equipment in the capacity range 250 kW-2.1 MW 50 manufactured domestically. In addition, up to 70% indigenisation has already been achieved for equipment sizes ranging up to 500 kW. The industry growth is expected to continue in similar product segments, while higher-capacity equipment will still to be imported. Under the "Make in India" campaign, a concession is granted on the customs duty on gearboxes, yaw components, controllers, etc. Also, full exemption on special additional duties is granted on all parts and components used in the manufacturing process. Compared to global levels, the capital costs of manufacturing are lowest in India, which 49 50

Press Information Bureau, Government of India Wind Energy Investment â&#x20AC;&#x201C; Destination India, IWTMA, 2015

makes it viable to manufacture turbines, towers, blades, generators, convertors, etc. The legal and fiscal set-up along with the growing Indian economy makes it a lucrative place for investments to have a manufacturing set-up and build a profitable enterprise. Global manufacturing companies like Enercon, Suzlon, GE and Siemens are utilising this opportunity and have established operational set-ups in India.51 In 2014, Gamesa announced an investment of USD 112.85 million for the next five years, the majority of which will go into enhancing the manufacturing capability. The company plans to introduce new wind turbines with larger blades for installations in low-wind areas. In addition, Gamesa and Suzlon are planning to introduce offshore wind turbines in India as well.52

With the new tariff mechanisms in place and foreign investments in the sector, the current level of financial support is sufficient to achieve the wind energy targets The Indian government provides three major types of financial assistance in the wind energy sector:  Accelerated depreciation (AD)  Generation-based incentives (GBI)  Bank loans by government-funded organisations Under the AD scheme, the owner is entitled to depreciate the asset value by 80% in the first year, which results in tax benefits. In 2015, almost 1000 MW of wind energy installations are expected to be driven by AD. Under the GBI, USD 0.01 is provided for every kWh of electricity fed into the grid for a period of no less than 4 years and not more than 10 years53 of operation with a cap of USD 154 thousands per kW. A GBI scheme will be applicable, which can be utilised at least until the end of the 12th five-year plan, i.e. 2012-2017, of the Indian government54. The favourable GBI scheme has attracted large investors like Goldman Sachs, Deutsche Investitions, FE Clean Energy Group, IFC, UTI Capital, etc. who have invested in several wind energy projects55. These two financial incentives can be exercised exclusively by the developer. Many states have abolished the VAT on wind turbine components.56 Apart from the incentives, the IREDA finances the renewable energy projects in two ways. First, it issues loans to cover up to 75% of the total wind energy project costs. Second, in the 2013 budget, the government also introduced a low-interest-rate funding mechanism that will be applicable until 2017 for all renewables including wind energy. Under this scheme, the MNRE allocates the capital generated by the NCEF from coal taxes to the IREDA, which in turn issues loans for wind energy projects at low interest rates. In addition, the allowance of 100% foreign direct investment has helped attract investments from foreign parties in wind energy. In early 2015, US federal agencies, including the US Trade and Development Agency, the US Overseas Private Investment Corporation and the US Exim Bank, committed a total of USD 4 billion for renewable energy development in India, including projects and equipment sourcing.57 By 2020, the wind energy sector is expected to have attracted investments worth USD 15 billion because of these favourable policies.58 The complete financial assistance at state and national level with overseas support has eased things for investors and will lead to massive growth in the coming years. Wind energy projects have a high IRR of approximately 18%, which makes them profitable investments The Central Electricity Regulatory Commission (CERC), the Electricity Act of 2003 and tariffs by the State Electricity Regulatory Commission (SERC) have made investments in wind energy viable. Many independent power producers (IPPs) have taken on project development and are expected to contribute around 75% of the new installations. The

Renewable energy, Make in India, 2015 Gamesa Retains Top Position In Indian Wind Energy Market, Clean Technica, 2015 53 Press Information Bureau, Government of India 54 IREDA, Operational Guidelines for Implementation of Extension Scheme of GBI for grid connected wind power projects, 2015 55 A Second Wind for India's Energy Market, the Shakti Foundation, 2014 56 Press Information Bureau, Government of India 57 US commits $4 bn for Indian renewable energy sector, Business Standard, 2015 58 India's Wind Energy Sector To Attract $15 Billion Investment By 2020, Clean Technica, 2015 52

government is also taking steps to address issues related to land acquisition. Agricultural land can be purchased for renewable energy project development in states like Tamil Nadu, In the past five years, the project scales and sizes have increased enabling developers to get an internal rate of return (IRR) of 16.5% to 18%. The attractive incentives coupled with the lower risk on return on wind energy projects due to short gestation periods59 make the Indian wind energy sector highly attractive for investors. State distribution companies give preferential tariffs for wind energy projects. Several states have increased their feed-in tariffs (FIT) from 2% to 15% to attract investments in wind energy, particularly in regions like Rajasthan, Madhya Pradesh and Gujarat which are located in low-wind zones.60 To increase the attractiveness of the wind energy industry in India, the MNRE is also supporting skill development activities for the wind energy sector by supporting educational and training organisations for renewable energy skill development. For offshore wind energy, the Indian Union Cabinet has approved the National Offshore Wind Policy in September 2015. The MNRE will be the authority for offshore wind energy in the country, and the NIWE will allocate the offshore land blocks for the project and co-ordinate across ministries for the development of the new industry. Both the MNRE and the NIWE have already signed a Memorandum of Understanding for offshore wind energy development that includes a consortium of partners consisting of the National Thermal Power Corporation (NTPC), the Power Grid Corporation of India Ltd (PGCIL), the IREDA, the Power Finance Corporation (PFC), the Power Trading Corporation (PTC) and the Gujarat Power Corporation Ltd. (GPCL)61. Indian wind turbine generator Suzlon is one of the key companies eyeing this development in the country. Last year, Suzlon sold stakes in Senvion while securing an agreement to use Senvion's offshore technology in the Indian market. The private sector has responded well to the overall support at all levels provided by the government to the growth of the wind energy sector in India.

