The big push for renewable energy in India: What will drive it?

Abstract

India’s government has a bold goal for deploying renewable energy: 175 gigawatts of electricity-generating capacity by 2022, including 100 gigawatts of solar power. The country has a history of promoting renewable energy and a rapidly growing portfolio of solar and wind projects, but meeting the solar target alone will require a growth rate equivalent to doubling India’s installed solar capacity every 18 months. It will also require a clear understanding of the three factors that drive energy demand in India (access, security, and efficiency); new federal and state policies and incentives; innovative financing for capital investments estimated at $100 billion or more; and additional funding for manufacturing, training, and job creation. Project developers will have to grapple with the cost and availability of land, grid connections, and backup power. To meet the electricity needs of the poor and encourage rural entrepreneurship, India’s energy policies should aim for a mix of grid-connected and decentralized renewable energy sources.

Two years ago, I visited the mud hut of a farm laborer in southern India. He had managed to put his eldest daughter through nursing school and she was working in Bangalore. His two other daughters lived with him, attending a local village school by day and rolling beedis (Indian cigarettes) in the evening. A tall bamboo stalk, sliced in half lengthwise, served as a channel to harvest rainwater from the family’s tiled roof. Also on the roof was a solar panel. The farm worker clearly did not have much in the way of collateral, so why did he take out a loan of (approximately then) $400 to install the panel, which provided him only enough electricity for two LED lights and a mobile-phone charger? Before installing the solar panel, he told me, his two white shirts got dirty very quickly because he burned kerosene indoors for lighting. He spent 50 rupees a month (at the time equivalent to about $1) on laundry detergent. Installing the solar panel reduced his monthly detergent cost to 20 rupees.

The drivers of renewable energy in India cannot be easily captured by the calculations of large investors or analysts focusing solely on aggregate energy scenarios. Factors as seemingly minor as the cost of laundry powder can play a key role in decision making. Project developers, service providers, and investors have to understand consumer needs and behavior to offer appropriate renewable energy solutions. Complicating matters further, a major shift toward more renewable energy in India’s power supplies poses its own set of challenges—including the need for new policies; significant additional and innovative finance; investment in manufacturing capacity, skills, and jobs; and the ability to deal with the intermittent nature of the sun and wind.

Although its dependence on imported fossil fuels has grown consistently, India has also had a long history of promoting renewable energy. Solar power advocates established the Solar Energy Society of India in 1976, soon after the first oil crisis. A joint government-private venture erected India’s first grid-connected wind turbine in the state of Gujarat 30 years ago. In 1982, the Indian government formed a Department of Non-Conventional Energy Sources, which became a full-fledged ministry a decade later—making India the first country to set up a ministry dedicated to renewable energy (Ganesan et al., 2014a: 21). As of March 2015, of a total installed electricity generation capacity of nearly 270 gigawatts, India’s renewable energy sources (solar, wind, waste-to-energy, biomass power, and small hydro) accounted for about 12 percent, or 32 gigawatts (Central Electricity Authority, 2015: 3).

Both wind and solar power are growing rapidly in India. The country is now the world’s fifth-largest producer of wind energy and in April 2015 the state of Madhya Pradesh approved the construction of the world’s largest solar project—a 750-megawatt plant (to be commissioned in 2016) significantly bigger than any in California. Last fall, Indian Prime Minister Narendra Modi announced an ambitious goal: to install at least 100 gigawatts of solar power capacity, 27 times more than India has now, by 2022. In January 2015, President Obama visited Modi and the two leaders announced that they would work together on financing for solar and nuclear power and would cooperate on efforts to fight climate change—although without setting any specific targets. But even with US help, achieving India’s grand vision for a solar subcontinent will not be easy.

