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Akhil Gupta: Let the Sun Free India from a CAD Crisis

Investment in solar power can lead to a significant improvement in the balance of payments by reducing energy imports as well as, eventually, driving down power tariffs for end-users

Published: Aug 21, 2013 06:18:16 AM IST
Updated: Aug 16, 2013 12:31:03 PM IST
Akhil Gupta: Let the Sun Free India from a CAD Crisis
Image: Getty Images

Akhil Gupta
Akhil Gupta is Senior Managing Director at The Blackstone Group and Chairman of Blackstone India. He previously served as CEO-Corporate Development for Reliance Industries (RIL), focusing on developing RIL’s oil & gas, refining, and telecom businesses. He began his career at Hindustan Lever.

The biggest freedom a country can wish for is freedom from external overdependence. With our humongous current account deficit (CAD), which forces us to depend on volatile capital flows to finance our import bills, the rupee has taken a beating, falling 14 percent in a matter of weeks. But a bad CAD affects more than just the value of the rupee; it imports inflation, weakens government finances by raising subsidies, deters foreign investment and prevents the Reserve Bank from lowering interest rates. Basically, a high CAD sucks the economy into a vicious cycle of high inflation and low growth.

The biggest culprit here is energy imports. Consequently, a solution that kills many birds with one stone is for the government to go big on solar power in partnership with the private sector. The government’s role should be to:

  • (a) Act as credit enhancer to tie up facilities from multilateral agencies, the US, Japan and China for the import of solar panels worth, say, $50 billion over the next five years. This will enable the creation of 50 GW of solar power capacity.
  • (b) Assure solar developers that anyone who signs a valid power purchase agreement (PPA) with any state electricity board (SEB) will quickly receive a low-interest rupee loan for 70 percent of the total project cost at the same rate in rupee as the dollar interest rate at which government has borrowed.  
  • (c) Guarantee SEB payments on the solar PPAs against any state defaults and adjust such amounts against disbursements to states. The Central government’s risk will be diversified against 25 states.
  • (d) Encourage insurers like LIC to provide takeout financing for fully commissioned projects—this enables recycling of equity to be deployed for the next project, and a steady yield stream for insurers.
  • (e) Offer a Re 1/KWH subsidy to SEBs if they pay the solar generators on time. This can be funded by a renewable energy fund already built through a cess on coal production. This subsidy can also eventually be recouped from carbon credits.

All the actions suggested will enable developers to offer solar power to SEBs at a net rate of Rs 5/KWH. This reduction in tariff will ensure faster adoption by states as this form of power becomes immediately competitive with thermal power. In fact, solar, at Rs 8/KWH, is competitive even now as it displaces peak power, with diesel power costing Rs 14/KWH on the margin. The latest long-term PPA bids from thermal power plants were north of Rs 5/KWH. Solar power costs will continue to decrease as panels become cheaper and their conversion efficiency increases; thermal power costs, meanwhile, will continue to rise with inflation. The economics, therefore, are heavily in favour of solar power.

The private sector’s role here will be to: Develop solar projects more expeditiously and cost-effectively, using the latest technology and construction practices; enter into long-term PPAs with SEBs; invest equity (around $20 billion), acquire land and undertake execution risks once they are sure of getting debt financing of 70 percent.

Akhil Gupta: Let the Sun Free India from a CAD Crisis
The benefits of this solar initiative will be enormous. It will mitigate India’s CAD issue, resulting in net savings of $500 billion or more in foreign exchange over 25 years. It will help India manage the power crisis sure to loom large in three to four years given that the development of thermal power has slowed down enormously. A solar plant can be built in six to nine months against four to five years for thermal. It will lead to greater energy independence and reduce our carbon footprint.
At the conceptual level, this solution works because the government borrows at 4 percent dollar cost to facilitate solar power development, while the returns in dollar terms are 17-18 percent per year. The government will shoulder the risk but it won’t cost anything in real terms.

Consider the central issue now. To continue growing at 7 percent, India needs a 60 percent jump in power capacity by 2018 from the present 1,78,000 MW. Any deficit needs to be met with diesel gensets, where the marginal cost of power is Rs 14/KWH, without taking into account subsidies and the cost of importing fuel.

Akhil Gupta: Let the Sun Free India from a CAD Crisis
Image: Getty Images
The Godawari solar-thermal power plant near Nokh, Rajasthan, is Asia’s biggest. A focus on solar energy can lead to greater energy independence

The time is ripe for solar power since the prices of equipment (solar panels) have reduced by over 50 percent in the last three years, driving down the cost of solar generation to as low as Rs 8/KWH. India is in a unique position to capitalise on these falling costs. First, most parts of India have very high solar irradiance, with the majority of cities receiving insolation of 2,000–2,500 KWH/sqm/year compared to 1,000–1,500 KWH/sqm/year in European cities. Thus, a 1 MW solar plant generates 72 percent higher energy—1.75 million KWH/year in India versus 1.02 million KWH/year in Germany.

