Gujarat & The Problem Of Plenty

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By Akhilesh Magal

How One Indian State Kickstarted The Solar Market, And Is Now Looking At Next Steps

Gujarat was the first state in India to announce it’s solar policy in 2009. The policy preceded the National Solar Mission (NSM) and was the first (and since then the only) policy to be based on a fixed feed-in tariff (FiT). Almost all other states of India have some form of reverse auction that enables the market discovery of solar power purchase agreement (PPA) prices.

Subsequent to the announcement of the policy, Gujarat has gone on to commission over 800 MW of solar power in a short span of three years. Since then, not much has happened. There have been no further allocations, and the state solar policy expired in 2014. No new policy has yet been officially announced. Gujarat also does not allow third-party open-access (where an independent power producer connects to a buyer) transactions. The state electric utility companies are wary of granting open-access permissions, as this would thwart businesses.

It would be wrong to say that there isn’t enough land. The solar resource, of course, continues to be good. Most developers and investors have had a good experience in Gujarat. The question is why is the state holding back on further allocations? There are three reasons:

1. Power Surplus

Gujarat is one of the few states in India that have a power surplus. In India today, this is almost a luxury. Power cuts are rare, and largely due to technical failures or regular maintenance, unlike Tamil Nadu or other states that face up to eight hours of power cuts in peak summer.

While the industry and consumers are satisfied, Gujarat’s distribution companies (DISCOMs) literally do not need any more power, and therefore have no reason to purchase solar power. And this is a point to note: in most other states with power deficits, solar power is an easy way to quickly meet the deficit. Thermal power plants take time to get commissioned, and coal linkages are a constraint in India today. In Gujarat, solar can only replace conventional generation, and not augment it. Sending power to other states is allowed, but severely limited due to transmission capacity bottlenecks.

2. Where’s The Money?

Although the price of solar has fallen by more than 60% since Gujarat signed its first PPAs, solar is still about 30% more expensive than long-term thermal power contracts from new coal plants. DISCOMs are not allowed to freely pass on these costs to consumers unless they get the proposed tariff approved by the regulator (SERC). This limits the DISCOM’s ability to absorb these additional costs without adversely affecting its finances. One way other state DISCOMs and central producers (like the NTPC) do it is by “bundling” the power with cheaper thermal power. This makes the net additional cost almost negligible. However, since Gujarat need not buy any additional power, this option is ruled out, too.

3. Governments with Commitment Issues

This would leave the onus on the government to bridge the difference. Solar PPAs are long-term agreements (at least 25 years), which would mean that the government has a sizable outflow on its cash-flow sheet for a long time. Governments generally are wary of making such long-term commitments.

If India is to achieve its 100 GW goal of solar by 2022, then Gujarat must play a significant role in that journey. What’s more, the central government is keen on devolving more power to the states. But as always, with more power, comes more responsibility. The government has already indicated that the 100 GW target will have to be apportioned to the states. This means that Gujarat will have a sizable target within the 100 GW target. This puts Gujarat in quite a spot of bother.

As always, there are solutions. There are four ideas that Gujarat can espouse and ensure that it contributes towards the 100 GW target.

1. Ensure that all new industries and commercial establishments that have a power demand of 1 MW (MVA to be precise) and above procure a certain percentage through solar power. This can be legally challenged, as it was in Tamil Nadu. Amending the Renewable Purchase Obligation (RPO) framework can circumvent this problem.

As India pushes towards greater industrialization (through the “make in India” program) and as many more “smart cities” come up (Gujarat will be home to several such cities, since a large part of the proposed Delhi Mumbai Industrial Corridor will pass through Gujarat), this can be an effective way to ensure a large-scale deployment of solar power.

2. Invest heavily into upgrading the transmission infrastructure. While this point is oft discussed, one cannot stress it more. It makes no sense for a country like India to import hydro energy from Bhutan and Nepal when we are in a surplus situation in Gujarat. Setting up transmission linkages across the country will be expensive, but will pay back itself – especially if the open energy market is truly opened up. Once the transmission linkages are in place, the possibilities become endless. Imagine a day when a textile industry in Tirppur, Tamil Nadu, purchases solar power generated in the deserts of Rajasthan. Plants can be located at the best sites, thereby improving efficiency and decreasing cost – further accelerating the movement towards parity with coal power.

3. Accelerate and encourage the third-party solar market. The third-party solar market is the SunEdison model or the SolarCity model. In this model, the developer signs up an independent power contract with the consumer and supplies energy for a defined period of time. This model requires no government support (as some commercial tariffs are higher than solar tariffs). Gujarat needs to build the right regulatory framework to ensure a fair, open, and vibrant third-party solar market. This is the easiest way the government can reduce their subsidy burden. As time progresses, and parity is achieved across many more consumer segments (e.g. industrial), this market will only accelerate further. What’s stopping the market is the lack of clear regulations.

This model will also mean that India’s utilities have to rethink their business models. They can no longer resist renewables, but must rather adopt them with full gusto. Looking at the way the power markets across Europe panned out last year, I personally believe that the only way utilities can survive this technological change is to jump on the bandwagon. Utilities are perhaps best positioned to start the solar lease model. They already have the consumers on board, and can best enforce solar contracts by threatening to cut off supply. Utilities also have all the necessary billing and payment mechanisms that would make the shift to solar relatively inexpensive. Utilities also have trained manpower who best understand their grid. The only thing, perhaps, that is lacking is the mindset to change and adopt.

4. Boost the rooftop market. Many homeowners, businesses, and educational institutions are looking at solar seriously. Despite the high upfront costs, they see solar as providing energy security, and as a “cool” thing to do. The rooftop market, while distributed, is still a sizable market. My own guesstimate is that the market can easily touch 5 GW across Gujarat’s main cities. Allowing net metering can accelerate this market. Net metering costs almost nothing to implement. Yes, the utilities lose out on energy sales, but all energy that is net metered can count towards fulfilling their RPOs. This means that the DISCOMs needn’t purchase any additional expensive solar power to meet their RPOs.

Gujarat is yet to announce its net metering policy to all consumers. This is, notably, at a time when almost all major states have already announced net metering policies.

About the Author: Akhilesh Magal is the Head Advisor – Solar Energy for the Gujarat Energy Research and Management Institute (GERMI), an institute dedicated to research in the fields of solar energy, energy efficiency, environment, and petroleum research. He is an environment engineer from Carnegie Mellon University and is an expert on solar policies and grid integration of renewable energy. He can reached at: akhilesh.m@germi.res.in or @akhileshmagal

Image Credit: Gujarat Power Corporation Limited