India’s Dysfunctional Rooftop PV Subsidy

The article below appeared in the August 2014 edition of PV Magazine

IMG_9942
In the five years leading to 2012, India suffered a 9.3% supply­demand electricity gap. The 1.5 GW natural gas power station shown above sits idle outside of New Delhi because the supply of gas from the offshore field never materialized. 

The 30% capital subsidy for rooftop PV has not been disbursed for over 18 months. As long as the dysfunctional subsidy is not removed, customers with projects viable without subsidies will defer installation.

On June 12, 2014, the Times of India reported that the Ministry of New and Renewable Energy (MNRE) had a subsidy backlog of INR 32 billion ($536 million) of approved and pending applications for decentralized solar projects. The program provides a 30% capital subsidy for on­grid and off­grid solar PV systems smaller than 500 kW as well as a subsidy for off­grid solar thermal and solar cooking systems.

This subsidy exists only on paper. In practice, it has not been available for over 18 months. The program ran into trouble when the Indian government needed to cut spending to reduce its looming fiscal deficit. During the 2013 fiscal year, the Ministry of Finance allocated INR 15.2 billion ($250 million) to the MNRE for various renewable energy programs, but only disbursed INR 4.4 billion ($72 million).

In response to receiving only 20% of what was originally allocated, the MNRE decided not to close the subsidy program. Instead, it asked the Ministry of Finance and the National Clean Energy Fund (NCEF) for additional funds in order to continue the scheme as planned. Given the fiscal challenges, however, the funds to support the MNRE were not forthcoming.

A month before the Times of India article was released, the President of India reapproved the subsidy for decentralized solar power with an additional allocation of INR 4.7 billion ($790 million) to clear the subsidy backlog. However, given the uncertainty surrounding the actual disbursement of the funds, the announcement has not swayed those in the PV industry who call for a removal of the subsidy.

Crippling the rooftop PV market

At the Renergy 2014 International Conference in Chennai, Tamil Nadu, Pashu Gopalan, Managing Director of SunEdison Asia, described the effect of the dysfunctional subsidy to pv magazine.

“The capital subsidies are hindering the growth of the rooftop PV industry,” said Gopalan. “If they were removed, the industry would boom since, in several states, solar PV has reached parity at the customer level. Potential rooftop customers that have viable, subsidy­free projects don’t move forward because they think they can get a 30% subsidy.”

Jasmeet Khurana of Bridge To India echoed Gopalan’s sentiment in a recent blog post: “Customers are aware that a subsidy policy exists and expect low system prices which channel partners cannot offer. Many customers then prefer to wait for the subsidy to be available and defer going solar. This lure of subsidies even negatively affects projects that are viable without any subsidy. Clearly, a bad subsidy scheme is worse than no subsidy scheme.”

In a country that spends over 2% of its gross domestic product on subsidies and is struggling to reign in its fiscal deficit, the government should use its limited funds in areas where it is truly needed. Grid­connected rooftop PV is not one of those areas.

Subsidy­free rooftop PV

India’s combination of high electricity prices and endemic power cuts make it fertile ground for the growth of subsidy-free rooftop PV.

Removing the capital subsidy would not only encourage more customers to install solar PV today, it would also dramatically reduce the political risk for investors looking to cash in on rooftop PV’s potential.

The growth of rooftop PV will be driven by the increasing level of grid parity for commercial and industrial customers. Rooftop PV could supplement decentralized diesel generation and provide greater reliability for residential customers.

The price of electricity in India varies widely, not only across different customer segments but also across different states. The price of electricity ranges between INR 4 and INR 11 ($0.07 – $0.18) per kWh for commercial customers, from INR 4 to INR 8 ($0.07 – $0.13) per kWh for industrial customers, and between INR 3 and INR 6 ($0.05 – $0.10) per kWh for residential customers (India Solar Compass, April 2014). Agricultural customers pay an even lower price for electricity, which in some cases is virtually zero.

Commercial and industrial customers heavily subsidize the price of electricity for agricultural and residential customers through a cross­ subsidy mechanism. The cross­subsidy surcharge levied on commercial and industrial users ranges from INR 0.53 to INR 2.8 ($0.01 – $0.05) per kWh. The cross subsidy, like all subsidies, distorts the electricity market, making solar PV more attractive for commercial and industrial users and less attractive for residential and agricultural customers.

