The future of renewable energy in India: Challenges and opportunities for investors

India is the third-largest consumer of energy in the world and, with a population of 1.4 billion and a rapidly growing economy, demand is rising. 

Just under half of electricity generation comes from renewable sources and the government has committed to a target of 500GW of energy derived from non-fossil fuels by 2030.

Radiance Renewables is a leading light in India’s commercial and industrial renewable energy sector. We spoke to its CFO, Nitin Bhatia, to gain an insight into the state of India’s renewable energy market and his personal take on the future.

Q. Could you give me some background on your role at Radiance?

Radiance is a clean energy company currently based purely in the CNI (critical national infrastructure) space. We set up projects for companies and enter into long-term contracts to provide them with energy, using the existing state-owned power grid. 

But we don’t deal with the utilities ourselves: the customer pays the charges for the energy transmission and claims the relevant State discount. I am the company CFO and I also head up all the commercial activity.

Q. What is your view of the current state of the solar energy market in India?

There are essentially three segments. First, you have the large-scale renewable projects that government agencies put out to tender and companies bid for contracts to construct and supply solar, wind, or batteries. 

It’s a reverse auction process and it’s usually the bidder with the lowest tariff who wins. That’s the bulk of the market and it’s expected to add over 40 gigawatts a year. But not just solar; wind and batteries are becoming increasingly important.

Second, there’s the CNI space where we are, which is purely focused on supplying energy. That area is expected to grow between 8 and 10 gigawatts a year. People like us supply directly to customers via the grid.

Finally, you have a subset of rooftops – smaller solar energy projects, mostly low capacity, typically ranging from as small as a 50 kilowatt peak on the roofs of buildings, going up to a 5-6 megawatt peak somewhere else on the premises, what we call “behind the meter.”

The renewables industry is expected to grow about 50 gigawatts a year, and on the large-scale utility side we’re starting to see more and more bids for combined technologies. You don’t see bids for purely solar projects anymore, almost all of them are solar with wind, solar with battery, or a combination of all three.

Q. What’s behind the increased focus on combined technologies?

Well, solar is only available from around 7am until about 4pm; I don’t remember the exact numbers, but I think we have about 200GW of solar generating power during that time, and now that other renewables are feeding into the grid, we’re starting to see an oversupply during the daytime.

In addition, customers that have a global commitment to clean energy want longer periods of renewable power. At the moment, solar only gives you 6-7 hours of clean energy; wind can give you another few hours. So, depending on which state you’re in, solar plus wind would typically give you a PLF of 60-65%. That means you’re meeting over two-thirds of your clean energy demand through a combination of solar and wind.

Then there’s the third element, which is batteries, and there are two reasons for using them, one of which is to stabilize the grid. If I remember rightly California had an issue years ago, when their grid collapsed because of an excess supply of, I think, solar and wind energy.

The Indian government is saying let’s use batteries to store energy when demand is low so that you can supply it later. That extends the time that you are supplying clean energy and also ensures the stability of the grid. The government has just issued a directive to all the agencies and state utilities requiring new solar or wind projects to have at least 20% of their capacity in the form of batteries. We’ve also had a recent battery auction.

But there is a caveat. All the state utilities offer discounts for renewable energy, but we have about 40 gigawatts worth of tender winners who still haven’t signed their PPAs. So while we keep bidding, the PPA executions are lagging. That’s an ongoing challenge here in India.

Q. Where do batteries fit in Radiance’s business model?

Batteries are not necessarily something customers want in the CNI space. It may be a slightly controversial statement, but in India wind is used because it’s cheaper rather than because it’s green! 

For a typical solar project, a customer would save anything between 1.75 to 2.5 rupees per unit. And that directly affects their bottom line, so very few of them are doing it to be green, most of them do it because of the cost. But batteries make it expensive. 

