Will solar replace coal as the lead power source in India in ten years?
Today, solar adds less than 1% to the Indian power mix. Coal, by contrast, contributes over 60%. Coal is the lead power source and setting the overall power price. However, as coal is getting more expensive with respect to solar, and since the potential for solar is almost without limits, solar can become the lead power source in the next ten years.
- The cost difference between a kWh of coal and solar has reduced from a factor of 7x in 2011 to only 1.8x in the summer of 2013.
- Solar is the only currently commercially available energy source that has the theoretical potential to replace coal and satisfy India’s long term power requirements
- But can an infirm power source like solar replace a firm one like coal as the backbone of the Indian energy mix?
India’s economy is heavily dependent on coal power. Most of the coal is mined in India, but the share of imports is increasing fast. In a recent report, the Pune think tank WISE estimates that coal production in India will peak in the early 2030s. While this may seem a far off point in time, it impacts investment decisions already today as coal plants have expected operational lives of 40 years and more. An increasing dependence on imported coal will further push the current account deficit to at least 13% by 2030, according to the report.
The cost of power from imported coal is pushing towards INR 4/kWh. This does not include the cost of externalities. (WISE estimates that including those and subtracting hidden subsidies would bring the cost of coal to almost INR 13/kWh for domestic and over INR 15/kWh for imported coal.) Solar from large, grid connected power plants is now offered at INR 7/kWh (wind is even cheaper at INR 3.5 to 5/kWh). In 2011, coal-fired Ultra Mega Power Plants (UMPP) signed PPAs with tariffs around INR 2.8/kWh and CERC estimated the cost of solar to be as high as INR 18/kWh. The differential has thus reduced hugely over the last three years, from INR 15.5/kWh to INR 3/kWh (for imported coal). This is a game-changing fact.
In addition to this shift on the cost side, there are persistent concerns about energy availability and security in India. The power deficit hovers around 10% (base load). Importing ever more fossil fuels to close this gap (under conditions of rapidly rising power demand) will increasingly put India at the mercy of volatile global markets and individual exporting nations. The grid is another concern: Although India is making progress in connecting villages to the distribution grid, the country is still hundreds of millions of people away from supplying reliable grid power to every household.
Solar power is the only currently commercially available source of power that could both provide enough power from within the country to meet India’s rising demand and in addition offer distributed solutions that are less dependent on grid extension. In addition, solar plants can be built relatively fast and at any size, while coal plants are often mired in all the challenges of large infrastructure projects in India, including bureaucracy, social and environmental concerns, as well as compliance, land acquisition and water usage issues. I do not think that land is a limiting factor for the spread of solar, as less than 1% of India’s land would suffice to power the country with solar plants.
As a result, solar could replace coal as the backbone of the Indian power supply. If, how and when this will happen, will depend on four main considerations:
- The long-term cost trajectory of solar power vs. coal. The cost of solar might fall to around INR 5/kWh in the next couple of years. In the longer term the cost will likely fall further, but this will depend on future innovations in materials used, new production technology and efficiency improvements. At the same time, the cost of coal might rise further or stabilize (shale gas in China and the US could play a key role). However, whereas the long-term cost for solar is driven continuously downwards by the industry itself, the cost for fossil fuels as limited, non-replenishing resources depends on much more fickle global, regional and local supply and demand dynamics.
- The cost of balancing and storage. Solar is a relatively infirm power source (although far more predictable than wind), which is not always available. As a result, a high share of solar in the energy mix will incur additional costs in balancing demand and supply. This is a complex topic and we are currently working with Prayas and IIT Mumbai on understanding it. Some key issues are: the quality of the grid, the availability of storage (e.g. pump hydro or the use of distributed storage opportunities such as irrigation pumps, inverters or- in the future, perhaps – electric vehicles), the availability of balancing power generation (especially gas-based), the development of smart grids and demand management systems, and perhaps the liberalization of power prices and the creation of a new grid code. On the other side, there could be large savings as the mining, port and railway infrastructure required for a massive scale-up of coal-fired power generation would not need to be built.
- If and how externatilites are measured. While solar has some negative externalities in terms of e.g. emissions in the manufacturing process, these are significantly lower than for coal. Coal externalities are global (greenhouse gas emissions) and local (soil degradation, water usage, pollution, etc.). The way coal is currently mined, transported and burned in India is highly harmful to the environment and the people. Indian politics might currently not place a high priority on these externalities vis-à-vis the more pressing concerns of generating enough power. However, a look at China’s development path suggests that this may soon change.
- If and how energy security is measured. Importing more and more fossil fuels will be a costly decision. The US, which for the last decades was highly dependent on imported oil, has spent large amounts on building and securing the supply routes. This included military and foreign policy decisions that often stood at odds with the country’s other interests and in turn created unpredictable follow-up costs (including wars). India’s geostrategic environment, the emergence of China and the fact that many reserves are already claimed or developed, will make it difficult to follow that path, even if the country wanted to. So India would likely depend on fossil fuels with only a very low degree of control over supply amounts, security and prices. This would incur its own set of ‘balancing’ costs in terms of high current account deficits, risks of political crises and stunted economic development.
What will this mean for long-term power prices in India? Currently power prices are driven upward by rising costs of fossil fuels, by inefficiencies in the transmission and distribution system and by past political decisions on power pricing. As a result, solar has come close to parity. It is likely that prices will continue to rise for a period of ten years or so, in a mid-term price ‘hump’. During this time, the power infrastructure would need to change from a centralized one to a more flexible central/decentral one. Post that, when solar becomes the lead power source, average power prices would likely fall. This process of transition should be politically actively managed to ensure that energy security is always guaranteed, that there are no infrastructure bottlenecks and that power prices do not become excessively volatile at any point in time.
Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.