India is stepping up efforts to establish itself as a global leader in solar energy. Surveying the country’s renewable energy landscape,
Bob Nelson discusses the way forward
As countries continue to come to terms with a post-Copenhagen world, India has been taking its first bold steps towards becoming a world leader in renewable energy and cleantech. On 11 January the government officially launched the Jawaharlal Nehru National Solar Mission (NSM) with ambitious plans to raise installed capacity to 20,000 megawatts of solar power by 2022.
Over the last few years India has made steady progress on the renewable energy front. Great strides have been made in the area of wind energy in particular, largely through the work of Suzlon and other local groups. At present the biomass and biofuels arena and that of solar energy is witnessing increased activity. Given the degree and intensity of sunlight that India enjoys, the government has realized that solar energy can potentially play a significant role in fulfilling the country’s energy needs.
The role of renewables
India has a legacy of unreliable and insufficient power that has constrained the growth of manufacturing and other power-intensive industries and hampered economic development. This has prevented the economy from absorbing additional sources of available labour, including the underemployed in rural India.
Clearly, most of the demand for power will have to be met by conventional thermal generation sources (particularly coal-fired power plants, and to some degree gas-fired plants using India’s recently discovered natural gas reserves) and through the growth of the Indian nuclear industry. However, even here “green” considerations enter into play with calls for clean coal technology as India’s coal reserves consist largely of “high-ash” lignite (soft brown fuel).
Nevertheless, several factors have helped increase interest in the development of renewable energy in India. In the run-up to the Copenhagen summit, India found itself increasingly marginalized because of its opposition to mechanisms that might have curtailed its progress in the domestic power generation sector. To protect itself, India felt the need to appear proactive on the renewable energy and sustainability front.
In addition, perceptive government and business leaders realized that there were significant business opportunities available in renewable energy. This was manifested through Prime Minister Manmohan Singh’s call for “solar valleys” that would replicate on the solar energy front what Silicon Valley accomplished on the information technology front, and calls by business leaders like Anand Mahindra to “harvest the sun”. In this regard, China’s emergence as a dominant player in the global photovoltaic industry (as well as in the global wind industry) did not escape India’s notice.
The government also quickly recognized that renewable energy could be a viable solution for the nearly 500 million people who are currently off the energy grid. India has some of the best insolation (solar radiation) in the world – particularly in Rajasthan and Gujarat – and distributed generation, for which various types of renewables are well suited, would be an ideal way to meet these needs. This could help transform rural India, which is a priority for the current Congress-led government.
These and other factors have led to major governmental policy initiatives on the renewables front. In broad terms, as stated in various laws and policies such as the Electricity Act, 2003, and the National Electricity Policy, 2005, India plans to increase its renewable energy generation to 100,000 megawatts by 2050.
Clearly, such goals can be achieved only with greater government action. Within the last year India has taken a giant leap in this direction, through the adoption of the NSM. In addition, India’s dedicated Ministry for New and Renewable Energy (MNRE), led by the forceful and dynamic Dr Farooq Abdullah, and staffed by a skilled cadre of technocrats, has surveyed global renewable energy policies to determine what has worked elsewhere and what may be appropriate for India.
The National Solar Mission
The main objective of the NSM is to “establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible”. Considerable interest from both within and outside India has been generated as experts agree that India could soon be one of the two or three largest generators of solar energy in the world.
The NSM is one of eight missions of the National Action Plan for Climate Change (NAPCC) announced in June 2008. It has three phases. Phase 1, which is scheduled to run until 2012-13, is designed to add around 1,000 megawatts of grid-connected installed solar capacity. This includes both solar thermal generation (utility-scale concentrated solar power plants) and photovoltaic (PV) power (grid-connected, with the off-grid goal being 2,000 megawatts by 2022). Projects are to operate on the basis of power sales for a guaranteed feed-in tariff as well as demonstration projects for various types of technologies.
The feed-in tariffs set by the government have generated substantial interest in participation in the ongoing application process for Phase 1. Based on early signs of interest it appears that applications filed by 30 June of this year for Phase 1 projects will cover substantially more megawatts than can be awarded, although recent indications that the government could try effectively to cut back on tariffs and megawatts available per group may dampen interest somewhat. At this stage relatively more interest seems to focus on the PV front, as solar PV investments can be made in smaller and more discrete quantities. Solar thermal investments require a larger project size (50-100 megawatts per project).
