Indian electricity market is under transition. India added 60 GW of coal and 24 GW of renewable in the past 5  years. However, the volume is expected to reverse in the next ten years, with renewables expected to add  200 GW while coal net addition expected to be 48 GW during the same period. This come from India’s  intended target laid out in National Electricity Plan-2018, which plans renewable energy at 175 GW by FY 2022 and at 275 GW by FY 2027 while coal is intended to contribute 238 GW cumulatively in FY 2027.

The key driver for this transition has been the reduction in price of renewables, enabling them to become  energy source of choice among buyers. Wind and solar are already cheaper than coal today, with unsubsidized cost of coal being INR 3.8-4.2/kWh (including grid charges), while that for renewable being INR  2.8-3.0/ kWh (excluding AD, including the current waive-off on ISTS charges). Going forward, the cost of coal power is expected to increase by ~15% in the next 10 years, due to increase in the domestic fuel costs, higher cost of debt and increasing environmental costs. The cost of power from wind and solar, on the  contrary, is expected to decline by 30-40% in the same period, driven using state-of-the-art technology,  insourcing of O&M and localization of supply chain. Renewables are expected to reach INR 1.9/kWh, as compared to coal which is expected to cost INR 4.4/kWh in 2027 (see exhibit-1)

Exhibit 1-Expected development of coal, wind and solar costs in India

Currently, there are 48 GW of coal projects under-construction and these are expected to be online by  2022. In addition, there is 84 GW of coal pipeline at pre-construction stage including, permitted, pre-permitted and announced plants). Multiple cancellations have been taking place in the pre-construction pipeline due to issues in business case, and nearly 53 GW out of 84 GW of current pipeline is  expected to move outside 10 years purview due to multiple issues like imported coal supply, delays  and financing issues etc. If no coal is added post 2022 and coal-retirements are accelerated due to  government’s environmental focus, and capacity is added according to merit order (renewables) on  grid, renewable can be expected to cumulatively reach ~380 GW over the next 10 years. However,  government policies need to move away from coal addition towards economical dispatch and  augment grid proportionally to fulfill this potential.

Yet, the trajectory of renewable is expected to go through starts and stops. Three factors will be  responsible for this.

In short-term, role of renewable will be dependent on grid availability. Currently 17 GW and 50 GW of  grid is planned to be built in the next two years to integrate 22 GW of wind and 60 GW+ of solar online  by FY 2022. This will limit the amount of capacity to the availability of grid.

In mid-long term, coal plants may not retire or be even utilized at higher rate than today. Coal assets  in India are currently running at suppressed CUFs of 60%-65%, and further additional pipeline of 120  GW+ (if the bottlenecks are solved) is expected to put further downward pressure. Government’s  strategy to revive these stressed assets can impact contribution of renewables.

Lastly, in long term, specifically wind is expected to be dependent on new technology to exploit the  wind sites. India has a potential of ~300 GW of wind resource, however, sites above 6.5 m/s are  limited to ~80 GW, which are expected to be exhausted by 2027. This will result in escalating tariffs  on remaining sites, if no new technology is available. Solar faces no such restriction.

Considering the above factors which can impact renewable energy installations in the country, four  scenarios emerge with varying level of RE and coal power on the grid. These are- Business-As-Usual  scenario, National Electricity Plan (NEP) scenario, RE-Preference scenario and Coal-Preference  scenario (framework showcasing scenarios in India-Exhibit 2)

Exhibit 2-Possible scenario for Indian Electricity mix in 2027

RE integration in the next 10 years varies by a factor of 15X, between coal-preference scenario and RE-preference scenario. While in former scenario, renewables are restricted by both grid and coal’s role on grid, in latter scenario no coal addition takes place post 2022 and grid is planned to enable RE to meet electricity demand.

However, to facilitate the core-driver of RE, i.e. cost decline in India, market participants need to think big, while being vary of the risks. Facilitation will happen by transfer of the state-of-the-art technology in product as well as services and full localization of wind and solar value chain.