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Opinion

Coronavirus crisis should not stop India's move to green energy

Government must support renewables sector even as problems pile up

| India
Workers carry solar panels at the Gujarat solar park, pictured in April 2012 during construction: growth of renewable electricity will be hampered by the dampening of demand.   © Reuters

Kanika Chawla is Director of the CEEW Centre for Energy Finance.

While the economic slowdown inflicted by the novel coronavirus has sharply reduced greenhouse gas emissions from aircraft and industry, the crisis has also disrupted clean energy supply chains, dampened electricity demand and crashed oil prices.

With market conditions worsening, and many competing priorities for significantly depleted public resources, COVID-19 could slow down or even halt the significant progress India has made in its energy transition.

Over the last several years, India has done a fine job of balancing domestic priorities and climate action by displaying global leadership in transitioning to a renewable energy-rich electricity mix.

In 2014-15, India committed to having 175 gigawatts of installed renewable energy capacity by 2022 and to 40% of its electricity capacity coming from non-fossil fuels by 2030. At the U.N. Climate Action Summit in September 2019, Prime Minister Narendra Modi further strengthened India's commitment to this transition by announcing an aspiration for 450 gigawatts of installed renewable energy capacity.

But the crisis is affecting this. Of that 450 gigawatt target, close to 50 gigawatts is in the pipeline, awarded but not yet operational, and currently suffering supply chain disruptions.

As much as 90% of the solar cells and modules used in India are imported from China. Further, several domestic supply chains for other parts also begin in China. All of these have been facing disruption since late January, first with the lockdown in China and now with the lockdown in India.

This adversely impacts the energy transition at two related and critical levels: first, its pace, and, second, the financial viability of clean energy companies.

The government of India has declared the pandemic a force majeure event, meaning an unforeseeable circumstance, and said it would not charge a penalty for delays in commissioning renewables power caused by COVID-19 related disruptions.

However, it may not address all cost overruns as developers cope with manufacturing delays, rising commodity spot prices from unmet demand and accumulated port charges thanks to the lag between shipping and collection.

Beyond installation delays, the greater risk may be to the financial viability of renewable energy companies and their debt financiers. There is no force majeure clause in financial contracts and companies will be required to make their debt servicing payments despite the disruptions.

Further, insurance products do not cover pandemic-related disruptions, so over-leveraged renewable energy companies are likely to face a liquidity crunch that could result in payment defaults. These payment defaults are likely to trigger concerns in the fragile domestic banking and non-banking financial sector.

An employee works at a solar cell production line in Baddi.   © Reuters

Beyond the immediate problem, these concerns could hurt the availability and quality of domestic debt for financing India's energy transition.

If disrupted market economics were not enough, Indian energy companies face another existential obstacle, demand risk. Peak power demand declined by 43 gigawatts to 120 gigawatts from March 20 to March 26 because of the nationwide lockdown. While demand is likely to rise with the rising temperature, as people switch on their air conditioning, it will not make up for the loss of industrial and commercial demand, the highest tariff paying electricity consumers.

This may seem a temporary disruption but the industry is unlikely to bounce back to grow at the pre-pandemic rates right away. Rating agency Moody's lowered India's growth forecast for 2020 to 2.5%, but back to a steady 5.8% in 2021. In the face of this slowdown, overall demand for electricity is unlikely to grow at the pace projected, limiting the space available for new capacity to be deployed.

Even though renewable electricity is cheaper than conventional power, its growth will be significantly hampered by the dampening of overall demand.

As demand is declining, the supply side is seeing shocks too. Oil prices have stayed below $30 a barrel in the last two weeks and they are likely to decline further as we witness a global supply glut. The economics of transitioning from petrol and diesel now become less compelling. India imports 85% of its oil requirements and could save as much as $15 billion for each $10 decline in the per-barrel cost of oil.

When the World Health Organization declared COVID-19 a pandemic, it characterized it as not just a public health emergency, but rather a crisis that would impact every sector. The response to it, both immediate and in the future, must also bear this in mind. The economic stimulus to aid recovery should focus on sectors of the future, rather than keep alive those that were circling the drain even before the crisis.

For India, this is an opportunity to use such a stimulus to accelerate a transition out of thermal power toward a more sustainable, agile and future-aligned electricity mix which fulfills both its domestic needs and its international commitment.

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