The awkward case for expensive power

Is solar energy becoming a Veblen good for India?

Imagine a “Sale: 90 per cent off” sign in a shop, and no one turns up. There are goods for which a fall in price actually leads to a fall in demand, and there is a term for them — Veblen goods. Most of these would be luxury retail goods, where the higher price is part of the appeal of the product. Think Birkin bags.

When solar power was offered at Rs 15 per unit back in 2009-10, India was setting up new plants, and it continued to add capacity and increase targets, as prices declined. When solar power price dipped to a low of Rs 2.4 per unit in the last auction in May, one would have assumed that there would be a spurt in activity, now that solar was unequivocally cheaper than coal power. Instead, there seems to be a surprising rethink on solar capacity additions within the government. Is solar becoming a Veblen good for India?

Like all countries, India should want to move towards a market where power is competitively priced, reliable and clean. Except that perhaps it does not. The country’s chief economic advisor, Arvind Subramanian, made a rather bizarre statement recently, “Our provisional assessment is that for India, and for some time, the social costs of renewables are likely to exceed those of thermal.”

With the negative externalities associated with coal, this assessment is intriguing.

Subramanian’s explanation is: The “social cost of renewables should include the cost of stranding thermal power and coal assets”, as well as the cost of installing storage, among other things.

There is a lot to disagree over in this.

In that disagreement could be lost the momentum that solar power had gained in the country. Solar power capacity has crossed 13 gigawatts, but it is a long way away from the targeted 100 gigawatts by 2022. Wind is a little over halfway to the target, at almost 33 gigawatts. Projects are facing payment delays, output curtailment and renegotiation or cancellation of power purchase agreements — all red flags for prospective investors.

Corporate India, meanwhile, is trying to consume cleaner power while keeping its bills in check. One way to do that is to buy power directly from clean energy generators. Delhi Metro, for example, signed an agreement to buy power from the Madhya Pradesh government-promoted 750-megawatt Rewa solar project. The decision to levy an interstate transmission charge has shaved off 35 per cent of the savings of Rs 1,220 crore that the Delhi Metro was expecting from the solar procurement over a 25-year contract period, Business Standard reported last week.

In the World Bank’s Ease of Doing Business Report, India has significantly improved its rank under the “Getting Electricity” head. If the report was instead measuring “Getting Clean Electricity” — which is what it should also look at since global companies are under pressure to show how renewables-friendly they are — India would be demoted.

Companies that are committed to getting 100 per cent of their power from renewables would likely think twice about expanding in a country where securing green power is a challenge. There are 102 companies that have signed on with RE100, a group promoting this target on green electricity, and they include familiar names such as Apple, Facebook, Google, Infosys, Microsoft, Ikea, Adobe and Swiss Re.

The author is editor, Global Policy, for Bloomberg New Energy Finance; vgombar@bloomberg.net