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The Last Word: Will India Be the Next Big Green Growth Market?

In 2009 India's installed renewable energy capacity, excluding large hydroelectric power plants, was about 16 GW. In terms of installed wind capacity it ranked fifth in the world with more than 11 GW.

But despite this impressive set of figures, total power produced by this capacity currently accounts for less than 2% of the total power produced in India. Assuming continued strong growth in electricity consumption, India would need an installed renewable energy capacity of some 100—110 GW to reach its 2020 target, meaning a capacity ramp up of about 8 GW/year.

As challenging as this may seem, other countries have already successfully demonstrated how to quickly increase renewable energy growth rates in a relatively short period of time. For example, since Germany's renewable energy law was passed in 2000 its installed renewable energy capacity has grown at a compound annual rate of 16% from 11.9 GW in 2000 to 39.9 GW in 2008. Over the same period, the total power produced in Germany from renewable sources soared by over 150%. Before the law was enacted, the country had only managed to achieve single digit growth rates for renewable installations between 1990 and 2000.

Meanwhile, China has for the past five years doubled its installed wind capacity year-on-year, adding 13 GW in 2009. Latest official Chinese statistics show that the nation's renewable energy capacity is now increasing at a faster pace than that of its coal plants.

Investors might look back and remember how India has in the past failed to achieve declared ambitious growth targets in its power sector. For instance it fell about 40% short of its 2007—2008 capacity addition programme target, while the implementation of several of its infrastructure projects have been beset with troublesome issues such as land acquisition.

However, there are five good reasons to believe that India will achieve ambitious renewable energy growth rates soon.

Vast Renewable Resources

India is very rich in wind resources and official estimates predict the country's installed capacity at about 50 GW by 2020 but some industry experts believe this figure too conservative and suggest levels could be as high as 150—200 GW by the same year.

India also has huge solar potential. The daily average incident solar energy over the country varies from 4—7 kWh/m² and the country benefits from 2300—3200 sunshine hours per year, depending upon the location. In addiiton, as the cost of building solar technologies continues to fall over the next 5-10 years, a significant scale-up of solar generation, in multiples of tens of GW, is a very realistic possibility for the country.

There is also vast untapped potential from different biomass sources. Agro-residue has a potential of generating approximately 18 GW of energy in India, while bagasse has the potential of generating about 4 GW. And, about 60 GW of power can be generated from energy crops in the country's degraded wastelands, while the country's renewable energy minister has identified 15 GW of potential generating capacity from small hydroelectric power plants.

Energy Security Remains Key Concern

Driven by consistent economic growth, India's power requirements are expected to grow at a rate of 6.4% per year and are anticipated to reach 1600—1800 TWh by 2020. This would imply that the country's total installed capacity will soar from about 160 GW in 2010 to about 450 GW by 2020. Coal is expected to remain the country's principal energy source in the coming years and despite India holding almost 10% of the total global reserves of coal, imports rose from nothing five years ago to more than 50 million tonnes in the last fiscal year. It also imports somewhere in the region of 75%—80% of its crude oil requirements and, until recently, a significant amount of LNG. Given its market exposure, the vulnerability of the country to international oil price volatility is another threat to India's energy security which renewable energy resources could help guard against.

Rural Electrification Rates are Set to Increase

India has come a long way in the past two decades in terms of rural household electrification with about 52% electrified as of 2010, against 43.5% in 2001 and 30.5% in 1991. Distributed generation from green energy sources can help in fulfilling the government's stated 'power for all' policy objective, under the terms of which it is envisaged that still further efforts to develop rural electrification systems at an accelerated pace will take place.

Development as Renewable Energy Manufacturing Hub

India's wind turbine industry clearly shows that the country has developed into a global hub for manufacturing renewable energy equipment. Its current wind turbine generation manufacturing capacity is some 4 GW with the potential to increase capacity to 15 GW annually. As a result, this growing industry could potentially employ 400,000 people in India and generate revenues of up to US$12 billion/year for the country. Players such as Suzlon have already emerged as global leaders and the company, which also includes a majority holding in German manufacturer REpower, is the third largest supplier globally and in 2009 held 10% of the market.

Threats from Climate Change

India is the fourth largest carbon emitter in the world and if its reliance on conventional energy continues, emissions will increase further. The country's carbon dioxide emissions are expected to triple by 2030 if the current dominance of conventional resources in the energy mix continues. The country's National Action Plan on Climate Change has categorically called for keeping the per capita greenhouse gas emissions below that of developed countries at any given point in time. By 2020, India aims to reduce its emission intensity to 25% of the 2005 levels. Power from green energy plays an important role in the portfolio of options pursued under the National Action Plan on Climate Change.

However, players in Indian green electricity generation still face a number of critical challenges today, some of which traverse all renewable technologies. These include inconsistent and unreliable incentive schemes; limited grid infrastructure/connectivity; difficulty in passing on the additional cost of renewable power to final consumers; outdated or unavailable resource maps; as well as the currently limited size and scale of domestic component production.

Meanwhile, some issues are more technology-specific. Wind faces hurdles in grid infrastructure and power evacuation, a shortage of human talent and R&D capability, as well as difficulties in recovering payments from distribution utilities.

Solar's problems, meanwhile, come from the high initial capital expenditure required and the fact that a significant number of the most suitable sites are in remote regions which can add complexity to the output transportation issue which may require additional transmisison infrastructure. Elsewhere biomass has feedstock availability issues and low feed-in tariffs, while small hyrdoelectric power plants face complex bureaucratic hurdles.

These challenges mean that decisive steps need to be taken in order to overcome the growth barriers first and foremost by adapting the legislative framework and the introduction of a set of renewable energy laws with clear guidelines. In addition, the industry would benefit from focusing on creating a market for renewable energy by introducing renewable purchase obligations and securing preferential grid access for renewable energy output.

The industry could also draw support from the strengthening of country's grid infrastructure through the introduction of a strict grid code and clear roles and responsibilities for the evacuation infrastructure along with ownership and maintenance.

Evolving the grid infrastructure into smart grids would facilitate net-metering, which in turn could significantly increase distributed power generation from renewable sources, especially wind and solar. And by introducing land reform, sites that are rich in renewable energy resources could be reserved for power generation.

The issues raised could be overcome with government support and industry leadership in the near future and therefore investors should be positioning themselves already today to benefit from this growing market.

Klaus Peter Müller is Partner in the Global Energy & Chemicals Competence Center with Roland Berger Strategy Consultants. Pratik Kadakia is Practice Head Energy & Chemicals with Tata Strategic Management Group.

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