Here comes the Sun

The Holy Grail of energy companies would be some sort of an everlasting source that can produce enormous amounts of it with minimal inputs. Now I understand that words like ‘everlasting’ are relative. Once oil and coal were pretty much thought to be ‘everlasting’ but now we do know that they’re going to end pretty soon, maybe even within our lifetimes. Dams are great in working with minimal inputs but they need extensive maintenance and not all waterways can be dammed as well because we need the water to survive. The wind perhaps then? We have been using windmills for various jobs since ages. Well yes, but then again not all areas are suitable for wind turbines, people don’t want them in their backyards and they need a lot of individual components to generate the required power. The Sun on the other hand is basically a large self-sustainable reactor and by all measures is expected to outlast mankind by ages with the only problem that it is too large to be placed here on Earth and a bit too hot and bright perhaps. But in its present position, it is placed at a great spot to be facilitating all life on Earth while supplying our entire energy needs for a year in a little more than an hour! The Sun at its zenith provides an incident solar radiation of about 1050 W/m2 in comparison, the global demand for primary energy was just 152,899 TWh for the entire 2015! So, solar energy can actually solve our problems.

Now while solar has been around for ages, it hasn’t been the go-to energy solution for cash-strapped economies like India. Since its Independence in 1947, India has been playing catch-up with its fast-increasing domestic energy demand. With significant domestic coal resources, thermal power stations had been the backbone of its energy sector for decades with hydroelectricity being its sole source of renewable energy (the nation has a significant hydroelectric potential much of it remains untapped). Options such as nuclear got a good start but couldn’t be exploited to their potential due to various geo-political issues. So, by the turn of the millennium India was sourcing more than 70% of its electricity needs from dirty, inefficient, coal-burning power stations using obsolete technology. It was at this point, the government already in the way of opening its economy to foreign and private investment decided to open its energy sector up as well. The resulting Energy Act of 2003 not only allowed for the direct investment by private investors in energy (and electricity) projects, it also for the first time gave direction to the minute renewable industry in the nation by removing bureaucratic obstacles to the setting up of the energy projects and to the setting up of an energy market for the trading of energy certificates. This law quickly followed by the National Electricity Act in 2006 would shape the Indian renewable energy industry.

It’s been a decade since then and India has come a long way. It’s GDP and global economic influence has been steadily growing all these years and now its Prime Minister would like to see India rival China in the manufacturing sector. While that is indeed good, things could indeed be better. A quarter billion Indians still lack a proper connection to the electricity grid and clean cooking facilities (and other facilities as well but that is beyond the scope of this blog). Its cities are rapidly expanding bringing with them a fleet of new vehicles. Oil demand is on the rise with no outlook of a recent decrease and the stream of traffic along with its smoke-spewing power stations threaten to choke the country to death. Millions of emissions related deaths occur in India every year and this figure is only going to rise. The laws of ’03 and ’06 did bring much needed money into the sector and led the way for cleaner and better ways of electricity production along with a rapidly expanding energy access base for its citizens but much, much more needs to be done if any of it is to matter when needed.

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In December 2015, countries around the world met at Paris to determine several self-determined ‘pledges’ or targets for the countries to achieve in the coming years to reduce their effects on climate change. India has been facing intense global scrutiny of late due to its increasing pollution levels (it is currently the third-highest polluter). An ambitious plan was needed for India to reduce its pollution, increase its energy base while fulfilling its domestic market demands. And that is what Mr. Narendra Modi did when he took to the podium at Paris in December.

India pledged to increase its renewable generation capacity significantly – 60 GW of Wind, 100 GW of Solar, 10 GW of Biomass, increasing its hydroelectric and nuclear capacities while pursuing an efficiency-increasing strategy for its existing fossil-fuel power stations (full text here). This Mr. Modi hopes will not only reduce India’s carbon dependence but also help in the growth of a domestic renewable component industry.

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Ambitious targets that’s for certain, especially when the current renewable capacity stands at just 42 GW of which the solar capacity stands at just 12 GW. That’s a massive 733% increase to be achieved in just 5 years! Okay so we’ll miss our target. That’s fine if we consider that even if we can achieve just a quarter of the remaining amount, we’ll basically increase our current solar generation capacity by 183%.