Demand-side drivers of renewable energy

Coal still provides the lion’s share of India’s electric-power capacity, 62 percent. Gas-based power capacity is another 9 percent, hydropower is 15 percent (India does not consider large-scale hydropower as renewable energy), and nuclear power is only 2 percent of capacity (Central Electricity Authority, 2015: 19). Thermal power (coal, gas, and diesel) accounted for 84 percent of the actual power generated during the year that ended in March 2015 (Central Electricity Authority, 2015: 1). India’s energy and development imperatives will largely shape its response to climate change. Yet this does not imply that a high fossil-fuel-based energy pathway is the only option. With the electricity generation sector accounting for 38 percent of India’s gross greenhouse gas emissions (Indian Network for Climate Change Assessment, 2010: i), a significant shift to renewable energy could make a dent in overall emissions. The Council on Energy, Environment and Water estimates that nearly 20 percent of India’s electricity could come from renewable sources by 2020, and this share could rise to 30 percent (including large-scale hydropower) by 2030 (Ghosh and Ganesan, 2015: 157). Three demand-side drivers will determine the implementation of renewable energy targets in India: energy access, energy security, and energy efficiency.

Energy access. India is struggling with a gap between energy demand and supply: The electricity shortage during peak demand was 2.1 percent for the month of March 2015 (Central Electricity Authority, 2015: 7) but the shortage will almost certainly be larger in the summer months; in July 2014 it was 3.9 percent (Central Electricity Authority, 2014: 7). These numbers do not account for the significant blackouts and brownouts in India’s electricity system because peak deficits are calculated based on estimations of demand, rather than on actual demand.

India still has close to 75 million households, including almost 45 percent of all rural households, with no access to electricity (Ganesan et al., 2014b: 1). This means that 750 households would have to be electrified every hour for the next 10 years just to cover the existing deficit (Ghosh, 2014: 48). But this understates the challenge. The average annual per capita electricity generation in India in 2011–2012 stood at around 767 kilowatt-hours (kWh), a quarter of the global average of 3,045 kWh. The theoretical maximum generation that India could achieve from the existing system, assuming no bottlenecks, would be a mere 1,200 kWh per person annually (Ganesan et al., 2014b: 2). Clearly, an economy slated to grow at a rate of 8 to 9 percent over the next two decades will need a lot more electricity than that.

The cooking-energy deficit is even larger. Despite rising incomes, less than half of urban households and only 6 percent of rural households exclusively use liquefied petroleum gas (LPG) for cooking. Up to 80 percent of rural Indian households continue to use traditional fuels (such as firewood, dung cake, coal, and charcoal) because of affordability, access, and awareness limitations (Jain et al., 2014: vii).

Energy security. Imports of coal have grown rapidly in recent years. Domestic oil production has remained almost flat over the past decade and oil imports are expected to increase four- to five-fold between 2005 and 2030 (Planning Commission, 2006: 48). India is exposed to both supply risks (such as war, strikes, political upheavals in oil-exporting countries, and deliberate blockades of supplies) and market risks (higher and more volatile prices) (Steven and Ghosh, 2014: 47–48). Demand for gas is expected to grow at more than 5 percent annually up to 2030, requiring substantial investment in liquefied natural gas (LNG) terminals and transnational pipelines (Corbeau, 2010: 6–7; Observer Research Foundation, 2012: 3). Renewable energy cannot substitute for the full range of energy services that fossil fuels provide, in the near or medium term. But from an energy security perspective, renewable energy is attractive as one critical part of a diversified energy mix—one that does not increase dependence on overseas energy sources.

Consider Tamil Nadu, the state with the highest wind power capacity. While thermal power plants provide baseload electricity, small changes are visible during the morning and evening peak power periods. Wind energy lowers the plant load factors of thermal power stations during these peak periods and the evidence of lower power outages during these times indicates that wind power is able to provide for domestic and industrial demand across the state (Ganesan et al., 2014a: 51).

