Who doesn’t want clean or ‘green’ energy? But what if this costs a bit more? We might quickly find many people’s appetite for renewable energy (RE) is lower, especially if the worry cited is something as invisible, long-term, and global as CO2 emissions that impact climate change. RE is making enormous progress in India—but it is driven more by targets, governmental support, and simple economics than a consumer push for being green. The good news is that the price for RE, especially solar power (photovoltaics, or PV) is falling dramatically. What this can allow us to do is focus on the next set of challenges in making RE scale, sustainably.

UNDERSTANDING RE IN INDIA: TARGETS AND BID PRICES

India was one of the first countries in the world to have a dedicated ministry for renewable energy. In 2014, even before the Paris climate agreement, the government increased the solar energy target almost five times to 100 gigawatt (GW) of solar capacity by 2022, and total RE to 175GW, with 60GW to come from wind. This capacity would provide for about 17-19% of generation in 2022, and would require a 25% compound annual growth rate (CAGR), far higher than about 5% CAGR needed for the targets set by China, the European Union, and California (which wants 50% RE supply but only by 2030). Within India’s solar target, 60GW is to come from grid-scale large solar farms, and 40GW from rooftop (i.e., consumer edge-based) solar.

From solar prices of Rs14 per kilowatt hour (kWh) just a few years ago, newer bids have come in at Rs2.44/kWh for large grid-scale projects. This is remarkable. Earlier bids included reverse subsidies (viability gap funding), but most new bids ostensibly aren’t subsidized. Of course, these are only the levelized cost of energy (LCOE) bids, which don’t account for the fact that not all power is the same or fungible—let alone enormous hidden subsidies (support for land, free transmission, etc.) or system level costs. Because of the inherently variable nature of RE, the rest of the grid needs to be ready to compensate, adding to overall costs.

OPPORTUNISTIC RE: TAKE IT WHEN YOU CAN

The biggest challenge with headlines touting RE now being at ‘grid parity’ or even cheaper than coal is these aren’t apples-to-apples comparisons. RE (wind and solar) is opportunistic: take it when the sun shines or the wind blows. What do you do in the evening, when India’s electricity demand is at its peak? You need something else. If you still need to build something else, then the value of RE is only equal to the marginal (or fuel) cost of alternatives. To add to variability, there is unpredictability—I’m sure that solar PV’s output at 8pm is zero, but even in the middle of the day output can fall dramatically (in minutes) due to clouds. Wind is also seasonal, especially in coastal regions.

What this means is that RE as deployed today helps meet an energy need (kWh), but doesn’t help meet the peak by contributing capacity (kW) at the right time, which is India’s main challenge. Most models predict that high solar penetration will significantly displace thermal (coal) power, further reducing their plant load factor (PLF). One may consider this Schumpeterian ‘creative destruction’ but the contracts and frameworks of today mean that those plants risk becoming either stranded assets—with their fixed costs paid for by others (‘socialized’)—or non-performing assets for banks.

There are other subtle problems and potential risks: for one, falling solar prices mean that solar’s competition isn’t with coal but with solar a few years hence. Utilities don’t want to be locked into a bad deal, and the current system is designed around long-term (25-year) contracts or power purchase agreements (PPAs). This is a new issue, since with coal or traditional power plants, costs have always risen over time. Additional worries include concerns on panel quality/lifespan (especially with hot Indian conditions), and whether costs will continue to fall (just recently Chinese module suppliers raised prices, reversing years of a downward trend and putting recent bids at risk as they likely factored in continually falling prices).

ROOFTOP SOLAR: A FAR BIGGER CHALLENGE

If falling prices are the reason grid-scale solar is growing, the same should apply to end users. However, rooftop solar is far, far behind schedule to meet the 40GW goal. While small deployments naturally cost more than grid-scale farms, we have to dig deeper into who would install such systems, and why. A small subset of consumers (commercial and industrial, plus the top residential) pay high electricity tariffs as they cross-subsidize other users. They will be the first ones to put up rooftop solar. But, they won’t exit the grid (with opportunistic RE)—they would return to it in the evenings. This treating of the grid like a battery, which includes giving their excess generation into the grid via ‘net metering’ not only lowers utility earnings but also raises the costs for the system, prompting more consumers to use solar. This is dubbed the ‘utility death spiral’, a risk that is fast approaching.

I spoke recently to a residential consumer putting up a rooftop solar system. He got a 30% subsidy for this, making his effective cost under Rs4.5/kWh, while his marginal tariff (as a large household user) is well above Rs7. Today, the system and utilities adjust as the volume of RE is small, but at what point does the appetizer become the entrée? Worse, why are we spending taxpayer money to subsidize the rich?

HOW TO MAKE RE SCALABLE

A typical question planners ask is how much RE can you handle? The good news is almost any amount—as long as you are willing to put in the investments and effort in transmission, alternative sources (especially fast-ramping and ‘peaker’ plants), etc.

The government has already pushed down costs of RE through large-scale bids, and even wind has moved from a feed-in tariff to a competitive bidding regime now. Bravo. It now needs to address the system-level costs of RE in a transparent manner that best signals who is causing what distortions and who can best handle the fixes. ‘Socializing’ costs doesn’t give proper signalling—one shouldn’t have marathon runners (coal plants) cycling up and down when sprinters (peaking plants or storage) would be far better. If we don’t recognize the system-level costs, we risk making RE a zero-sum game. If RE is viewed as a threat or problem by the utilities (discoms), there is a risk they will resist its expansion under the guise of ‘grid security’, as is already happening. The same thing happened with policy mandates under the Electricity Act, 2003 for open access (the ability for larger consumers to choose their own supplier)—discoms resisted it to the point that its implementation is a tiny fraction of the potential.

To fix some of these issues, we have to stop treating all units of power the same, like we sell a basket of fruit (say Rs5 per kilo). This basket includes mangoes, bananas, lychees, etc.—options that include differences in costs, availability, predictability, ramping rates, etc. Blending the options and selling at the average rate masks the marginal costs, which is where scope for improvement exists. Instead, Time of Day (ToD) pricing—in which consumers are charged based on when power is consumed—will encourage not just dynamic load management (called demand response) but also boost energy storage technologies—the next revolution which will also buttress the RE revolution (and push electric vehicles).

The government is doing a lot on standardization of both RE bids and PPAs. This will help reduce transaction costs—investors (most RE is private sector) have complained that dealing with India is like dealing with 29 different countries. There are also efforts to make cross-state RE power flows easier—important since RE is concentrated in a handful of windy and sunny states.

The last step being done is one of risk reduction: some RE bids enjoyed this through payment security mechanisms. These help, but one has to ask, “Are these a distortion: why don’t other suppliers get these?" Such mechanisms certainly help with cash flow (liquidity) issues in the short run, but not the solvency problems in the long run. Ultimately, reducing risks will have to tackle the elephant in the room—the poor finances of the discoms. Even in the absence of RE, the grid and the overall system need improvements, ranging across transmission strengthening, ToD pricing, signalling for fast-ramping generators and flexible contracting, etc. These will take time, but growing RE makes these even more urgent.

RE has a very bright future ahead of it, short-term clouds notwithstanding, and supporting technologies such as storage and smart grids (which add real-time visibility, control, and flexibility) are also becoming more and more affordable. Ultimately, it is the improved frameworks that will most help RE scale sustainably.

Rahul Tongia is a fellow, Brookings India, and was the chair of the Working Group on Policy of the Clean Energy Finance Forum (CEFF). All views are personal.

Renewable energy is making enormous progress in India, but it is driven more by targets, governmental support and economics than a consumer push

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