At Radiance we are looking at how we could make batteries viable, especially for those more green-focused players who want at least 70-80% of their power to be green. Currently, there is very little battery use in the CNI space; but it is much more common in the utility space.

Q. What are the main investment opportunities in India’s renewable energy space?

There are still opportunities right across the value chain – wind, solar wind, solar hybrid, and batteries. I do think that over the next three to five years pure-play battery will come to play a pretty big role, and availability-based rather than unit-based. So that’s a big investment opportunity in India.

But, having said that, there will also be people like us who will do the whole integrated solution for their clients: we’ll set up solar, we’ll set up wind, and we’ll set up battery. Investors are continuing to look at all three options independently and in combination. 

Also, in India, there’s a lot of talk about green hydrogen, and for that to really take off you need an integrated solution: you can’t just rely on one of the three types of renewables, you need all three. 

Given that our Government wants to be a major global player in green hydrogen and is encouraging industry to take it up, I believe that there will be investment opportunities over the next three to five years in all three segments, individually and together.

Q. What are the main regulatory challenges you face? And how does it vary in each state?

Each state is like a unique country with its own regulations. Even the approval processes are very different. 

There are three stages to obtaining approvals. Stage one is getting the connection rights and acquiring land for the project. Each state has a very different way of allocating connection rights and you have to tailor your application to their specific requirements. And they each have different rules for buying land.

Once you’ve crossed that hurdle, the second stage is construction and commissioning. And each state will have different regulations, even down to what equipment you use and the kind of contracts you have to sign. 

Then there’s the third stage when you’re actually operating the plant. The charges vary, the discounts vary, and even requirements on reporting or issuing credit to the customer vary.

The good news is that once your project is installed and commissioned under a certain set of rules, even if the process changes afterward you can continue to operate according to the original rules. The courts have come down very heavily on attempts to apply new rules retrospectively.

It’s usually the installation and approvals that take the time; once the project is established life gets easier. Which isn’t to say that there are no challenges, but nothing you can’t handle. 

And if you are struggling, you can always go to the regulator: the state regulators are extremely knowledgeable, and there are mechanisms to address your concerns and protect your investment.

Q. Is government policy still supportive of renewable energy in India?

India’s legislation on power is split between central and local government. Central government enacts laws such as the Electricity Act, and then each state passes local regulations that have to align with central government policies. 

The government is consistently trying to make it easier for private investment in renewable energy, but at state level it’s not so clear-cut, and this is because of the discounts, at least in the CNI space.

CNI customers are usually the really high energy users, so we are taking away the utility’s best-paying customers, leaving them with lower-income clients like retailers or farmers. They push back by making the approval processes longer or issuing a new policy here and there. 

So setting up new projects is challenging, but the governments do recognize the need for clean energy and that demand is increasing substantially, so maybe what we are taking is that incremental demand, rather than reducing the existing demand. A lot of states are in favor of green energy, they just make it more difficult than the center does.

Q. Finally, are there any other trends you think will shape the industry over the next few years?

I think we’ve just about covered everything. Green energy will become more and more important as we move to wanting green energy 24/7. And green hydrogen will be big once it’s mature, probably in the next three to five years.

One trend I do see happening is consolidation in the various spaces. So the 12-14 CNI players in the country today will come down to about five or six players eventually. The same will happen in the utility space.

Also, a lot of the current platforms are PE-owned and we’re seeing more and more strategic acquisitions. Investors are coming in and buying a lot of the larger platforms and even some of the smaller ones: for instance, JSW recently acquired O2, and Ayana, which is a sister group company, was acquired by ONGPL and NTPC. So we’re going to see a lot of the private equity platforms being sold out to strategics. 

I also think some of the larger global renewable energy players will start looking at India, and some of the bigger platforms, the 15-20 gigawatt options, will eventually be sold to global players as well as Indian ones.

I envisage a lot of M&A in the next five years and these fundraising transactions are definitely a trend that will play out over the next couple of years.