Energy efficiency. Coal power plants switching to cleaner technologies could deliver efficiency gains, although the incremental capital costs of such investments are significant (Ghosh and Watkins, 2009: 35). India has already launched the innovative Perform, Achieve and Trade scheme, mandating energy efficiency targets for plants and factories in eight industrial sectors, failing which they would need to purchase additional energy savings certificates from over-performers (2015 will be the first year of trading). Efficiency will also be a major driver for residential appliances (the Super-Efficient Equipment Program, launched in 2013, aims to reduce energy consumption by 390 million kilowatt-hours annually, avoiding 95 megawatts of capacity) (Chunekar and Singh, 2013: 12) and for the adoption of alternative chemicals and technologies for air conditioning and refrigeration in residential and commercial buildings (Chaturvedi and Sharma, 2014). The government has also developed plans for demand-side management in municipalities to decrease their energy consumption: Savings of 257 million kilowatt-hours of electricity are expected from urban local bodies by the end of the Twelfth Five Year Plan in 2017, with an additional 208 million kilowatt-hours of electricity saved in water pumping (Ministry of Power, 2012: 13–14, Chapter 5).

In the power sector, however, aggregate technical and commercial losses are significant. In 2011–2012, utilities lost about $12.8 billion because of unmetered consumption, low efficiency in collecting dues, and insufficient expenditures for upgrading transmission infrastructure (Ganesan et al., 2014b: 18). Renewable energy is not a substitute for reducing transmission losses. However, it could boost electricity supplies and increase the demand for greater investment in efficiency improvements.

Super-sizing solar

These demand drivers help to put India’s latest targets for renewable energy in context. By the end of March 2015, wind energy comprised two-thirds of India’s grid-connected electricity generation capacity in the renewable energy category, despite fluctuating fortunes in recent years. The solar industry grew 200-fold in five years (Ghosh et al., 2014a: 26) and by March 2015 had an installed capacity of 3.7 gigawatts (Ministry of New and Renewable Energy, 2015). This is a result of the initial years of the Jawaharlal Nehru National Solar Mission (launched in 2010), which aimed to deploy 20 gigawatts of grid-connected solar power and 2 gigawatts of off-grid power. The government has since upscaled its ambitions.

India’s annual federal budget for the fiscal year 2015–2016, announced in late February of this year, called for 175 gigawatts of renewable energy to be deployed by 2022. The total would include 100 gigawatts of solar power, 60 gigawatts from wind, 10 gigawatts of biomass, and 5 gigawatts of small hydro. This was the first time these revised targets were mentioned in Parliament. The railway budget echoed the government’s commitment by setting a target of 1 gigawatt of solar photovoltaic capacity.

These are not trivial numbers. To reach 100 gigawatts, installed solar capacity has to double every 18 months—or at a compounded annual growth rate of 62 percent (Choudhury et al., 2014: 2). The government intends to have 60 gigawatts of medium- and large-scale projects and 40 gigawatts of rooftop projects. These need not be solely for commercial rooftops. One-fifth of the 31 million households with a roof area sufficient for a 3-kilowatt system could add almost another 20 gigawatts (Choudhury et al., 2014: 4). In reality, the scale of deployment will remain small during the early years, until policies are in place. Thereafter, there must be a sharp increase in capacity addition (approximately 15 to 17 gigawatts annually) to meet the targets.

There is significant scope in rural decentralized energy systems as well. For instance, if 15 percent of irrigation pumps in India were converted to solar they would amount to 20 gigawatts of additional capacity (Choudhury et al., 2014: 4). ¹ The point is that the evaluation of India’s solar (and other renewable energy) targets should not focus solely on the scale of the goal and the speed of deployment. There are other development imperatives that can help propel India toward its goal.

Policy imperatives

Over the past four decades, several policies and programs have sought to spur renewable energy. However, the biggest policy boosts have come after the year 2000. Government incentives have included direct financial transfers such as feed-in tariffs, generation-based incentives, low-cost financing from the Indian Renewable Energy Development Agency (IREDA), and viability gap funding to subsidize capital costs. Governments have also offered preferential tax treatment: accelerated depreciation (particularly for wind projects), tax holidays, and excise duty exemptions. A third set of incentives has stimulated demand by bundling renewable energy with thermal power, imposing renewable purchase obligations on all state utilities, and introducing a trading scheme for renewable energy certificates (Ganesan et al., 2014a).

Significantly, several state governments have also taken the lead in pushing policy innovations to encourage renewable energy deployment in India, such as accelerated depreciation in Gujarat, exemptions from wheeling and transmission charges (which lower operating costs) for electricity sold within Andhra Pradesh, and a renewable energy infrastructure development fund in Rajasthan. State-level programs supported two-thirds of the solar installations during the first phase of the National Solar Mission (Ghosh et al., 2014a: 12).

