TODAY’S STUDY: THE SUN RISING IN INDIA

Paving the Way for a Transformational Future; Lessons from Jawaharlal Nehru National Solar Mission Phase I

December 2013 (The Energy Sector Management Assistance Program)

Executive Summary

Renewable energy, especially solar power, has been garnering a lot of interest from governments, international development organizations, civil society, and the private sector for the last few years. There has been a huge surge in the popularity of this important energy source from various stakeholders in India as well.

In India, with rising levels of technology maturity, and cost competitiveness, solar power is attracting investments from the private sector. On the other hand, solar power presents a formidable option for addressing pertinent issues being faced in international geopolitical and national macro-economic arenas for the Government of India (GoI).

On the national front, firstly, solar power stands to partially address the issue of shortage of power for economic growth. There is an established positive correlation between energy requirement and Gross Domestic Product (GDP) growth. With energy shortages in excess of 10 percent and with more than 300 million people without access to energy, solar power can potentially address the shortage by both adding to the grid-connected electricity supply and providing a viable energy solution for off-grid areas. Secondly, closely related to the first point, solar power can foster energy security for India by reducing dependence on imported fuel. This will further help in reducing the current account deficit for the country. Grid-connected and off-grid solar power can partially replace the need for imported coal and diesel requirement to power the economy.

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On the international front, firstly, India has already demonstrated that it is an industrial low-cost destination worldwide. It has the potential to capture cost reduction leadership for solar power as well. Domestic manufacturing and scale of implementation in India can cause a drastic fall in costs to bring solar power costs to grid parity sooner than other parts of the world. Secondly, cleaner energy production through solar power also contributes to India’s international commitment in Copenhagen in 2009 to reduce the emissions per unit of its GDP by 20-25 percent by 2020 over 2005 levels. India is currently the world’s seventh largest emitter of global warming pollution and fifth largest for emissions from fossil fuel combustion.

Though the World Bank, India considers all market segments of solar power to be important; this report specifically looks at the utility-scale grid-connected segment of solar power in India.

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Achievements of JNNSM Phase I

As one of the eight missions under India’s National Action Plan for Climate Change (NAPCC), the Jawaharlal Nehru National Solar Mission (JNNSM) was launched in January 2010 with the aim of accelerating India’s march toward grid parity in solar power. JNNSM envisages the achievement of grid parity through long-term and predictable policy, large-scale deployment, aggressive Research and Development (R&D), and domestic production of critical materials, components, and products along the value chain. Considering that India is blessed with immense solar potential, JNNSM can serve as a crucial element of India’s response to the challenges of energy security and climate change.

Phase I (2010-13) of JNNSM, still under implementation, experienced enthusiastic participation from Indian and international investors in the grid-connected segment with substantial discounts to the benchmark tariffs determined by the Central Electricity Regulatory Commission (CERC) for 500 megawatt (MW) each of solar thermal and solar Photovoltaic (PV) projects. Power from these solar projects is being bundled with conventional power from the unallocated quota of power from coal-based stations of the National Thermal Power Corporation (NTPC) on equal capacity basis. The bundling of solar power with cheaper conventional power reduces the tariff impact of solar power on the distribution utilities.

Another unique feature of JNNSM Phase I has been the adoption of a reverse auction method for awarding projects to qualified bidders. The bidding process has been able to fully realize the benefits of declining module prices in the global market and declining demand in key economies, leading to surplus supply in the international market. JNNSM has been instrumental in bringing the purchase price of both PV and Concentrating Solar Power (CSP) to a level that is competitive across the world. The levelized tariffs discovered through the competitive process have been far lower than the CERC benchmark tariffs. The average levelized tariffs have also declined between the two batches in Phase I, from INR 12.12 per kilowatt hour (kWh) (US$0.20 per kWh) to INR 8.77 per kWh (US$0.15 per kWh). This has made India amongst the lowest cost destinations for grid-connected solar PV in the world. Figure E1 illustrates the solar PV and CSP tariff in India compared to other leading countries worldwide.

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In addition to the achievement of lower solar energy prices, the pace at which solar capacity additions have been accomplished also needs to be commended. In a span of three years, the total installed capacity of solar power has increased from around 30 MW to more than 2,000 MW with JNNSM contributing around 500 MW of that capacity.

The Government of India (GoI) took several proactive steps in Phase I of the mission, such as offering a bundling of solar power with unallocated coal-based power through the NTPC Vidyut Vyapar Nigam (NVVN), implementing a Renewable Purchase Obligation (RPO) for solar power, instituting a Payment Security Scheme (PSS), and undertaking certain measures for promoting local manufacturing, which all combined to ensure the success of Phase I. Starting with the state of Gujarat and buoyed by the success of Phase I, several other states have also instituted state-level policies for encouraging solar energy. Gujarat has been a forerunner in solar capacity addition with Asia’s largest solar park located in Charanka, constituting over 500 MW of multi-Amidst developments triggered by Phase I of JNNSM and the Gujarat Solar Policy, it is important to keep sight of JNNSM’s overall objectives, which—apart from targeting a capacity of 20 gigawatt (GW) by 2022—aims at positioning India as a major power in solar manufacturing and R&D. Against this backdrop, the World Bank, in consultation with the Ministry of New and Renewable Energy (MNRE), instituted a study to identify the key barriers and constraints that could come in the way of scaling up the grid-connected solar program to levels envisaged in the subsequent phases of JNNSM.

