Getting the economics of solar power right

Narendra Modi has raised the target for solar electric capacity from 20,000MW to 100,000MW by 2022 at a cost of maybe $100 billion. This is a serious blunder. It will sabotage his “Make in India” plans by technically disrupting the whole electricity grid, and raising the cost of a critical manufacturing input — electricity.

India already has the highest interest rates among its Asian competitors. Its new land law will raise land prices maybe fourfold, making India uncompetitive there too. Indian electricity has long been uncompetitive: bulk power costs Rs 6-7/unit or more in most states, one and a half times as much as in competing Asian countries.

Solar power will be even more expensive, despite massive subsidies. So, “Make in India” will take a hit.

As long as solar power was a small fraction of total power supply, its national impact was marginal. Experimentation with various solar technologies made sense, preparing for the day when solar power would finally become competitive. Its cost has halved in the last decade, but needs to halve again.

However, 100,000MW of solar power by 2022 will constitute maybe a quarter of total power capacity. This will upset the whole grid, since solar power disappears when the sun sets, just as electricity demand rises to its daily peak, with homes switching on lights and stoves. Meeting peak needs will require a big cushion of idle thermal power during the day, a huge hidden cost of solar power.

- - - Solar electricity is most promising. But it is also hugely subsidized today. Stripped of subsidies, solar power currently costs 14 cents/unit (around Rs 9.5/unit). With subsidies, solar producers have been able to reduce their bids substantially in recent years. Adani has just signed a deal in Tamil Nadu to supply solar electricity at Rs 7.01/unit.

But add transmission and distribution costs, various levies, plus cross-subsidies for farmers and homes, and bulk power for industry will cost Rs 9/unit. That is prohibitive and will make users uncompetitive. Big companies producing captive power from captive coal mines say their electricity costs just Rs 2/unit. This will go up a bit after high auction prices for new captive mines, but will remain far below even subsidized solar power. But not every manufacturer can generate captive power.

Most state electricity boards are bust, with accumulated losses approaching Rs 300,000 crore. Some electricity distribution companies refuse to buy even small amounts of expensive solar power that they are mandated to buy, and many refuse even cheap conventional power for want of funds. So, who can credibly guarantee that they will actually pay for Modi’s huge additions of costly solar power?

Being non-polluting, solar power deserves some price preference. But it already enjoys huge preferences. Taxes, cesses, royalties and auction prices are levied on fossil fuels. Equipment for thermal power and coal mining equipment is taxed, while solar equipment is highly subsidized and mostly duty-free.

Solar costs have plummeted recently with new technologies and scale economies. Hopefully this will continue, but it’s not guaranteed. The US gave large subsidies to a glamorous solar company Solyandra, hailed as a US champion by Obama. Alas, Solyandra couldn’t match Chinese companies cutting prices, and went bust.

The biggest Chinese solar company, Hanergy, became a stock market darling. Its owner, Li Hejun, became the richest man in China. But Hanergy has just suffered a meltdown in Chinese stock markets after revelations of dodgy accounting. This should sober all those who have become euphoric about future solar prospects. At least some of the recent fall in solar prices has been due not just to subsidies but unsustainable price-cutting. Warning: falling solar prices can represent distress sales, not cost breakthroughs.

Hopefully, a cost breakthrough will ultimately come. Yet that is not guaranteed. We should move forward modestly, starting with rooftop solar panels that eliminate transmission and distribution costs. We should experiment with new ideas like solar pumps for farmers: these can be economic if they replace free farm electricity.

Apart from such experiments, we should go all out on solar power only after it is fully established as competitive, and even then only to the extent it does not disturb the grid. Otherwise we will be risking the entire edifice of Indian manufacturing on a bet that could go badly wrong.

For the full text of the brilliant column by Swaminathan A Aiyar in the Sunday ToI, click here.

Actually, I have reproduced almost the entire text here, making for the most compelling reading as it does.

And, I thought the subject merited a fresh blog itself, since a lot of hype has been sought to be built over it by Namma sarkara, which I see mostly as an attempt to earn brownie points (check here), while covering up its unwillingness to usher in proper reforms, so as to allow the loot by vested interests to carry on merrily. This is apart from the hype created by green hyper-activists (I claim to be a green activist) who would like to see all coal based power plants shut down right away.

Muralidhar Rao