THE LIGHT AT THE END OF THE TUNNEL: A POLICY ANALYSIS OF INDIA’S SOLAR MARKET SPACE

The importance of electricity in the day-to-day functioning of society cannot be overstated. The Modi government announced in 2018 that “every single village of India now has access to electricity.” From 2010-2016, India has made electricity accessible to 30 million people each year. The World Bank ranked India 26^th in the 2017 “electricity accessibility” list, a position attained by jumping 73 spots. Despite this, electricity demand is on the rise.

Coal is the resource most widely used to generate electricity. However, the advent of global warming and climate change in recent years has thrown the environmental impact of fossil fuels into sharp relief. Resultantly, technology was developed to harness the energy in wind, tides and the sun to generate electricity, giving rise to renewable “non-conventional” sources of energy.

The government of India has presented a commitment to expanding the country’s renewable energy base. In accordance with the sustainable development goals set by the United Nations, India has set an ambitious target of increasing its renewable energy capacity to 227 GW by 2022 and 275 GW by 2027. The use of renewable sources has shown an upward trend in recent years, and to increase investment in this sector, national auctions for wind and solar photovoltaics have been conducted. Recent studies also show that India’s investment in solar energy in 2018 was greater than that in fossil fuel sources. Across the world as well, countries have seen a decline in the cost of solar and wind energy. 2016 saw the lowest tariff bids in this sector, with some nations like Chile attracting bids less than half those for fossil fuels

ENERGY POLICIES IN INDIA

Market competition is responsible for encouraging innovation, quality and competitive pricing among players and provides consumers with a variety of choices from which to select services and products. Governments across the world tend to encourage competition, and this is true for India as well. However, a study by The Energy and Resource Institute (TERI) found that India’s energy sector still has very little competition. This market is dominated by the public sector and ostensibly, this is caused by policy and regulatory issues, structural and institutional challenges, abuse of dominant position, etc.

Competition in India’s energy sector was introduced with the Electricity Act of 2003. This Act consolidated all existing laws on generation, transmission, distribution, trading and use of electricity and allowed private players to enter the market by “unbundling” State Electricity Boards (SEBs). The unbundling process divided the function of the SEB into three sectors, namely generation, transmission and distribution, with each state opting for a model of unbundling based on its own needs and requirements. Two central policies are of specific interest in this matter: the National Electricity Policy of 2005, which allows preferential tariffs for power produced from renewable energy sources, is one. This policy also extensively discusses the latent potential of non-conventional energy sources and examines the feasibility of increasing their share in the electricity mix. Further, the National Tariff Policy, 2016, inter alia, stipulates that no transmission charges will be levied on electricity generated from solar and wind sources.

THE SOLAR ENERGY SECTOR

Growth in the solar sector can be attributed to a variety of factors, which together tell the story of an effective public-private partnership (PPP). With licensing no longer a prerequisite for energy generation under the Electricity Act, about 45% of the power generation market in India is privately owned – a huge leap from 8% of 2008. Therefore, a PPP, which is a modernised framework that empowers private-sector investment and encourages competitiveness in the market, is the best choice for driving much-needed growth in the solar sector.

Together with other policy measures specific to the solar energy sector, the groundwork has been laid for it to grow exponentially. For instance, earlier this year the Ministry of New and Renewable Energy (MNRE) removed the tariff cap on renewable energy auctions. The government has also allowed foreign direct investments up to 100% under the automatic route. Further, RK Singh, the Union Minister of State for MNRE informed the Rajya Sabha in December 2019 about schemes such as Pradhan Mantri Kisan Urja Suraksha evam Uttham Mahabhiyan Yojana (PM-KUSUM) to enhance adoption of solar energy.

The recent elevation of tensions with China has led India on a path to boycott Chinese-made products and revitalised interest in the “Make in India” movement. It has also resulted in a certain amount of policy uncertainty. Late in June 2020, the government announced the imposition of basic customs duty (BCD) of 20% on solar power equipment from August 2020 to discourage imports from China. At present, 80-90% of the solar equipment utilized in the country is imported from China and these are 8-10% cheaper than those produced locally. However, bids made prior to June 2020 could not have accounted for this new duty and the resultant rise in capital expenditure. So, to combat this issue and provide relief to the developers of under-construction plants, Minister RK Singh stated that he would seek exemption for the projects that have been bid out till the date of imposition of the new duty. Furthermore, this policy decision has the potential to go either way – it may hamper growth in the solar sector in the short term but has the capability to drive innovation and competition in the local industries which will be better in the long term.

BARRIERS TO GROWTH  

While there is no doubt that India has made great strides in the adoption of solar energy, developers still face a number of challenges, such as unfavourable state policies, curtailment of power-purchase agreements, etc. The coronavirus pandemic has thrown up its own share of problems. There is a real risk of established companies monopolising the renewable energy market with their low bids at auctions and government support. Aside from these, there are three major issues which have crippled India’s energy sector – financial position of DISCOMs, grid transmission capacity and policy uncertainty.

Firstly, the financial health of DISCOMs is one of the most long-standing issues in India’s energy history, caused primarily by increasing average technical and commercial losses (AT&C). This situation adversely affects the market since DISCOMs are forced to seek low bids to stem their own losses, which ultimately affects competition. Low-cost bidders brought to the forefront of the race by “competitive bidding” also have the potential to generate power sub-optimally or fail to deliver on their promises, which opens its own Pandora’s box of issues. In 2015, the government had rolled out the UDAY scheme to help these debt-ridden entities. Though not a complete failure, it did not quite live up to its expectations either. A report by the Institute for Energy Economics and Financial Analysis (IEEFA) has found that policy risks and erratic payments by DISCOMs are the foremost cause for financial issues in the renewable energy market.

Secondly, a major requirement is the expansion of India’s grid capacity to keep up with the rapid growth observed in the generation sector, particularly in relation to renewable sources. It is imperative to improve this capacity in order to sustain the large – and still growing – energy demand of the country. To this end, the government is implementing the ambitious Green Energy Corridor Project, which also aims to synchronise electricity produced from renewable and non-renewable sources. Regulatory changes to develop a highly efficient “smart grid” would further this goal.

Finally, as discussed in the previous section, the last year has seen a number of shifts and changes in energy policy. The Ministry of Power has also recently proposed draft amendments to the Electricity Act and the National Tariff Policy, among others. The amendments in the Tariff Policy have received mixed reactions with some aspects, such as the new cross-subsidy surcharges mechanism being heavily criticised, while others such as the time limit on tariff adoption were welcomed. It is imperative that any and all changes are implemented in a timely manner since policy certainty is a driving force for investment.

CONCLUSION

India’s energy solar energy market has tremendous potential. Leveraging that potential in order to improve the country’s energy security is the need of the hour. Aside from policy concerns highlighted above, renewable energy development projects also require better centre-state coordination, which in turn would also help reduce delays and cost overruns. Revitalising the financial health of DISCOMs will also go a long way in ensuring the linear growth of the energy sector. It is essential for the Indian government to engage with companies to reach a common ground for risk. India’s immense solar potential must not be allowed to go to waste.

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ABOUT THE AUTHOR

Abhishree Manikantan is a fourth-year law student at Symbiosis Law School, Pune. 

In Content Picture Credit: BBC.com