Rent management in the Indian solar market

Rent management in the Indian solar market

Dr. Tobias Engelmeier, Managing Director at BRIDGE TO INDIA, has co-authored a scientific paper on ‘Rent management and policy learning in green technology development: The case of solar energy in India‘ along with Dr. Tilmen Altenburg, Head of Department for ‘Competitiveness and Social Development’ at the German Development Institute, Bonn, Germany. The following blog is an excerpt from this paper.

Sir Nicholas Stern has called climate change “a result of the greatest market failure that the world has seen”, because it has potentially huge global effects for the whole world’s inhabitants. In order to keep global warming within tolerable limits, new mitigation technologies must be developed and many conventional greenhouse gas-emitting technological trajectories disrupted.

  • Investors need to be able to earn above-average returns in the new green industries to build up physical capacities, acquire capabilities and make these industries competitive
  • The challenge for policymakers is to manage rents so that they reach the targets with a minimum of political capture and waste of taxpayer and consumer money
  • Solar energy is a socially desirable source of energy, but remains considerably more expensive than energy from other sources for which it requires steadfast government support till it can achieve grid parity
The areas in which it is necessary to accelerate major technological breakthroughs are well
known: renewable energy and energy storage technologies, carbon capture and storage
technologies, new resource saving materials, new mobility concepts and more eco-efficient
agricultural technologies – to name just a few. In most cases, it could take years, or even
decades, until carbon-efficient technologies become competitive in the market place. To
accelerate their development, reliable long-term policy frameworks are required with
attractive subsidies and/or guarantees that reduce the risk and bridge early development
and commercial success. In economists’ terms, rents need to be created, that is, investors
need to be able to earn above-average returns in the new green industries for as long as
needed to build up physical capacities, acquire capabilities and make these industries
competitive.

 

Creating rents for supporting specific industries can, however, have two undesirable effects (Chang 2006). Policymakers tend to act on incomplete information that can lead them to make wrong choices and support technologies which never become commercially viable. Thus, the possibility of earning above-average returns in regulated markets creates a strong incentive for rent-seeking, that is, lobbyists will try to influence regulations in order to increase their rents or stretch them over longer periods of time than are necessary for developing the new industries (‘political capture’). Thus the challenge for policymakers is to manage rents so that they reach the targets with a minimum of political capture and waste of taxpayer and consumer money. Rent management is especially demanding when pressing environmental problems require that established technological trajectories be disrupted and new generations of technologies developed.

In such cases, policymakers must often design support schemes without knowing which technologies will become the commercially successful ‘dominant design’ (Anderson / Tushman 1990) – or the specific capital requirements, the speed with which economies of scale will reduce unit production costs, how long it will take until the new technologies reach cost parity with incumbent technologies, and to what extent the new activity will create knowledge spillovers in related activities. All this makes it very difficult to determine the necessary amount and duration of subsidies or protection. At the same time, uncertainty increases the scope for rent-seeking: industry lobbies have strong incentives to overstate the need for subsidies and protection. Governments must take the trial-and-error approach to testing various policy options and continuously adjust their support in view of the market’s changing realities.

The paper on ‘Rent management and policy learning in green technology development: The case of solar energy in India’ explores how the Government of India creates and allocates rents in its attempt to promote solar energy generation, how it tries to minimize political capture and how it tests and fine-tunes its policies. This case is particularly interesting for two reasons. First, energy from the sun is a socially desirable source of energy that deserves and requires long-term policy support: it is practically emissions-free, is more abundant than other renewable energies in many countries, and can be locally generated, which furthers development. At the same time, solar energy remains considerably more expensive than energy from other sources (conventional, as well as hydro or biomass) and therefore requires steadfast support until it achieves grid parity. The Government of India has recently adopted a ‘National Solar Mission’ that includes a range of new incentives, and some Indian state governments are also experimenting with support measures. India thus provides a unique ‘laboratory’ for learning about solar policy.

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