However, with the revised targets some key policy deficiencies must be addressed soon. First, delays in announcing policies create uncertainties. If developers do not know the tariffs for even the next financial year, they have difficulty securing long-term, low-interest financing. Second, policy fluctuations have undermined investments in recent years. The withdrawal of accelerated depreciation benefits for wind turbines resulted in a 47 percent decline in deployments in 2012–2013 and a 31 percent decline in 2013–2014, compared with 2011–2012 (Ghosh et al., 2014b: 4). Third, the government must clarify which institutions are going to underwrite or offer payment security for power purchase agreements. There are several public institutions in the fray (for example, the Solar Energy Corporation of India, the NTPC Vidyut Vyapar Nigam, and IREDA) but they need sufficient assets on the balance sheet to give investors confidence that their power purchase agreements will have state-backed guarantees. Fourth, central and state regulators have to begin to enforce the renewable purchase obligations (RPOs), without which there can be no long-term credibility in demand for renewable energy nor a viable market for renewable energy certificates (RECs). This is already happening in the case of the new solar targets: The National Thermal Power Corporation has committed to deploying 15 gigawatts of solar power by 2022 but is finding it difficult to secure guaranteed buyers for solar-based electricity (Upadhyay, 2015).

Show me the money

Along with policy, renewable energy deployment in India will be contingent on the quantity and quality of finance. Estimates of the capital investments needed to deploy 100 gigawatts of solar by 2022 range from $100 billion to $113 billion. ² This range takes into account the alternative routes (and therefore costs) of large-scale and rooftop projects and varying assumptions about the pace at which photovoltaic module prices will fall, the balance of system costs, and the expected inflation rates.

At RE-Invest, the largest investor conference for renewable energy in India, held in February 2015, investors expressed their intention to deploy as much as 266 gigawatts of renewable energy but financing commitments were less than 30 percent of these numbers. Unfortunately, the recent government budget did not map out an investment trajectory for the renewable energy sector.

This year’s budget allocation to the Ministry of New and Renewable Energy is only 11 percent more than for the 2014–2015 fiscal year, even though deployment targets have increased far more than that. Of this allocation, close to 90 percent (roughly $400 million) will be financed through the National Clean Energy Fund (NCEF). India has since July 2010 imposed a price on carbon. Until July 2014, this price was 50 rupees (about 80 cents) for every metric ton of domestic or imported coal. The price was then doubled to 100 rupees and in February 2015 doubled again to 200 rupees ($3.20). The collected funds are transferred to the NCEF, which could have a critical role in underwriting investments, loans, and contracts with power utilities.

The NCEF is both an innovation and an underachievement. As a fund-generating mechanism, it has served reasonably well. The government’s most recent Economic Survey estimated that the fund had accumulated about $2.7 billion by the end of the 2014–2015 fiscal year. Of this, $2.62 billion was earmarked for 46 clean energy projects (Ministry of Finance, 2015: 124). While this is indeed promising, there is no clear information about any disbursements. In fact, the government is using the NCEF to balance its books and lower the fiscal deficit, as did the previous administration (Bhaskar, 2015).

Other innovations in finance are being considered in India. Project developers are eager for infrastructure debt funds—government-backed tradable instruments to help channel debt financing with lower interest rates and longer tenure. The renewable energy sector has also been lobbying for a provision by which India’s central bank, the Reserve Bank of India, can direct banks to prioritize lending to certain sectors (Ghosh et al., 2014a: 20). More recently, interest in green bonds has been growing. IREDA issued its first tax-free green bond in 2014 (AAA-rated) for $80 million. It plans on issuing bonds worth $238 million in the coming year (Upadhyay, 2014). A private bank, Yes Bank, issued a $160 million green bond in February 2015, and India’s Export-Import Bank sold a $500 million green bond in March (Headway Solar, 2015).

