Banking Article, Banking Finance 2020, Banking Finance July 2020

Renewable Energy – The Way Ahead

In today’s time probably renewable energy is the solution of many environmental problems. In this article we will have an idea of its relevance and how this sector can be pushed ahead by help of Banking sector in India. But before moving ahead it is necessary to get acquainted to few terms relevant for understanding importance of Renewable Energy.

Greenhouse:

A Greenhouse is a chamber made of glass where the temperature and atmosphere is regulated in such manner so as to create an environment which is conducive for the existence and growth of certain plants, insects, animals, birds, fish and even human beings. All these structures are closed chambers where the temperature is controlled in such a manner, so as to create an environment similar to the various temperate zones of our Planet Earth and the vegetation of those areas are grown. Even if you visit during the cold winter when snow is all around, the environment within the glass house would be different from the environment outside.

In the same manner, our planet Earth’s atmosphere also acts like a Greenhouse. The energy from the Sun does enter the atmosphere of Earth but not all of it can escape. The heat generated from the energy of the Sun is absorbed by Greenhouse gases such as water vapour, methane, nitrous oxide, ozone, carbon dioxide and other gases which are referred to as halocarbons. Eventually the heat is released, only to be absorbed by another greenhouse gas. This phenomenon is necessary to maintain a temperature which is suitable for living things. However, if the heat thus absorbed keeps on increasing then it leads to global warming which is a matter to be alarmed about.

Global Warming and Renewable Energy:

Global Warming is the increase of Earth’s average surface temperature due to the effect of greenhouse gases. The most significant greenhouse gases are Water Vapor, and Carbon Dioxide. Water Vapor is not something that is produced directly by humans in significant amounts. However, even slight increases in atmospheric levels of Carbon Dioxide (CO2), which is produced due to Fossil Fuel combustion by Humans, can cause a substantial increase in temperature.

There are a number of anthropogenic greenhouse gases. These include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), Water Vapor (H2O) and a group of gases referred to as halocarbons.  These gases have the “internal vibration modes” that can absorb and re-radiate infrared radiation, which causes the greenhouse effect. Moreover, Carbon Dioxide (CO2) is the most important of the anthropogenic greenhouse gases as it tends to remain in the atmosphere for a very long time (hundreds of years) whereas Water vapor can easily condense or evaporate, depending on local conditions. Water vapor levels therefore tend to adjust quickly to the prevailing conditions in such a manner that the energy flows from the Sun and re-radiation from the Earth achieve a balance. However, CO2 tends to remain fairly constant and therefore it behaves like a controlling factor, rather than a reacting factor. More CO2 means that the balance occurs only at higher temperatures and higher water vapor levels.

In recent times, the CO2 concentration in the atmosphere has increased by about thirty percent, which is an extremely significant increase. Combustion of Fossil Fuels, for electricity generation, transportation, and heating, all result in the total worldwide emission of about 22 billion tons of carbon dioxide into the atmosphere every year. About one third of this comes from electricity generation, another one third from transportation and the rest from all other sources. The impact of such emissions lead to global warming and results in Rising Seas, Melting of the ice caps, Melting glaciers, Changes in rainfall patterns, Bleaching of Coral Reefs and Loss of Plankton due to warming seas, Widespread vanishing of Living beings and vegetation on land and sea and increased likelihood of extreme events resulting in calamities such as flooding, hurricanes and spread of disease etc.

The best way to overcome all these ills is to go for other natural sources of energy generation and simultaneously curtailing the use of fossil fuels like Coal, Petroleum Products etc. whose availability as well is restricted. The need of the hour is to extensively make use of the various resources of Renewable Energy available in nature for our use and disposal.

Energy Security:

The environmental benefits of renewable energy technologies are widely recognised, but the contribution that they can make to energy security is less well known. Renewable technologies can also enhance energy security in electricity generation, heat supply, and transportation.

Access to cheap energy has become essential to the functioning of modern economies. However, the uneven distribution of fossil fuel supplies among countries, and the critical need to widely access energy resources, has led to significant vulnerabilities. Threats to global energy security include political instability of energy producing countries, manipulation of energy supplies, competition over energy sources, attacks on supply infrastructure, as well as accidents and natural disasters. Energy security, therefore, has become fundamental from many perspectives, and is being therefore increasingly at the centre of legal and policy issues linked to social, economic, and development matters.

Nonrenewable Energy Vs. Renewable Energy and its benefits:

Non Renewable energy is energy generated by resources which take a very long time to replenish and are available in limited amounts in specific locations and can be totally exhausted due to excessive use. e,g, Fossil Fuels like Petroleum Products, Wood, Coal etc. Excessive use of these resources also leads to formation of Greenhouse gases which in turn are instrumental in inducing Global warming

Renewable energy on the other hand is generally defined as energy that is collected from resources which are naturally replenished such as, sunlight, wind, rain, tides, waves, biomass and geothermal heat. Renewable energy mostly provides energy in four important areas: electricity generation, air and water heating / cooling, transportation, and Grid connected / rural (off-grid).

