Renewable Energy and MSMEs
Published on : Wednesday 01-02-2023
MSMEs can play a vital role in decarbonising the Indian economys supply chain, says Darshana Thakkar.
During the Covid-19 lockdown, Himachal's Dhauladhar mountain range was visible from Punjab's Jalandhar. The water quality of Ganga water was improved by 40-50 %. During the same period, there was also decreased seismic noise of the earth. Industrialisation has made modern human life full of comfort but damaged Mother Earth with irreversible effects. The tremendous usage of fossil fuels is damaging our environment. Climate change is now the top concern across the world. India is also in a race, being a developing country.
Fortunately, India has rapidly transformed its energy production from fossil fuel to renewable energy in the past few years. India is the world's 3rd largest consumer of electricity. With its active efforts and quick actions in the past few years, India has become the world's 3rd largest renewable energy producer, with 40% of energy capacity installed in 2022 (160 GW of 400 GW) coming from renewable sources. According to Ernst & Young's (EY) 2021 Renewable Energy Country Attractiveness Index (RECAI), India ranked 3rd behind USA and China. In November 2021, India had a renewable energy capacity of 150 GW consisting of solar (48.55 GW), wind (40.03 GW), small hydropower (4.83 GW), biomass (10.62 GW), large hydro (46.51 GW), and nuclear (6.78 GW). India has committed to 500 GW of renewable energy capacity by 2030.
International cooperation of India
India has strengthened its existing alliance and forged new ones to harness globally available know-how on renewables. (https://mnre.gov.in/international-relations/overview)
i. India participated in the International Solar Alliance – ISA’s 4th assembly on October 22, 2021.
ii. In FY 2021-22, 11 countries signed the ISA Framework Agreement taking the total membership to 86.
iii. India and the International Renewable Energy Agency (IRENA) signed a strategic agreement on January 16, 2022, to strengthen collaboration on knowledge sharing on RE, including green Hydrogen.
iv. India participated in the 22nd IRENA Council meeting on October 26-27, 2021 and in the 12th General Assembly on January 14-16, 2022, in Abu Dhabi.
v. The US Department of Energy and the Ministry of New and Renewable Energy, India (MNRE) launched the Hydrogen Task Force under the bilateral Clean Energy Partnership on June 17, 2021.
vi. The Centre of Excellence on Offshore Wind was launched under the India-Denmark Partnership on RE on September 9, 2021.
Apart from all the international alliances by the Indian government, many schemes are in operation under the Ministry of New and Renewable energy, Government of India (https://mnre.gov.in/). A few among the major ongoing schemes are:
i. Pradhan Mantri Kisan Urja Suraksha Evam UtthaanMahabhiyan (PM-KUSUM) for decentralised solar
ii. Roof Top Solar (RTS) Programme Phase-II
iii. Central Public Sector Undertaking (CPSU) Scheme for Grid-Connected Solar Photovoltaic (PV) Power Projects
iv. Development of Solar Parks and Ultra Mega Solar Power Projects
v. Domestic manufacturing: Production Linked Incentive (PLI) Scheme, 'National Programme on High-Efficiency Solar PV Modules
vi. Green Energy Corridor
vii. Human Resource Development Programme: To train human resources for renewable energy (50,000 plus Surya Mitra were trained under this scheme), and
viii. Renewable Energy Research and Technology Development (RE-RTD) Programme.
Other new initiatives
Green Hydrogen: National Hydrogen Mission announced to turn India into a Global Green Hydrogen Hub.
Energy Storage: The storage tenders in India have evolved from RTC, peak power, and now, standalone ESS. SECI issued a tender for a 1000 MWh Battery Energy Storage System (BESS) in October 2021 to enable DISCOMS to use storage facilities on an on-demand basis.
Carbon-Neutral Ladakh: A combination of the solar park, Hydrogen, and geothermal projects under planning to fulfill the country's vision of a carbon-neutral Ladakh.
Green Energy Corridor: The second phase of the Intra-State Transmission System Green Energy Corridor Scheme approved on January 6, 2022, to set up intra-state transmission infrastructure in 7 States, viz., Gujarat, Himachal Pradesh, Karnataka, Kerala, Rajasthan, Tamil Nadu and Uttar Pradesh.
Industrial energy consumption in India
Out of the total consumption of electricity in 2020-21, the industrial sector accounted for the largest share (41.09%), followed by domestic (25.67%), agriculture (17.52%), and commercial sectors (8.31%). The domestic industry has experienced the highest CAGR of 7.02 between FY: 2011-12 to FY: 2020-21
India is taking giant leaps in the renewable energy sector, with a total installed energy capacity of 150.54 GW (as of November 30, 2021); this includes 48.55 GW of solar, 40.03 GW of wind, 4.83 of small hydropower, 10.62 of bio-power, and 46.51 GW of large hydropower. During the last 7.5 years, India's renewable energy capacity has grown 1.97 times, with solar energy expanding 18 times.
Still, the area of the rooftop solar sector is untapped, mainly against the government's target of installing 40 GW of RTS power projects by 2022.
The MSME sector contributes about 36% of India's total manufacturing output. The MSME segment accounts for about 48% of the total energy consumed by India's industrial sector.
Despite this higher electricity consumption by the Indian MSME sector, adopting renewable energy practices is shallow in this sector.