Phase 2 of the NSM will run from 2013 to 2017, and Phase 3 from 2017 to 2022. Targets for Phases 2 and 3 will be based on Phase 1 achievements, a decline in solar energy prices and the availability of international finance. While Phase 2 goals currently call for an additional 3,000 megawatts, the hope is that this number could be tripled through technology transfers and greater international financial flows, so that there would be 10,000 megawatts of installed solar capacity by 2017. Phase 3 will aim to double that number so that by 2022 there will be 20,000 megawatts of competitively priced electrical power.
Under the NSM, the designated purchasing entity is NTPC Vidyut Vyapar Nigam (NVVN), a subsidiary of NTPC, India’s largest power generator. To keep costs competitive, the solar power purchased by NVVN will be blended with inexpensive power made available to it.
As the 30 June application deadline looms, there is a flurry of activity among Indian and international developers (including leading solar companies like Sener from Spain), construction contractors, equipment providers and financing sources, with MOUs being inked and consortiums being assembled.
In addition to existing energy companies (such as Reliance and Tata) and contractors, established Indian companies are also looking to get into the expanding solar energy market. Some like Mahindra & Mahindra, which is traditionally strong in infrastructure development, see it as a way to enhance their profile and to carve out a profitable niche in an area of potentially strong growth.
Challenges to the NSM
Despite the interest and activity, a number of questions must be answered before Phase 1 can fulfil expectations. These include financial, technological, governmental and regulatory issues.
On the financial front – will the proposed feed-in tariffs provide sufficient returns to drum up the required proprietary and third-party capital? There may be no apparent shortage of potential investors, but it is not clear how smaller-scale PV projects will overcome the hurdle of start-up and transaction costs in order to be profitable.
Investors out to woo developers include Indian merchant banking groups like Enam and Kotak Mahindra, Indian companies with substantial internal funds for purposes of infrastructure investment, numerous Indian and global infrastructure and private equity funds, and multilaterals like the Asian Development Bank and the International Finance Corporation (IFC) of the World Bank Group. (The IFC recently provided financing for Azure Power, which successfully developed a grid-connected solar generation facility without the benefit of the NSM).
Questions also surround India’s ability to implement solar power projects. Even in established solar PV markets like the US, project developers have faced challenges in operating profitably, leading to considerable consolidation and vertical integration (with equipment suppliers) in the industry.
India’s role in new energy development promises power both locally and globally
To date, wind power has been the most successful form of renewable energy in India. The country has developed substantial domestic capacity and Suzlon has become a world leader in the sector. This sector should continue to develop, as estimates suggest that India can at least double its current amount of installed wind capacity. There should also be more opportunities for the domestic manufacture of equipment.
Biomass and biofuels were seen to have great promise for India, with substantial excitement over plants like the Centre for Jatropha Promotion & Biodiesel and the possibility of turning agricultural and urban biomass waste into power. However, it turned out to be more problematic than initially thought, and optimists on the waste and biomass front neglected to consider how efficient the rag pickers of urban India are and how Indian villages already utilize much of their agricultural waste for productive purposes. However, as technologies have become more efficient and greater attention is paid to proper project sizing, there has been a renewal of interest on this front. Teaming up with Indian companies that have strong rural presences through their traditional activities, and NGOs that work closely in Indian villages in different parts of the country, can be the way forward.
Whether at the Indian Institutes of Technology or in overseas locations, Indians play key roles in the development of new energy technologies and cleantech that promise to benefit not only India, but the world. As noted above, the prime minister himself has expressed the hope that “solar valleys” will emerge in India. For this to happen, India would need to address the traditional difficulties that the venture capital industry faces in financing small-scale business in India.
Energy efficiency will be an area of increasing importance in India and one in which substantial energy savings can be obtained. India passed the Energy Conservation Act, 2001, but only recently (perhaps spurred on by the Energy Conservation Building Code, 2006) have more companies begun to consider green building methods.
Ideally there has to be a pipeline of projects available, with financing structures in place that can be carried from project to project. This ensures that financing costs do not swallow up the potential profits in each project. In India, there is the additional problem of relatively high interest rates when compared with desired returns on investment. Thus, finding special financing, whether through institutions like the Indian Renewable Energy Development Agency or multilateral or export credit agencies, may be critical.
The tariff structure for solar thermal projects is slightly less favourable than that for PV projects and there are additional factors of size and risk to consider. These are projects that will cost billions of rupees and require construction in often inhospitable environments where water availability may be an issue. As such, the risk is higher, which affects financing possibilities, even though solar thermal projects stand the best chance of producing grid-connected solar power at the lowest price. This makes the cost of financing and the availability of concessional finance even more important.
