Why renewables cannot penetrate the market

Published: Tuesday 30 April 2002


-- #1. Subsidies on fossil fuels (both covert and overt) make renewables uncompetitive.
The biggest barrier to commercialisation of renewable energy is political. Politicians use subsidies as sops to retain power. The Electricity (Supply) Act, 1948, requires sebs to earn a minimum rate of return (ror) of 3 per cent on their net fixed assets in service after meeting the financial charges and depreciation. But on the contrary most sebs are running on losses. According to the Planning Commission, to achieve the ror, the average tariff should be increased by Rs 0.60 per unit throughout the country. During 2001-02, the net subsidy on electricity was Rs 26,613 crore. Transmission and distribution losses are also staggering: it was 22.8 per cent in 1991-92 and 22.0 per cent in 1999-2000.

To defuse this crisis, the Planning Commission set up the Central Electricity Regulatory Commission -- which sets the bulk tariffs for all central generating and transmission utilities -- and State Electricity Regulatory Commissions (serc) in the states to fix tariff rates. The serc is expected to introduce competitiveness within the sector and encourage energy efficiency.

But most renewable energy experts are not optimistic. "Since most serc members are keen on creating resource for sebs, they will not be interested in buying power from renewables, which is more expensive," says Saroj Mishra, senior programme officer, energy and environment, Winrock International India.

This cost disparity in turn affects the renewable energy producers, particularly in the wind sector as the cash-starved sebs refuse to buy power from them. For example, the wind power producers of Tamil Nadu faced this problem in 2000, when their five-year agreement with the mnes ended. According to the agreement, the tneb would pay Rs 2.20 per unit, which would increase by 5 per cent every year. By the time the agreement expired in 2000, the rate was Rs 2.76 per unit, but the tneb refused to renew the agreement. tneb's contention is that if it can buy thermal power at Rs 1.88 per unit, why should it buy wind energy at a cost of Rs 2.20 per unit?

However, if the cost of conventional energy is compared against renewable energy, energy from biomass cogeneration, biogas and wind work out to be competitive candidates.

A study by Venkat Ramana, As if Institutions Matter: An Assessment of Renewable Energy Technologies in Rural India shows that thermal power becomes less viable with increasing distance from the grid. At a distance of five kilometres, thermal power costs Rs 4.77, whereas off grid application for agro-based biomass with subsidy, costs Rs 2.50 per unit and biogas costs only Rs 0.83 per unit.

#2. Regulations are a stranglehold. Entrepreneurs cannot sell the electricity they generate, except to government. Government is bankrupt.
The Central Electricity Act, 1948, does not permit individuals, communities or cooperatives to generate or distribute power, though participation from companies is allowed as long as power is sold to the government. However, the government fixes pre-determined rates, mostly at a subsidised cost, thus reducing the investment viability.

For instance, wind energy faces problems because of high wheeling -- amount given to the sebs by wind power developers for sharing the grid and banking charges (a wind power developer can deposit and store a certain percentage of the power production and withdraw that power during a certain time frame). This is done to compensate for the problem of intermittent quality of wind power. mnes guidelines ask for 2 per cent wheeling charges, but cash-strapped states often increase charges. Karnataka imposes a 20 per cent wheeling charge, while Gujarat recently increased its charges to 15 per cent. Key states -- Tamil Nadu and Andhra Pradesh -- do not allow wind manufacturers to sell to third parties -- that is, except to the state electricity boards.

Similarly, in Madhya Pradesh biomass plants generating less than 500 kw of power are prohibited from grid connection. "Even if the power produced is above 500 kw, a high wheeling charge of 15 per cent is imposed and to make matters worse, it prohibits third party sales," says P K Bhatnagar of Development Alternatives, an ngo.The losses in conventional energy are unaccounted for when renewables are pitted against fossil fuels. G S Sohal, managing director, National Thermal Power Corporation (ntpc) agrees, "Power theft, which accounts for 20 per cent of the power distributed, is never calculated. When the cost of power delivery to inaccessible rural areas is considered, solar energy works out cheaper.

The high tax imposed upon solar products remains an impediment. "Customs duty on silicon, a major component of the solar cell, is 65 per cent while the duty on all equipment for thermal power is only 25 per cent. The 30 per cent excise duty on battery should be done away with, in order to make solar energy compete with thermal energy," adds Sohal.

#3. Providing access to energy is not seen as an integral part of rural development strategies.
Bureaucratic red tape ensures that only the foolhardy survive. Setting up a small hydropower requires as much paperwork and procedure as big hydel powers. According to an ireda official, the entire procedure for even a small project takes as long as two to three years.

"Electrifying remote places through the grid involves huge transmission and distribution losses, so it is sensible to introduce decentralised, small hydro-power that can supply energy to the surrounding areas," says Mangotra. But India remains locked in bureaucratic mindsets, unlike Nepal. In 1985, the Nepalese government delicensed all electricity installations under 100 kw. Ever since, setting up small hydels does not require permission as long as the local people do not object to it. No license, royalty or income tax is required for setting up hydro power plants up to 1 mw. The private sector project developers are allowed to fix the tariff for the plants that are not grid connected. Help is provided in acquiring land for hydel power plants, while loans with interest rates of 17 per cent is also available for micro hydel installations.

