The Future of Distributed Renewable Energy in India

The Future of Distributed Renewable Energy in India - CPI

India is the world’s third largest carbon emitter, with emissions expected to rise as the economy grows. While this economic growth is important for advancing development objectives, especially in the wake of a likely recession due to the COVID-19 pandemic, it
also poses a challenge as around 600 million people in India are at risk from the impacts of
climate change such as floods, wildfires, and heat waves. Additionally, inaction on this threat
could shave USD 1.12 trillion off the country’s GDP by 2050,2 eroding progress on sustainable
development and poverty alleviation in a country that already struggles with meeting basic
needs.

India has set ambitious targets to increase the share of renewable energy (RE) in its energy mix. The Government of India (GoI) plans to install 175 GW of renewable energy projects by 2022 and 450 GW by 2030. To put that in perspective, total installed energy capacity in India at the end of 2020 was 379 GW, or which 93 GW (25%) was RE. To date, the government’s primary focus of RE expansion has been on large grid-scale solar. However, achieving India’s ambitious RE targets will also require an increase in distributed renewable energy (DRE) projects. If a more favorable regulatory and policy environment is created, such DRE projects, though smaller in size, have greater scalability potential. They also avoid the long lead times and execution bottlenecks associated with public-sector offtake procurement projects.

Figure ES1: DRE annual financing market

Backed by central government incentives, states had initially created a favorable policy environment for DRE. However, in recent years, a number of these incentives have been rolled back. For example, due to RTS subsidy rollbacks, state electricity distribution companies (DISCOMs) are turning hostile towards RTS as they foresee a loss in revenue, an increase in costs, and the longer-term threat of disintermediation. In addition, the COVID-19 outbreak has had a severe financial impact on all stakeholders, leading to a conservative outlook on demand, profitability, and cash flows.

POLICY GAPS AND OPPORTUNITIES

In addition to its current focus on large grid-scale projects, to meet its sustainable energy goals India needs a shift in policy focus towards creating a robust private market for the DRE sector.
A stable policy environment with incentives for all stakeholders is required to accelerate
growth and would help direct more public and private financing, from domestic and international sources, into the DRE sector. Specific examples developed further in this report
include:

• Rooftop Solar: A more holistic demand aggregation model integrated into the GoI’s Phase
II grid-connected RTS scheme would allow DISCOMs to get both a transaction fee for facilitating the installation as well as monthly fee for Operation & Maintenance (O&M),
such that billing/collection would better allow them to stay relevant and eliminate the
threat of disintermediation.

• Distributed Storage: Distributed energy-storage policy should be integrated with the Phase II RTS scheme. Instead of promoting a capital-subsidy based model, the government should create a more favorable environment for operational models with the involvement of DISCOMs.

• Smart Energy Management: Creating incentives for Internet of Things (IoT) based energy efficiency retrofits, that can attach to existing home circuits, will accelerate energy consumption optimization in households and small commercial establishments. This would not only help reduce energy bills and carbon footprint, but could strengthen overall grid resilience. For example, DISCOMs could move more quickly towards Time-of-Day billing as a part of their demand-side management.

• Electric Vehicle Charging Infrastructure: India’s EV-charging infrastructure should be treated as a public good. Policy should support a decentralized approach, with DISCOMs being the implementing agency for a franchise-based model. Allowing commercial establishments that produce excess solar power from RTS to set up retail charging points would be another step in the right direction.

• Solar Agricultural Pumps: The GoI’s KUSUM scheme currently has a centralized tendering process. Allowing state DISCOMs to partner with private installers at a local level should be considered. DISCOMs could facilitate commercial partnerships with solar pump installers and local farmer co-operatives. The DISCOM, through the installer, could pool the excess power generated from solar pumps into a single point of injection into the grid and pay power purchase costs, net of service fees, to farmer co-operatives.

• Solar Cold Storage: The GoI currently offers a 30% subsidy on solar cold storage installation under its broader rural livelihood subsidy scheme. However, considering the importance of cold storage in the agriculture supply chain, it is vital to create a separate solar cold storage program to bring down capital costs.

• Productive Use Appliances: It is imperative to shift the focus of grants from subsidizing
product purchases to providing project development support to entrepreneurs developing
the products. Equipment subsidies limit grant usage to the number of assets that it
can fund, whereas project development support allows entrepreneurs to both defray
technical assessment costs associated with commercial capital raising as well as develop
commercially scalable business models that reduce the cost of products for end-users.

FINANCING GAPS AND OPPORTUNITIES

The RTS and OGS markets are small and fragmented, largely reliant on philanthropy or subsidized private funding. There is currently limited interest from private commercial capital. Supported by stronger financial-sector policy and strategic public investment, the public, private, development and philanthropic sectors have a tremendous opportunity to work in coordination to open significant new DRE market opportunities for India.

MARKET POTENTIAL

The potential of distributed renewable energy in India is huge. In this section, we outline the
sub-segments that have the highest growth potential for meeting government targets for sustainable energy security in the coming years but have fallen short so far on this front.

ROOFTOP SOLAR
Adoption of rooftop solar by several small and medium industries can play a key role in decarbonizing India’s manufacturing supply chain.

