Economy-Realising energy sector targets !!!

Prime Minister Narendra Modi’s style is to set ambitious targets with impossible-looking deadlines. Perhaps he is inspired by a Gujarati poet who said, “ Nishaan chuk maaf, nahi neechu nishaan ” (missing the target can be forgiven, setting a low target cannot). This challenges his colleagues and staff to accomplish much more than what they would otherwise.

Thus Mr. Modi was able to get 24×7 electricity to nearly all villages in Gujarat in two and a half years. The targets set for power, coal, and renewable energy show the same determined approach: set up 175 gigawatt (GW) of renewable capacity by 2022 and increase domestic coal production to 1,500 million tonnes (MT) by 2020 from 612.4 MT in 2014-15, the period during which India imported around 210 MT of coal.

Are these targets for coal and renewable energy consistent? How are we to achieve 175 GW of renewable capacity by 2022? If 175 GW of renewable capacity comes on line, do we need 1,500 MT of coal?

Coal production target

The domestic coal production target of 1,500 MT is to be realised in this manner: 1,000 MT by Coal India Limited, 100 MT by Singareni Collieries Company Limited, and 400 MT by captive and private producers.

175 GW of renewable capacity will generate 350 billion kWh of electricity per year as a renewable power plant operates for around 2,000 hours a year. A coal-based plant uses 0.6 kg of coal for generating 1 kWh of electricity. Thus 175 GW of renewable capacity will reduce coal demand by 350 x 0.6 billion kg of coal, namely, 210 MT of coal.

Imported coal has a calorie content of 6,000 kcal/kg compared to domestic coal’s calorie content of 4,000 kcal/kg.

The total coal consumption in India in 2014-15, accounting for the 50 per cent higher calorie content of 210 MT of imported coal, was 924 MT of domestic coal equivalent. In 2010-11, it was 622 MT of domestic coal equivalent giving a compound growth rate of 10.4 per cent over 2010-11 to 2014-15.

If the economy picks up as it is expected to at this rate, the coal demand in 2020 will grow to 1,675 MT of domestic coal. By 2020 we can have 140 GW of renewable capacity if the 175 GW by 2022 target is to be realised. Then the coal requirement it would replace would be around 170 MT. This would suggest that we will need 1,500 MT of domestic coal production if we want to eliminate imports by 2020.

Of course, all imports cannot be eliminated as we need to import coking coal for steel production. If we provide for some 66 MT of coking coal import, we will still need domestic production of around 1,400 MT of coal. Thus the target of 1,500 MT of coal production is a reasonable one.

Renewable capacity

The next question is whether we can have 175 GW of renewable capacity by 2022. We have used three measures to encourage renewable power: feed-in tariff (FIT), renewable portfolio obligation (RPO) and accelerated depreciation allowance.

Under FIT, a fixed tariff is guaranteed to the power producer for a certain number of years. For him or her, this is desirable as it ensures assured income that eliminates market risk and he or she is able to raise finance easily.

In the solar mission launched in 2009, we had ensured that FIT does not compromise the incentive to cut down costs and that competition prevails by requiring reverse bidding for the FIT. Thus firms were asked to bid for the FIT they would need to generate solar power. In the first bidding, where the expected level of FIT was Rs.15/kWhr, the lowest bid came to Rs.13.5/kWhr. In subsequent bids it has come down lower and lower and now a recent bid for a 70 MW project at the Bhadla Solar Park in Rajasthan asked for an FIT of Rs.4.34 per kWhr.

Under the RPO, an electricity distribution company (DISCOM) is required to purchase a certain percentage of its total distributed electricity from renewable sources. The price that a renewable power producer will receive is determined by the market. Thus there is also incentive to supply electricity at completive rates. However, this creates uncertainty of revenue for the power producers, and banks are reluctant to finance them.

The way out is to guarantee a certain minimum price to be paid to a renewable power producer. Also, for RPO to be effective, it should be enforced. This would require that a DISCOM that does not meet its RPO obligation is made to pay a sufficiently high fine for the extent of the shortfall. If properly implemented, RPO will ensure that the renewable electricity generated will have a market and will be paid for.

Another advantage of RPO is that it can be neutral to technology. One does not have to prescribe whether it is solar or wind or biomass. Competitive market forces will select the most economical option. Thus there is no need to prescribe separate levels of RPO for wind, solar, small hydro, and so on.

Accelerated depreciation allowance, which helped boost wind power in the country, provides incentive to set up the plant but not to maintain it or generate electricity.

The new RPO guidelines

If FIT has been so successful, do we need RPO? Setting and enforcing a trajectory of RPO obligations ensures that the target for renewable power generation and capacity will be realised.

The Ministry of New and Renewable Energy (MNRE) has recently announced consultation guidelines for long-term RPO trajectory. The guidelines stipulate separate RPO for solar and non-solar electricity. The guidelines prescribe that 2.75 per cent, 4.75 per cent and 6.75 per cent has to be solar energy for 2016-17, 2017-18 and 2018-19, respectively. The shares of non-solar energy such as wind, biomass, and small hydro for these years are to be 8.75 per cent, 9.50 per cent, and 10.25 per cent, respectively.

While the Central government has issued these guidelines, electricity is a State subject and some States are not happy with the guidelines. States which do not have renewable potential feel that they would have to bear a higher burden for the renewable target. If West Bengal has to import renewable electricity from Tamil Nadu or Rajasthan, it will have to bear a higher burden or transmission charges.

The Centre has said that no transmission charge would be levied on renewable power. While this would allay the concerns of States, it will create a distortion in the location of renewable plants just as freight equalisation of coal and steel created distortion in the past in the location of industries. Many manufacturing industries that would have been located in Bihar were located in western India, far away from the source of the raw material.

The success of the RPO scheme will depend on the specification of a floor price and effective enforcement by States. The Centre needs to create some mechanism to incentivise States to enforce the RPOs. The Centre could provide money from the coal cess revenue to States depending on the extent to which they meet the RPO targets.

Levying no transmission charge on renewable power will create a State-wide distortion just as freight equalisation of coal did in the past.