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.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.