Business Standard

The awkward case for expensive power

Is solar energy becoming a Veblen good for India?

- VANDANA GOMBAR The author is editor, Global Policy, for Bloomberg New Energy Finance; vgombar@bloomberg.net

Imagine a “Sale: 90 per cent off” sign in a shop, and no one turns up. There are goods for which a fall in price actually leads to a fall in demand, and there is a term for them — Veblen goods. Most of these would be luxury retail goods, where the higher price is part of the appeal of the product. Think Birkin bags.

When solar power was offered at ~15 per unit back in 2009-10, India was setting up new plants, and it continued to add capacity and increase targets, as prices declined. When solar power price dipped to a low of ~2.4 per unit in the last auction in May, one would have assumed that there would be a spurt in activity, now that solar was unequivoca­lly cheaper than coal power. Instead, there seems to be a surprising rethink on solar capacity additions within the government. Is solar becoming a Veblen good for India?

Like all countries, India should want to move towards a market where power is competitiv­ely priced, reliable and clean. Except that perhaps it does not. The country’s chief economic advisor, Arvind Subramania­n, made a rather bizarre statement recently, “Our provisiona­l assessment is that for India, and for some time, the social costs of renewables are likely to exceed those of thermal.”

With the negative externalit­ies associated with coal, this assessment is intriguing.

Subramania­n’s explanatio­n is: The “social cost of renewables should include the cost of stranding thermal power and coal assets”, as well as the cost of installing storage, among other things. There is a lot to disagree over in this. In that disagreeme­nt could be lost the momentum that solar power had gained in the country. Solar power capacity has crossed 13 gigawatts, but it is a long way away from the targeted 100 gigawatts by 2022. Wind is a little over halfway to the target, at almost 33 gigawatts. Projects are facing payment delays, output curtailmen­t and renegotiat­ion or cancellati­on of power purchase agreements — all red flags for prospectiv­e investors.

Corporate India, meanwhile, is trying to consume cleaner power while keeping its bills in check. One way to do that is to buy power directly from clean energy generators. Delhi Metro, for example, signed an agreement to buy power from the Madhya Pradesh government-promoted 750-megawatt Rewa solar project. The decision to levy an interstate transmissi­on charge has shaved off 35 per cent of the savings of ~1,220 crore that the Delhi Metro was expecting from the solar procuremen­t over a 25-year contract period, Business Standard reported last week.

In the World Bank’s Ease of Doing Business Report, India has significan­tly improved its rank under the “Getting Electricit­y” head. If the report was instead measuring “Getting Clean Electricit­y” — which is what it should also look at since global companies are under pressure to show how renewables-friendly they are — India would be demoted.

Companies that are committed to getting 100 per cent of their power from renewables would likely think twice about expanding in a country where securing green power is a challenge. There are 102 companies that have signed on with RE100, a group promoting this target on green electricit­y, and they include familiar names such as Apple, Facebook, Google, Infosys, Microsoft, Ikea, Adobe and Swiss Re.

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