This New Finance Policy Tweak Boosts India Solar Energy

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By Tara Parthasarathy and Alex Perera, World Resources Institute

India is facing down one of the key challenges confronting developing economies: Can it reduce power-sector emissions to curb climate change without hindering economic growth?

This challenge became even more pressing when China and the United States, the world’s two largest carbon emitters, agreed to landmark emissions reductions and renewable energy targets. International attention has now turned to India, the world’s third-largest emitter, to pledge decarbonization ahead of the COP21 United Nations climate summit in 2015.

Last month India pledged to increase national solar generation capacity to 100 gigawatts (GW) by 2022, but connecting solar projects to the country’s grid has been difficult in the past and could limit progress toward the new goal. Fortunately, an innovative decision by the Indian state of Karnataka may show how to solve the problem.

In August, the Karnataka Electricity Regulatory Commission (KERC) waived grid usage charges for solar power generators, cutting costs and creating opportunity to provide affordable clean energy. The new policy extends the amount of time newly commissioned solar installations are free from additional charges, spurs economic development, and will provide cost-effective clean power to millions of Indian citizens without access to reliable electricity.

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Practical India Solar Energy Policy Takes Shape

Over the past decade, KERC has made multiple changes to grid usage charges (fees levied on power projects to recover installation and maintenance costs) including wheeling and banking charges (fees for moving and storing electricity) and cross-subsidy surcharges (fees collected on large power users to subsidize costs for smaller power users). By waiving these charges, solar installations connected to the grid are able to sell clean power at rates that are cost competitive with existing fossil-fuel power providers.

In theory, this makes solar more competitive, but in practice, the existing KERC proposal would only provide solar power installations, including rooftop and small solar photovoltaic power plants completed by March 31, 2013, five years free from these charges – an insufficient span considering companies report the typical payback period for a new utility-scale solar plant (above one megawatt/MW) in India is between eight and 10 years.

Rohan Parikh, head of infrastructure at technology company Infosys and co-chairman of WRI’s Green Power Market Development Group, along with other members of the group, interacted with KERC to show that large energy buyers are increasingly motivated to buy renewable energy but needed regulatory solutions to reduce the costs of renewable energy projects.

After a series of hearings, KERC announced it would extend the exemption to solar plants commissioned between April 1, 2013 and March 31, 2018. The exemption will now start when a new solar plant is first commissioned and last 10 years from that date.

solar power india

What it Means for Developers and Buyers

KERC’s decision to double the fee-exemption period creates long-term price certainty for developers and consumers, provides a major boost to financing clean power in the region, and will have significant ramifications for developers and buyers going forward.

This revised, decade-long period for solar power plants to establish themselves without the financial burden of charges incurred for connecting to the grid gives potential financiers confidence new projects will find solid footing in India’s power market, and makes them more likely to invest in the country’s solar industry.

The extension also creates certainty for developers and buyers signing long-term power purchase agreements (PPA). PPAs are contracts where consumers agree to buy power from third-party project developers, who often then operate the solar installation. Long-term PPAs feature a fixed rate (often below grid prices) so consumers don’t have to worry about price volatility and create a long-term revenue stream so developers know when their project will be paid off.

Prior to KERC’s decision, banks and private investors saw the more limited five-year fee-exemption time period as insufficient for solar projects to get up and running. To develop and thrive in the emerging industry, India’s solar sector needs a little extra help – exactly what KERC’s new policy provides.

solar panels in india

New Rules Give Competitive Edge to India Solar Industry

Waiving grid usage charges makes solar more affordable and creates an opportunity for KERC to expand clean energy resources through utility-scale solar projects. Earlier this year, Karnataka’s government announced an ambitious goal of installing 2,000 MW of new solar power capacity by 2022. If other states follow suit, India’s renewables market may mature to a scale where growth doesn’t hinge on suppressing these costs and the industry reaches a point where solar is the most cost-efficient and practical energy alternative.

India is a critical piece of the puzzle in the international shift toward a sustainable, low-carbon future. Policies like KERC’s give India’s solar sector an opportunity to grow and, therefore, provide the country with a stronger footing to reach ambitious emissions targets.

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