Why “Swaminomics” is wrong – solar has passed the point of no return in India

06 July 2015 |

On Sunday, 5th June 2015, one of India’s leading economic journalists, Swaminathan Aiyar, in his weekly column “Swaminomics”, wrote that India should wait for five years before trying to implement big plans for solar (refer). He argues that solar is still a comparatively expensive energy generation technology and that because India is an evening peak country, increasing the share of solar would be a “double whammy”, by driving up indirect costs for thermal, peak power generating sources. As a result, he concludes, India should go all out on solar only after it is fully established that the cost breakthrough has been achieved and the technology is more mature. While there are interesting insights in the article, we disagree with his conclusions. Here is why.

  • Solar costs are not as high as Swami claims. In fact, upcoming NSM bids will show that it’s neck to neck with new thermal projects.
  • India is an evening peak country right now but as the economy develops the peak will move into the daytime (cooling).
  • Global investors already see the social and economic appeal of solar and are moving out from coal to the sector.

Let us look at the first part of his argument – that solar is still very expensive. Swami takes the recent signing of PPAs in Tamil Nadu to arrive at the benchmark cost of INR 7.01/kWh for solar power. However, this is not India’s benchmark solar price. Developers signing PPAs in Tamil Nadu take state-specific risks and costs, and expect higher returns. The real cost of utility scale solar can better be judged by the bidding in the upcoming central government allocations in the neighboring state of Andhra Pradesh. Here, the costs are expected to fall to about INR 5.50/kWh or even lower.

These costs should then be compared to the marginal cost of other sources of power, or simply put, the cost at which new conventional power plants are willing to sell power. Recent bids for new thermal power capacity in Andhra Pradesh saw tariffs at INR 4.27/kWh to INR 4.98/kWh (refer). In 2013, in Rajasthan and Tamil Nadu, thermal power prices where even higher at INR 5.41/kWh and INR 5.66/kWh (refer). Add to that the future price volatility of coal versus the locked-in cost of solar (for 20 years), and solar is already far more competitive than Swaminathan would have us believe. Going forward, the largely undisputed trajectory of solar costs is downwards.

The second argument put forward in Swaminomics is that India is still an evening peak country and despite a large capacity of solar, peak power generating stations will still need to be built and they might be required to run at lower utilization rates in the day time due to the availability of solar power. This, he writes, would lead to increased power costs in the country. This is a valid concern but this argument is true for almost all infrastructure sectors. Roads, airports, railways and shipyards are all to be built to handle the peak traffic and not the base (at least they should be!). In the power sector, there are two peaks to consider: The daily peak and the seasonal peak. Hydro power provides some of the lowest cost electricity, but generation peaks during and after the monsoon, while India’s demand peaks during the hot and dry summer months, when – incidentally – solar produces the most. As intermittent sources of power become cheaper and diversification for energy security becomes a necessity, like the rest of the world, India will need to leave the comfort of almost completely relying on steady power sources such as coal and nuclear and develop a “smart” (read: nimble) energy infrastructure. Moreover, India’s peak power requirement will also slowly move to the day time as we grow and develop and cooling will play an every more important role. In the meantime, measures such as dynamic pricing and time of the day tariffs can help.

Should India then wait before making the big solar plunge, as Swaminathan suggests? Let us look at it from an investment perspective. If solar costs will indeed continue to fall in the next five years anyway, making solar ever more competitive, who would want to invest into new coal based power plants with a life of 30 years? More and more investors are betting on a solar future for India and losing interest in coal and other conventional sources. The enormous SoftBank commitment of $20 bn over 10 years is just one of hundreds of new serious investment prospects in solar.

The main argument for investing later is that solar itself will be even cheaper later. However, India’s power demand needs to be met today already. Also, it is crucial that India learns how to integrate volatile solar power into the grid successfully (we are talking about just over 10% of the power mix by 2022). In the past, India had already missed the first bus on semiconductor manufacturing and we know the result of that. The country should be investing in the technology of the future and not into the technology of the past. Creating a domestic market will also encourage domestic manufacturing and we can already see that happening. We believe that solar has already passed the point of no return in India. The results from the upcoming bids will prove that.

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