Second, the profile of generation also matches peak demand for electricity—that is, during daytime hours and in summer (as our power requirement is for cooling). Last, setting up solar plants near areas of demand can also help balance the grid, since there are no constraints on the source of fuel. To illustrate, if solar photovoltaic (PV) plants were set up on only 2 percent of the landmass of Rajasthan and Gujarat, they would generate enough power to meet the current energy needs of the entire country!

Going solar is also one of the few plausible ways to bridge a power deficit in a quick way given the shorter gestation periods for solar plants. Further, they can use small/irregular-sized land plots. In fact, various countries have experimented with concepts such as greenhouse-cum-solar plants, which may help produce power as well as boost agricultural productivity.

Finally, let’s look at the economics of solar power from the country’s perspective. Even at Rs 8/unit, the cost of generation from solar PV plants is more than 40 percent lower than diesel gensets and is already at retail parity for industrial/commercial customers in some states. Plus, if solar power were to displace only 50 percent of diesel used for power generation, it would assist in the reduction of oil imports by $3 billion annually. As the grid connectivity improves, the displacement of diesel by solar generation will reach up to 70 percent. Over the life of a plant, assuming flat diesel prices for the next 25 years, an investment of $1 billion in solar power reduces the import bill by $9 billion.

Akhil Gupta: Let the Sun Free India from a CAD Crisis

Despite all these obvious benefits, the development of such solar power capacity is far below potential. Reason: The unavailability of financing, with banks reluctant to lend to solar plants, being unwilling to underwrite the credit risk of the SEBs. This is why, to give a boost to the sector, the government should develop the public-private participation (PPP) model described earlier. It can also enhance its creditworthiness by making it a priority sector for lending by banks. Given these loans will be backed by hard assets and fixed PPA tariffs for the next 25 years, the only key risk is the SEB’s credit risk. If the government can eliminate that, the creditworthiness of the sector will improve and should increase the availability of loans and reduce the cost of borrowing for developers.

Now consider the impact of solar power on the country’s CAD. Cumulatively, over the life of the plant, a $10 billion debt investment results in a net improvement of the balance of payments to the tune of $110 billion, with the import cost of panels and debt service being offset by huge savings in oil imports. Not a bad return on the government’s investment.

If the government follows the PPP mode, it will attract FDI in the sector. If it passes on the benefit of low interest rates to developers, the solar tariff can fall further (a reduction of debt rates from 12 percent to 4 percent should drive the tariff down from Rs 8 to Rs 6).

The solar solution allows the government to reduce energy imports and improve CAD, mitigate endemic power shortages and boost GDP growth while taking advantage of globally depressed equipment prices and low interest rates. All this, in turn, will drive power tariffs down further, a win-win-win for the government-developer-consumer. The only question left to ask is whether India will grab its moment in the sun.

(This story appears in the 23 August, 2013 issue of Forbes India. To visit our Archives, click here.)

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  • Dr.a.jagadeesh

    Excellent article. Yes. Renewables will change the economy of our country. Dr.A.Jagadeesh Nellore(AP),India

    on Feb 24, 2014
  • Siddharth Garg

    Actually Piyush, the electricity demand growth comes from economic growth. Though you are right about controlling abuse, one must understand that our appetite for consumption cannot go negative. And consumption of anything drives consumption of power. Now imagine the scenario where power is FREE and relook at the problem. Suddenly a lot of things iron out. However I am of the opinion that demand will come more not from individual households but from captive solar use from Commercial and Industrial consumers of power who must value it the most and who stand to loose the most from hikes or even fluctuations in power price. This is also because they bear the brunt of the subsidies available to household consumers. But plainly speaking just look at solar energy. It makes total business, economic and logical sense. Even when viewed from a long term business planning and business budgeting perspective an inflation proof solution that lowers and standardizes cost is a god sent. I wish to refer you to a beautiful article that explains in more details www.sunipod.com/blog/solar-pv-solution-to-growing-electricity-demand

    on Feb 20, 2014
  • Piyush

    Why must electricity demand keep growing year over year? Where is the 7 % growth goal coming from? Instead of talking about reducing consumption and stopping population growth, there is always talk about more and more growth. People even say \"sustainable growth\" these days but this phrase is an oxymoron. It is an obvious truth that nothing can keep growing on a finite planet and growth is causing many problems also that are not well accounted. Please see the video lecture called \"arithmetic, population and energy\" on you tube. Also, solar is not yet sustainable, the cost of solar panels has been brought down by China by liquidating its environment by burning huge amounts of coal, besides there is a very complex supply chain powered by fossil fuels behind this. It would be much wiser to reduce energy demand first and then build using renewables to the lower energy demand and also bring population to sustainable levels, else the problem will never get solved. We need to end the religion of endless economic growth on a finite planet, it is totally unscientific.

