India’s GDP grew at an exceptional pace of 7.6 percent in 2015 while global growth continued at a sluggish pace. However, this growth was primarily driven by the less energy-intensive services sector, which employs only 25 percent of the country’s labor force. On the other hand, over 50 percent of Indian citizens are employed in agriculture, while the contribution of agriculture to the GDP is a mere 17 percent. In order to sustain growth momentum and rebalance the economy, Prime Minister Narendra Modi’s government in 2014 announced the “Make in India” initiative, with the intention of increasing the share of manufacturing in GDP to 25 percent by 2022, creating 100 million jobs in the process. The government ever since has been actively pursuing investment from abroad in exchange for the promise of better governance, infrastructure facilities, and incentives.
India’s development engine needs a way to sustain its exponentially increasing appetite for energy. At present, India consumes 302 GW and still over 300 million people in the country live without access to electricity. By 2030, India’s energy consumption is expected to more than double, rising to 746 GW. The demand is expected to increase not only due to growth in the manufacturing industry but also due to the electoral promises of providing full access electricity to all citizens by 2019.
India today is grappling with not just the challenges of development but the country is also highly vulnerable to the effects of climate change. Policymakers in the country are cognizant of the dilemma of balancing sustainable development along with energy security and are now making choices for the future. India clearly has placed its bet on both coal and solar. Coal shall provide base load power and solar peak load power.
India’s Coal Dependency and Solar Challenge
India, a major importer of coal from Indonesia, has doubled its production targets, aiming to produce 1.5 billion tons of coal by 2020. The intent is to reduce its import dependence and provide coal to the underutilized thermal power plants in the country. India is also rapidly expanding its coal-fired electricity generation capacity, with around 113 GW of new capacity already under construction in addition to the 205 GW of existing capacity. In 2012, electricity generated from sub-critical coal-fired thermal plants accounted for 71 percent of India’s electricity generation and this scenario is expected to change only slightly in the next two to three years. Given the investments underway and the abundance of the resource in the country, coal will undoubtedly continue to play a dominant part in India’s energy mix.
However, India is also moving to increase the share of renewable energy. India has set a goal to achieve 175 GW of renewable energy capacity by installing 100 GW of solar, 60 GW of wind, 10 GW of biomass, and 5 GW of small hydroelectric projects by 2022. Of the 100 GW target for solar, 40 GW is expected to be achieved through the deployment of decentralized rooftop projects, 40 GW through utility-scale solar plants, and 20 GW through ultra-mega solar parks. This is an ambitious goal considering that world’s installed solar power capacity in 2014 was only 181 GW. It is clear that India wants to grow its solar capacity to not only provide electricity to remote areas but also to reduce the energy intensity of its GDP. India, in its INDC (Intended Nationally Determined Commitment), committed to reducing its emissions intensity by 33-35 percent below 2005 levels by 2030.
While the impetus has been provided by the center, almost every state in the country now has a renewable or solar energy policy. Incentives like GBI (Generation Based Incentive), AD (Accelerated Depreciation), Viability Gap Funding, capital subsidy, and feed-in-tariffs, both at the federal and state level have helped increase India’s total installed solar capacity by over 80 percent in the last 12 months to reach 8.1 GW. Initiatives for the development of 25 solar parks, Ultra Mega Solar Power Projects, canal top solar projects, and 100,000 solar pumps for farmers are at different stages of implementation. However, the political economy of a weak power sector and the continuous power struggle between the state and center has undermined this progress to an extent.
Internationally, India has pledged $30 million over five years to establish the International Solar Alliance (ISA) with 121 nations across the globe as members, to facilitate easier finance from multilateral banks for solar projects. Domestically, India is working on incentives to promote renewable energy deployment over coal through fiscal instruments like an increased coal access, cuts in fossil fuel subsidies, increase in taxes on petrol and diesel, and market mechanisms like Renewable Energy Certificates (REC) and a regulatory regime of Renewable Generation Obligation (RGO) and Renewable Purchase Obligation (RPO). However, ramping up India’s solar capacity from 8.1 GW to over 100 GW in the next six years would entail adding over 15 GW in solar capacity every year, which necessitates finding solutions to a number of structural problems.
