Utility-scale wind and solar PV generation capacity have seen rapid growth in India on the back of proactive policy support and a mix of domestic and international capital. From around 30 gigawatts (GW) in 2015, wind and solar capacity has grown four times to exceed 120 GW at the end of 2022. This impressive growth has been driven by an ambitious target of 500 GW of renewable power generation capacity by 2030, together with a clearly communicated pathway to reach this target, and a range of supportive policies by the central government.

Solar PV will make a significant contribution to this target. In 2022, USD 15 billion was invested in solar PV in India, a 50% increase compared with the 2017‑2021 annual average investment. Under the Stated Policies Scenario (STEPS), average annual spending on solar PV in India is expected to reach USD 20 billion between 2031 and 2035. For India to be on track with its net zero by 2070 ambition – which is reflected in the Announced Pledges Scenario (APS) – average annual solar PV investment in this time frame would have to increase by a further 20%.

One aspect that is holding back even greater investment in India is the fact that the cost of capital for utility-scale solar PV is, for example, still 80% higher than that in advanced economies. This reflects various associated risks in the country, despite India’s overall progress and experience with utility-scale solar. According to the IEA Cost of Capital Observatory, investors report that regulatory, currency and off-taker risks were among the top three concerns impacting the cost of capital in India.

In the past years, India has significantly advanced its regulatory framework for investments into variable renewables and sought to address some of the risks which ultimately increase financing costs. The Government of India formulated clear policy goals by aiming to have 50% of power generation capacity fuelled by non‑fossil sources by 2030, which in turn is supported by its Green Energy Corridor project, which aims to create sufficient transmission capacity to integrate the growing deployment of renewables, as well as India’s production-linked incentive scheme, which provides subsidies towards the creation of new manufacturing capacity for solar PV modules and batteries.

Improving auction design

India has been providing a steady capacity pipeline for utility-scale renewables through a competitive bidding process based on “reverse auctions”, wherein companies bid the lowest selling price of electricity for the stated new generation capacity. The companies are then responsible for the design, construction, finance, operation and maintenance of the projects. The Indian government is targeting a pipeline of 50 GW of renewable energy capacity bids per year between the fiscal years 2023/24 and 2027/28. The latest auction designs have also included hybrid tenders that combine solar PV, wind and battery storage. These allow investors greater geographic flexibility (e.g. projects do not have to be directly co‑located), orientate themselves more along performance criteria that leave it to the project developer to devise the most appropriate technical solution, and can reduce transmission risk as well as improve the economics of a project.

However, off-taker risk – the risk that distribution companies (DISCOMs) cannot pay generation companies in full or on time – still remains a significant obstacle in India. As of March 2023, there were over USD 11 billion in legacy delayed payments to electricity generation companies from DISCOMs, with payments being 163 days late on average. These late payments stem from the poor financial condition of several DISCOMs, as illustrated by the accumulated losses that they find themselves in. As of 31 March 2022, DISCOMs in India had accumulated losses totalling USD 70 billion, because of a host of factors, including aggregate technical and commercial (AT&C) losses (as a result of inefficient transmission and distribution infrastructure), metering and billing errors and non‑payment by consumers, the lack of tariff reform, and poor governance and management.

Since 2012, the Ministry of Power has been commissioning an Integrated Ratings Exercise to evaluate the performance of DISCOMs. In the most recent ratings released in 2023, of the 57 DISCOMs rated, 29 had a rating of B‑ or lower, reflecting relatively poor financial performance, distribution losses, poor billing efficiency and other operational metrics.

Accelerating the deployment of renewable sources therefore necessitated addressing risks arising from off-taker risk. The Indian government has deployed a range of policy measures in this direction. Most notably, the Ujjwal DISCOM Assurance Yojana, the Revamped Distribution Sector Scheme, and the Late Payment Surcharge (LPS) rules. Under the Ujjwal DISCOM Assurance Yojana, the state has taken over large shares of DISCOM debt and facilitated structural reforms since 2015. Participating states have also received federal government support in the form of priority fuel supplies and infrastructure investments. Under the Revamped Distribution Sector Scheme, which was implemented in 2021, the target is to reduce the AT&C losses by up to 15% and cost-revenue gap to zero by 2024/25 through infrastructure upgrades, modernisation and financial assistance. The LPS was adopted in 2022 and penalised DISCOMs for late payments to generation companies.

As a result of these reforms, there has been a gradual improvement in key metrics, including AT&C losses (reduced from 22% in 2020/21 to 16% in 2021/22) and the cost-revenue supply gap (declined from INR 0.69 (rupees) per kilowatt-hour in 2020-2021 to INR 0.22/kWh in 2021/22). Further, there was an improvement in payments to DISCOMs: between 2020-2021 and 2021/22, the delays in payments improved from 175 to 163 days. In particular, as a result of LPS that enforced a penalty on DISCOMs for late payments to generation companies, the total outstanding dues by DISCOMs decreased from USD 18 billion in June 2022 to USD 9 billion in January 2024.

In addition to these structural measures to improve distribution company financial and operational performance, India has also attempted to address off-taker risk for renewable power projects in particular through the Solar Energy Corporation of India (SECI) Limited. Solar and wind projects at the central level are largely awarded through tenders administered by SECI, which signs PPAs with the generation companies. SECI in turn signs power sales agreements with state DISCOMs. SECI maintains a Payment Security Fund that protects generation companies from delays and defaults by DISCOMs, and has in place a set of rules and mechanisms that ensure that solar and wind generation companies get paid in a timely manner.

India’s experience at scaling up wind and solar PV power generation capacity, and specifically its attempts to address off-taker risk, offers valuable lessons to other emerging economies that might be in a similar situation. First, the sector benefited from clear target setting of renewable capacity, which included an annual pipeline target for tendering by putting in place "reverse auctions", and other enabling policies such as solar parks that kick-started the sector through a plug-and-play model for generation companies, and transmission infrastructure creation through the Green Energy Corridor. Second, India has been tackling the issue of late payments to generation companies by dedicated measures that encourage timely payments, as well as payment security mechanisms that included government support towards power procurement in the case of delayed payments. Third, India has also been attempting to address ecosystem issues that impact DISCOM finances, such as AT&C losses, through programmes and policies that incentivise timely bill collection, and organisational restructuring. While these improvements are welcome developments that help mitigate off-taker risk, there is a need to sustain this policy push to help Indian DISCOMs reform and find financial stability, which would help significantly improve investor perception on this issue.