Future of green energy in India brighter than investors realise

David Smith, Senior Investment Director, Asian Equities

When it comes to investment opportunities in renewable energy, China attracts the lion’s share of attention. But investors should note India’s unheralded potential in this exciting growth segment.

The world’s second most populous country is one of the largest producers of renewable energy globally, ranking 5th worldwide by the International Renewable Energy Agency in 20201 and fourth in 2021 by Indian government data.2

India’s recent growth in installed renewable capacity has been considerable, having quadrupled in the decade to November 2020.3 Today it stands as one of the fastest-growing solar power markets in the world.4

Today India stands as one of the fastest-growing solar power markets in the world.

Importantly, this advance is being driven both by supportive government policy and interest from global investors drawn to India’s stable and supportive regulatory regime.

The market revised up its 2030 capacity targets recently, further underlining its growth potential. India’s per capita electricity consumption is forecast to more than double by 2040.

Renewables are an important means to help prevent associated growth in per capita greenhouse gas emissions, and momentum is building behind India’s continued expansion in renewables capacity.

Its Ministry of New and Renewable Energy announced recently that non-fossil fuel energy accounted for 150GW of installed capacity – or 40.1% of total capacity – ahead of targets it set at the United Nations’ climate change conference in Paris in 2015 (COP21).5 With the government upsizing capacity targets and setting net-zero goals, much optimism surrounds India’s renewables sector.

Observers had low expectations about India committing to a net-zero target ahead of the recent UN climate change conference in Glasgow last November (COP26). But Prime Minister Narendra Modi surprised many by pledging that it would achieve net-zero carbon emissions by 2070.

Further, Modi announced that India would target non-fossil energy capacity of 500 gigawatts (GW) by 2030, estimating it could meet 50% of energy needs from renewable energy by the same year. The 500GW figure was revised up from 450GW and follows ambitious government-set renewable energy targets, with India on course to meet its stated goal of 175GW of renewable energy by 2022.

India’s strong, consistent policy and regulatory approach is attracting market operators such as utility companies, which is driving tariffs for renewable energy lower and making it more affordable. November 2020 marked a new low, with Singapore operator Sembcorp setting a record of INR2 (~$0.0270)/kWh6 (see chart).

 

Trajectory of lowest solar tariffs in India

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India’s levelised cost of electricity using PV had fallen to $38 per megawatt hour in 2019, 14% cheaper than coal-fired power – which has the cheapest source of power generation traditionally.7 This gave India the lowest renewable energy costs among all Asia-Pacific countries.

While tariffs have levelled off since, the reduction underscores the traction that renewable energy can garner in India, with renewables surpassing fossil fuels as the cheapest source of electricity in many cases.8

Attractive return potential

Critically, renewable energy is not dependent on subsidies in India, nor is it driven by them. While India has seen a reduction in tariffs, renewables projects there still offer attractive equity returns, which our company meetings suggest are often higher than for China.

India’s energy transition comes amid a backdrop of relatively low levels of per capita electricity consumption in the country. In 2020, per capita consumption of electricity stood at 1,208 kWh,9 a figure that utility company NTPC estimates will rise to 3,000 kWh per person by 2040.10

 

India's per capita electricity consumption (kWh)

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In fact, per capita consumption of electricity in India is less than half the global average (see graph below). Chinese per capita consumption is around four times that of India, while the US figure is more than 10 times higher.

 

Per capita electricity consumption in various countries in 2016 & 2017

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Not only does this point to expected growth in per capita electricity consumption in India, but these forecasts also highlight the potential growth in penetration of renewables in the electricity mix – a dual tailwind for the sector.

Of course, while per capita greenhouse gas (GHG) emissions in India are lower than the global average, it remains the world’s third largest emitter after China and the US, with power the primary contributor.11 As electricity consumption per capita rises, per capita GHG emissions will also increase unless India can decarbonise its power sector rapidly.

While renewable energy enjoys clear price advantages over fossil fuels in India today, achieving the country’s targets for installed capacity won’t be easy. India needs to overcome a number of issues before it can achieve its targets, including upgrading its electricity grid.

The International Energy Agency (IEA) has noted: “There are still important structural, regulatory and institutional challenges that could hamper further growth, and progress has been uneven across different renewable technologies. The challenges include the poor financial position of many state distribution companies, difficulties in obtaining access to finance and in acquiring land, grid congestion, and uncertainties over grid infrastructure development.”12

On the issue of the grid, the IEA commented: “Growth in the share of wind and solar photovoltaics (PV) in the Indian power system needs to be accompanied by a strengthening of grid infrastructure. To address this, the government has been focusing on flexibility in operations, technologies and infrastructure.

“The Green Energy Corridors initiative is one attempt to boost flexibility. It aims to expand and improve transmission infrastructure, facilitate the integration of renewable energy management centres and energy storage options, and enhance the flexibility offered by India’s thermal power fleet.”13

This government-endorsed drive to upgrade infrastructure is creating opportunities, notably for transmission companies to operate power lines to draw renewable energy from areas of high irradiance to areas of high electricity demand.

Conclusion

In short, investors should know that India’s renewables sector has become a global success story in recent years and the outlook remains bright, in our view. A consistent, predictable policy and regulatory environment allied to a number of high-quality companies and a growing ecosystem of operators and support services point to the potential growth in renewables penetration.

So even if China continues to attract the lion’s share of global attention when it comes to green energy, we urge investors seeking opportunities to invest in decarbonisation not to overlook India.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

1 Country Rankings (irena.org)

2 https://pib.gov.in/PressReleasePage.aspx?PRID=1745254

3 A Decade of Growth - Renewable Watch

4 India's Azure Power commissions 600-MW solar project, offtake at $34/MWh | S&P Global Platts (spglobal.com)

5 See: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1777364

6 See: https://mercomindia.com/new-solar-tariff-record/

7 India leads with lowest renewable cost in Asia Pacific (aa.com.tr)

8 See: http://investors.azurepower.com/~/media/Files/A/Azure-Power-IR/reports-and-presentations/apgl-investor-presentation-march-1-2021-vf.pdf

9 See: https://cea.nic.in/wp-content/uploads/pdm/2020/12/growth_2020.pdf

10 See: https://www.ntpc.co.in/presentations/10256/presentation-17th-analysts-investors-meet-held-02082021

11 See: https://www.carbonbrief.org/the-carbon-brief-profile-india

12 See: https://iea.blob.core.windows.net/assets/1de6d91e-e23f-4e02-b1fb-51fdd6283b22/India_Energy_Outlook_2021.pdf (p38)

13 See: https://iea.blob.core.windows.net/assets/1de6d91e-e23f-4e02-b1fb-51fdd6283b22/India_Energy_Outlook_2021.pdf (p39)