The government has unveiled an ambitious programme for solar energy development with the goal of 20,000 MW of solar power capacity by 2020. The plan aims at ensuring that by 2020 solar power is cost-competitive. How realistic is this?
At present the cost of electricity from solar photovoltaics averages to around Rs 15/kwh while coal-based electricity costs around Rs 4/kwh. This cost gap will narrow for two reasons. One is the reduction in solar power costs that is expected from around Rs 150/watt now to Rs 30/watt by 2020 for solar panels. The other reason for expecting the gap to narrow is the likely explosion in the costs of fossil fuels as supply constraints start to bite. This latter, energy security concern may well be sufficient to justify the programme.
The two energy-poor economic giants of the world, China and India, are growing rapidly and urbanising at a fast pace and that will add enormously to the global demand for coal, oil and gas. Take India, for instance. The integrated energy policy projects that India’s import dependence for oil will exceed 90 per cent by 2030. The demand for coal, if coal remains dominant, will rise to over a billion tonnes by 2030, 45 per cent of which will have to be imported. Even the domestic supply will involve more expensive coal as we move to deeper seams and more difficult areas and tighten environmental and safety standards. Much of the unexploited coal reserves are in protected forest areas and it may not be easy to extract these, given our ambitious forestry goals.
Add to these numbers China’s even larger demands — oil in excess of 15 million barrels a day (mbd) and a coal import demand of the order of 800 million tonnes — and a huge price rise looks inevitable. The scenario of large increases in coal, oil and gas prices becomes even more plausible if we allow for turmoil in the Gulf, from where the bulk of the additional oil will have to come, or green group pressures that restrain Australian coal supplies. The bottom line is that fossil fuel-based electricity will cost far more than Rs 4/kwh by 2020.
Our challenge is to build up an energy supply system that is ready to cope with the price and supply crunch for fossil fuels that is on the horizon.
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The crunch will create a huge market for non-fossil fuel energy technologies, not just in India and China, but globally. In some ways the prospects are similar to the boom in Japanese car exports around and after the big increase in oil prices towards the end of 1973. Japanese manufacturers had invested in developing fuel-efficient small cars at a time when oil prices were below $2 a barrel. The Japanese were motivated mainly by their high oil import dependence and the advantages of a small car in the Japanese-built environment. When the oil crisis hit, they were ready with a product which the world wanted. Japanese car exports boomed, doubling between 1973 and 1977, and continued to rise to a peak in 1986. The situation with solar technology could be similar.
If fossil fuel prices are driven up by Chinese and Indian demand and supply-side problems, they will affect everyone and give a competitive edge to whoever is ready with alternate energy technologies. Our challenge is to nurture an effective eco-system for innovation and investment in solar and other non-fossil fuel options for a decade or thereabouts so that when the price crunch comes, Indian industry is ready for the opportunities that will open up. One big difference between now and earlier attempts at promoting solar technology is the visible interest of private sector players. It is true that much of this is some limited value addition to imported technology and modules. But the work that is being done to develop viable business models for disseminating solar technology is not unimportant.
An eco-system for innovation has three key components: technology, entrepreneurship and finance. All three may require official support in the interregnum. Nurturing the eco-system for energy innovation will require public investment in research as the returns may be too long-term for the private sector. The areas which need special attention are well-known: lowering the costs of solar panels and films, developing viable solar thermal power, bringing down the costs of storage of energy so that the load factor can be improved, promoting the direct use of solar energy in low-intensity thermal applications, integrating these supply sources into the grid, etc.
But to position ourselves for the huge opportunities that could lie ahead we need more than just the proving of technology. We need commercial projects that by 2020 will supply 20,000 MW of solar power with profit. This will require policy measures like differential feed-in tariffs for solar and wind energy, an obligation on the power distributors to purchase some minimum quantity and similar measures that can compensate for what, hopefully, will be a shrinking cost disadvantage.
We need this because the real challenge of solar and some other alternate energy technologies like wind is not just the technological challenge of reducing unit costs but also the business challenge of integrating them into the established energy supply system. This is where some big changes may be possible.
The key lies in smart grids that use IT to precisely manage power demand down to the residential level, simplify the distribution of decentralised electricity generation and make the power grid a collaborative rather than a centrally controlled network. This could be a game changer with the same impact in reducing the role of the grid monopoly that mobile telephony did with the landline monopoly. We need regulatory reform, particularly in power grid management, that is as disruptive of yesterday’s systems as was the case with telecom deregulation.
The phrase “climate change” has not appeared so far in this column where the case for solar and, by implication, other non-fossil energy sources has been made largely on grounds of the likely evolution of costs and potential supply bottlenecks. But given escalating climate fears, these alternate energy sources will help countries and companies to live within carbon quotas and save on implicit or explicit carbon taxes.
Solar is the way to go and the future is sunny for those who recognise this.