Renewable energy resources exist over wide geographical areas in contrast to other energy sources like coal, petroleum which are concentrated in a limited number of countries. The benefits from use of renewable energy include control of environment pollution, air pollution, climate change and global warming. Renewable energy is prominently used in Power Generation, Heating and Transportation.

Increasing renewable energy deployment contributes to multiple policy objectives, including boosting national energy security and economic growth, creating jobs, developing new industries, reducing emissions and local pollution, and providing affordable and reliable energy for all. Policy makers continue to promote renewable heating and cooling, renewable transport technologies and renewable power by implementing a range of policies including targets, regulations, public financing and fiscal incentives as well as, increasingly, complementary policies enacted together.

Diverse Modes of Renewable Energy:

Now we try to understand different modes of renewable energy.

Wind power – the use of air flow through wind turbines to mechanically power generators for electricity generation. Wind power is one of the best alternatives to burning fossil fuels and is available in abundance,  widely distributed, clean, produces no greenhouse gas emissions during operation, uses no water, and uses little land. The net effect is that it does not pollute the environment.

Hydropower or water power – The power derived from the energy of falling water or fast running water, which may be harnessed for useful purposes like a renewable energy source for irrigation through water wheels  and watermills and also for the operation of various mechanical devices, such as gristmill, sawmills, textile mills, trip hammers, dock cranes, domestic lifts, and ore mills. In late 19th century, hydropower was first used to generate electricity.

Solar energy radiant light and heat from the sun, is harnessed using a range of ever-evolving technologies. Solar technologies are broadly characterized as either passive solar or active solar depending on the way they capture, convert and distribute solar energy. Passive solar techniques include orienting a building to the Sun, selecting materials with favorable thermal mass or light dispersing properties, and designing spaces that naturally circulate air. Active solar technologies encompass solar thermal energy, using solar collectors for heating, and solar power, converting sunlight into electricity either directly using photovoltaics (PV), or indirectly using concentrated solar power (CSP).

Concentrated Solar Power – (also called concentrating solar power, concentrated solar thermal, and CSP) systems generate solar power by using mirrors or lenses to concentrate a large area of sunlight, or solar thermal energy, onto a small area. Electricity is generated when the concentrated light is converted to heat, which drives a heat engine (usually a steam turbine) connected to an electrical power generator

Bio energy – Biomass is biological material derived from living, or recently living organisms. It most often refers to plants or plant-derived materials which are specifically called lignocellulosic biomass. As an energy source, biomass can either be used directly via combustion to produce heat, or indirectly after converting it to various forms of biofuel. Conversion of biomass to biofuel can be achieved by different methods which are broadly classified into: thermal, chemical, and biochemical methods.

Geothermal energy – is thermal energy generated and stored in the Earth. Thermal energy is the energy that determines the temperature of matter. The geothermal energy of the Earth’s crust originates from the original formation of the planet and from radioactive decay of materials. Geothermal power is cost-effective, reliable, sustainable, and environmentally friendly, but has historically been limited to areas near tectonic plate boundaries

Investments In Renewable Energy worldwide and In India:

The top 10 national investors consisted of four developing or emerging countries and six developed countries. In addition to China and the United States, top countries included Japan, India and Germany. The next five countries were Australia, the United Kingdom, Brazil, Mexico and Sweden.

The Indian renewable energy sector is the fourth most attractive renewable energy market in the world. As of October 2018, India ranked 5th in installed renewable energy capacity. According to 2018 Climatescope report India ranked second among the emerging economies to lead to transition to clean energy.

The global think-tank said in a special report the long-term outlook is favorable for renewable energy in India as the country saw a dramatic decline in the wholesale electricity tariffs from solar and wind generation sources in 2017-18 with capacity consistently awarded at sub-Rs3 per unit through reverse bidding auctions.

Installed renewable power generation capacity has increased at a fast pace over the past few years, posting a CAGR of 19.78 per cent between FY14–18. The focus of Government of India has shifted to clean energy after it ratified the Paris Agreement. With the increased support of government and improved economics, the sector has become attractive from investors perspective. As India looks to meet its energy demand on its own, which is expected to reach 15,820 TWh by 2040, renewable energy is set to play an important role.

As of February 2019, total renewable power installed capacity (excluding large hydro) in the country stood at 75.06 GW. Off-grid renewable power capacity has also increased. As of October 2018, generation capacities for Waste to Energy, Biomass Gasifiers, SPV systems stood at 175.28 MWeq, 163.37 MWeq and 767.51 MWeq, respectively.

