Lydia Powell and Akhilesh Sati, Observer Research Foundation
Large quantities of solar (and other renewable energy forms) energy is expected to flow into India’s power grid in the coming years. Many believe that this will be a cost-less transition to lower reliance on coal, lower emission of carbon and other local pollutants and most importantly lower electricity bills. Unfortunately the transition to a low carbon energy system is neither likely to be cost-less nor simple (in terms of policy or technology).
The economics of electricity is shaped by the laws of physics. Laws of electromagnetism that capture the physics behind the generation of electricity limit storage, transmission and flexibility. Since storage and flexibility (available in energy forms such as oil) are complex, electricity must be seen as a heterogeneous good along time and space. In plain language this means that one cannot say that ‘electricity is electricity’ in the same way we would say that ‘milk is milk’. Electricity generated at 5 pm in India is more valuable than electricity generated at 12 am. Electricity generated at a certain place and time has a different value from electricity generated at a different place and time. Electricity that can be switched off and on at will has greater value than electricity that cannot be switched on and off easily.
Different primary sources such as coal and solar produce different goods with different heterogeneity and marginal value. When large quantities of renewable power is being generated (such as when the sun is shining brightly) their marginal cost of generation is low because renewable energy sources have low or zero marginal costs (they don’t have to pay for fuel).
In reality solar and other forms of renewable energy have higher overall costs than conventional fuel sources that they replace. If solar power developers are reliant on market forces to recover all their costs they are very likely to lose money. The case of decentralised (off-grid) solar power generation projects operating in rural areas of India are a good example. Even in cases where the project receives capital funding in the form of a grant or aid, the tariff is said to be higher than that for diesel based generation with some quoting a tariff as high as Rs 20-30/kWh (five to ten times average tariff for grid based power). (These figures are mentioned only in whispers and off the record as solar energy has gained reverence not only as the slayer of dirty and evil fossil fuels but also as the dependable target for policy that can give an international clean makeover to domestic political leaders who may be anything but clean in other contexts).
Dharnai village in the district of Jehanabad in Bihar was declared to be energy independent in 2014 when a 100 kW micro-grid project set up by Green Peace started supplying electricity to over 2000 people in the village. Today the project is reported to be struggling to meet ends. Its sources of aid have been cut off (for reasons unrelated to solar economics) and the project is reported to be unable to recover all costs through tariff payments.
This story explains why less than 3% of solar projects operating in India are off-grid projects. Grid connected projects free ride on the system designed for conventional power that are designed to have sufficient capacity to meet highest (peak) demand and also be flexible enough to change output of generation in response to change in demand. Renewable power generators are essentially policy driven and policy supported (as opposed to market driven or supported by market prices). They receive income through capital subsidies, viability gap funding, feed-in-tariffs and other government hand-outs. The low tariff quoted in solar auctions in India reflect both the low cost of capital and the low and negligible marginal cost of producing solar energy. They are neither expected to be flexible enough to meet changing demand nor are they expected to maintain sufficient capacity to meet peak demand. This means that renewable energy generators do not have to price these attributes in their tariff calculations.
As policy privileged energy renewable energy is allowed to get on and off the grid as per their convenience irrespective of changes in demand at the retail end. As solar developers are not reliant on the market they ignore even the weak ‘market’ signals that say that there is unwanted capacity in the system. Effectively government support encourages production and supply of renewable power which are in conflict with the nascent market system that is emerging in India. With distribution utilities under severe financial strain, it is not clear how the underlying higher costs can be recovered. In many countries (particularly Germany) they are simply passed on to consumer bills which have been going up along with costs at a time when wholesale market prices have been going down (refer Chart 1). This has resulted in a gap between market prices and underlying costs and a gap between wholesale market prices and consumer prices. The overall outcome has been the nullification of market signals.
Source: Compiled from various sources: Eurostat for European electricity prices & India Stat for avg. India electricity prices for domestic sector 2013-14 & (INR/EUR = 70.49); BP for Renewables (Solar and Wind) Capacity & UN for population data (as of July 1, 2015).
One consequence of this is the deterioration of the financial position of utilities in the European Union. Conventional plants in Europe are facing multiple problems. The demand for electricity is low because of the economic slow-down; whole-sale price for electricity is low because of the growing share of government supported renewables; exit of high volumes consumers on account of the increase in tariff at the retail end. Many conventional plants even efficient clean new plants are reported to be closing because they are losing money; in most cases they are not covering their fixed costs and in many cases not even their operating costs. Some have mistakenly hailed this as the victory of solar energy over fossil fuels. But these plants provide key value to the system such as flexibility needed to cope with periods of low renewable output and the capacity to ensure security of supply at times of peak demand. Renewable energy generators (including household roof top solar generators) help themselves with these stand by facilities but not pay for it.