Let’s look at how the current situation stands. The aforementioned acts along with other changes brought through the National Environment Policy (2006) and the National Action Plan on Climate Change has put the development of renewables in the forefront while ensuring the development of policy and financial frameworks that promote the participation of private stakeholders in the development of the same. And the ideas seem to have worked so far. Of the entire national renewable energy capacity a staggering 96.5% is owned and operated by private concerns. Banks have opened up to private lenders for the development of renewable generation plants. The country boasts of a massive solar potential of 749 GW (link). While investments in renewable energy declined globally in 2016, India invested $9.7 bn which was marginally up from that of 2015 ($9.6 bn). Of this $5.5 bn was invested in Solar followed by $3.8 bn in Wind. Just this month, a massive 5,525 MW of solar capacity was added to the current generation-mix which is nearly double the amount added in 2015-16 which was 3,010 MW. This brings our current solar capacity to 12,288.83 MW against 6,762.85 MW at the end of March 2016 (link). The Ministry of New and Renewable Energy (MNRE) has targeted a further addition of 7,750 MW by the end of 2017-18 to bring the cumulative solar capacity to a targeted 20 GW.

The Centre has in place several policy and financial measures that essentially incentivizes renewable solar generation. They are –
RPO – Renewable Purchase Obligations were put in place through the National Energy Act (2003) which made it mandatory for distribution companies to supply a portion of their overall electricity capacity from renewables. By an amendment of the National Tariff Policy (2011), the solar-specific RPO has been set at 3% for the states by 2022 (State-wise targets here). Also by then, 8% of the electricity consumed should be sourced from solar energy.
REC – Renewable Energy Certificates are tradable certificates that a producer of renewable energy generates for each unit of electricity produced. These can be traded in an energy market as a method to incentivize renewable based generation.
RGO – Renewable Generation Obligation is a policy measure through which coal/lignite based electricity producers are required to establish/procure/purchase a pre-determined amount of their overall capacity through renewable energy.
Solar Parks – These are concentrated zones established for the purpose for the generation and distribution of solar energy for projects of over 500 MW capacity. The Centre provides the area and well-developed infrastructure like roads, water, grid connectivity and communication to reduce upfront capital expenditure by renewable energy firms to reduce overall project risk and make the system financially viable.
Green Energy Corridors – Though not a policy, it is rather the result of a government study aimed at the seamless integration of renewable energy projects into the national energy-mix and the steps that can be taken to ensure it. It proposed the strengthening of Inter/Intra-State transmission systems, establishment of Renewable Energy Management Centre (REMC) along with flexible generation and forecasting to address intermittency issues for large-scale RE systems.
NCEF – The National Clean Energy Fund was set up in 2010 by implementing a cess or a tax on the coal produced/imported in a ‘polluter pays’ principle for the purpose of financing/promoting clean energy initiatives.
In addition to these, changes and additions have been made in other policy areas to accommodate and encourage renewables. Such as the Smart Cities mission statement where 10 per cent of renewables and rooftop solar was made mandatory. Solar bonds of INR 5,000 crores ($ 777 million at current rate) have been made tax-free to fund India’s solar dream (link) with roof-top solar being included in housing loans (link).

The enormous push towards solar capacity in India (as well as in China) have indeed been beneficial (World Energy Hits a Turning Point: Solar That’s Cheaper Than Wind). The global demand has increased production and have reduced cost of solar components (26% in 2016 alone as per analysts Bridge to India compared to the 5-7% drop as previously predicted by experts) while increasing efficiencies. Solar tariffs have fallen to being competitive with that of fossil fuels in various markets. Earlier in April this year, the winning price for a solar auction in India was just INR 3.15 which was at par with the average generation cost of NTPC which produces a bulk of its energy from coal (link). (The coal-based energy price is still lower than solar however with prices ranging around INR 1.80). And as cost of solar modules drop along with declining interest rates, this trend is going to continue (link). Earlier this week World Bank President, Jim Young Kim lauded India’s efforts in making solar “cheaper” and “quite competitive” (link). Near grid-parity, cheaper fund availability, grid availability and improvement in discom financials and grid balancing mechanisms are going to fuel a strong solar growth trajectory through 2017-19 as per a CRISIL research (link).

While it seems that the market participants remain quite bullish, there’s much cause for concern. India opts for an auction system where the supplier bids in a price at which it would supply power to the grid (lowest wins) instead of the more common feed-in tariff system where the supplier gets paid a pre-determined tariff amount based on the quantity of energy sold. This system often allows developers to bid ‘aggressively’ driving down prices through building optimistic case scenarios which might not be viable if the current trend of PV module price drop stabilizes.