With a potential capacity of 363 gigawatts (GW) and with policies focused on the renewable energy sector, Northern India is expected to become the hub for renewable energy in India.

According to data released by the Department for Promotion of Industry and Internal Trade (DPIIT), FDI inflows in the Indian non-conventional energy sector between April 2000 and December 2018 stood at US$ 7.48 billion. More than US$ 42 billion has been invested in India’s renewable energy sector since 2014. New investments in clean energy in the country reached US$ 11.1 billion in 2018.

Some major investments and developments in the Indian renewable energy sector are as follows:

  • Inter-state distribution of wind power was started in August 2018.
  • In the first half of 2018, India installed 1 MW of solar capacity every hour.
  • With 28 deals, clean energy made up 27 per cent of US$ 4.4 billion merger and acquisition (M&A) deals which took place in India’s power sector in 2017.
  • In March 2018, ReNew Power finalized a deal estimated at US$ 1.55 billion to acquire Ostro Energy and make it the largest renewable energy company in India.
  • World’s largest solar park named ‘Shakti Sthala’ was launched in Karnataka in March 2018 with an investment of Rs 16,500 crore (US$ 2.55 billion).
  • Solar sector in India received investments of over US$ 10 billion in CY 2017.
  • Private Equity (PE) investments in India’s wind and solar power have increased by 47 per cent in 2017 (January 1 to September 25) to US$ 920 million, across nine deals, as compared to US$ 630 million coming from 10 deals during the corresponding period in 2016.
  • As of March 2019, Eversource Capital, a Joint venture of Everstone and Lightsource plans to invest US$ 1 billion in renewable energy in India through its Green Growth Equity Fund.

Government initiatives:

Some initiatives by the Government of India to boost the Indian renewable energy sector are as follows:

  • A new Hydropower policy for 2018-28 has been drafted for the growth of hydro projects in the country.
  • The Government of India has announced plans to implement a US$ 238 million National Mission on advanced ultra-supercritical technologies for cleaner coal utilization.
  • The Ministry of New and Renewable Energy (MNRE) has decided to provide custom and excise duty benefits to the solar rooftop sector, which in turn will lower the cost of setting up as well as generate power, thus boosting growth.
  • The Indian Railways is taking increased efforts through sustained energy efficient measures and maximum use of clean fuel to cut down emission level by 33 per cent by 2030.

Role of Banks and other possible ways to fund the above schemes:

  • Banks can play very important role in development of Renewable Energy projects by way of financing project cost. But it is observed that structure of our rural banks is not strong enough to support these projects and commercial banks are reluctant in financing renewable energy projects due to high initial development cost. High cost of capital, short tenure and volatility of interest rates makes domestic finance unattractive and expensive currency hedging in India makes foreign financing unattractive.
  • To overcome this scenario our government has set up Indian Renewable Energy Development Agency Ltd. which has vital role of supporting various renewable energy projects including Bio Mass Power project.
  • During the last decade the World Bank and the other multilateral banks and the donor agencies have been more active in supporting RE programmes. Given the gap in the capital markets of Developing Countries there is a task for the public sector and the donor community to provide guarantee schemes.
  • The absence of a long-term debt market to mobilise matching finance for grid-connected mini hydro and off-grid village hydro projects impeded banks willing to lend to these sectors. This barrier was overcome under the renewable energy programme when long-term financing through a World Bank credit line became available. The Government, as borrower, receives concessionary terms and re-lends to PCIs in local currency at market rates, while absorbing the exchange risk. PCIs thus have access to long-term funds at market rates, and more importantly, are hedged against currency depreciation, which is consistent with the rupee cash flows of their sub-borrowers.
  • Like other infrastructure projects Renewable Energy projects also may be financed on project finance basis where security comes from future cashflows with no/little upfront collateral security. RE projects are more exposed to limited availability of project finance as the share of capital cost in total cost is much greater
  • In microfinancing of small but efficient renewable energy projects banks may play vital role by loaning to SHG instead of individuals to ensure better repayment.
  • Underwriting and syndication, club deals and SPV may be used by banks for financing large RE projects.

India has signed a Memorandum of Understanding with Germany “to expand bilateral development cooperation in the field of solar energy by increasing use of solar energy in India through technical as well as financial cooperation”.

As a part of this MoU, Germany “would provide concessional loans in the range of one billion euro (over Rs 7,200 crore) over the next five years”.

It has to be noted that the government’s investments may not necessarily be capital in nature but could be in the form of subsidies and tax-free bonds.

Road Ahead:

The Government of India is committed to increased use of clean energy sources and is already undertaking various large-scale sustainable power projects and promoting green energy heavily. In addition, renewable energy has the potential to create many employment opportunities at all levels, especially in rural areas. The Ministry of New and Renewable Energy (MNRE) is committed towards it.

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