Around 70% of India’s power comes from coal, less than 1% from solar. Will that change in the next 20 years? Can solar become the new backbone of the Indian electricity system? There is a good possibility that it will. Let’s look at some key drivers.
- India is just beginning to build the energy infrastructure it needs
- Solar is practically unlimited and cost trends are strongly in its favor
- As the energy market will become more flexible, investor preferences will shift away from coal and towards solar
Photo credit: Sierra Club
It is important to clarify that a transition from a coal backbone to a solar backbone requires no shutdown of existing coal plants. India will need to grow its power generation capacity manifold over the next 20 years. The question is: what new plants will be built? On a global level, investments into renewables already outpace investments into fossil-fuel plants. This trend will accelerate and in India it will give the shining solar knight the opportunity to topple “King Coal”. This is good news for India and great news for the global climate, which cannot be controlled unless this shift happens across all rapidly developing countries like India.
Since India has not yet built its future electricity system, it can more easily leapfrog towards a renewables-heavy, more distributed structure than countries with stable, functioning centralized power systems, such as Europe, the US or even China. That sounds like a good plan.
In reality, however, I think a key driver will be the inability of the government and government-backed or private infrastructure providers to build big infra. A look at the current, insufficient, leaky power grids suggest that this is not something India is cut out to do. Thus, a distributed system will emerge by default. This is how India’s vast, private power backup power market (mostly diesel gen-sets) has come into existence.
Of course, building a solar backbone will require infrastructure, too. Here, storage will play a key role. But storage will also more likely be distributed (e.g. batteries) than centralized (e.g. pump hydro plants). In all likelihood, India’s future power system will continue to be driven by the unsatisfied power needs of its citizens and businesses, not by the governments Five Year Plans.
In the process of privatization (think consumer solutions, not infrastructure) the power market will become increasingly more fluid and flexible. New, innovative players will enter, providing all kinds of customized solutions to customers. This process favors renewables and especially solar, because they are more flexible (faster to build, modular, smaller unit sizes, shorter lifecycle) than fossil power plants. In addition, there is a trend of households and businesses going for their own solar solutions – on site (on rooftops) as well as off site (e.g. in solar parks).
In the US, innovative industries, such as Apple or Google, already buy into large solar farms. They have at least three reasons to do so: firstly they want to lock in long-term power prices to re-risk their business. Solar and wind, which have negligible operating expenses, are ideally suited for that. Grid power prices, on the other hand, are expected to only go up. Secondly, grid buying solar can already be cheaper than buying grid power in many places (including in many Indian states). A third reason is going green. This is a smart business decision as the fossil fuel divestment movement gains pace and ever more investors and consumers look towards a company’s green credentials.
Underlying this shift from solar to coal is, of course, energy pricing. In the UAE a large solar plant has recently offered a tariff of less than USD 0.06 per kWh. In India, tariffs for large plants have come down to around USD 0.10 per kWh. This is already competitive with the cost of new, imported coal. The great thing about renewables as opposed to all fossil fuels is that the more we use, the cheaper they get. The cost of solar has come down enormously since the 1980s, and it has done so consistently every year. There is no reason to presume this trend will stop. Once the cost of storage (today adding around 30-80% on top of the cost of solar) will come down, too – which all industry observers expect – then solar will become a direct replacement for fossil-fuel power.
Today, the cost of coal and other fossil fuels is determined only by supply and demand. Environmental externalities are not accounted for. This might well change in the future. There might be an additional levy on coal, oil and gas usage that takes into consideration the air pollution these fuels cause (Indian cities have the most polluted air in the world) and the emissions and climate damage they cause (think of the debate over “unburnable carbon”).
This brings me to the last point. The future energy system that India needs to build will depend to a large extent in private investment. The government has made that clear on many occasions. From the point of view of investors, the energy landscape is changing rapidly. In the past, an investment into a coal-fired power plant was considered a fairly safe bet. It is a well-known technology, coal supply is ample in India (at least in theory) and there was no real competition.
A coal-fired plant has a lifetime of around 50 years. It was the perfect annuity investment, easily earned money. However, anyone looking 50 years into the future today will wonder whether that still holds true.
While the power market has been largely the same for the past 100 years, it will transform entirely in the next 10 years due to the growth of new, renewable energy technologies (especially solar) and due to the environmental and climate debates.
Irrespective of the returns a coal investment might promise, the risk side has changed fundamentally and for the worse. Solar, on the other hand, offers the investor speed and flexibility. It is the safe – and smart – bet. Once the majority of investors will be clear on that, solar will rapidly outgrow coal and become the backbone of India’s energy economy.