While these are encouraging signs, the scale of investment required is significantly higher. And to absorb investments at this scale new institutions and innovative finance are needed. Several key financial institutions—such as IREDA, the Power Finance Corporation, the Rural Electrification Corporation, large public-sector banks (such as the State Bank of India), and others—are needed to offer low-interest loans with long-term tenure. They could also help channel infrastructure debt funds and investments from insurance and pension funds as well as from large overseas investors. Risk insurance (to ensure bankable projects) and exchange swaps (to mitigate foreign-exchange risks) could reduce capital costs and leverage more private financing. Housing finance companies could provide loans to property developers for rooftop systems.

The key lesson from renewable energy financing in India is that different institutions are needed for different purposes. At a strategic level, public-sector financial intermediaries (such as the Reserve Bank of India or the Life Insurance Corporation) and multilateral financial institutions could shift the direction of the market—with priority sector lending or payment guarantee mechanisms, for example. At a project level, Indian banks and international institutional investors and private equity firms, among others, are needed for debt financing, boosting equity investments, and helping with market entry and upscaling. And at an ancillary level, domestic public funds and financial assistance from donor countries and organizations can boost skills training, extension of the grid, and other efforts that lower costs and incentivize investment (Ghosh et al., 2014a: 17).

Easy business?

Apart from the imperatives of clear policy guidelines and finance availability, there are at least three other issues that will determine the ease of doing business in renewable energy in India. First, land availability. Less than 1 percent of the barren and uncultivated land in the country would be sufficient for 80 gigawatts of grid-connected projects (Choudhury et al., 2014: 9). But land acquisition is not easy. Land accounts for 3.5 percent of project costs but could increase with rapid deployment and price speculation (Choudhury et al., 2014: 9). State governments could create land banks (as is being done in Gujarat and Karnataka, for example), lease government land for 25 years or less (as Rajasthan has done), offer exemptions on stamp duties on the sale of private land (an incentive offered in Madhya Pradesh), or ensure a small share per unit of electricity to the landowner. Whatever the solution, it has to be implemented quickly.

Second, the infrastructure to connect renewable power to the grid needs to keep pace with deployment targets. In the case of solar, the cost of connecting large projects (more than 10 megawatts) to the nearest transmission line is at least 2.5 percent of the project cost (Choudhury et al., 2014: 9–10). Lack of grid access has already delayed projects from coming online (Council on Energy, Environment and Water and Natural Resources Defense Council, 2012). The Ministry of Power must provide detailed road maps for building new substations. The Green Energy Corridors under development in Rajasthan and Tamil Nadu could be further expanded. Electricity regulatory authorities must also consider exemptions from wheeling charges, making it more affordable for energy producers to send electricity to customers via transmission lines controlled by utilities. With net-metering policies, grid-connected rooftop projects should get priority in dispatching power.

Third, the issue of managing intermittency and balancing the grid plays on the minds of project developers (who have an interest in selling power), as well as grid operators (who cannot afford any significant surge or disruption in power supply). With 100 gigawatts, solar would account for about 9 percent of India’s electricity generation in 2022, and renewable energy as a whole (175 gigawatts) would be 20 percent. ³ This would require large investments in upgrading the grid and in energy storage and backup. In the absence of major breakthroughs in energy storage in the short term, an additional investment of $20 billion to $33 billion in gas-based generation capacity would be needed solely to back up solar power. ⁴ More investments would be needed for other types of renewable energy. Given the current state of nuclear power in India (just 2 percent of the total electricity generating capacity and less than 4 percent of actual electricity generation) (Central Electricity Authority, 2015: 1, 3) and the delays in building new plants, it is unlikely that nuclear energy could serve as a viable backup to renewable energy in the short term.

Buy, make, or innovate?

The scale of ambitions will also impact manufacturing and imports. At current prices, and with no expansion of domestic manufacturing capacity, India would need solar imports worth $35.7 billion to meet its 100-gigawatt solar target. If domestic production grew by 1 gigawatt every year and international panel prices fell by 6 percent, imports could drop to $16 billion (Ghosh et al., 2015b: 24). Reducing import dependence means much greater domestic competitiveness as well as targeted investments in energy storage research and development.

