This January, Deepak Gupta, the Secretary for India’s Ministry of New and Renewable Energy (MNRE), reaffirmed plans to install 20 Gigawatts (GW) of solar power by 2022, calling it “perhaps the biggest target in the world”. This follows a number of statements made by Dr Kirit S. Parikh, the author of a government-commissioned report last year, recommending that the country “boost” solar power capacity. Despite the co-benefits of solar power and India’s relatively rich solar resource, there are critical questions which few people seem to be asking – what policies will India use to achieve these targets? And are they cost-effective?

India’s plans are ambitious. According to the Ministry of Power, around 65% of energy comes from fossil fuels, 22% from large-scale hydropower, 10% from ‘renewables’ and 3% from nuclear – in absolute terms, renewables contributing roughly 16 GW of the country’s 160 GW capacity. MNRE statistics indicate that 72% of the renewable energy supply is made up of wind power, 14% from small hydropower and 14% from biomass, with no information available on installed capacity of solar PV. The latest Renewables Global Status Report estimates that only a few megawatts were being generated in 2008 – essentially negligible. The target is also ambitious by international comparisons. At the end of 2009, the country with the most solar PV installations, Germany, had just under 10 GW installed.

The biggest barrier to rapid growth in renewable energy technologies, especially in the case of solar power, is the need for further cost reductions. According to the latest government and industry sources, solar thermal power in India costs between INR 13.70−18.80 (US$ 0.31−0.42) per kilowatt hour (kWh) and the cost of solar PV exceeded INR 20 (US$ 0.44) per kWh, as opposed to wind power’s INR 3.76−5.64 (US$ 0.08−0.13) per kWh and coal’s INR 1.70−2.60 (US$ 0.04−0.06) per kWh. In a 2009 statement, the MNRE recognised that there was a “requirement of preferential tariffs… [and] other fiscal or financial concessions” to make investments commercially attractive, among a number of other challenges, including the intermittency of supply, grid-synchronization limitations and relatively higher capital investment compared to conventional power projects.

Despite the scale of the challenge, it is easy to understand why the government is so keen to place its bets on solar technology. Nearly 30% of the population has no access to power, and electrification is a fundamental step in eradicating poverty and generally improving living standards. Bridging the gap will require a substantial expansion of capacity, predicted to grow four-fold to 640 GW by 2030.

Although coal would be the cheapest solution, it also gives rise to energy security concerns. India already imports 65% of its petroleum and coal, and the government estimates that domestic coal supplies may be exhausted in as little as 40 years. In addition, the government wants to ensure as small a rise as possible in CO2 emissions per capita. All renewable energy technologies are considered promising (with much hope also being placed on nuclear power), but India’s high average insolation makes solar power the leading contender among the renewables.

The policy tools that have been chosen to bring about this shift have, however, by and large focused subsidy mechanisms. Major interventions include:

• Quota obligations: In 2009, the National Tariff Policy mandated that each State Electricity Regulatory Commission (SERC) had to specify a renewable energy purchase obligation (known as an RPO), requiring distribution companies to source up to 10% of their power from renewable sources. In the same year, the chairman of the Central Electricity Regulatory Commission (CERC) stated that all SERCs would have to set RPOs at a minimum of 5%, and increase this by 1% for the subsequent 10 years. Plans exist to modify RPOs such that they mandate a specific solar power obligation too. In late 2010, a system was created to allow relatively resource-poor states to meet their targets by buying Renewable Energy Certificates (RECs) from their better endowed neighbours.
   