Figure 1: Annual capacity addition

SOLAR AGRI-PUMPS
India has traditionally been an agricultural economy with over 160 million households dependent on agriculture for livelihood.6 Access to reliable water remains a challenge as
only ~50% of the agricultural land in India is currently under irrigation.7 This presents a unique market opportunity to provide solar-based irrigation solutions to around 80 million households in India. The Government of India (GoI), under its KUSUM scheme, has targeted a cumulative installed capacity of 1.75 million solar water pumps (around 6% of the total agricultural pumps in the country) by 2024.8 At the current average price of agricultural pumps of around INR 200,000 (USD 2,700), the estimated annual market size would be INR
10,000 crores (USD 1.5 Billion).

Figure 2: Solar water pump installed capacity

SOLAR COLD STORAGE
India’s weak agriculture supply chain results in significant loss in agricultural produce, leading to loss in income for farmers. The government has set itself a target of doubling farm income by 2024, for which having a robust supply cold storage infrastructure is essential.

Figure 3: Solar cold storage market size

DISTRIBUTED ENERGY STORAGE
Energy storage is a crucial tool for enabling the effective integration of renewable energy and
unlocking the benefits of local generation and a clean, resilient energy supply. The technology is valuable to grid operators around the world who must manage the variable generation of solar and wind energy. However, the development of advanced energy storage systems (ESS) has been highly concentrated in select markets, primarily in developed economies.

Figure 4: Lithium-ion battery costs

In India, factors like operational inefficiencies in the state distribution system, crosssubsidization of agricultural and residential customers, and infrastructure development costs to support government schemes (such as rural electrification) have created a huge revenue gap for DISCOMs, leading to an increase in tariffs for commercial and industrial customers.

Figure 5: Tariff structure in India

ELECTRIC VEHICLE CHARGING INFRASTRUCTURE
India has over 200 million registered vehicles – with the number of vehicles increasing by over 20% in just the last five years. This number is expected to go up significantly in the coming years as private motor vehicle penetration in India is only 4% as compared to about 80% in the United States and about 55% in the EU. By 2030, it is estimated that India will have 600 million vehicles. In 2017, electric vehicles (EVs) accounted for less than 0.1% of the total automotive sales in India. With technology development and favorable government policies leading to a fall in total cost of ownership, it is estimated that EVs have the potential to account for up to 30% of the total automotive sales in India by 2030.

LOW AGRICULTURAL FARM INCOMES FROM UNSUSTAINABLE FARMING PRACTICES
Rural farm incomes in India have traditionally lagged non-farm urban incomes by a considerable portion. This has been a major factor in the recurring cases of agrarian distress
in India leading to multiple bouts of farmer suicides. With agriculture becoming increasingly difficult to sustain livelihoods, an increasing number of farmers of newer generations are
migrating towards low-paid informal jobs in urban and semi-urban areas. This trend is likely
to have an adverse impact on the long-term quality of agriculture in India. With this in mind,
the government has created a policy target to double farm incomes by 2022.

WEAK AGRICULTURAL SUPPLY CHAIN
India’s weak agriculture supply chain results in a significant loss in agricultural produce, leading to a loss in income for farmers. The government has set itself a target of doubling farm income by 2022, for which having a robust cold storage infrastructure in the supply chain is essential.

DEVELOPING THE RURAL SERVICES ECONOMY
Access to a reliable grid-based electricity source remains a challenge for agriculture in India. As a result, mechanization in the farm and non-farm sectors remains low. The total addressable market for equipment such as reaper binders, knapsack sprayers, and rice transplanters has been estimated at around USD 40 billion. A multitude of activities exist in the ancillary (non-farm) agricultural sector that can benefit from reliable clean electricity: milk cooling, flour milling, sewing, weaving, tailoring, pottery, jewelry, poultry, vehicle repair, furniture manufacture, restaurants, retail, etc. The total addressable market for such activities has been estimated at around USD 15 billion.

Figure 6: Total addressable rural services market (USD Billion)

While India has reached 100% village electrification per government statistics, villages suffer from intermittent power. In addition, several village economic activities are located away from village electrified areas, increasing demand for solar-powered productive use appliances.

MANAGING PEAK DEMAND AND SUPPLY DEFICITS
The total household energy consumption was 275 TWh in 2018 and is expected to reach 640 TWh by 2030, a CAGR of 7.5%, due to increasing household electrical appliance use. In addition, commercial energy consumption is expected to increase from 95 TWh in 2018 to 200 TWh by 2022, a CAGR of 6.5%, due to increasing commercial building heating, ventilation, and air conditioning (HVAC) demand.

Figure 7: Energy consumption in India

ROOFTOP SOLAR
The GoI’s Phase II grid-connected RTS scheme, which provides a central role to DISCOMs for disbursement of central government subsidy, is a step in the right direction. However, the program only covers the residential segment and links the fiscal incentives for DISCOMs
to annual installed capacity, which would be difficult to achieve unless the C&I segment is
also considered. A more holistic demand aggregation model, which allows DISCOMs to get
both a transaction fee for facilitating the installation as well as monthly fee for Operation
& Maintenance (O&M) and billing/collection would better allow them to stay relevant and
eliminate the threat of dis-intermediation.

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