While India is yet to make its Net Zero commitment in line with many of its peers, the government has issued two statements recently that reinforce India's green energy credentials and demonstrate its commitment to decarbonization.
(1) 'green tariff' policy that will help electricity distribution companies (discoms) supply electricity generated from clean energy projects at a cheaper rate as compared to the power from conventional fuel (such as coal) and incentivise investments in renewable energy and
(2) the country is to seek bids for renewable hydrogen production in the coming months and plans to introduce a compulsory purchase obligation for renewable hydrogen for fertilizer and petroleum companies. According to India’s Power Minister Raj Kumar Singh, green tariff will be the weighted average of the cost of procurement of green energy, which should be lower than the overall energy prices and that the new regulations will help ensure that if an industry wants only green power from a developer, the open access applications will have to be approved within a fortnight.
The open access allows large users of energy, typically those who consume over 1 megawatt (MW) of power, to buy it from the open market, instead of depending on the more expensive grid power. Ensuring open access will also attract large green electricity consumers to set up their own captive green energy plants, thus incentivising renewable energy fuelled captive power plants. This will help India raise its share of renewable power and reduce its carbon footprint.
The upcoming guidelines will aid the industries which are either not eligible to avail open access or do not have the necessary resources and expertise. It is also encouraging to hear that the government is in the process of formulating a set of rules and guidelines to enable such a mechanism, precluding a potential move towards a full spectrum Net Zero pathway.
"Once the mechanism is in place, discoms can exclusively buy green electricity and supply it at 'green tariff', which will be the weighted average tariff of green energy that the consumer will pay," Raj Kumar Singh said at a press conference on ‘India’s role as global champion for the Energy Transition theme of the UN High-Level Dialogue on Energy 2021.
With India's solar and wind power tariffs hitting an all-time low at INR1.99 per unit and INR 2.43 per unit respectively, the gap with thermal coal-based power tariff has widened substantially. If India’s nationally determined contributions target is realised (a lot more needs to be done here), the country may be running among the world's largest clean energy programmes, aimed to achieve 175 gigawatts (GW) of renewable capacity by 2022.
What is highly encouraging in the government's policy is the promise of industrial end users being given the choice of having exclusive green power, if they desire the same. Organizations focussed on sustainability principles could avail of this initiative and burnish their ESG credentials. This would also show a path to others and start a virtuous cycle of accelerated investments in renewable energy.
While these statements are very encouraging, we also believe that India needs to address the issue of uncertainty over legally binding, long term power purchase agreements. If the issue is not addressed now, it will become challenging for the Indian renewable energy market. Investors will increase prices to ensure that their returns match the extra risk associated with such projects, keeping large renewable energy offshore investors at bay.
In order to tap the upcoming explosive growth in green finance, India will need to work on two things on an urgent basis -
1. Articulate a clear strategy aligned across the oil, gas, power, industry, and surface transport ministries, towards achieving Net Zero carbon status by 2050
2. Announce a clearly defined 'Taxonomy' of green finance. The absence of standardized data on green finance and incomplete data on climate risk characteristics of infrastructure assets, will soon start to emerge as the largest barriers standing in the way of unlocking private capital to support India's decarbonization initiative, which we believe could be India's biggest commercial opportunity of the current century.
It is time all stakeholders recognize this and come together.
Authored by: Abhay Laijawala, MD and Fund Manager, Avendus Capital Public Markets Alternate Strategies LLP