Commercial customers in the states of Maharashtra, Delhi, and Kerala have already reached grid parity without subsidies, according to analysis in Bridge To India’s April 2013 Solar Compass report. The report models the progression of grid parity assuming a 6% compounded annual growth rate in electricity prices, and a 5% annual decrease in the cost of solar PV. The model predicts that an additional ten states will achieve commercial grid parity without subsidies by 2016, resulting in solar PV reaching commercial grid parity in 33% of India’s 39 provinces.

The levelized cost of electricity (LCOE) of commercial solar PV ranges between INR 7 and INR 13 ($0.12 – $0.22) per kWh. The variation in the LCOE stems from the low solar irradiance in the northern mountainous states.

Bridge To India had an even brighter outlook for solar PV’s competitiveness. They predicted commercial grid parity would be achieved in 45% of Indian states by 2016, after which the market would experience accelerated growth (India Solar Compass, June 2014).

The case of industrial grid parity is slightly less compelling as industrial electricity prices are about 10 – 15% lower than commercial tariffs. However, if a market­driven industry is allowed to thrive, the growth in the commercial rooftop PV industry will drive cost reductions in the industrial segment. Bridge To India’s analysis shows that Delhi, Maharashtra, Odisha, and Gujarat are close to achieving industrial grid parity and they estimate that full industrial grid parity will be reached in nine states by 2016 (India Solar Compass, April 2013).

Even though grid parity has not been reached in all states, most states in India making solar PV nearly half the cost of diesel electricity in states like Maharashtra and Delhi (India Solar Compass, April 2013). Since the price of diesel is determined globally and is subject to extreme price volatility, solar photovoltaics can act as a hedge against the price of diesel.

The last growth opportunity for rooftop PV is the residential segment. Subsidized residential rates make solar PV uncompetitive for residential customers. However, since residential customers receive cheap electricity often at the cost of reliable supply, the main driver for the adoption of PV in the residential segment will be greater reliability.

In Tamil Nadu, for example, power cuts can last up to 16 hours per day for residential customers (India Solar Compass, April 2013). Solar PV can serve as a backup power source when the grid fails and also charge batteries for use after the sun sets.

High grid prices, expensive diesel generation, and persistent power cuts are already driving the adoption of rooftop PV, but the government can help accelerate the growth by reducing regulations.

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Decentralized PV can provide power without transmission line losses. Transmission losses average 20% across India but can be as high as 50% in some states.

A market-­driven industry

To accelerate the adoption of decentralized solar power, the government should remove the subsidy for grid­connected rooftop PV and focus on streamlining regulation. The current regulation for electricity producers is designed for large­scale centralized generators, which results in unnecessarily burdensome grid charges levied on small­scale decentralized PV systems.

The patchwork of regulations across Indian states also represents a barrier to the deployment of PV. The central government should coordinate the State Electricity Regulatory Commissions to adopt national regulations for decentralized PV and seek to provide exemptions from cross­subsidy, wheeling, and transmission charges levied on rooftop PV systems below a threshold such as 1 MW. The most significant and perhaps most difficult policy would be instituting a net metering scheme for grid­connected systems. Eight states are either drafting or have approved net metering policies. The success of these policies, however, would ultimately rely on the stability of the utility companies, because they pay for the exported PV electricity. In the fiscal year 2009, only nine of the state­owned utility companies had positive internal revenues. Most utilities are not in proper financial shape to handle the additional burden of a net metering policy (India Solar Compass, April 2013).

As with the MNRE subsidy, having a net metering policy on paper that is not backed up by utility companies in practice is worse than not having a net metering policy at all. In the long term, the strength of the rooftop PV industry depends on the financial stability of the entire electricity system. Electricity reform is a serious issue that requires enormous effort and political capital to address. Fortunately, the prime minister has previous experience in addressing this issue.

During his term as Chief Minister of Gujarat, Prime Minster Narendra Modi turned Gujarat’s state­owned utility from one of the weakest utilities into one of India’s strongest. He did this by reducing political influence, reducing cross­subsidies, and increasing rates.

Through this reform, Modi embodied one of his campaign slogans of “more governance and less government.” The Modi­led government should continue to follow this principle by eliminating the MNRE subsidy and by letting the free market play a decisive role in the electricity sector. Only with consistent policy and a solid market­based foundation can decentralized rooftop PV begin to provide the reliable and affordable power that Indians desperately need.

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