The Economic Survey’s bizarre logic – social cost of renewables is 3 times that for coal

21 August 2017 |

India’s Ministry of Finance has released a mid-year macro-economic assessment of the country in the form of second volume of the Economic Survey 2016-17. The Survey reflects work of various government departments and provides valuable guidance to future policy making. The chapter on climate change and energy reiterates recent Central Electricity Authority (CEA) projections – capacity addition for coal based power is expected to be around 50 GW between 2017 and 2022 and nil between 2022 to 2027. As for renewables, the Survey takes a curiously negative view and recommends that India should ‘calibrate’ investments in renewables.

– The Survey assesses social cost of renewable power to be around 3 times that of coal power at INR 11 per kWh;
– Underutilization of coal fired power stations causing losses for investors and lenders is classed as the most significant contributor to “social cost of renewables”;
– The Survey’s ambivalent messaging betrays lack of clarity between different parts of the government, which is a very worrying sign for the sector;

The Survey argues that various sources of energy should be prioritized based on an analysis of their holistic impact (“social cost”) on the economy. It defines social cost of a power source as an aggregate of actual cost of power generation, grid related costs, opportunity cost of land utilized, environmental and health costs from carbon emissions together with, remarkably, the opportunity cost of stranded conventional power assets. Environmental and health costs of coal usage in the sector are estimated on the basis of USD 2.9/ ton of carbon emissions (source: Revisiting the social cost of carbon – William D. Nordhaus) and USD 4.6 billion due to 115,000 pre-mature deaths every year (source: Scientific American). Not much explanation or numbers are available for other costs except that underutilization of coal fired power stations causing losses for investors and lenders is classed as the most significant contributor to “social cost of renewables”. Accordingly, the Survey concludes that social cost of renewable power is around 3 times that of coal power at INR 11 per kWh and recommends that India should ‘calibrate’ (read lower) investments in renewables to reduce this “social cost”.

We welcome the holistic approach to future planning but the Survey’s methodology is opaque, selective and debatable. It is difficult to comment on it without having full details but in our view, underutilization of coal-fired power stations is down to poor planning by various government agencies as well as shoddy investment decisions made by private developers and lenders. It is completely wrong to attribute these problems to renewables.

The survey also cites the large land area requirement for setting up of renewable power capacity as a key barrier to its adoption. This is an old argument that has been debunked several times. Solar projects typically use low-cost, non-productive land and an analysis by BRIDGE TO INDIA shows how India can install as much as 1,000 GW solar capacity in just half the desert district of Barmer, Rajasthan (equivalent to 3.5% of India’s waste land).

We agree that the renewable sector has enjoyed several government incentives including preferential access to the grid. These special benefits need to be phased out gradually to make the sector viable on a stand-alone basis as also stated recently by the draft National Energy Policy.

Overall, the Economic Survey sends a negative signal to the renewable sector. It betrays lack of clarity between different parts of the government. That is a worrying sign for the sector already dealing with problems such as contract cancellations/ renegotiations, GST and prospect of anti-dumping duties.

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