According to reports, there are three key challenges for solar energy to be made to work in India. One, how will the country pay for solar energy in a situation where there is no money to pay for even the crashing costs of installation? Two, what is the best model for the distribution and use of this relatively expensive form of energy in a country where millions still live in the dark? Three, how should India combine the twin objectives of supply of clean energy and creation of domestic manufacturing capacities? Should it?
The government’s proposals for funding the differential costs of solar energy are twofold. One, under the National Solar Mission phase II draft guidelines, the ministry of new and renewable energy has proposed viability gap funding for new projects. In other words, it wants to go back to the era of capital funding, which has been riddled with problems. For instance, wind energy suffered because the operator had no real incentive to generate power; it only eyed benefits of capital finance and depreciation. The plants’ performance was abysmally low; therefore, generation-based incentive was introduced. It paid the differential based on actual power generation. The proposal to reverse this will be disastrous in a sector that has a huge gap in performance of systems. Capital funding will be used without consideration for efficiency and output.
The second option – open to states – is to fund solar energy through renewable purchase obligations or feed-in tariffs, whereby the power utility is required to buy a certain proportion of its energy from renewable sources. Andhra Pradesh and Chhattisgarh have announced ambitious solar policies built on this premise. Tamil Nadu has gone a step further: it has imposed solar purchase obligations on big end-consumers. But this looks good only on paper. The fact is that all energy utilities are bleeding. They have no funds to pay for costs of the energy they procure, let alone for more expensive solar energy. Banks will not lend money to any solar entrepreneur if they are told that state utilities are guaranteeing the viability of the project through payments. It will just not work.
This is when the cost of solar energy is definitely down and costs of energy from all other sources, especially coal or gas, are definitely going up. But the problem remains that the average pooled power purchase cost – the price utilities pay for power – remains lower. The only option is to build a feed-in tariff mechanism, which will meet the differential costs, with guarantees of no default. The National Clean Energy Fund – built by collecting Rs 50 per tonne of coal or lignite mined or imported into the country – can be used to meet this cost. Currently, the fund grows by Rs 3,500 crore per year, but is not used for substantial benefits.
But this is also related to the second question: who should benefit from solar energy? Should we continue to invest in large, grid-based solar projects, which feed the already fed? Or should we find innovative ways of upscaling decentralised solar energy – rooftop panels and mini-grids – to reach remote villages and institutional users? Currently, when we think of this option, we tend to think small — literally. We think of distributing individual solar lamps or panels that can light a few bulbs or power a fan. These are essential, but do not match needs or aspirations. In other words, solar energy is considered only a transitional solution; it is for the poor, when they are poor. This is a limiting option and will not work.
The best option is to build grid-interactive mini-power plants, also funded through a feed-in tariff paid through the National Clean Energy Fund. But these installations cost more: Rs 15-20 per unit of energy produced. Also, purchasing power is low in remote villages. Therefore, the differential will have to be paid partly through generation-based incentives and partly through tariffs collected locally by the developer. But the key is to provide a viable opportunity for investment in providing clean energy to the very poor. A similar model should be evolved for rooftop solar. Getting this right would be the real game-changer.
The third big question is, how to incentivise domestic manufacturing in an over-supplied global market? One option is to mandate domestic procurement. There is another option. Today, Indian solar developers buy American products, not because they are cheaper or better, but because they get loans at low interest on the condition of buying American products. Since the cost of capital determines their project viability, they accept the condition. The Indian government should do the same: it must provide low-interest loans to companies and mandate domestic equipment procurement. Surely, this is not too high a price to pay for triple benefits: clean energy, the growth of domestic manufacturing and, most importantly, meeting the energy needs of all, not some.
Solar energy is clearly the answer. But only if we know the question.