The capacity created in India’s renewable energy sector may be impressive, but the pace has begun to slacken. Solar capacity installations in the country is at 25,000 megawatts (MW), or one-fourth of the 2022 target of 100,000 MW, according to Mercom India research. As of July, Indian Wind Turbine Manufacturers Association pegged operating wind capacity at 34,393 MW, or about 57% of the 60,000 MW target set by the government for the five-year period.

Though the original target was to achieve 20,000 MW in solar installations by 2022, the current dispensation’s thrust on renewable energy had accelerated capacity additions. However, midway through, chinks have surfaced to take the wind out of the programme’s sails.

The wind energy sector was expected to return to growth this year, but is increasingly looking unlikely.

The new bidding regime and enhanced execution timelines have prolonged the transition. Energy infrastructure constraints are also making developers wary. Last month, the Solar Energy Corp. of India had cancelled a 2,000 MW tender after it was under-subscribed due to insufficient transmission infrastructure.

As a result, renewable energy industry research provider Wood Mackenzie, formerly Make Consulting, has downgraded its capacity addition outlook for India.

Solar power is no different. Mercom India research forecast a decline in solar installations in the second half of 2018, compared to the first half, due to lack of a strong project pipeline. Installations for 2019 were also projected to be flat compared to 2018.

“Due to the uncertainty around the safeguard duty, auction activity in the first half of 2018 was weak, which means the large-scale project pipeline for 2019 again will be weak,” Mercom India research added.

Even if the government streamlines capacity auctions, returns will remain a worry for investors. Maxson Lewis, managing director, Magenta Power Pvt. Ltd, a renewable energy solutions provider, said that untoward government actions, such as imposition of import duty, cancellation of tenders (in solar) and proposal to cap tariffs, have hit investor sentiment. As a consequence, the cost of capital is rising as investors are factoring in more risks, he added.

Consequently, project returns have fallen to low teens tracking the steady drop in tariffs, according to Aviral Jain, managing director-valuation advisory services practice, Duff and Phelps. “Some barely generate double-digit returns.”

With expectations typically in the range of 15-16% per year, there is a mismatch between the IRR (project internal rate of return) and equity return expectations. But if companies place operating assets in a special purpose vehicle, they can find takers from yield and fixed return-oriented investors, such as pension funds, said Jain.

Even then, policy clarity and stability remain a challenge. “Policy and regulatory changes upset the project calculations,” adds Jain. Otherwise, the renewable energy sector’s growth will fall short of targets.