Scaling Solar in India: Aggressive Policies Needed to Match Ambitious Targets

By Arunabha Ghosh

The future of energy in India is dependent on how well practical policy is balanced with current ambitions. This success can be gauged by three guiding principles—the speed at which effective policies are made, the scale at which these are implemented, and the skill at which plans are executed.

When asked how farmers were convinced to take large loans to install solar panels a rural bank officer replied, “I remind them that they use two units of electricity a day (60 a month, 730 a year). This country has given you so much. Won’t you install solar power, reduce your consumption from the grid and give back to the country?” This Kennedy-style pitch to market solar in India was heart-warming and inspiring, but in order to reach the 100 gigawatts (GW) planned by the government by 2022, more than inspiration will be needed. In line with the Prime Minister’s mantra, the solar sector must back its ambition with speed, scale, and skill.

The Indian federal government’s budget for 2015-16, summarized in the chart below, reinforces the government’s active commitment towards renewable energy.

Ghosh_pie chart

India has committed to increasing its renewable energy capacity.

February marked the first time these revised targets were mentioned in Parliament. The Rail Budget also supported the government’s commitment towards clean energy, by setting a 1 GW target for solar capacity in addition to focusing on a waste-to-energy programme. At present India has a little over 3 GW of installed solar power capacity. To reach 100 GW by 2022, install capacity must double either every 18 months or have a compounded annual growth rate of 62%. This is an ambitious goal by any standard.

Targets notwithstanding, the budget did not actually signal any major policy shifts which would have increased the confidence of investors. Allocation of funds to the Ministry of New and Renewable Energy increased merely 11% from the previous fiscal year despite the manifold of increased target goals. Of this allocation, close to 90% ($400 million) will be financed through the National Clean Energy Fund (NCEF).

India has been capitalising the NCEF since 2010 with a tax on every tonne of coal imported or produced domestically, which, until as recently as July of 2014, had been a steady $0.80. Current price increases have quadrupled this to roughly $3.2 per tonne of coal. Frustratingly, the strategies for allocating resources from the NCEF continue to remain unspecified. This leads to the sums collected likely being spent on balancing the budget rather than specifically on clean energy initiatives. Note that the NCEF is not the only source of funding (much of the investment has to come from the private sector), but if deployed properly it could have a catalytic impact for reducing risk and leveraging more investments. More importantly, the solar sector does not simply need additional funding: policies have to match the speed, scale, and skill demands of the current ambitious targets.

Speed

The speed of execution is paramount in India’s progress towards her energy goals. Delays in announcing policies create unwanted industry uncertainties. If developers do not know the tariffs for even the next financial year, how can they secure long-term, low-interest debt finance? Additionally, a roadmap for enforcing renewable purchase obligations (as Rajasthan has done) is urgently needed, so that project developers have a better guarantee of demand for solar energy from the utility companies. Land availability is another contributing factor—less than 1% of the barren and uncultivated land in the country would be sufficient for supporting 80 GW of grid-connected projects. Accounting for 3.5% of project costs, land acquisition can be a risky investment because the price of land can fluctuate widely due to rapid deployment and price speculation. State governments could create land banks (Gujarat, Karnataka), lease government land for 25 years or less (Rajasthan), offer exemptions on stamp duties on sale of private land (Madhya Pradesh), or ensure a small share per unit of electricity to the landowner to offset this risk. Regardless of the solution, it must be implemented quickly to be effective.

Furthermore, there is no use for solar project investment if the infrastructure of power to grid delivery does not keep pace. The Ministry of Power needs to provide detailed roadmaps for building new substations. Two states—Rajasthan and Tamil Nadu—are already implementing the Green Energy Corridors, which strengthen inter- and intra-state transmission systems and help the grid forecast variability in renewable energy. Ideally, this initiative should be expanded to other states with similar high renewable energy potential. Electricity regulatory authorities must also consider exemptions from wheeling charges. With current net metering policies in mind, grid-connected rooftop projects should be accorded power dispatch priority.