Developing a robust grid and a demand induced by the RPO mechanisms ensures the integration of the renewable energy capacity into the national electricity system Major bottlenecks in the transmission and distribution infrastructure and the poor financial health of the state distribution companies need to be addressed for the industry to gain installation momentum towards the targets. Green power corridor development is essential to support the massive renewable energy capacity development In India, the current grid infrastructure is not equipped to accommodate the incoming renewable energy capacity and not strong enough to handle the voltage fluctuations and intermittent supply. To address this issue, an estimated annual investment of USD 15 billion is required in the power grid infrastructure for generation, transmission, storage and smart supply and management.62 In 2012, the PGCIL planned a high-capacity transmission system (green energy corridors) for evacuation of renewable power from states rich on renewable energy resources to load centres. They also aim to construct a transmission link for 10 GW solar power requiring an investment of around USD 1.36 billion.63 Even though the demand for a grid infrastructure is evident, a comprehensive policy to address the required investment is lacking.64 Development on the green corridor programme is progressing, but slowly. In 2015, the government operationalised the second phase of the green corridor transmission project, which will handle 22 GW renewable energy capacity. The first phase of the project was designed to be allocated to 33 GW of solar and wind power.65 Germany's KfW 59

A white paper on India solar and wind energy, CRISIL & PHD Chamber, 2015 A Second Wind for India's Energy Market, the Shakti Foundation, 2014 61 Re-Invest 2015 Investors guide, PwC, 2015 62 Policy niggles put India's solar dream under a shadow, Business Standard, 2015 63 India starts work on green power corridors, Livemint, 2015 64 Policy niggles put India's solar dream under a shadow, Business Standard, 2015 65 India Expands Work On Renewable Energy Transmission Network, Clean Technica, 2015 60

Development Bank provided USD 1.12 billion for phase one of the green power corridor development, while the US EXIM Bank provided funds worth USD 250 million to further support the project.66 Figure 4.6 below gives a summary of policy initiatives from the government to increase the demand of electricity generated by renewable energy across the states.

Discoms need to be restructured for sustainable growth to develop and new policies need to be announced to reduce power tariffs and debt load To support the additional 144 GW renewable energy capacity growth at a national level, the government is taking steps to increase the demand for wind and solar electricity at state levels. Currently, there is a policy proposal specifically for wind and solar energy in the Renewable Purchase Obligation (RPO), which is to be increased from 3% to 10% for solar energy and from 2% to 14% for wind energy. However, the deteriorating financial condition of the discoms is a major bottleneck in the successful implementation of the RPO directive. In 2013, the combined debts of all discoms was at USD 30 billion. The biggest cause of these debts is the supply of subsidised electricity in the country.67 To address this issue of debt, the government is acting on two major fronts. First, they aim to reduce the solar energy tariffs so that there is a smaller cost difference between the purchase price and the subsidised selling price of electricity. To achieve these low costs, project developers opt for a reverse-bidding mechanism to source solar powered electricity. In the first auction of this type conducted in 2011, the winning bids cut the costs by 30% compared to the global average solar PV energy price.68 Solar PV energy has recently reached a price of USD 0.08 per kWh and is expected to drop further to USD 0.05-0.075 per kWh under the dollar-denominated tariff scheme6970. Second, to decrease the debt load on discoms, a financial restructuring plan was approved in October 2012, which aims to convert 50% of the outstanding short-term debts into 15-year bonds worth USD 9.4 billion, which would subsequently be taken over by the state governments in 2017.71 Furthermore, the government plans to reform the 66

India's transmission travails, Focus, 2014 Can Indian DISCOMs Support Indian The Solar Growth Story, Solar Quarters, 2015 68 Auctions Replace Renewable Energy Subsidies? India Auction Cuts Solar Costs 30%, Sustainable Business, 2011 69 Solar power may become cheaper than thermal in 2-3 years: India Ratings and Research, The Economic Times, 2015 70 Goyal eyes bidding in dollar to cut solar tariff, The Times of India, 2015 71 Investors see windfall from India's restructured discom bonds, Reuters, 2015 67

electricity distribution mechanism to make it more market-driven. No time frame has yet been stated, but the assurance of restructuring will give a lot of confidence to builders. If these two steps are implemented successfully, the renewable energy sector will grow sustainably as utilities procure energy for fulfilling the demand at the lowest cost.

India â&#x20AC;&#x201C; the renewable energy contender in the decade ahead In a global context, the shift of the cleantech cluster to the East makes the Chinese and Indian markets very attractive for investments and business expansions. However, with businesses in China generally being controlled by the state, India becomes the best option for investing in renewables. The Indian renewable energy industry is currently gaining momentum due to several steps taken by the government. India is continuously revising its various policies to make it easier for foreign investors to participate in all parts of the value chain. With international investments already responding to the changes in the country, it is crucial for companies with international ambitions to analyse and position themselves in India to grow in the next 5-10 years and reap the profits of an open and expanding market.

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