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India can convert a crisis into an opportunity

According to reports, on the import side, the biggest culprit contributing to the current account deficit is the inelastic demand for oil imports. A solution that kills many birds with one stone is for the government to facilitate the development of solar power in a big way under public-private partnership (PPA). This will cost next to nothing.

The government should act as a credit enhancer to tie up $50 billion from multilateral agencies in the US, Japan and China to import solar panels. This will enable development of 50 gigawatts (GW) of solar power.

It should assure solar developers that anyone who signs a valid power purchase agreement with any state electricity board (SEB) will automatically get a low-interest rupee loan for 70% of the total project cost at the same interest rate in rupees as the dollar interest rate at which the government has borrowed.

The government can guarantee SEB payments on the solar PPAs against any state default and adjust that against disbursement to states. This will reduce the perceived risks for early movers and investors.The central government’s risk will be diversified across 28 states. It can also encourage insurers like LIC to provide takeout financing for fully-commissioned projects. This enables recycling of equity to be deployed for the next project, and provides a steady yield stream for insurers, ideal for their requirements.

It should offer a Rs 1 per kilowatt-hour (kWh) subsidy to SEBs if they pay solar generator on time. This can be funded by the Renewable Energy Fund, already substantially built up through a cess on coal production. Together, these will enable developers to offer solar power at a rate of Rs 5 per kWh, which will fall further over time from technological enhancements. Solar is competitive even now as it displaces peak power, generated with diesel on the margin costing Rs 14 per kWh, while solar costs Rs 8 per kWh. The latest long-term bids from thermal power plants were north of Rs 5 per kWh and will rise over time.

The benefits of this solar initiative to the country will be enormous.

It could generate net savings of $500 billion over the next 25 years, from reduced diesel consumption. A rapid solar build-up will supplement thermal power, which has slowed down. A solar plant can be built in 6-9 months against 48-60 months for a thermal plant.

This will work because the government borrows to facilitate solar power development at 4% dollar interest cost, while the returns in dollar terms on solar investment for the Indian economy are in excess of 17-18% per year. That is because 80% of solar generation happens during peak demand and will save on diesel power.

Rahm Emanuel, the mayor of Chicago, once said, “You never let a serious crisis go to waste. It’s an opportunity to do things you think you could not do before.”

We can take advantage of two crises. Historically low interest rates produced by the global financial crisis to finance solar power, and our crisis of governance that has beaten down the rupee, to boost garment exports. Is our leadership capable of this? Yes, it is.

(The writer is chairman and senior managing director, Blackstone Group)

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