How will solar energy be made to work in India? As I discussed in my previous article there are three key challenges. One, how will the country pay for solar energy in a situation where there is no money to pay for even the crashed costs of installation. Two, what is the best model for the distribution and use of this relatively expensive energy in a country where millions still live in the dark? Three, how should India combine the twin objectives of supply of clean energy and creation of domestic manufacturing capacities?

The government proposals for funding the differential costs of solar are twofold. One, under the National Solar Mission phase II draft guidelines the Ministry of New and Renewable Energy has proposed a viability gap funding for new projects. In other words, it wants to go back to the era of capital funding, which has been riddled with problems. For instance, wind energy suffered because the operator had no real incentive to generate power; it only eyed benefits of capital finance and depreciation. The plants’ performance was abysmally low; therefore, generation-based incentive was introduced. It paid the differential but only based on actual power generation. Reversing this will be disastrous in a sector where there is a huge gap in performance of systems. Capital funding will be used without consideration for efficiency and output.

The second option—open to states—is to fund solar through renewable purchase obligations or feed-in tariffs, where the power utility is required to buy a certain proportion of its energy from renewable sources. Andhra Pradesh and Chhattisgarh have recently announced ambitious solar policies built on this premise. Tamil Nadu has gone a step further in solar purchase obligations on big end consumers. But this looks good only on paper. The fact is all energy utilities are bleeding. They cannot pay the cost of energy they procure, let alone more expensive solar energy. Banks will not lend money to any solar entrepreneur if they are told that state utilities are guaranteeing the viability of the project through payments. It will just not work.

This is when costs of solar are definitely down and the costs of energy through other sources like coal or gas are definitely going up (see ‘Going off-grid to power solution’, Down To Earth, September 1-15, 2012). Today, it is estimated that the levelised cost of diesel-generated power is Rs 8-15 per unit. This will only go up as diesel gets de-regulated. The cost of solar is Rs 7-9 per unit. But the problem remains that the average pooled power purchase cost—the price utilities pay for power—remains Rs 3-5 per unit. The only option is to build a feed-in tariff mechanism, which will pay the differential costs, with guarantees of no default. The National Clean Energy Fund—built by collecting Rs 50 per tonne of coal or lignite mined or imported—can be used to pay this cost. Currently, the fund grows by Rs 3,500 crore per year but is not used for substantial benefits. Why not allocate a portion of the fund to doing what it is meant to do, that is generate clean energy?

But this is also related to the second question about who should benefit from solar energy. Should we continue to invest in large, grid-based solar projects, which feed the already fed? Or should we find innovative ways of upscaling decentralised solar energy—rooftop panels and mini-grids—to reach remote villages and institutional users? Currently, when we think of this option we tend to think small, literally. So we think of distributing individual solar lamps or panels that can light a few bulbs or power a fan. These are essential but do not match needs or aspirations. In other words, solar is considered only a transitional solution; it is for the poor, when they are poor. This is a limiting option and will not work.

The best option would be to build grid-interactive mini-power plants—also funded through a feed-in tariff paid through the National Clean Energy Fund. But these installations cost more, Rs 15-20 per unit of energy produced and in addition the purchasing power is low in remote villages. Therefore, the differential will have to be paid partly through generation-based incentive and partly through tariffs collected locally by the developer. But the key is to provide viable opportunity for investment in providing clean energy to the very poor. A similar model should be evolved for rooftop solar as well. Getting this right would be the real game changer.

The third big question is how to incentivise domestic manufacturing in an over-supplied global market. One option is to mandate domestic procurement. There is another option as well. Today, Indian solar developers buy US products, not because they are cheaper or better, but because they get loans at low interest on the condition of buying US products. Since the cost of capital determines their project viability they accept the condition. The Indian government should do the same—provide low-interest loans to companies and mandate domestic equipment procurement. Surely, this is not too high a price to pay for triple benefits: clean energy, growth of domestic manufacturing and most importantly, meeting the energy needs of all, not some.

Solar is clearly the answer. But only if we know what is the question.