As a result many European governments have decided not to close these plants and are looking at options in introducing charges for maintain capacity to provide extra incomes in addition to energy (kWh) charges. If this is applied to India, the question arises as to who will pick up the additional costs? Unlike countries in the European Union it cannot be passed off to consumer bills for various reasons that we will not go into here. State governments in India are unlikely to voluntarily take on this responsibility. State governments that sign up to the Ujwal Discom Assurance Yojana (UDHAY) scheme launched by the central government to restructure state utility finances have to take over 75% of Discom debt as well as take on future losses. Most importantly they will lose access to advance short term debt from banks to finance losses. This means that any rational state government that signs up to the UDHAY scheme is unlikely to be interested in adding to the losses of the utilities by forcing obligations over renewable energy and add to costs. State governments that sign up to the UDHAY scheme are also offered the incentive of additional domestic coal which will further reduce interest in renewable energy. This complexity is neither understood nor acknowledged by policy makers and solar energy enthusiasts.
According to the government press release on the UDHAY scheme the accumulated losses of Indian distribution companies is estimated to be about Rs 3.8 lakh crore ($61 billion) and out-standing debt of about Rs 4.3 lakh crore ($69 billion) as of March 2015. The primary reason for such large accumulated losses is stated to be the growing gap between cost of service (of supplying electricity) and the revenue realised. State governments that sign up to the UDHAY scheme and the distribution companies (discoms) that they control must strive to decrease this gap through better technical and commercial efficiency.
P: Projection based on provisional reporting by States
Source: Ministry of Power, Coal and New & Renewable Energy
The press release observes that ‘financially stressed discoms are not able to supply adequate power at affordable rates which hampers quality of life and overall economic growth and development’. One cannot disagree with this observation but we must also ask ‘affordability for whom?’ If affordability refers to the poor rural household consumer then ‘affordable rates’ must mean low tariffs. If affordability refers to distribution companies (which are now being asked to demonstrate commercial viability in a market environment as per the UDHAY scheme) affordable rates means high tariffs. How this contradiction will be resolved is not clear.
The overall high cost of accommodating large volumes of solar energy on the grid must be recovered either through the tax payer or the rate payer. Unlike the German rate payer, the average Indian rate payer is unwilling to pay higher tariff for power even if it comes with the label ‘clean’. This is understood well by politicians if not policy makers. For example the budget for 2016-17 increased the cess on domestic coal from Rs 200/tonne to Rs 400/tonne supposedly to fund clean energy programmes. The day after the budget was released, the Minister in charge for Power had to issue a ‘clarification’ that the increase in cess on coal will not result in increase in tariff for power. How this will be achieved was left unexplained. Laws of economics would require that an increase in fuel costs translate into an increase in tariff. In theory, a dramatic improvement in commercial and technical efficiency in distribution of electricity can accommodate an increase in the cost of fuel (coal) without an increase in tariff. But in practice improvement in efficiency in the distribution segment have proved to be difficult if not impossible.
In Delhi where a private-public partnership arrangement is in place for distribution, a decrease in the gap between cost of supply of electricity and the revenue realised has been achieved primarily through an increase in tariff and not through an increase in efficiency. Delhi has little or no agricultural or industrial electricity consumption. Over 80% of consumers are households. This means that it is probably one of the least difficult Indian states for improvement in efficiency in the power sector. If efficiency initiatives are difficult to implement in Delhi it will be even more difficult to implement in the rest of India which have agricultural consumers and over 70 different tariff slabs on average.
Returning to the press release on the UDHAY scheme, there is a statement that ‘efforts towards 100% electrification, 24X7 power supply and clean power cannot be achieved without performing discoms’. This is a statement that we cannot contest but there are inherent contradictions in the three objectives listed. 100% electrification and clean power are to be met by state (central government) led interventions while 24X7 power supply is to be achieved by market oriented distribution companies owned by state (regional) governments. 100% electrification has been historically driven by publicly funded programmes under various names such as the minimum needs programme (early 1980s), Kutir Jyoti programme (late 1980s and early 1990s), Rajiv Gandhi Grameen Vidyutikaran Yojana (2000s) and the Deen Dayal Upadhyaya Gram Jyoti Yojana, (new name for the Rajiv Gandhi scheme given by the current government).
