Roll Out the Sun, But Gently

Invest in solar energy at a slower pace for cheaper, better technologies
When I argued recently that excessive speed in installing solar power threatened to bust coalbased plants and banks that had financed them, critics said I had ignored the environmental issues. Let\’s all agree that coal-based power is a mass polluter and health hazard. Our long-term goal must be 100% replacement of all thermal power by solar and wind power.These sources are intermittent. So, thermal power is currently needed when there is no sun or wind (up to 80% of the time). But cheap electric storage is being invented, and one day will enable day-time surpluses to be stored and released after sunset.

Showing Mirror to the Sun

However, the key issue is not of solar versus thermal. It is of cheap future solar versus today\’s costly, ageing solar technology . Prices have fallen a lot, but could halve again. No other industry invests at breakneck speed when costs are about to plummet.

Innovations keep improving the cost and efficiency of converting the sun\’s energy into electricity . In lab conditions in the US, SunPower claimsa conversion efficiency of 23% against today\’s 16-18%. New technologies promise supercapacitors 30 times as efficient as current storage options. Smart grid innovations will soon solve solar power\’s current transmission problems. So, investing massi vely in today\’s technology at today\’s prices means locking into costly , obsolete systems.

Clean solar power merits a price premium over dirty thermal power. premium over dirty thermal power.Reasonable people can disagree on whether this premium makes solar energy (which, for fair comparison, should include storage costs of ` . 2-5 per unit) competitive today . Dubai and Chile, which have low interest rates, recently got auction prices of just . 1.6-1.7 per unit.` Interest costs account for almost all operational solar costs -other costs are negligible. But India has among the highest interest rates in emerging markets, making Indian solar power much costlier.

Solar plants are the most capital-intensive of all power plants, needing correspondingly more borrowing. As countries like India develop, interest rates tend to fall. Inflation depends much less on volatile food prices. If India\’s interest rates are going to fall, that\’s another reason to hasten slowly . Why lock into today\’s high rates?
The first solar plants came up at guaranteed power tariffs of ` . 8-15 per unit, against only ` . 2-4 per unit for coal-based plants. Nevertheless, this drive for solar power made sense, to create an ecosystem for making and installing panels, which could be scaled up massively later. Solar costs have fallen globally , and the latest Indian auction yielded a bid of ` . 2.71per unit.

But this was aided by subsidies like cheap land and accelerated depreciation. Solar power imposes substantial costs via additional transmission facilities. Huge costs are involved in keeping thermal plants idle when the sun shines.

Such costs can be absorbed by central government-owned plants that get paid for available capacity even when they don\’t generate power. But `availability-based\’ rates are not on offer for private sector plants selling at low, fixed rates or depressed open market rates.

The investment in such private sec tor plants runs into lakhs of crores of rupees. If rapid solar capacity expan sion forces them to idle their capacity, many can go bust, hitting the banks that financed them. They account for only a minority of thermal capacity .

But the problem also extends to some state-owned plants.


Where power plants are protected by availability clauses, a huge financial burden shifts to distribution compan ies (discoms). When such plants back down, the amount payable by disco msfalls by a sum equal to their reduc ed coal consumption cost (averaging . 2 per unit). If discoms buy solar po ` wer at `. 3.50 per unit and reduce pay ments to availability-based plants by . 2 per unit, they lose ` ` . 1.50 per unit, which adds up to huge sums when cro res of solar units are generated.

Solar rooftop installations threat en even greater losses. Discoms sell to retail consumers at ` . 4-10 per unit, depending on the state and user cate gory . So, rooftop panels will reduce discoms\’ revenue by ` . 4-10 per unit, of which only ` . 2 per unit will be offset by lower payments to availability-based plants, leaving a gargantuan net . 2-8 per unit.loss of ` In the medium run, this will be partly offset by reduced transmission investments. Rapid solar adoption means either crippling losses for discoms or much higher consumer tariffs.

Realpolitik means that bust state electricity boards (SEBs) won\’t abandon free and subsidised power for sundry vote banks. Some SEBs are already failing to lift their contractual minimum percentage of solar power. If ample new solar power is available soon at, say . 2 per unit, will SEB\’s ,` honour commitments to older solar plants at far higher prices?
Remember Enron. When it was forced to cut generation, its effective power rate became ` . 7 per unit. That was deemed so outrageously high compared to other sources that the Maharashtra government junked the contract. That can happen again to old, costly solar power.

We must invest in solar power. But why shoot up from just 12 GW today to 100 GW by 2022? A more measured pace will give time for thermal plants and banks to adjust, and leave space for cheap, future technologies. It will also reduce the risk of new Enrons.

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