Key Findings
The International Energy Agency (IEA) in its India Energy Outlook 2021 says India has the potential to become a world leader in battery storage, predicting that it could add 140-200 gigawatts (GW) of battery capacity by 2040 - the largest of any country and more than 100 times as much as the amount installed in the U.S. today.
Solar power is now the cheapest source of new Indian electricity capacity, and with record low tariffs of Rs1.99-2/kWh (US$~27/MWh) it is now below the marginal fuel cost of coal-fired power plants.
The report calls for policy support for a time-of-day pricing mechanism to incentivise capital investment in key grid-firming solutions to ensure flexible, reliable peak-time power supply.
Executive Summary
India already has 93 gigawatts (GW) of on-grid variable renewable energy (VRE) capacity (as of January 2021). Now, one of the next big challenges for India’s electricity sector transition is integration of large-scale VRE into the electricity grid.
Countries such as Germany, which has 46% of its total generation from VRE, and states such as South Australia and California, which had more than 60% and 36%, respectively, of their electricity coming from VRE in 2020, are leaders in integrating large-scale renewables.
The much-bigger Indian market benefits from its strongly connected national electricity grid, but has its own set of challenges and market structure dynamics in dealing with large-scale VRE. However, there are opportunities for cross-learnings as some of the renewable energy rich Indian states such as Rajasthan, Gujarat, Maharashtra, Karnataka and Tamil Nadu could have renewable generation increasing to 50% by 2030 from the current levels of 10-30% of their total power generation.
To begin with, integration of large-scale VRE into India’s grid requires policy support for a time-of-day (ToD) pricing mechanism that incentivises investment into a multitude of technology solutions for flexible, peaking power delivery.
Just when the Indian renewable energy industry was coming to terms with the record low solar tariff of Rs2.36/kWh (US$31/MWh) discovered in Solar Energy Corporation of India’s (SECI’s) auction in June 2020, expectations of tariff deflation were surpassed by ~15% lower tariffs in recent competitive auctions from SECI and Gujarat Urja Vikas Nigam Limited (GUVNL). With tariffs of Rs1.99-2/kWh (US$~27/MWh), solar is not just grid-competitive, it is now even cheaper than the marginal fuel cost of thermal power.
The Central Electricity Authority’s (CEA) optimum generation mix report projects India’s solar and wind to form 420GW of capacity, 51% of the total installed capacity, by 2030 which will provide 31% of the total generation (biomass and small hydro will add another 30GW to the total installed capacity).
The International Energy Agency (IEA) in its recent India Energy Outlook 2021 predicts that by 2040 India could add 900GW of renewable capacity with renewable energy becoming the dominant source of power supply in India’s electricity system.
But this requires a rapid grid system modernisation and the pricing of flexibility in demand and supply.
In this report our focus is to discuss technology and enabling policies that incentivise investments into some of the key grid firming (peak-time power supply) options such as flexible coal-fired power generation, battery storage and green hydrogen, while also noting the key support provided by largely flexible hydro power.
Flexible coal-plant operation — Coal, which is likely to be the dominant source of Indian electricity generation for some time to come, is playing a vital balancing role in integrating large-scale variable renewables. This highlights the need to differentiate between the cost of and value of power generation in terms of ToD pricing.
To best capture the value of more flexibility, coal-fired plants would require retrofitting, operational and regulatory amendments. This would incur capital costs as well as additional operational expenditure depending upon the size, age and combustion technology of the plant, but could be rewarded with a higher ToD price.
In this report we discuss the findings of a couple of pilot studies on flexible coalfired plant operation in India, optimising sunk investments to help transition.
Under the current structure in India, the load dispatch merit order incentivises least-cost generation units. Plants with lowest variable charges get dispatched first. In IEEFA’s view this metric going forward should evolve to a highly flexible, dynamic ToD pricing to incorporate the flexibility parameters of coal-fired power plants in support of VRE integration.
Battery storage — Like solar and wind generation technology, battery storage technology has also made massive advancements. The cost of standalone lithium-ion battery systems globally has fallen from US$1,100/kWh in 2010 to US$137/kWh in 2020 (2019 prices in real terms). BloombergNEF (BNEF) projects a further decline in the cost to US$58/kWh by 2030.
IEA’s India Energy Outlook 2021 predicts that India could have 140-200GW of battery storage capacity by 2040, the largest of any country.
Utility-scale batteries are now thriving in a few leading developed markets such as Australia, the U.S., the U.K. and China – indicative of things to come in India. Deployment of large grid-scale batteries in Australia has brought down power firming costs and grid service-related costs due to the speed of construction and increased competition in the battery storage market, while battery system costs have declined rapidly via learning-by-doing in the domestic context.
IEEFA believes that despite the cost sensitivity of large parts of the Indian market in the face of current high battery costs, grid-scale batteries are not a distant dream for India, particularly for the commercial and industrial (C&I) and high-end consumer segments already paying an excessive cross-subsidy. Domestic and international developers as well as utilities await battery cost deflation and policy support in the form of ToD pricing that incentivises high initial capital investment into such assets.
Smaller batteries from Tata’s distribution business in Delhi (10 megawatts [MW]) and Neyveli Lignite Corporation’s (NLC) battery in the Andaman and Nicobar Islands are small steps towards what could be India’s battery storage dream.
Green hydrogen — Electrolysis of water using electricity, one of the two most common methods of hydrogen production, is now moving towards being competitive by the end of this decade, spurred on by the growing availability of ever-cheaper VRE.
According to The Energy and Resources Institute’s (TERI) recent analysis, the cost of alkaline electrolysers is projected to drop 56% from around Rs6.3crore/MW (US$0.86m/MW) today to around Rs2.8crore/MW (US$0.38m/MW) by 2030.
The decline in electrolyser costs will be partly driven by large-scale deployment in India and globally, by a virtuous circle between falling VRE and electrolyser manufacturing costs, plus a rapidly strengthening global policy to promote hydrogen. Improving efficiencies of electrolysers, as well as increasing load factors of hybrid wind-solar plants, will also play an important role in driving the costs of green hydrogen below Rs150/kg by 2030 (US$2/kg) – versus Rs300-440/kg (US$4- 6/kg) as of today.
Though yet to be commercially deployed in India, green hydrogen is a clean fuel with a wide range of potential applications in transport, industrial production of ammonia, methanol, steel and electricity storage, and is an opportunity that India cannot afford to miss.
Billions of dollars of capital commitments across the globe are building a critical mass in the green hydrogen space. India will have the benefit of leveraging these learning-by-doing pilots that are underway in developed economies.
India can look to green hydrogen as a lower cost, zero pollution domestic alternative to using imported LNG as a source of peaking power and the fuel to underpin low cost, zero pollution domestic manufacturing of fertilizers, steel and aluminium et al. However, India’s strategy should be to plan in advance and be prepared to ride on this wave when it arrives, to bolster the country’s energy security. Hydrogen gas peakers might prove another key tool to managing VRE integration, but again, only when supported by a ToD pricing.
Please view full report PDF for references and sources.
