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Renewable energy: best bet for farm sector

According to reports, India is primarily an agrarian society with 52 per cent of the population directly engaged in agriculture. Pumping water is critical for India given the seasonal rainfall and competitive usage of scarce land resources. India has more that 26 million installed water pumps – 10 million are run by diesel gensets while the rest are grid-connected. Cost of energy to drive water pumps constitute about 30 per cent of the total input cost for a farmer. Indian farmers are currently drawing more water 212 million mega-litres from the ground each year to irrigate about 35 million hectares.

Diesel-powered pumps still account for bulk of the Indian agricultural pump market primarily because of their low upfront cost translating into an annual market size of $1.2 billion.

Total installed diesel pump capacity in India is estimated to be 30 GW, equivalent to almost 15 per cent of India’s total installed power capacity and an annual diesel subsidy of $6 billion.

Diesel pumps, however, are fraught with social, environmental and economical challenges – high operating cost, carbon emissions, deplete water table more than necessary by pumping heavily at short intervals.

These challenges result in difficulty in utilising the pumps forcing farmers to practice deficient irrigation of crops, considerably reducing their yield and income.

India’s geographical advantage makes solar-powered water pumps an excellent alternative to diesel powered pumps in particular. Studies estimate India’s potential for solar PV water pumps for irrigation to be 9 million to 70 million pump sets.

Further solar pumps can substantially improve the financial health of State Electricity Board (SEB) by reducing subsidised power to farmers and eliminating incremental capital expense to connect farms to grid which is estimated to be ₹1.7 lakh per connection.

While the upfront capital cost of solar powered pumps is higher than traditional pumps, a lucrative payback economics of 3-5 years is possible given the high operating cost for diesel pumps.

Indian government led by the Ministry of New & Renewable Energy (MNRE) has placed a substantial emphasis on further penetration of solar PV power pumps with a vision to replace existing 26 million pumps with more efficient solar power pumps.

In the Union Budget, the Finance Minister announced a ₹ 415 crore package for installing 100,000 solar powered pump sets. In November 2014, the government launched a programme for promoting 30,000 solar pumping systems per year for the purpose of irrigation.

The programme will be implemented alongside state governments. MNRE will provide a subsidy of 30 per cent (maximum amount is capped per category of pump) and soft loan at 5 per cent with an additional subsidy from state governments.

Rajasthan has been a pioneer in promoting solar water pumps, and offers an additional subsidy of 56 per cent over and above the MNRE subsidy, which means that the solar water pump owner gets 86 per cent subsidy in total.

In Tamil Nadu, a total of 80 per cent subsidy is provided, whereas in Punjab, the total subsidy comes to about 70 per cent. Maharashtra has recently proposed a plan to provide 5 lakh solar pumps to farmers and is in the process of formalizing the program.

In spite of favourable macro-economic and government support, solar power pumps have still lagged considerably vis-a-vis diesel power pump addition. Total installed solar pumps are merely 25,000 vis-a-vis 10 mn installed diesel pumps.

So, what is the reason for this limited penetration?

Firstly, solar power pumps have a substantially higher capex vis-a-vis diesel pumps. With limited capability of upfront payment, the market is heavily dependent on government subsidies. While subsidies are in place, it is typically very difficult to make use of these payments (especially the state portion)

Secondly, the solar pumps are not portable unlike diesel pumps. Movable pumps protect from theft and can be easily rented out. Lastly, diesel pumps have a higher degree of user confidence vis-a-vis solar pumps which have limited track record.

We believe solar pumps provide an exceptional opportunity to not only improve the productivity of farm lands but also substantially improve the energy security of the nation and reduce the subsidy bill.

However, in order to realise the utmost potential, several steps need to be taken.

Firstly, in our view, heavily subsidised model is not feasible in the long run.

Emergence of PPP model to install these pumps on a pay per use basis by private entrepreneurs would assist in increasing the market penetration.

Pay per use model would enable shared usage of solar pump infrastructure by multiple farmers. This will result in deeper penetration amongst marginal farms and maximum utilization of the system resulting in lower payback period. This model has worked quite well in rural micro and mini grid installations in India.

Support could be provided to these entrepreneurs via soft loans. Subsidies could be better utilized in undertaking R&D efforts to reduce the initial capex of these products which would be more productive in the long run

Secondly, no power cost in solar powered pumps, poses the risk of over usage by farmers, resulting in wastage and affecting the water table. Pay per use model stated above could assist in reducing the wastage. Further usage of solar pumps should be accompanied by efficient mechanisms such as drip irrigation and water storage facility – most of the subsidy schemes have already included this as a requirement

Further, a strong local eco-system needs to be created to promote and provide cost effective O&M solutions for the system. This will not only assist in cost effective maintenance of the system but will also increase rural employment

Finally, educational and promotional campaigns to explain the economical and social impacts of solar pumps vis-a-vis traditional pumps would be critical to increase the penetration and acceptability of the products amongst farmers.

(The writer is Managing Director, Investment Banking at YES Bank)

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