An unviable route

Draft of national solar mission’s second phase fails to learn from past mistakes

By Jonas Hamberg, Ankur Paliwal
Published: Monday 31 December 2012


THE government is aiming big in the second phase of the Jawaharlal Nehru National Solar Mission (JNNSM), the flagship programme of UPA. It intends to install 9,800 MW of solar power by 2017, according to the draft document made public by the Ministry of New and Renewable Energy (MNRE) on December 4. The financial mechanisms introduced in the draft, however, may defeat the ambition of the mission.

JNNSM was launched in 2010 with a target of 22,000 MW (20,000 MW grid-connected and 2,000 MW off-grid) to be installed by 2022. The first phase with a target of 1,200 MW (off-grid and on-grid) will end in March 2013. The second phase has a target of installing 9,000 MW of grid-connected solar power and 800 MW of off-grid application. Considering the high-capacity addition target, MNRE is proposing three financing mechanisms for on-grid projects—bundling, viability gap funding (VGF) and generation-based incentive (GBI). While bundling has been explored in the first phase, VGF and GBI are new. In bundling, solar power is bundled with unallocated conventional thermal power. Cheaper thermal capacity subsidises the expensive solar capacity so that the cost for state power utilities does not increase beyond normal purchasing cost of power.

In the second phase, the draft hopes to provide 800 MW of solar capacity through bundling, while VGF will fund majority of the capacity. VGF is a capital subsidy that bridges the gap between the project cost dictated by the prevailing electricity rate and the price quoted by a developer. Suppose the cost of a project comes to Rs 6 crore per MW based on the purchase rate of Rs 6 per unit. A developer (X) quotes Rs 7 crore per MW for the project based on use of cheap, substandard products; while another one (Y), ready to use high-quality equipment, projects a cost of Rs 8 crore per MW. As per VGF, the developer who asks for lesser subidy (gap) gets the project. In this case, X will get the project, since he is asking for Rs 1 crore. The draft hints that up to 40 per cent of the project cost can come from VGF. Funds for VGF will come from National Clean Energy Fund, which sources money from a cess of Rs 50 on each tonne of coal in the country.

Highlights of the draft
  • Introduction of new mechanisms like viability gap funding and generation-based incentives
  • Deployment of one million off-grid lighting systems
  • Deployment of 1,000 MW of rooftop projects both at off-grid and grid-connected levels
  • Target of 25,000 solar integrated telecom towers
  • Promotion of solar water heaters in 15-20 cities and replacement of electric geysers
  • Target of roping in at least 100 institutions for deployment of solar cookers and 25,000 installations for solar cooking applications in schools for midday meals

Analysts say that the VGF route may lead to inefficiencies as happened in the road sector. “VGF will remove the developer’s focus from long-term performance of the project,” says Ashwin Gambhir of NGO Prayas energy in Pune. Given the wide range of solar technologies with varying costs, developers will try to cut corners, he adds. The draft itself points to disadvantages of VGF, like no penalty for bad performance.

Harish K Ahuja, president, strategy and corporate affairs, Moserbaer, fears the mechanism may encourage entry of non-serious players to avail benefits. “The draft, however, specifies milestones to release VGF,” he adds. Abhijith Jayanthi, consultant with World Bank, highlights other problems with VGF. “Involvement of multiple ministries may result in coordination-related delays which may have detrimental impact on timelines and bankability of projects,” he says. The National Clean Energy Fund (NCEF) is under the Union finance ministry and Solar Energy Corporation of India (SECI), an MNRE undertaking, looks after project execution. There is no clarity on the disbursement of funds and the role of SECI, adds Jayanthi. This uncertainty may deter banks from funding projects, says Gaurav Sood, managing director, Solairedirect, a project developer in Pune. “Bundling is the best proven way to go ahead with,” adds Sood. MNRE sticks by VGF. “Putting inefficient system is the developer’s loss because he will generate less power for a shorter duration. Hence, he will earn less money from utility,” says Tarun Kapoor, joint secretary, MNRE.

The other mechanism, GBI, which has got little importance in the draft has received mixed response. In GBI, an extra incentive is given for every unit of energy generated. For example, in case of wind energy, the government used to give 50 paisa extra for every unit of energy generated. “GBI encourages the developer to put efficient systems and sustain it till the end to avail benefits,” says a developer seeking anonymity. Kapoor has a different take. “GBI can be dangerous, for it binds us to provide incentive throughout the 25 years of project-period even if the cost of solar power generation falls in future. Given the budget constraints every year, we may not be able to continue it,” he adds. Gambhir of Prayas says the incentive money can come from other sources, like NCEF.

GBI is the model the government should go ahead with, says Chandra Bhushan, deputy director of Delhi NGO Centre for Science and Environment. “Capital subsidy has been proven inefficient across the world and is being done away with,” he adds.

Off-grid: the neglected one Like in the first phase of JNNSM, off-grid remains neglected in the second one as well, as clearly seen in the draft. It offers no analysis of what has worked and what has not in the earlier phase.

MNRE has been running off-grid programmes for more than a decade. One such is the Remote Village Electrification Programme (RVEP) which claims to have electrified 9,000 villages. Ground report tells that RVEP, which is based on 90 per cent capital subsidy, is rife with corruption and non-performance. Even off-grid projects in the first phase of JNNSM have found few takers. In the first phase, the ministry gave 30 per cent capital subsidy on off-grid projects. The remaining had to be managed by the beneficiary either by paying upfront or through cheap loans with 20 per cent down payment. “This marginalised the poor as only a few people could afford to pay the remaining,” says a developer who does not want to be named.

Despite the shortcomings, the draft for the second phase proposes to continue with capital-based subsidy.

According to the Renewable Energy Working Group, an initiative by Khemka Foundation in Delhi, interest-based subsidy is a better option. It subsidises the interest that a person pays along with monthly installments to a financial institution to take ownership of a product. In this, a developer ties up with a bank to sell his appliances with the help of cheap loans given to people at some down payment. The bank collects the remaining cost from the customer through monthly installments with some interest. “This mechanism encourages multiple players to come in the market and empower the rural users to access products and service combinations through increased choice,” says Amarjeet, vice-president of Claro Energy Pvt Ltd in Delhi. “Developers would also be happier as more people can access their products which is not the case with capital-based subsidy,”ÔÇêhe says. But this mechanism needs to be attached with good aftersales service of the products, he adds.

Referring to the 20 per cent down payment on cheap loans, the Renewable Energy Working Group says it should be reduced. “It is high for some low-income households. Twenty per cent should be made the maximum limit.”

Jayanthi has a different take. It is difficult for a developer to ensure the bank a large customer base in case of interest-based subsidy because loan is taken on 100 per cent of the product cost. “In case of capital subsidy, the customer takes loan only for a part of the product cost since rest of it is subsidised. Hence banks will be more confident to finance projects,”ÔÇêhe adds. For similar reasons, MNRE is sticking with capital-based subsidy. “Banks find it difficult to handle projects based on interest-based subsidy,” says Kapoor.

The draft, however, scores points for emphasising the need for mini and micro grids for rural electrification. “But this should also be linked with generation-based incentive to make it commercially attractive,” suggests Gambhir.

Various plans, including a new programme which aims to target 20,000 villages, has been listed in the draft document for the promotion of off-grid. But there is no clarity on how they will be executed. “It seems MNRE has no vision for off-grid promotion, as it has shown in grid-connected,” says Bhushan.

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