Driving Sustainable Growth: Increasing adoption of solar energy by corporates

In the early 2000s, solar and wind po­wer development in India was mostly unfeasible, and coal accounted for the majority of the nation’s energy consumption. How­ever, a turning point ev­entually arrives for every technology. Between 2010 and 2020, the tables tur­ned in favour of renewable technology, creating a situation where coal power plants need to be salvaged, while solar power is expanding. This scenario seem­ed improbable a few decades ago, but it is now a ground reality.

In pursuit of its 2030 green energy ambitions, India has started to implement measures to transition its grid towards sustainability by focusing on harnessing the po­wer of solar energy. Solar power has emer­ged as an efficient means to ac­complish India’s climate goals due to its versatility in installation, as solar panels can be easily deployed on rooftops or on the ground, unlike wind turbines, which cannot be us­ed in densely populated regions. In particular, distributed solar energy offers a fantastic opportunity to fulfil the power req­ui­re­­ments of bu­sine­sses. Consequen­tly, co­mmercial and in­dustrial (C&I) customers are increasingly looking to procure solar power through the open access route to satisfy their en­ergy needs, driven by both cost and ecological considerations.

Key drivers

Cost economics stands as the primary factor behind corporate entities adopting distributed solar power. Contrary to what was anticipated in the early 2010s, solar and wind power currently compete fa­vou­­rably against fossil-fuel-based power. Ce­ment, steel, aluminium and data centres are a few industries where power co­sts comprise a significant portion of the overall fuel and energy prices, highlighting the substantial financial burden they face. These businesses are anticipated to disconnect from the aforementioned grid, pa­r­ticularly if the availability of storage and round-the-clock power becomes mo­re prevalent. The rapid adoption of digitisation has led to exponential growth in data centres, which have high energy re­quirements and are now emerging as significant customers for renewable group captive power solutions. This is because in the majority of the states group captive landed costs are significantly lower than grid tariffs and third-party open access.

The surge in demand for distributed so­lar energy has been fuelled by both con­su­mer and financial demand. According to statistics, the top consumers of rene­wable energy include businesses in the IT, automotive, electrical manufacturing, co­nstr­uction and metal industries. The current demand from C&I customers on the In­dian electricity grid is 35-40 per cent, and this demand is now filtering do­wn to include household consumers as well. As the government continues to lo­wer le­gislative and regulatory hurdles, the ma­rket is poised to experien­ce rapid ex­pansion. Additio­na­lly, a growing number of states are introducing supportive legislation to facilitate the adoption of re­ne­wable energy.

Major industry players are abandoning fossil fuels due to a lack of funding, accelerating the transition towards cleaner and renewable energy sources. A long-term net zero ambition is crucial to at­tract financing, especially from overseas entities. Positioned on the globalisation curve, India aspires to establish itself as a key su­pplier of renewable energy, particularly green hydrogen. Furthermore, the­re is a growing international preference for businesses that run green operations. The­re­fore, to meet export goals, the de­mand for renewable procurement by businesses is likely to rise further. While mandates have been the main drivers of demand thus far, this may no longer be the case in the future. Business ethics are crucial, and if a company plans to secure financing, particularly from international markets, it nee­ds to incorporate sustainable practices to green its operations.

Business models for corporate procurement of renewables

Three business models are prevalent in the industry. First is the capex model, which is frequently used by small market players. The capex model tends to be ad­opted by micro, small and medium enterprises that lack the necessary credit rating for a group captive model, whereby a thi­rd-party developer invests funds on their behalf. In this scenario, the client finances the capital expenditure and owns the project. These projects are typically develop­ed on an engineering, procurement and construction basis (on-site or off-site), wi­th operations and maintenance (O&M) responsibilities falling under the con­sumer’s purview or being outsourced to a third-party service provider.

Second is the opex model, whereby the developer finances the capital expenditure and retains ownership of the project. The consumer enters into a power purchase agreement (PPA) on a per unit basis with the developer, who is also in charge of construction and O&M.

The third type of business model is the group captive model. In this model, a synthetic equity structure is established bet­ween the developer and the consumer, with captive consumers holding at least 26 per cent equity and consuming at least 51 per cent of the energy produced. The gr­oup captive consumers sign a PPA with the developer, who is in charge of construction and O&M. Ac­cording to the Electricity Act, group captive consumers are not subject to the cross-subsidy surcharge.

There are also other hybrid models in the market, such as lease models, deferred pay­ment models and virtual PPAs.

Risks and challenges

Corporate renewable energy procurement entails various complexities, including regulatory inconsistencies, policy obstacles and delays in discom approval. It faces ba­­rriers imposed by the open access ru­les, while the tightening of banking regulations further complicates the process. Therefore, corporate entities must come up with their own solutions, which frequ­ently involve using pumped storage and ba­ttery storage. Additional obstacles in­c­lu­­­de forecasting and scheduling, rising demand fees, and changes related to ex­emption from open access charges. Mo­reover, the market environment is prone to being adversely affected by delays in discom approvals for open access, metering, interconnection and evacuation. Tech­ni­cal shortcomings in local substations are frequently cited as a justification for refusing authorisation. The long-term growth of the market and its associated value chain may be in jeopardy if these issues remain unresolved. Consistency in policies is essential to instil greater confidence among potential consumers.

Future outlook

There is no denying that in recent years the interests of private equity investors, developers and financiers in the renewable energy sector have grown. This can be attributed to a number of economic and societal factors, such as concerns ab­out sustainability, cost reductions and technical improvements. Going by the recent emergence of virtual PPAs and power exchange instruments such as the green term-ahead market (G-TAM) and the green day-ahead market (G-DAM), one can anticipate fresh business models to appear in the future. Corporate consu­mers can purchase renewable energy directly from power exchanges through G-TAM and G-DAM. Addi­tionally, India is expected to establish a phased-in carbon market in the near future. Such models offer corporate customers flexibility without needing them to go through drawn-out PPA procedu­res. While many consu­mers today may lack the expertise or willingness to purchase power from exchan­ges, leading them to rely on PPAs, the inc­reasing ad­option of these new models is likely to drive a change in consumer be­haviour in the coming years.

Anticipated developments include the launch and market penetration of emer­ging models associated with decarbonisation/energy-as-a-service, battery storage, and green ammonia- and green hy­drogen-related captive projects. Mo­re­over, the pursuit of round-the-clock su­pply of power has fuelled the growing momentum for hybrid projects. As a result, integrated solutions such as ba­ck­up power with storage and effective energy management will play a crucial role in the sector’s expansion.

Above all, rigorous monitoring of on-ground implementation is crucial. To this end, it is anticipated that regulatory measures such as renewable purchase obligation compliance will be ti­gh­tened in the coming years. Green en­ergy open access rules have also impro­ved accessibility and lowered the de­ma­nd for eligibility co­n­tracts. The separation of carriage and co­­ntent gives customers the freedom to choose their desired power sources. Mer­chant finan­ce for renewables has caused a fundamental shift in the market, and de­spite impending difficulties, it is anticipated that the market will continue on its current course and achieve equilibrium. In the coming yea­rs, adopting greener practices will no lo­n­ger be an option but a mandate, prom­pting corporates to enter and establish their place in this bur­geoning market.

Based on a presentation by Hitesh Sachdeva, Partner, KPMG, at the 16th edition of the Solar Power in India conference organised by Renewable Watch