The primary mandate for these schemes has been to erect infrastructure for electricity access in rural India. Once basic infrastructure such as distribution transformer and distribution lines are provided in the inhabited locality as well as the dalit bastis (areas segregated for lower castes in a village), electricity is provided to public places like schools and health centres and at least 10% of households access electricity (for how long is not specified by the official definition of electrification), the village is declared as electrified and the central government role in providing electricity access literally ends. The responsibility of supplying power 24X7 trough this infrastructure now shifts to the regional government owned discom that is being asked to follow market signals under the UDHAY scheme. If the discom does follow market signals, it would prefer to cut off supply to rural households with low loads and little or no revenue potential.
The last objective of clean energy is a state (primarily central government) driven intervention. This is also an intervention that the distribution companies would rather ignore if they are to follow market signals as explained in Part I of this column. The cheapest way for discoms to meet constraints imposed on them by the UDHAY scheme is to provide no energy to poor rural households. Providing clean energy will make them worse off compared to providing ‘dirty’ energy. The press release on the UDHAY scheme says that ‘default on bank loans by the financially stressed discoms has the potential to seriously impact the banking sector and the economy at large’. Distribution companies that sign up to the UDHAY scheme will not have access to short term borrowing from banks. This means that the only way in which distribution schemes can meet the goal of reducing the gap between cost of supplying power and revenue realised is by resorting to the ‘power-outage’ model – that of supplying no energy because the more energy they supply the more money they are likely to lose. In the absence of deep structural changes that will increase efficiency and in turn reduce costs this is the only option discoms have. This is where solar energy ‘enthusiasts’ are likely to rush in and say that this is a great opportunity for decentralised mini-grids to power rural households. We would like to pose the question: ‘opportunity for whom’?
Installing solar panels in rural India, putting up a few bulbs and fans in a poor households and taking pictures of smiling families under solar panels is a great opportunity for those who are ideologically committed to solar energy to portray the victory of solar energy over rural poverty and dirty coal in India. But does it really have an impact on rural poverty and coal based grid power? Is it just a claim similar to that of the claim of ‘electrification’ in India which does not demand continues supply of power to all households? What long term economically viable opportunity does it open up for a rural household especially if its fate is most likely to be that of the decentralised solar project of Green Peace in Bihar (see part I of this column)? If providing energy is the goal (as opposed to limiting carbon emissions) would it not make more sense to use efficient diesel generators in mini-grids as it is done in most islands?
Solar panels are not among the aspirational dreams of rural households. To get out of poverty; to have wage incomes from salaried jobs (probably similar to the young people coming to rural areas from urban cities in India wearing fine clothes and holding tab computers – both manufactured from petrochemicals – to install and inspect their solar panels – made using fossil fuels and transported by petroleum fuels. These youngsters come to the village only because they know they can return to the coal fired comfort of their urban homes using the efficiency and speed of their petrol fired cars and this is what the rural poor want for their children) rather than derive sustenance incomes from self-employment in their tiny agricultural plots; to have air-conditioners, televisions and fridges that run at the flick of a switch are among their aspirational dreams. These dreams may not be to the taste of the affluent ‘other’ who are infatuated by the idea reversing climate change but aspirations are by definition only the strong desire to imitate or become the powerful ‘other’. As long as the powerful ‘other’ remains wedded to fossil fuel fired production and consumption, the poor are unlikely to conform to the aspirations of the affluent that the poor obey the laws of climate change policy that they conveniently ignore. We will leave this bit of digression at his point and return to the question posed by the title of the column.
Will the growing share of renewables make power utilities non-renewable? Though this is not an immediate problem for Indian utilities given the share of power from new renewable energy sources such as wind and solar are small, it may become a problem when the share grows or forced to grow.
Increasing penetration of renewable energy in Germany is flattening the intra-day price curve. This means that the gap between the peak and non-peak prices in a day is growing small (See Chart 3). The gap is reported to have fallen from 3 to 1 in the last decade. As pointed by a recent paper, the irony is that the energy sources with the highest overall costs (solar) is reducing overall prices of electricity.
Note: Euro to Rs conversion- by taking values at the end of each year from Xe.com
In India there is no ‘time of the day’ pricing and so this has flattening of the price curve is not yet materialised into a major problem but the fact that increasing share of renewables can reduce overall tariff and yet at the same time increase overall costs for distribution companies is an issue that Indian discoms under the UDHAY medication must take note of. The celebration of low prices quoted in solar auctions in India should send shivers down the spines of discoms under the UDHAY scheme. As the volume of renewable energy grows, the tension between policy driven renewable energy and market driven discoms could grow. This will mean that all that renewable energy will counter the impact of UDHAY and make Indian discoms non-renewable in the long run.
Views are those of the authors
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Courtesy: Energy News Monitor | Volume XII; Issue 39
Courtesy: Energy News Monitor | Volume XII; Issue 40