Indian Energy Investment — Where Will The Money Come From?

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In a recent research note, Indian rating agency CRISIL suggested that power sector loans of as much as $62.5 billion might turn toxic (for comparison: this is around half the new bailout package for Greece). Half of the amount has been lent to India’s chronically loss-making distribution companies. The other half has been lent to around 46 GW of planned thermal power capacity that might turn out to be unviable.

Loss-making power projects, loss-making utilities, and — as a result — bad loans are at the core of India’s power sector woes. Many Indian lenders (banks and non-banking financial institutions) have reached sector limits in their risk exposure to the power sector. This severely constrains future power capacity build-up, whether of conventional or renewable plants. It is perhaps the largest risk to the Indian government’s plan to grow power supply in line with the country’s desired industrialisation and economic growth.

Discoms are loss making, because of politically suppressed power pricing (tariffs would need to be increased by an average 50%, according to CRISIL, to allow discoms to break even) and aggregate commercial and technical distribution losses of 25% or more. Power Minister Goyal recently stated that there is an (unspecified) Indian state where more than 80% of grid power is stolen.

Some thermal power projects are loss making because of overly aggressive or optimistic tariff bidding, a lack of long-term buyers, infrastructure bottlenecks, and uncertain or inadequate fuel supply. The planned Ultra Mega (Coal) Power Projects (UMPPs) bid out before 2005 are a case in point: only 1 out of 13 has been built. The others are in a state of limbo. Most recently, Reliance Power pulled out of a UMPP contract, citing land acquisition issues. The more likely reason is tariff unviability.

In response, the Indian government is working to increase power tariffs and to financially restructure the discoms. Both are very complex and politically loaded tasks. Additionally, India is wooing international capital to drive its power sector growth.

All this has an effect on renewables in India. At first sight, renewables are equally hit by risks associated with weak discoms and grids, and by Indian lenders’ diminished readiness to support the power sector. In the longer term, however, they might benefit.

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The challenges in the thermal power sector will probably lead to delays in new capacity additions (many projects are already delayed by several years) and this will lead to an increased cost of thermal power in India — to discoms and to consumers. Wind and solar, which can already compete with new thermal power on generation cost (at around Rs. 5.5, or 9¢, per kWh) and which can be built rapidly, will be an ever more attractive option.

Of course, dispatchability is a key concern. However, looking at a time horizon of 3–5 years (the typical planning time of thermal power projects) and the fact that the cost of grid and distributed electrical storage is dropping rapidly, Bridge To India assumes that renewable-based, hybridised power at below Rs. 5 (8¢) per kWh at the grid side and Rs. 7 (11¢) per kWh on the consumer side (socket) is quite feasible — without government subsidies. It will not even take an Indian Elon Musk (although that would help, and there is a larger question of how permeable to disruptive innovation the Indian market is).

Lastly, renewables attract a new breed of domestic and international investors with fresh money. They include many sources of equity and debt that for commercial, strategic, political, or climate reasons prefer to invest into renewables over thermal projects. They are unencumbered by the bad debts of the thermal sector and could drive not only India’s power capacity buildup, but a transformation in the energy mix, too.

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