Solar power, with policy pushes and cutdowns in costs, is looking at a good run in 2018 and beyond. But issues in ancillary sectors could take the sheen off
WITH THE COMING OF THE NEW YEAR comes the good news that India’s installed capacity in renewable electricity crossed 62 GW in November 2017 in an overall electricity portfolio of 333 GW, thus representing nearly 19 per cent of the total. The 62 GW number includes 16.6 GW of solar and 32.7 GW wind, with small hydropower and biopower making up the rest. While wind remains the biggest source in the renewables category, solar has been one of India’s major success stories in which outcomes on the ground have well exceeded expectations of only a few years ago. Market factors have undoubtedly facilitated the solar surge—module prices have crashed 70 per cent in the past eight years and other ‘balance-of-system’ costs have also fallen through economies of scale and learning.
But government policy has been arguably even more important than market dynamics. India has had a national solar mission (NSM) since 2010 with a target of 20 GW to be achieved in 2022. But in a bold decision that caught most observers by surprise, Prime Minister Narendra Modi quintupled this target to 100 GW shortly after coming to power in 2014. This enhanced target formed an implicit part of the formal Indian
commitment under the Paris Climate Agreement (signed in December 2015) to achieve at least 40 per cent non-fossil fuel capacity (which includes renewables, nuclear and large hydropower) in electricity generation by 2030.
Announcing an ambitious target was, however, only part of the effort. Policy implementation hurdles were also substantially removed. Power, coal and new and renewable energy ministries were placed under a single, dynamic minister for the first time, which led to a minimising of turf wars. A comprehensive solar parks policy was announced with a subsidy of Rs 2 million per installed MW. Payment guarantee mechanisms through entities such as the Solar Energy Corporation of India (SECI) enhanced investor confidence in a sector notorious for payment delays. Instead of the expensive feed-in tariffs implemented in countries such as Germany and Spain, the Modi government doubled down on the reverse auction mechanism already operational under the NSM, resulting in record-setting price discoveries that reached a new low of Rs 2.44 per kWh in a recent auction in Rajasthan.
Tariff bids, however, do not reflect the ‘true’ cost of solar electricity. Solar power only gets generated when the sun shines, and this variability in generation needs to be balanced appropriately and integrated into the grid. According to estimates by the Central Electricity Authority, this additional hidden cost currently amounts to Rs 1.50 per kWh (dropping to about Re 1 per kWh by 2022).
Thus, even after accounting for hidden costs, the cost of solar power is now below power from new coal plants (which is well above Rs 4 per kWh.) In addition, a significantly improved investment climate due to falling interest rates, increased role of multilateral lenders and other foreign sources of investment, and a greater environmental awareness among all stakeholders are also aiding the growth of the sector.
Even as solar surges, coal is stalling. Many newer coal plants are running at low capacities and may not be viable going forward. Although about 50 GW of new coal power projects are currently in the pipeline nationwide, it is not clear how many of these will see the light of day. For instance, the state-owned utility in Tamil Nadu (Tangedco) recently decided to cancel a major new coal plant planned in Ramanathapuram district and set up a 500 MW solar power project instead. Though this particular decision was also triggered by environmental concerns, the cost-competitiveness of solar also drove the switch.
But these successes, remarkable as they are, need to be juxtaposed against some old and new barriers to the sector’s future rapid growth. The biggest among the legacy barriers is the debt burden of the distribution companies (discoms), typically owned by state governments.
EVEN AFTER ACCOUNTING FOR HIDDEN COSTS, THE COST OF SOLAR POWER IS NOW BELOW POWER FROM NEW COAL PLANTS, WHICH IS ABOVE Rs 4 PER kWh
Discom distress matters hugely, as it places a major limit on how much new power states can buy.
Discom debt is nothing new, nor are bailout packages to rescue them. The latest such package, which goes under the acronym UDAY, is supposed to fix the problem once and for all. Though it has provided short-term debt relief to discoms, aggregate technical and commercial losses, which amount to approximately 23 per cent, remain stubbornly high. It is vital that UDAY succeeds for the solar take-off to accelerate.
Then there is the barrier of sluggish electricity demand in India, growing at a pace of about 4-5 per cent per year rather than the 7-8 per cent power planners had originally assumed. Some of this is due to increased energy efficiencies, but a chunk of it is also due to weaker-than-expected economic activity, particularly in the energy-intensive manufacturing sector. If demand remains sluggish, solar can only grow rapidly if more old coal plants are shut down. But it is these older already-depreciated plants that generate the cheapest electricity, which makes them politically and economically difficult to phase out quickly.
Newer hurdles are also emerging in the sector. The remarkably low tariff bids in recent solar auctions have also triggered fears of an irrational exuberance and questions about their sustainability. The rapid fall has also caused several states to renegotiate previously closed auctions, hoping for a revised lower price. All this creates policy uncertainty, dampening the sentiments of new investors in the sector.
Problems are also emerging in the rooftop segment (rooftop installations are in-house grid-integrated mini power plants located within the premises of commercial and industrial establishments and higher-end residential properties). The segment has performed well over the past two years, but is slowing down of late. Many of the larger business establishments have already embraced solar. The next tier of businesses that would like to do so have much lower credit-worthiness. Given the lack of a payment guarantee mechanism similar to the case of large centralised projects, developers see this as a riskier market, save for the few buyers who are willing to fork out the entire cost upfront. Policy innovation in the rooftop segment is sorely needed to overcome this hurdle.
If rooftop is slowing, the offgrid segment aimed at poorer, rural consumers never really took off in the first place. Universal electricity access remains a major challenge, 72 years after independence—around 250 million rural Indians lack electricity access of any kind. Offgrid capacity additions have been incremental, tariffs are sky high, and financing is rarely available on commercial terms. The offgrid business model does not appear to be scalable. This may be why the Centre recently launched the grid extension scheme, ‘Saubhagya’, a new incarnation of similar schemes in the past.
The strong national performance thus far masks the widely divergent trajectories of individual states. Of the states with major solar potential, Rajasthan, Telangana, Andhra Pradesh, Tamil Nadu, Karnataka and Madhya Pradesh have been strong performers. Gujarat was the early trailblazer in solar, but has stalled of late in adding new capacity. Maharashtra has done well on rooftop but much less well on centralised solar. Chhattisgarh has shown leadership in energy access. Most of the remaining states are constrained on solar potential but even so have generally performed poorly. Power being a concurrent subject in the Constitution, it is important that laggard states come fully on board.
Solar manufacturing has also largely failed to take off partly due to the superior ability of China to flood global markets with cheap products. Meanwhile, the anti-dumping duty on solar imports currently being envisaged by the central government can be a doubleedged sword. While in the long run it will provide infant industry protection to domestic solar manufacturing which may or may not enable it to grow, it will certainly make solar less cost competitive and hurt its prospects in the short to medium term.
All said and done, it is virtually assured that solar will continue to make gains in 2018 and beyond. But there is still a long way to go before India can be said to have achieved its three critical national goals of energy security, energy access and environmental sustainability in the electricity sector.
THE DEBT BURDEN OF DISCOMS IS A BIG WORRY. DISCOM DISTRESS MATTERS HUGELY, AS IT PLACES A MAJOR LIMIT ON HOW MUCH NEW POWER STATES CAN BUY
Sarang Shidore is a senior global analyst with geopolitical forecasting firm Stratfor and visiting scholar at the University of Texas. The views expressed are personal