GIM 2009 -
POSTED ON: 01 Dec 2009
RESEARCHERS: Eric Abrams, Ruth Densborn, Allison Koo, Justin Rose
India can’t go on like this.
With the country’s rapid economic development has come a massive increase in energy demand, posing extraordinary environmental and national security challenges. At present, India’s heavy reliance on coal condemns the country to pollution rates that grow at the torrid rate of the economy as a whole. Of equal concern, India is a net importer of coal and other fossil fuels – a situation projected to worsen with future economic and population growth. To ensure a healthy and secure future, India must find and exploit alternative domestic sources of energy.
For answers, many are looking to the sun: solar power. Despite solar’s promise, myriad obstacles remain, including finding financing and overcoming land use issues. But in a country where over 400 million people still lack adequate access to electricity, solar’s allure as a clean and potentially plentiful energy source is impossible to ignore.
This paper is a synopsis of research conducted as part of Kellogg’s Global Initiatives in Management program into the potential for solar power to make a meaningful contribution to India’s future energy mix. The research examined this question through three central hypotheses, ultimately concluding that solar power will play an important role in India’s energy future.
Hypothesis 1: India Can’t Meet Its Demand for Electricity
India obtains energy primarily from oil, coal, natural gas, hydro-electricity, and, most recently, nuclear sources. Given its low cost, coal has been dominant. However, despite having the world’s fourth largest reserves, India spends $6 billion annually to import coal. Worse, India already imports 68% of its oil and has limited proven reserves of fuel for nuclear reactors. Relying on fossil fuels to meet future energy demand surely consigns India to the role of net energy importer.
India’s energy demand, already the world’s fifth highest, is expected to double by 2030, driven by massive industrialization, income growth, and urbanization. India’s population is expected to swell to 1.6 billion in 40 years, with 5% annual economic growth projected for the next 25. Today, only 55% of Indian households have access to the power grid, with many areas lacking adequate power-distribution infrastructure; thus 27% of India’s population uses 87% of the total grid power. However, as the portion of the population living in urban areas rises – estimates project 45% growth in urban population by 2030 – the strain on the existing infrastructure will reach a breaking point.
Although the government recognizes this strain and plans to greatly expand generating capacity and connect rural areas to the grid, the historical precedent is not promising. Today, many parts of the country, including large cities, have only sporadic electricity; even in large cities such as New Delhi, small businesses can be observed operating by candlelight. Low infrastructure quality and theft exacerbate this challenge, as up to 53% of generated electricity is lost or stolen in transmission. State electricity boards lack the funding to invest on a scale that will meet the country’s current, let alone future, electricity demand.
Hypothesis 2: India Must Build Electricity Capacity Using Low-Carbon Technologies
The combustion of coal contributes to CO2 emissions and climate change. In 2004 India’s CO2 emissions were the 4th highest and fastest growing in the world at 4.9% of global emissions. India’s carbon intensity (carbon emissions per dollar of GDP) is surpassed only by China’s.
Of the three million pollution-related deaths that occur globally each year, it is estimated that India accounts for more than any other country. New Delhi’s level of airborne particulate matter is ten times India’s legal limit. Furthermore, scientific studies anticipate that India would be one of the hardest hit countries in the event of major climate change. While developed nations have the money, resources and infrastructure to cope with population resettlement, food supply disruption and changing weather patterns, developing nations, such as India, may not. Thus, it is in India’s interest to find energy solutions that are reliable and environmentally sustainable.
To date, India’s government has been soft on discouraging carbon emissions, as the country tries to strike a balance between economic growth and environmental stewardship. Recently, major initiatives – such as the National Solar Mission, calling for 20,000 MW of solar power by 2020 – have been announced. Reaching this goal would establish solar as a major power source for the country, eliminate over 15 million tons of CO2 emissions annually, and decrease India’s reliance on energy imports.
Hypothesis 3: Solar Energy Can Meet India’s Electricity Needs Cost-Effectively
India has about 300 sunny days a year, suggesting great solar power potential—6 billion GWh annually, or 1500 times India’s electricity demand. Solar energy already plays a key role in rural areas, through decentralized distribution of photovoltaic (PV) power for water pumping, streetlights, and home use. Major PV manufacturers include the BP-Tata JV and Moser Baer.