    on Dec 3, 2013
    • Forbes India

      Hi Piyush, There is a response to your earlier comment on this article by Siddharth. Do check his comment please on the article page.

      on Feb 21, 2014
  • Vijay G. Kamat

    I have simple ideas to begin with. Solar (CSP and PV), Wind, Geo-Thermal, Bio-gas, Biomass, Bio-fuel, ethanol, OTEC, Microbial Hydrogen, etc, etc everything is good. The government, utilities, power generators and consumers think of abundance of energy. They produce energy supported by subsidy on capital equipment, fuel subsidy, etc First try to close the transmission, secondly try to bring usage efficiency, third have appliances and equipments which consumer less energy, fourth make aware the actual cost of providing energy to all category of consumers, fifth phase out the subsidy while making investment in renewable energy. Ask people to use bicycle on monday, walk on tuesday, share vehicle on wednesday, take a bus on thursday, take their own vehicle on friday.

    on Nov 22, 2013
    • Arun Jain

      I beg to differ with Akhil that solar PV plants are a perfect solution in the sense that the solution is prohibitively expensive. ($20million/MW). In my opinion part solution lies in reducing electricity consumption by way of demand contraction. In a country which buys 1000 million pcs of incandescent and CFL bulbs and tubes per year it makes sense to adopt LED lamps when 18-20% demand for electricity is for lighting. 5W LED bulbs are =40 W ILS.

      on Nov 22, 2013
      • Arun Jain

        Using disruptive techniques it is now fundamentally , technically and economically viable to produce

        on Nov 22, 2013
  • Dr Mahesh Kumar

    India needs to spent at least 1% of its monthly oil import amount towards solar power generation and this will effectively start reducing oil import bill from 24th month onward. Govt of India must direct major oil / petroleum importing companies to sponsor various solar power projects by providing easy finance to various solar power generation companies, which should be collected back from the proceed obtained by selling electricity generated from these plants. If this scheme implemented honestly and regularly for 10 years, than India will reduce its oil dependence as well as reduce CAD too significantly.

    on Sep 19, 2013
  • Vijay Chakrawar

    Yes, these are the out of box solutions that work and address huge problem of CAD and add to productivity. PM and FM should consider these suggestions. India can show the world it\'s true potential. Read more: http://forbesindia.com/article/independence-special-2013/akhil-gupta-let-the-sun-free-india-from-a-cad-crisis/35909/1#ixzz2etZ6o5FG

    on Sep 15, 2013
  • Sanjay

    If this is all true, then why are their no UMPP projects on solar by any government organisation. we have so many UMPP of 4000 MW to 30,000 MW coal fired or gas fired being executed today by private company. These proejcts are stuck in for fuel linkages. if the story was true they would have moved to solar by now. This is a distant future dream

    on Aug 31, 2013
  • Gyanesh

    Great article, very informative. Congratulations.

    on Aug 23, 2013
  • Aditya Singh, Ck Legal

    I am completely concur with the opinion expressed by Akhil. We can attract more investment in solar sector by resolving two major issues: Payment security from SEBs (news is that even GUVNL is making default) and by providing instant access to finance once developer signs PPAs. Various states have terminated PPAs due to inability of developers to start construction activities at production sites.

    on Aug 22, 2013
  • Sanjaya

    SURYA DEVAYA NAMAHA. Very well voiced article, anything renewable will takes us towards sustainability. Technology and technologists exist , Govt will and policy is missing. We need to act and emerge instead of being under economic pressures.

    on Aug 22, 2013
  • Dr.a.jagadeesh

    Excellent Article. Investments not only in Solar but in Other Renewables especially established wind power are the need of the hour to supplement conventional Power. Dr.A.Jagadeesh Nellore(AP),India

    on Aug 21, 2013
  • Arun Jain

    Akhil has hit the nail on the head .The Energy scenario in India is already frightening.We are an energy starved country with approx 100 million households who do not have access to grid electricity. Demand for electricity is likely to grow 400% by year 2032. Power generation capacity must increase from 1,60,000 MW to 8,00,000MW to meet this demand.640(1000MW) power plants will be required to be set up to meet this demand. 40%of electricity generation will rely on coal, a fossil fuel.18-20% demand for electricity is for lighting.In a country which buys 1000 million pcs of incandescent

    on Aug 21, 2013
    • Vijay G. Kamat

      New LED lights consume far less power than GLS and CFL, rather constructing new power plants, just replace the bulbs, quick and easy. 7W LED light gives out lumen equivalent of 60W GLS and 13W CFL. Going by your calculation of 18% only for lighting we will require only 9% or even less. Take back the old bulbs and tubes for proper recycling.

      on Nov 22, 2013
  • Rg

    Yes, these are the out of box solutions that work and address huge problem of CAD and add to productivity. PM and FM should consider these suggestions. India can show the world it\'s true potential.

    on Aug 21, 2013