Similarly, in the 1960s, China adopted the 'self-construction, self-management and self-consumption strategy' where the local administration owned and implemented small hydropower projects. The government only remained a facilitator by giving tax and duty benefits and subsidy on turbines and transmission lines.

In Nepal as well as China, decentralised electrification is seen as part of agriculture and rural development initiatives. But in India, there is no effort to integrate energy supply with land and water resources. Biomass gasification needs regular supply of raw material and this raw material can also become be a source of income generation for rural communities. But policies dissuade people from planting trees as regulations make it virtually impossible to cut or transport tree biomass.

Similarly, while large energy projects invariably get permission under the Forest Conservation Act -- which requires Union government's permission to convert forestland to other uses -- the energy projects of the poor gets a short shrift. For instance, while the Kudremukh Iron Ore Company Limited got permission to operate in a national park by the Karnataka forest department, the forest department turned down the request of Menasinahadya village, Chikmangalur district, which wanted to set up a micro-hydel project in the forested hills.

#4. Subsidies and incentives are nothing but instruments of corruption and tax-evading techniques.
Government support is essential. But misguided subsidies and incentives can hinder development. Take the case of wind energy. This source is one of the most successful renewable technologies worldwide that requires an investment of approximately Rs 4-6 crore per mw, making it competitive with thermal power. Wind energy generation reached its peak by the mid-1990s when the government offered attractive packages to private investors. As a result, the installed wind power capacity grew from 54 mw in 1993 to 900 mw in 1997. However, with the withdrawal of certain incentives, the sector recorded a slump in 1998. Private sector was given up to 100 per cent accelerated depreciation -- the value of the wind power equipment could be entirely deducted in the first year itself from tax. In 1995-1996, the government reduced the corporate tax, usually paid by profit making companies, and levied the minimum alternate tax (mat) for zero tax companies. Since then, the attractiveness of wind as a tax-management option reduced. Interestingly, most wind investments were made between January and March, so that companies could write off tax.

Similarly, the National Project on Biogas Development (npbd) programme is considered as the most successful programmes undertaken by mnes, but subsidies are still provided for biogas plants. The ministry provides subsidies ranging from Rs 1,800 to Rs 3,500 to families with four or more cattle heads, with four years warranty. In order to make any significant progress in the sector, Ramana suggests that the ministry should withdraw the npbd, decentralise the system and come out with a new approach and strategy. "Since it is already a proven technology, the ministry should terminate the npbd and instead divert the subsidy cost for r&d ," states Ramana.

An official from Indian Rural Energy Network (irenet) and member of the All India Women's Conference (aiwc) raises the question of the ministry's 'achievement' of 3 million biogas plants. "Many villages of Uttar Pradesh and Bihar recycle old family-type biogas plants and register them as new ones. In order to claim subsidy, it is circulated within the family under different names once the warranty period ceases." The aiwc is one of the agencies identified by the mnes to distribute biogas plants.

Subsidies on products for commercialisation can also be counter-productive. "They put barriers in marketing of renewable energy, reduce competition and only a few influential manufacturers get the deal," says Ashok Khosla, president, Development Alternatives, a Delhi-based ngo. He adds: "There should be a one-time capital investment subsidy, after which subsidies should be offered only on performance basis."

#5. Financial institutions have failed to make these technologies viable to poor people in remote areas.
"Financial intermediation needs to be carried out by local banks and institutions," suggests Ajay Narayanan, vice-president, Infrastructure Development Finance Company Limited (idfc), Chennai. Local entrepreneurs can also be trained to create a chain of markets in a decentralised manner. Says Mishra: "Many financial institutions are apprehensive about funding renewable energy projects because they are not proficient with the technology. There is a need to spread awareness." wii is disseminating information at the district and state level under the Solar Finance Capacity Building Initiative (sfcbi) programme where bank officials of different levels all over the country are trained to acquaint them with solar energy and to build projects for investments. wii has tied up with the Syndicate Bank and Bharathiya Vikas Trust to train officials under the sfcbi as a pilot programme.

At the Roundtable on Renewable Energy for Sustainable Development: Opportunities, Barriers and Solutions organised by Development Alternatives, financial institutions said a key apprehension was the lack of established technologies, the high-front cost and the high off-take risk. They pointed out "a lack of sustainable operation and maintenance plan, absence of a mechanism to evaluate the technology and innovative financial mechanisms are coming in the way of promoting renewables". Mentions Narayanan: "Lack of capacity in the rural areas and inaccessibility of fund to the small entrepreneurs is a major problem."

No doubt, solar products are unaffordable for the poor without subsidy. But with appropriate financial schemes the need will gradually decline. For instance, the solar home lighting systems, the most viable lighting source in remote areas, costs Rs 16,000 to Rs 18,000 in the market. But with subsidies, the beneficiary has to pay around Rs 10,000. Since this initial cost is high even with subsidies, it is imperative to have an affordable financing scheme, particularly at the village level.

This is where companies like the selco have done a commendable job by penetrating into many unelectrified villages of Karnataka through partnerships with local financing bodies like the Malaprabha Grameen Bank and the Syndicate Bank in Dharwad, without the subsidy (see Down to Earth Vol 10, No 11). "Even the low income people are willing to pay a high amount as long as they receive quality power," says Hande. Many energy experts support this belief: "It is a widespread misconception that the poor cannot pay for energy."

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