Distributed PV generation is particularly suited to rural areas, as it locates power sources close to end-users—often right on the user’s rooftop. Yet distributed PV generation is intermittent and often insufficient for energy-intensive tasks such as cooking. If India desires to increase the population’s living standard—including a wider use of modern tools such as home appliances and computers — distributed generation is an insufficient long-term solution.
Solar energy can also be centrally produced using centralized solar power (CSP) technology. CSP has the potential to be paired with thermal storage, which means that the energy produced can be cheaply stored for use later. Although CSP requires grid infrastructure to be built to distribute the power that is generated, an analysis of the total cost of CSP versus PV shows that 85% of India’s population could be most cost-effectively electrified with CSP.
But how feasible is using CSP to drive utility-scale electric power in India? A comparison of solar insolation with simulated Indian grid demand suggests that 85% of India’s total current electricity demand could be economically served through CSP, even when allowing for a 60% variability in hourly consumption. These findings are consistent with recent literature examining similar questions for the US and Australia, where up to 92% of grid load was found to be serviceable by CSP.
While CSP is significantly costlier than generation with traditional fossil fuels, it compares favorably with other renewable technologies. Moreover, deploying CSP on a larger scale would diminish associated costs. For example, specific segments of the CSP value chain are highly scalable, and leveraging low cost local labor would further lower expenditures. An economic analysis of cost reduction potential for CSP shows that the technology could become competitive with traditional fossil fuel generation by 2020, even without government subsidies.
Carbon pricing and emissions trading could further close the cost gap between CSP and traditional generation. Many carbon-trading systems, notably the EU’s Emissions Trading Scheme for Greenhouse Gases, issue permits specifying caps on emissions and penalties for exceeding these. It is anticipated that new climate agreements will expand the role of such markets, tightening caps and raising the price per ton of CO2 in the future. Major emissions trading players, such as the Chicago Climate Exchange (CCX) are considering India as a potential growth market. The CCX and domestic energy players, including Tata Power and Reliance Power, are currently discussing the possibility of developing a voluntary climate exchange in India.
Implementing CSP: Hurdles and Recommendations
There are three major hurdles to financing Indian CSP projects: (1) High cost of equity capital: Because it must be operated on a scale of 100+ MW to compete with traditional energy forms, CSP requires a much larger upfront investment than other renewable sources. The long period required to recoup such investment represents a risk, especially from sudden policy changes, which many are unwilling to take. (2) High cost of debt capital: A lack of understanding about how to price CSP project risk and a lack of appropriate term options for debt instruments hinder solar thermal players in India. A major contributor is the fact that Indian bond terms are a maximum of 15 years, while CSP projects recoup investment over a longer time horizon. Refinancing and Western financing channels can offset this problem. (3) Low leverage ratios: While conventional power plants enjoy 80/20 debt-to-equity ratios, lenders are unlikely to allow unproven CSP projects to go beyond 50/50, raising the cost of capital. Using long-term solar thermal plants in the US as a benchmark may counter this lender reluctance. For example, an early set of solar thermal installations known as the “SEGS” plants have operated in California for nearly 30 years.
Non-financing-based hurdles include the Indian government’s focus on developing lowest-cost power sources and its high degree of regulatory bureaucracy and fragmentation, along with the growing scarcity of land appropriate for CSP projects (often the same land suited to agriculture). An additional problem is the scarcity of data on the frequency and duration of sunlight in much of India.
Several steps may help overcome these hurdles. Government incentives could be restructured and extended to match CSP project time horizons and to raise the current 50 MW cap for total solar projects eligible for subsidies. Government bodies and NGOs could promote indigenous production by facilitating partnerships among Western technology providers and Indian firms, designating specific land for solar parks similar to special economic zones. Finally, companies focused on solar energy should seek a financing mix that includes both local and Western funds.
Whatever the route used, it’s clear that an emphasis on solar sources can brighten India’s energy future.