The technology and related cost considerations include concerns over potential requirements for Indian content of PV equipment. In the near term, buying such equipment internationally could provide attractive prices since supply has increased over the last couple of years and consequently suppliers may be willing to cut prices in order to get into the Indian market. However, the government sees the solar power initiative, in part, as a way of India gaining a greater role in the global solar power value chain. So, there is understandable pressure to favour domestic producers. This will create something of a chicken and egg problem and while there are some Indian PV manufacturers like Moser Baer, additional domestic capacity is required in order to meet prospective domestic needs.
On the solar thermal front domestic production is less of an issue. Key components like solar collector assemblies in a parabolic trough facility can amount to about half the cost of a solar thermal plant. So, size and transportation considerations make it more feasible and inexpensive to manufacture them locally and the goal will be to reduce the cost of material quickly.
The MNRE feels that the capital cost of a solar thermal facility can be brought down to about US$3 million per megawatt, but given the challenging nature of the sites, it is not entirely clear how that will happen. This is particularly pertinent as the NSM will take place in phases and only a certain capacity will be built during Phase 1. It is thus hard to base the development of a whole project on a series of component projects that are yet to be built, even if the latter would bring down average costs through amortized costs and economies of scale. The problem is that the tariff and other rules that will be in place in Phases 2 and 3 are as yet unclear. It is also uncertain if the desired future projects will be sanctioned in Phases 2 and 3.
A third obstacle that must be crossed before the NSM can be implemented effectively is the divided and variable regulatory regime. According to the constitution of India, energy is a matter of concurrent jurisdiction between the centre and the states. Many states have policies of their own regarding the purchase of renewable power, including 11 state regulators who act according to the National Tariff Policy, 2006. In the case of renewables, there is the further issue of the division of responsibility at the central governmental level and while the MNRE has significant authority, so too does the Ministry of Power. There is also the Central Electricity Regulatory Commission (CERC), which recently said all state-owned power utilities should purchase at least 5% of their requirements from renewable sources. In addition now the NVVN is charged with purchasing solar power generated in Phase 1 of the NSM.
In terms of integrating present activities with future plans, uncertainties abound. Even if tariffs for Phases 2 and 3 were announced now, there is a long history in India, as in other countries, of established policies being changed for budgetary or political reasons. India needs to demonstrate that it can maintain coherent and sustainable policies in the power sector – with a supportive regulatory framework – over the long term. Although these prospects have greatly improved, now only time – and the ability to maintain policies even through difficult times and circumstances – will tell.
Another key element that may hamper effective implementation of NSM policies is the myriad permits needed at various levels – central, state and local. These relate to the development and financing of projects and can be difficult both in connection with small-scale and utility-scale projects. For the former they substantially increase transaction costs as a percentage of total project costs, and for the latter they raise both the risk profile and the cost.
India is not alone in such regulatory complexity, as domestic and foreign developers of projects in the US may acknowledge. This author has had to deal with permit issues ranging from the fate of the desert tortoise, to reflected light from solar collector assembly mirrors potentially shining into the eyes of jet fighter pilots from nearby Edwards Air Force Base. This was all in the course of developing a 350-megawatt series of utility-scale solar thermal projects. With time, patience and will, much can be overcome.
The way forward
While renewable energy, including hydropower, only provides a small percentage of India’s needs at present, the current policy trajectory and related private sector activity suggest that it will grow substantially over the coming decade.
To the extent that there is a revived move towards international carbon trading efforts, renewable energy growth in India could expand further.
The key to such growth will be sound legislative and regulatory approaches like the NSM. Consistent and predictable government policy, reducing difficulties in the implementation of infrastructure projects, and facilitating domestic and international financing efforts will also aid the continued growth of India’s renewable energy resources. This will also ensure that India and Indian companies “take a global leadership role in solar manufacturing (across the value chain) of leading edge solar technologies”, which as the NSM states, is one of its objectives.
Bob Nelson is a partner at Akin Gump Strauss Hauer & Feld. He has over 15 years of professional experience in the Indian power sector, including representing Bechtel and GE in the Dabhol power project restructuring that culminated in 2005. The views expressed in this article are the author’s personal views and are not attributable to Akin Gump Strauss Hauer & Feld. The author would like to extend his thanks to Sudip Mullick and Amitabh Sharma of Khaitan & Co for their helpful comments on several points and to the long-time former head of Bechtel India, Dr Phiroze J Nagarvala, for his sage advice over the years and that pertaining to this article in particular.