A volatile carbon credit market means companies will be less likely to invest in clean energy projects as the incentives are hard to predict.
For the first time in more than four years, growth is slowing in India’s clean energy sector. With falling oil prices, constrictions in credit and a volatile carbon credit market, investors are growing increasingly bearish about what has, until recently, been one of the country’s fastest developing markets.
Industry analysts expect the slowdown in the United States and Europe to have a considerable impact on the development of clean energy projects in India in the coming year. Signs are that in some sense, the impact is already being felt: In 2007-08, when the worst of the credit crunch had yet to come, an additional capacity of 1,663 MW was added in wind energy, down from 1,716 MW in 2005-06 and 1,742 MW in 2006-07.
Crash in CER prices
Prices of Certified Emission Reductions (CERs) — the in-demand carbon credits achieved through UN-approved Clean Development Mechanism (CDM) projects — have crashed from 22 euro to 8 euro in the past two months, at a time when the Indian companies holding them were expecting their prices to go up. CER prices are significant because they reflect the incentive for investing in clean energy. Under the United Nations Framework Convention on Climate Change (UNFCCC), credits achieved through CDM projects can be purchased by companies in Annex One countries that have ratified the Kyoto Protocol so that they can meet their emission reductions. India and China are the world’s largest suppliers of carbon credits.
A volatile carbon credit market means companies will be less likely to invest in clean energy projects as the incentives are hard to predict, says Ram Babu, Managing Director (Asia) of CantorCO2e, an emissions trading company and consultancy whose clients include the GVK group, Jindal Power and the GMR group.
“Six months ago we had a healthy, bullish market that was maturing,” Mr. Babu says “Then came the recession, and falling oil prices. Now, the market is so up and down that it is unlikely that people will make an investment in developing technology or projects.” Mr. Babu says while companies are still likely to stick to their long-term plans of adding capacity, projects in the coming months are likely to be put on hold.
“This month has been particularly bad with the revised forecasts from the EU indicating the possibility of economic contraction,” he says. “If this happens, EU firms simply will not face the need to meet emission limits and there will be absolutely no demand for carbon credits.”
Mid-level energy companies also face the problem of financing their projects in the current climate.
“In clean energy, the initial investment is higher than in conventional energy projects though the operating cost is less, but with the credit crunch, companies are now facing the problem of making that investment,” says Sudipta Das, partner and national leader, climate change and sustainability services, Ernst & Young. Recent months have also seen companies affected by growing supply constraints and increasing delivery times for parts.
“Many suppliers in this sector are heavily dependent on the export market, and have been very badly affected by the problems in the EU and the U.S.,” Mr. Das says.
Prabhat Upadhaya of The Energy and Resources Institute (TERI) says the slowdown in clean energy projects in India has been compounded by “the system tightening its screws,” which, he says, has affected the sector more than the downturn. CDM projects need approval from the UNFCCC in order to be eligible for carbon credits. The second half of 2008 saw a tightening up of monitoring, regulation and registration for such projects.
“There has definitely been a slowdown in CDM projects and it is not going to be an aggressive market for the next few months,” Mr. Upadhaya says. Under the XI Plan (2007-12), the government has ambitiously targeted adding 15,000 MW of installed capacity by 2012, including 10,500 MW additional capacity in wind energy. If these targets are to be met, the consensus among those in the industry is that more government incentives, such as the generation-based incentives announced for wind and solar power last year, are needed.
“The UNFCCC envisaged the carbon credit market as the main incentive to support clean energy and energy efficiency,” says Mr. Das.
“Many of the premises on which the projects are based on and the cost-benefit analyses are going haywire. If those incentives go down, people will be looking at other incentives from the government, but we haven’t seen any indications of that happening soon. If the slowdown continues, it is going to be a challenge for India to meet its targets,” Mr. Das says.