• Feed-in tariffs: In September 2009, the CERC also published guidelines on which projects it would give feed-in tariffs and how these tariffs would be determined. The system takes into account specific capital, operations and maintenance costs for various technologies, as well as their “useful lives”, with payment periods of 13 years for most renewables, but 25 years for solar PV and thermal and 35 years for small hydro. Payments for solar energy in 2009-2010 were set at INR 18.44 (US$ 0.41) per kWh for solar PV and INR 13.45 (US$ 0.30) per kWh for solar thermal, although solar developers can also approach the CERC for a project-specific tariff.  In addition to this policy, the IEA reports that a 2008 solar-specific feed-in tariff is still in force, offering rates of INR 12 (US$ 0.26) per kWh for 10 years, capped at a maximum of 10 MW per state and 5 MW per developer. A number of states also run their own, alternative feed-in tariff schemes.
   
• Research and development: The Jawaharlal National Solar Mission – created in 2010 with an aim of reducing solar energy costs such that they are equal to average grid prices by 2022, and coal-based prices by 2030 – plans to create 2−3 large domestic manufacturing parks, to be treated similarly to special export zones, with zero import duties, low-interest loans and a “special incentive package” to promote domestic manufacturers. The government also permits Indian partners to enter into a financial or technical collaboration with foreign investors, automatically approving proposals with up to 100% in foreign equity participation.

A range of other incentives also exist, including tax holidays, accelerated depreciation, nil or concessional excise and customs duties, ‘soft refinance facilities’ for the banking community and capital subsidies for the electrification of remote villages, as well as mentoring, networking and financial support for SMEs, and some non-subsidy mechanisms, such as creating one-stop application planning processes for renewable energy and removing artificial barriers to their grid connection.

In politics and the press, opinion on the issue seems to be largely in favour of the significant financial support. Unsurprisingly, industry figures are among the most outspoken. Speaking about India’s policies to Subsidy Watch, Sourabh Sen, co-Chairman of Astonfield Renewable Resources said that the National Solar Mission “provides the foundation for growth in renewables… [the] short-term targets, budget allocations and favorable feed-in tariffs to ensure this goal is met.”

K. Prabhakar, managing partner of Orion Energy Systems, concurred, saying “The feed-in-tariff provision in India is better than providing a capital subsidy to the power plant.” A 20-year veteran of the solar industry, he also emphasized the need for a nuanced perspective, arguing that while subsidies were “…the right direction in the long term, especially if transmission and distribution losses bordering on 40% can be minimized,” that they should also “be put to good use”. With the right bidding methods, he maintained, winning projects can be close to cost-competitive at market lending rates.

Despite industry endorsement for the government’s approach to the promotion of solar technology, the apparent lack of critical debate about the cost-effectiveness of subsidies is a surprise and concern, especially considering the large amounts of money involved. A number of questions could and should be asked: on what basis does the Solar Mission believe it can reach grid parity by 2022? Should India put more funds into research and development and wait for prices to fall before it promotes deployment? In the light of recent WTO challenges to China, does India risk challenge under international trade agreements?  Over and above policy design, there is also the political fall-out of subsidies to consider – the creation of powerful lobby groups, whose economic importance gives them increasing influence over government policy.

Harish Hande, Managing Director and co-founder of SELCO-India, a business that provides sustainable energy solutions to ‘under-served’ households and businesses, is one of the few people who spoke out critically to Subsidy Watch about the subsidization. He argued that the policies “…[have] been drafted in a way that does not meet the needs of the poor. … It does not make sense to apply what succeeded in Germany to India. Feed-in tariffs worked in Germany because homes were suburban… Policymakers in New Delhi are too insulated and did not tap into the expertise of practitioners to come up with a viable subsidy policy. They do not understand the missing links in the industry.” Critical of the National Solar Mission in particular, he contended that its emphasis on grid power is likely to be expensive and inefficient, and would probably not meet the needs of the poor. He also claimed that the land requirements of large-scale solar power plants are socially unsustainable.

In the meantime, with no larger public debate, and no convincing analysis of the cost-effectiveness of subsidies for solar PV and other renewables, the current trajectory seems set to continue,: a comprehensive policy on renewable energy has been firmed up, which aims to raise renewable capacity to 100 GW by 2050.