This is part two of a blog series in which I propose a renewable energy agenda for the next Prime Minister of India. Part one outlined how the current energy strategy (or perhaps the lack of it) is damaging the economy (Click here to read part one). In this part, I outline the solutions.
- Reduce India’s dependence on imported energy by primarily focusing on solar energy – a widely available resource in India
- Slowly phase out fossil fuel subsidies while simultaneously increasing solar subsidies. As solar gets cheaper, the subsidy can altogether be eliminated
- Complete the incomplete deregulation of the power sector
India can change course. The technology, skills and finance are already available. Perhaps, the only significant thing lacking is the will to change. Every election presents an opportunity for change and therefore, I have three recommendations for the new Prime Minister.
1. Reduce India’s dependence on foreign energy
India must make a conscious decision to reduce its dependence on coal and diesel for generating electricity. India is rich in solar and wind resources and should aggressively pursue them in order to make bring them into the mainstream.
India has made a good start. It has been a pioneer in the wind sector. And the National Solar Mission (NSM), India’s flagship solar program has been quite successful with the quotas always being oversubscribed. Similarly, a host of states have announced solar policies and although many of them are caught up in delays, states like Gujarat have shown the way.
My recommendation to the next Prime Minister is to come out with National Wind, Biomass and Waste-Energy mission, on similar lines as the NSM. The NSM has shown that when policies are transparent, investors are willing to put their money behind these technologies. The NSM has also shown that governments play a very important role in bringing down costs of generation of renewable energy. Solar prices in India have more than halved from INR 17.91/kWh in 2010 to INR 6.48/kWh as of 2013. Wind energy in India is as low as INR 4.0/kWh. Already today, renewable power is cost competitive with coal based power during certain times and in certain segments of the electricity market. However, the pace of deployment remains far too slow. India must set itself more aggressive goals to increase renewable energy deployment.
2. Reallocate subsidies targeted towards fossil fuels to renewable energy
India spent a record 170 thousand crore (USD 26 billion) on fossil fuel subsidies for the year 2012-13. The largest contributor to the fossil fuel subsidy bill is diesel. Most diesel subsidies are targeted at farmers (tractors and water pump sets), but a report by the Petroleum Planning and Analysis Cell (PPAC) shows that most benefits of the subsidy goes to unintended recipients.
The report suggests that over 13.15% of diesel subsidies are consumed by high-end SUV cars (owned by the rich). Commercial vehicles utilize a further 8.94% and three-wheelers 6.39%. Industries and electricity generation (diesel generation sets) consumed 9% while mobile towers consumed 1.54%. This means that only about 13% of the diesel subsidy bill is reaching the farmers (the recipients who need the subsidy the most) and the transport sector, with the rest being siphoned off.
Source: Petroleum Planning and Analysis Cell (PPAC). http://bit.ly/1kWaSre
In comparison, renewable energy subsidies are negligible. The National Clean Energy Fund (NCEF) funds the National Solar Mission (NSM). The total budget allocated so far to the NCEF is INR 8,180 crore (USD 1.3 bn). Out of this INR 3,320 crore (USD 0.52 bn) has already been allocated to the MNRE. The MNRE (which is responsible for the NSM) has allocated INR 1,793 crore (USD 0.3 bn) towards Phase 1 of the NSM and INR 1,875 crore (USD 0.3 bn) for Phase 2. This means that the total NCEF subsidy budgeted between 2010 and 2013, is less that 5% of the total fossil fuel subsidy during one year (2012-2013). This must change.
Source: BRIDGE TO ANALYSIS based on publically available data
I therefore recommend the reduction of fossil fuel subsidies in the following manner: (1) Completely phase out diesel subsidies for all sectors except agriculture and transport of goods (especially agricultural produce). This can be done using the direct cash transfer mechanism. (2) Target LPG subsidies only for the poor. Cash transfer mechanism can help here, too. (3) Reduce kerosene use for lighting by subsidizing solar lanterns.
3. Completely deregulate the power sector
The deregulation of India’s power sector began in 2003, but has remained incomplete. Open Access (OA) ensures that private power producers can now sell power to consumers by using the state owned transmission and distribution network. However, unrealistically high OA charges often deter consumers from switching to private power producers. Moreover, OA charges are often tweaked to discourage competition. There is an urgent need for a fair methodology of determining the OA charges so that neither the DISCOM, nor the consumer nor an independent power producer is disadvantaged. Truly opening up open access will allow consumers to tie up with cheaper renewable energy producers (especially wind). This lowers energy costs, boosts productivity and improves the economy.
Second, politicians must not be allowed to tinker with power prices. The State Electricity Regulatory Commissions (SERC) must have the absolute authority to decide power prices. In the financial year 2012-13, DISCOMS across India suffered from aggregated losses of over INR 250,000 crore (USD 39 bn). Most Indian DISCOMs are simply not bankable. This is the single greatest hindrance to private sector investment into the power sector.
These three recommendations may be simple, but implementing them requires political audacity. The election will hopefully open the path for the much-needed reform of the sector and enable India to recover it’s lost economic and development momentum.
Akhilesh Magal is Senior Manager, Consulting at BRIDGE TO INDIA.