Grid Evacuation Infrastructure Concerns
States like Rajasthan, Gujarat, Madhya Pradesh, Tamil Nadu, Andhra Pradesh, and Telangana account for around 80 percent of India’s total installed solar capacity against only 38 percent of India’s overall power consumption. Most of the other power consuming states are lagging behind in setting up new solar capacities. On the other hand, states with high capacity for renewable energy are facing significant grid curtailment, upsetting project cash flows and the expectations of investors.
The Green Energy Corridor Project, spearheaded by the state-owned Power Grid Corporation and financed by the Asian Development Bank and Germany’s development bank KfW, is expected to enhance the electric grid’s transmission capacity. It is designed to transmit 55 GW of solar and wind power being generated in eight renewable energy-rich states to load centers in the country’s north. However, if grid evacuation infrastructure doesn’t match the pace at which India wants to scale up solar energy, the stability of the grid might be compromised.
Apart from this, India also needs to invest in R&D to augment grid level storage in order to balance the variability in the grid due to renewable penetration, reduce its exorbitant Aggregate Technical and Commercial AT&C losses, strengthen its wholesale market, and design its DSM (demand-side management) architecture. The government’s recent Integrated Power Development Scheme (IPDS) policy intends to reduce AT&C losses, strengthen sub-transmission and distribution networks, and fix administrative losses in accounting, billing, and collections through IT integration. Rapid implementation at the state level, however, will be the key to success.
High Cost of Financing
India will need $250 billion in the next six years and $1 trillion by 2030 to provide 24/7 electricity to all its citizens. The World Bank sees this solar impetus as an investment opportunity and is providing $1 billion to support India’s ambitious solar initiatives. However, the harsh on-the-ground reality is that the high cost of capital, foreign currency risk, and unfavorable terms of debt are the biggest deterrents for renewable energy projects in India.
According to a CPI study, inferior terms of debt such as high costs, short tenor, and a variable interest rate add approximately 30 percent to the total cost of renewable energy in India compared to developed countries. The increased cost is a major barrier for solar producers.
Powerless Regulators and Fledgling State Power Distribution Utilities (Discoms):
Enforcement of the Renewable Purchase Obligation RPO target (17 percent by 2022, with an 8 percent minimum provision for solar energy) has so far been slack due to a misalignment of incentives and lack of enforcement mechanisms. India’s Supreme Court has signaled a strong stance against those who are noncompliant with the RPO. However, the Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERCs) need to ensure stricter compliance, yet both are handicapped by staffing crunches and have backlogs of pending cases.
State Discoms, on the other hand, are in distress due to political pressures as well as poor financial and operational practices such as billing irregularities, pricing failures, a legacy grid infrastructure, network unreliability, transmission and distribution losses, and electricity theft (averaging 22.7 percent). Government policies like UDAY (Ujwal DISCOM Assurance Yojana) and the Power Sector Development Fund (PSDF) are intended to turn around these Discoms, which have accumulated losses of approximately $54 billion (as of March 2015), in the next two to three years. Under these policies, the central government mandates states to take up to 75 percent the Discoms’ debt and ensure their financial viability. However, the problems of repressed tariffs, power subsidies, political interference, poor infrastructure, lack of stringent compliance and enforcement mechanisms, and poor management practices at Discoms are going to remain the biggest impediments to the success of the envisioned turnaround.
Land Acquisition Woes
Sixty percent of India’s ambitious 100 GW goal focuses on utility-scale ground-mounted grid-connected solar energy. Most state governments have promised single window clearances for environmental impact assessment and easy land acquisition procedures in their solar energy policies. However, the truth is that land acquisition in India continues to be one of the biggest hurdles to investment. The 2013 land acquisition law calls for consent from 70 percent of families in case of public-private partnership projects and 80 percent if the land is being acquired for a private company. A social impact assessment is also mandated by law for any land acquisition. Unfortunately, in 2015 Narendra Modi’s government failed to get the amendments to the Land Acquisition Bill 2013 necessary to simplify the norms of consent and social impact assessment.
The bottom line is that India’s solar 100 GW goal is ambitious. The Modi Government needs to align the incentives and get the states to come on board to ensure that this dream becomes a reality.
Radhika Lalit is a recent graduate of Stanford University’s International Policy Studies Program. Previously, she has worked with TERI (The Energy and Resources Institute) in India.