The study, which culminated in the submission of this report, is based on consultations with key stakeholders and aims to provide an analytical lever to GoI in evaluating certain key policy debates that have emerged at this juncture.

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Scaling up under JNNSM: Barriers and Challenges

Phase I of JNNSM, with a capacity target of 1 GW, was positioned to be a cautious beginning in India’s ambitious journey toward 20 GW of capacity addition by the end of Phase III of JNNSM by 2022. Viewed in this context, it is essential to identify and address the key challenges faced by the stakeholders, which could prevent the program from reaching and, possibly exceeding, the scaled-up targets over subsequent phases of JNNSM.

Amongst the issues identified as critical by most stakeholders, which require closer attention and resolution, are the following:

1. Lack of adequate participation of Scheduled Commercial Banks in solar financing

Scheduled Commercial Banks (SCBs) mostly shied away from financing projects under Phase I of JNNSM, with export credit agencies, multilateral financial institutions, and some nonbanking financial institutions accounting for the bulk of debt financing over Phase I of JNNSM, as well as for projects under the Gujarat Solar Policy. Financing of most solar projects also happened on the basis of limited to full recourse…

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2. Bottlenecks in the enabling environment

Developers and financiers outline several key bottlenecks in the enabling environment, which have persisted despite significant efforts from MNRE and State Nodal Agencies (SNAs). These relate to land acquisition and converting land use designations, delays in approvals and clearances at the state level, limited field-level data availability on solar irradiation, nonavailability of support infrastructure pertaining to water and power evacuation, limited coordination between the central and state institutions, and the absence of a clear mapping of responsibilities of institutions in the public domain.

3. Payment security for future projects

The Phase I policy provided a robust commercial framework with the bundling of 1,000 MW of solar power with 1,000 MW of unallocated coal-based generation capacity from NVVN, which acted as the counterparty to all contracts, and the institution of a PSS, backed by budgetary support from GoI, which assisted in guarding the interests of developers against defaults by distribution utilities. Bundling is no longer a major option…

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4. Unintended technology outcomes over Phase I

PV technology is broadly classified into Crystalline Silicon (c-Si) and Thin Film (TF). The latter, which emerged as a lower cost option in the era of rising polysilicon prices, has been steadily losing ground over the past few years as c-Si experienced a dramatic decline in prices. From a one-time high of about 30 percent market share, TF accounted for 11 percent of the global PV market at the end of 2011…Compared with this global scenario, Phase I of JNNSM saw TF accounting for close to 70 percent of PV installations…

5. Beleaguered local solar manufacturing environment

An important objective of JNNSM is to develop India into a major force in low-cost, high-quality solar manufacturing. In Phase I, to provide support to domestic manufacturers, GoI included a DCR for both c-Si and solar thermal-based projects. As is now apparent, this measure did not contribute significantly to the revival of the domestic solar PV manufacturing industry, which continues to operate at an average capacity utilization of less than 50 percent…

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6. Adequacy of the current approach to developing solar thermal projects

The framework for award of projects under Phase I of JNNSM, similar to that for solar PV, was a reverse auction, which awarded seven projects totaling 470 MW under Batch I. Solar thermal with less than 2.5 GW of installations globally is, however, far from commercially viable compared with solar PV with over 100 GW of installed capacity globally. Solar thermal projects require a range of preparatory activities…

7. Enforceability of RPOs and concerns around solar Renewable Energy Certificates

Although several State Electricity Regulatory Commissions have mandatory regulations specifying RPOs, they have so far been lenient in imposing penalties for noncompliance by distribution utilities. This threatens the very basis of JNNSM as well as other renewable energy programs in the country…The pricing of solar Renewable Energy Certificates (RECs) is another matter of concern…

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JNNSM Phase II and Beyond: Essential Policy and Design Choices

1. Efficacy of public funding: “buying down” tariffs vis-à-vis addressing structural impediments to financing

Adequately structured public funding is essential to move the solar industry forward, given the evolutionary nature of solar PV and CSP technologies, their higher cost, and the risk perception amongst private investors and financiers in this segment…

2. Promoting local manufacturing: DCR vis-à-vis comprehensive industrial policy actions

Recognizing the importance of solar manufacturing, the National Manufacturing Policy of 2011 (Department of Industrial Policy and Promotion (DIPP) 2011) identifies solar energy as among industries of strategic importance where national capabilities are envisaged to be developed to make the country a major force in the sector…

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3. Solar thermal: public private partnerships vis-à-vis private-led development

A probabilistic model of procurement followed for both solar thermal and solar PV projects is more suited for commercial technologies, where upfront costs are limited in establishing project feasibility, and knowledge and experience are well-established for developers and financiers…

4. Role of central government: facilitative coordination vis-à-vis central sector projects

The draft Phase II policy document of JNNSM presents a differentiated pathway for central and state sector projects, with most incentives and support mechanisms under the policy reserved only for central sector projects. Only about 3.6 GW of the 9 GW capacity to be added over Phase II is envisaged in the central sector…It is important, in this regard, to revisit the role of public support mechanisms under JNNSM…

5. Development through solar parks or cluster-based approach

Experiences from Phase I and the Gujarat State Solar Policy indicate the need for organized development of grid-connected projects. A deterministic approach to planning of shared infrastructure through the provision of solar parks is the way forward as it optimizes land, water and evacuation infrastructure, and paves the way for planning and developing transmission and grid management features in a coordinated manner…MNRE should consider making solar park-based development the baseline for large, grid-connected solar projects in Phase II of JNNSM…

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