“Indian developers are keen to scale up and willing to accept higher risk”
Bridge to India

Analysts are concerned about whether in the bid to win bids and construct solar parks, the developers have taken the long-term approach and proper pricing of risks. While plant utilization rates have remained at satisfactory levels over the last few years at 20%, location, land availability and grid availability might significantly drive up costs. While the creation of Solar Parks has somewhat taken care of the issues regarding grid availability rates and land acquisition, non-Solar Park projects stand at a higher risk from these factors. Moreover, bid rates tend to be the same about the country. This signifies greater risks because not all discoms are at the same financial condition. While Gujrat enjoys a favorable A+ credit rating, Jharkhand is rated considerably lower at C (link) which would increase risks and thus bid prices significantly for the latter.

“Average harmonized tariff for our sample set is INR 4.31/kWh. If we consider a six-month cash reserve in the model to address delayed payment risk of DISCOMs, we get an equity IRR (Internal Rate of Return) of 14.20%, significantly below the benchmark expectation of around 18%.” 
Bridge to India

Further if grid availability rates are dropped to 90 from the present 99%, the IRR drops down to just 10.5% making the projects non-viable.

Remember the plan to make indigenously manufactured solar components competitive with that of China? That’s not going well yet. Sluggish global demand in 2015 and 2016 have created a vast oversupply of solar components. China which pretty much controls the global prices have also seen a massive slowdown in its domestic solar market. Investment there has fallen by a third from last year which combined with a 56% drop in investment in Japan have reduced prices and the global PV market is flooded with modules. And China has essentially been benefitting from India’s steady growth.

“India imported solar and photovoltaic cells worth about $826 million from China in the first six months of the current fiscal (FY 2016), which is over 87 per cent of the country’s total such imports. India’s total imports of these cells were worth $948.88 million, including $825.98 million from China, constituting 87.05 per cent, during the April-September period of 2016-17, New & Renewable Energy Minister Piyush Goyal stated in a written reply to Lok Sabha on Thursday.”
Business Today

But there’s more than a silver lining to the story. Lending institutions are opening up to more and more investments in the solar sector. The most benefits have been seen in the expansion of energy access and in the creation of micro-grids. Cheap solar lanterns and batteries have been providing power in the areas where the grid hasn’t been able to reach yet. And aided by micro-finance institutions, it is giving rise to a local solar community.

How Solar Lanterns Are Giving Power to the People – Clean-energy lights are transforming lives—and creating entrepreneurs—in Africa and India – National Geographic.

The story of Solar energy in India is just beginning. While targets maybe ambitious and impossible to achieve in a short span, it is definitely going to ease India’s carbon burden. Falling module costs have reduced rooftop solar costs to a minimum that government institutions, local bodies, industries and even consumers have started to embrace it even as the subsidy supports are being removed. Solar water heaters are already common in many homes especially in the northern half of the country. The Ministry along with research organisations are coming up with support material that helps an user gauge the solar generation potential at their location which would enable them to opt for a rooftop solar unit. Free consultation calls are being provided by various government institutions along with the distribution of free solar lamps to households below the poverty line.

“To fully take advantage of India’s RE potential over the next few years, however, will require new initiatives from central and state governments — beyond policy and programs currently in place — to support the engagement, participation, and new behaviors of power sector stakeholders including RE industry and developers, grid operators, public and private finance, consumers, and others.”
NITI Aayog

India has spoken and Solar power is here to stay.

Written by Sagnik Ghoshal

If you like the post please like, share and comment below. 

[Cover image from goldsea.com]


Further Readings:

Report on India’s Renewable Energy Roadmap 2030 by NITI Aayog

(Published February, 2015)

http://niti.gov.in/writereaddata/files/document_publication/RE_Roadmap_ExecutiveSummary.pdf

Analysis of utility scale solar tenders in India by Bridge to India

(Published March 2017)

http://www.bridgetoindia.com/wp-content/uploads/2017/03/BRIDGE-TO-INDIA_Tender-report.pdf

Money Talks? Risks and Responses in India’s Solar Sector by Kanika Chawla, Council on Energy, Environment and Water

(Published June 2016)

http://ceew.in/pdf/CEEW%20-%20Money%20Talks%20Risks%20and%20Responses%20in%20India%27s%20Solar%20Sector%20Jun16.pdf

Global Trends in Renewable Energy Investment 2017 by Frankfurt School – UNEP

(Published February 2017)

http://fs-unep-centre.org/sites/default/files/publications/globaltrendsinrenewableenergyinvestment2017.pdf

 

 

 

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