Cleaning solar panels in Rajasthan. Source: CEEW.

Scale

Speedy policy making leads to increased project scale but there is more than one route to accomplish this. Researchers at the Council on Energy, Environment and Water (CEEW) have proposed three alternatives: “utility heavy” (80 GW of utility scale projects), “rooftop heavy” (45 GW of rooftop projects), and “rural decentralised heavy” (20 GW of solar irrigation pumps). It might be tempting to dream of mega solar parks but they bring with them the aforementioned challenges of land acquisition and dispatch. If just 15% of irrigation pumps were converted to solar they would add up to 20 GW energy capacity. Similarly, only one-fifth of the total 31 million households with sufficient roof cover for 3 kW systems could add another 20 GW.

The government intends to develop 60 GW of medium and large-scale projects and 40 GW of rooftop projects. CEEW estimates this would require capital investments of $100–113 billion, depending on assumptions about falling module prices, the balance of system costs and inflation rates. Having 100 GW of solar would imply a roughly 9% share of electricity generation, necessitating huge investments in grid upgrades, energy storage, and backup. In the absence of major breakthroughs in energy storage in the short term, our estimates suggest an additional investment of $20–33 billion in gas-based backup capacity.

In order to absorb investments at this scale, new institutions and innovative finance are needed. The Green Bank, initially capitalised via the NCEF, could offer low-interest loans with long-term tenure. It could help to channel infrastructure debt funds and investments from insurance and pension funds, as well as large overseas investors. Risk insurance (to ensure bankable projects), exchange swaps (to mitigate foreign exchange risk), and green bonds could reduce cost of capital and leverage more private financing. Housing finance companies could also provide loans to property developers for rooftop systems.

At current prices, assuming no expansion of domestic manufacturing capacity, India would need solar panel imports worth $35.7 billion to reach 100 GW of power generation. Import of energy could drop to $16 billion a year if annual domestic production grows by as little as 1% and international panel prices fall by 6%, thus increasing competitiveness of domestic panels and freeing up capital for energy storage research and development. Having reductions in duty prices on only certain components of solar manufacturing in the budget—specifically round copper wire and tin alloys—fails to incentivise manufacturing in the solar sector.

Skill

CEEW and the Natural Resources Defense Council found that between 2011 and 2014, the solar sector created at least 24,000 full-time equivalent jobs across the value chain. If 100 GW capacity is to be achieved, as many as 1 million short-term and about 300,000 long-term full-time equivalent jobs can and should be created. These would be far more than those created in the manufacturing industry.

The need for aggressive skill development and training programmes is crucial to meet the industry’s labour demands. While the Finance Minister did allocate $1.6 million for training 50,000 Surya Mitras (Solar Friends), this scheme may need to be scaled up significantly in the coming years. Nationwide training programmes, under the National Skills Development Council, would have to be delivered through a network of trained entrepreneurs, for both grid-connected and decentralized energy projects. At least in this respect, the budget showed support for the electrification of 20,000 villages by 2020 and for renewable energy–based rural applications. Small scale project developers, who are key to furthering decentralised energy, could also benefit from the Self-Employment and Talent Utilisation (SETU) programme announced in the budget, which aims to support start-up businesses and various self-employment activities.

At the largest investor conference for renewable energy in India, RE-INVEST, up to 266 GW of renewable energy were committed, but financing commitments were less than 30% of these numbers. Unfortunately, the budget did not specify an investment trajectory for the renewable energy sector, nor did it detail many of the reforms, which could encourage financial commitments. The roadmap for a significant role of solar in India has many milestones yet to come. Speed, scale, and skill are needed; there is little time to waste.

 

Dr. Arunabha Ghosh is CEO of the Council on Energy, Environment and Water (CEEW), an independent policy research institution in India. Twitter: @GhoshArunabha. CEEW’s report, Tapping Every Ray of the Sun, is available here.