Let us understand why Indian MSMEs are not leveraging the benefits of non-conventional energy resources like rooftop solar, which can quickly transform the energy consumption pattern of the industry.
Opportunities
A huge opportunity lies with the MSME industry in helping to achieve the target. The rooftop solar installation potential within the MSME sector is estimated at 15 GW (37.5% of the 40 GW target). According to the Ministry of New and Renewable Energy, a typical MSME grid-connected rooftop solar system has a 10-100 kW capacity and costs about ₹ 38,000 per kW. With meager maintenance cost, the system is warranted for output peak watt capacity, which should not be less than 90% at the end of 12 years and 80% at the end of 25 years. The initial investment can be recovered in just four to five years. This way, MSMEs can play a vital role in decarbonising the Indian economy's supply chain.
Despite a significant potential and a sustainable opportunity to shift from the conventional grid and fossil fuel-based power sources to rooftop solar to meet their energy needs, MSMEs are not adopting non-conventional sources.
Reasons for low adoption of renewable energy by the MSME sector:
a. Lack of awareness about the financial and environmental benefits of rooftop solar.
b. After the covid-19 pandemic, MSMEs were in a tremendous financial crunch. They are struggling to manage working capital. The priority was to invest their scarce working money in their core business operations, including purchasing raw materials, machines, etc., which gives faster returns on investment.
c. The investment in rooftop solar cannot be encashed for working capital requirements. In contrast, any additional investment in plant and machinery can be mortgaged for the working capital requirement at any time.
d. For various reasons, available finance options for rooftop solar installation are also minimal for MSMEs.
e. Unlike the machinery and other financing options, attractive finance is not available for rooftop solar. Most MSMEs need to borrow funds from non-institutional institutes or local loans at arbitrary interest rates.
Challenges financial institutes face in funding industrial solar:
a. The poor creditworthiness of MSME borrowers is also a significant challenge for institutional lenders to finance rooftop solar projects
b. For lenders, financing for rooftop solar is risky due to the absence of a secondary marketplace to resell or redeploy the solar system in case of default
c. Decommissioning of fragile solar equipment results in degradation of system performance and lapse of associated warranties
d. Solar project borrowing is limited due to the non-availability of historical financial data and payment track record of MSMEs, lack of formal credit ratings, high rates of default, and uncertainty about the sustainability of business operations
e. Another problem is the high transaction cost due to the small size of projects, and
f. Collateralisation of borrower's assets is an area of concern for them.
Role of financial institutes
By addressing the above challenges, there is considerable potential for lending opportunities for Non-Banking Financial Companies (NBFCs), Small Finance Banks (SFBs), and commercial banks. This way, they can help our country pave a low carbon pathway to achieve the net-zero carbon emissions target by 2070.
i. The financial institutes should propose MSME-friendly lending facilities. For example, the debt fund's EMI shall equal monthly savings in the electricity bill. It will help MSMEs quickly adopt the project.
ii. Financial institutes can extend short-term loans to solar developers that will enable them to enter into power purchase agreements of similar duration with MSMEs.
Need for policy changes
i. A credit guarantee is not available for this project. Credit guarantee on the loans extended to MSMEs needs to be set up that cover 50-60% of the loan amount in case of default.
ii. This institution can further be asked to provide credit ratings to the MSME borrowers based on their repayment of these loans. It will improve their credit worthiness.
iii. A secondary marketplace must be created to facilitate the resale and redeployment of defaulted solar assets.
iv. Development of refurbished marketplace: Availability of services for packaging and quality assurance and certification services by inspecting the modules' quality and providing a new warranty for 3-4 years on the refurbished equipment.
v. Design of specific insurance policy: Insurance can act as a tool to mitigate the perceived risks associated with government policy, system performance, or any other factor intrinsic to the borrower.
vi. State electricity regulators should devise a system to incentivise power distribution companies to invest in the upgradation and modernisation of the grid while compensating for these investments from the lower average power purchase cost for purchasing electricity from rooftop solar sources.
To conclude, I firmly believe that all the system stakeholders, including Central and State governments, DISCOM companies, Financial Institutes, Entrepreneurs in the solar sector, and of course, the MSME business owners, have the power to transform the Indian energy transition. With the joint efforts of all the parties, we can move forward to save Mother Earth from climate change crises. This way, rooftop solar can contribute significantly to our nation's climate agenda and decarbonisation of the economy.
Darshana Thakkar is MSME Transformation Specialist and Founder, Transformation – The Strategy Hub. An Electrical Engineer followed by MBA – Operations with rich industry experience, Darshana is an expert in transformation, cost reduction, and utilisation of resources. She has invested 25 years in transforming Micro and Small Enterprises. Her rich experience in resolving pain areas and real-life problems of SMEs helps organisations achieve quick results. Her expertise in managing business operations with limited resources helps clients transform their business practices from person driven to system driven with existing resources.
Darshana has helped many organisations to increase profitability and achieve sustainable growth. She is passionate to support the start-up ecosystem of our country. She is associated with CED, Government of Gujarat as a Business Function Expert in the Entrepreneurship Development program, as faculty for industrial subjects in the Second Generation Program (SGP), and as a start-up mentor and member of the start-up selection committee in the CED incubation centre. She is a certified corporate director registered with IICA and the Ministry of Corporate Affairs, Government of India. Apart from this, she is an author and publishing her blog, article, and case study related to the MSME industry. Email: [email protected]