But there is more than just a choice between manufacturing and importing. The real strength of the renewable energy sector in India lies in process innovation, whether in bringing costs down for grid-connected plants or for business models of decentralized energy. The decentralized clean energy sector offers a range of sustainable implementation models—across technologies (such as solar panels and small wind turbines) and scales of operation (such as household, village, or district)—through leasing, retail sales, community-based interventions, and mini-grids that have a predictable demand for baseload power (such as from a cell-phone tower or a community hospital). More than 250 firms are already working in this sector in India, with many more companies in their supply chains (Council on Energy, Environment and Water, 2013: 6).

Even as the centralized grid expands, and a network of pipelines is installed to supply cooking gas, the rising demand for modern energy sources will not wait several decades for the centralized system to meet the needs of the poor. Rather than consider decentralized energy in opposition to grid-connected electricity, India’s energy policy is beginning to appreciate how they are complementary: offering adequacy and reliability of supply, improved resource use efficiency, energy security, employment, rural entrepreneurship, and a cleaner energy mix.

Clean jobs and green skills

Job creation is the final major motivation for India’s policy makers. The central government seeks 100,000 solar jobs by 2022, and 25,000 wind jobs over the next five years. The prime minister’s call for “Make in India” has a strong focus on job creation, especially in micro, small, and medium-size enterprises. The solar market alone created nearly 24,000 full-time-equivalent jobs from 2011 to 2014 in business development, design and construction, commissioning, and operations and maintenance (Ghosh et al., 2014c: 14). Including wind industry jobs, the two sectors accounted for nearly 70,000 jobs (Palakshappa et al., 2014: 2). If 100 gigawatts of solar were installed, as many as 1 million short-term, and about 300,000 long-term, full-time jobs could be created (Ghosh et al., 2015a: 1). For 60 gigawatts of wind, another 180,000 jobs could be created (Ghosh et al., 2015a: 1). These would be over and above any jobs created in manufacturing.

Renewable energy projects typically create more jobs per unit of electricity than from fossil-fuel-based power, and smaller-scale projects create more jobs than larger ones (Ghosh et al., 2014c: 13–15). This is another reason to encourage decentralized energy.

To fill these jobs, aggressive training and skills development would be needed. The finance minister allocated $1.6 million in the current budget for training 50,000 Surya Mitras (Solar Friends). But the scheme will have to be scaled up significantly in the coming years. Small-scale project developers, who are key to furthering decentralized energy, could benefit from the Self-Employment and Talent Utilisation (SETU) program announced in the latest budget, which aims to support start-up businesses and self-employment activities. A nationwide group of decentralized-energy entrepreneurs plans to educate more than 2,000 people as managers, technicians, and trainers over the next three years (Council on Energy, Environment and Water, 2013: 39). This initiative has now taken shape as the Clean Energy Access Network (CLEAN).

Eventually, nationwide training programs, under the National Skill Development Corporation (NSDC), would have to be delivered through a network of trained entrepreneurs (for both grid-connected and decentralized energy projects). The NSDC recently established a sector skills council and is initiating studies to match skills with jobs on an industry-sector and geographical basis.

Aiming high

The intriguing case of the farm laborer installing a solar panel on his roof begins to make sense when viewed against the background of the multiple demand drivers and supply-side factors affecting renewable energy in India. In that one hut, a visitor can see the need for energy access, the benefits of energy-efficient lighting, the effectiveness of policy incentives, the results of innovative financing whereby rural bankers manage to reach far-flung villages and hamlets, and the rural entrepreneurship and jobs that make it possible to find potential customers and to provide them with energy services.

Of course, one hut does not make a renewables revolution. In fact, very real challenges remain and they are compounded by setting very high targets for renewable energy in a very short time span. However, it would be wrong to place bets on whether India will meet the 175-gigawatt target by 2022. The question to ask is: By which sequence, and with what intensity, should policies, innovative finance, manufacturing, R&D, skills, and jobs be promoted so that Indians can think of renewable energy as a viable solution to energy access, energy efficiency, and energy security? Finding that sequence and delivering that intensity will be the core question for policy makers, project developers, investors, analysts, and citizens.