Solar power, subsidies and capitalism

This piece of mine was published on The Indian Republic on 1st October, 2014 over here.

Subsidies galore

It has been raining subsidies in the solar energy space, not only in India but globally. It is estimated that the US Federal government spent approximately $81 billion (inflation-adjusted) between 1950 and 2010 on assistance to the renewables space that consists of the solar, wind and geo-thermal energy sectors[1]. Following in its footsteps, the Indian government approved spending of Rs 4337 crores between 2010 and 2013 under the first phase of the Jawaharlal Nehru National Solar Mission- mostly in the form of incentives to solar power producers[2].

In India, solar power producers receive government assistance in a variety of ways e.g. generation based incentives (GBI) that entail a higher price per unit of energy supplied to the grid, viability-gap funding (VGF) that entails a government grant of up to 30% of the cost of setting up the plant. But, the most interesting form of government assistance consists of what is known as “accelerated depreciation” (AD). This provision allows the power producer to write-off 80% of the cost of setting up the plant in the very first year of operation. This allows the power plant-owner to save a significant amount of tax if he has other departments in the same company generating profits. However, this provision is useful only to companies that generate large profits from other businesses and thus is of little use to pure play -solar energy companies.

Solar power is simply not economically viable today. The notional cost of producing one kilowatt-hour of solar energy is about Rs 6.5 (based on the lowest bid received) as of today and it therefore makes no sense for a power producer to produce solar energy at this price and sell it to the grid at a price that averages about Rs 5.5 (e.g. Rs 5.71 in Delhi).[3] Therefore, if the government wants more solar energy to be produced in the country, subsidies are a must.

Subsidies are controversial as it is. But, when an industry that competes directly with thermal power industry is subsidized, the debate heats up further. The question is – Should the government continue subsidizing solar power?

The case for subsidies to power the solar industry

Solar power is clean energy: In the era of global warming, solar power scores over thermal power as it is environmentally clean and could play a large role in reducing the world’s green-house emissions. Data from the UN’s Intergovernmental Panel on Climate Change (IPCC) shows that a solar power plant produces only about 4.5% of the greenhouse emissions per unit of electricity produces as a coal powered thermal power plant and about 9.8% as much as a natural gas powered power plant[4]. Therefore, solar power could hold a key to drastic cuts in greenhouse emissions in the medium-long term.

Unsubsidized solar power is expected to become commercially viable in this decade itself: Another important point in favour of subsidies to the solar industry is that the solar power is getting much cheaper over time and therefore, government subsidies need not be continued for long. A US Department of Energy report observed that the median price of solar power from commercial and residential systems fell by 80% from 2008 to 2012.[5] The cost of producing solar power in India fell by a whopping 61% over the last three years.[6]

With the price of solar power falling sharply and the cost of power from conventional sources rising, unsubsidized solar power is expected to achieve grid-parity (same cost of production as the price paid by the grid) and become commercially viable in this decade itself, with some analysts estimating grid parity to be achieved by 2017. In fact, it is already theoretically profitable to produce (unsubsidized) solar power and supply it directly to commercial establishments in some part of India such as Maharashtra where the utilities charge as much as Rs 10.91 per kwHr [7][8].

The (misplaced?) case against subsidies to the solar industry

Opponents of subsidies to the solar industry argue that the idea of subsidizing an inefficient and expensive energy source goes against the very grain of capitalism and economics. They argue that if the cost of conventional energy is really rising and if solar energy is really the way of the future, then solar power plants will mushroom when the cost of generating conventional energy becomes prohibitively high, thus making solar power economically viable.

The problem with this argument is that it does not take into account the time lag of about a decade at the very least that needs to go into research and development required to produce cheap solar panels and equipment necessary to build solar plants. Therefore, if governments did not start supporting the solar industry before it became economically viable; there would be a drastic energy-shock that would threaten to derail the global economy once the prices of crude oil and coal rise above a threshold level. Therefore, subsidies to the solar industry are essentially helping smoothen out the supply shocks that would become inevitable with rising crude and coal prices.

The bottom line

Viewed in isolation, the central government’s solar power subsidy number of Rs 4337 crore sounds huge, but India is slated to rack up a total subsidy bill of about Rs 2, 46,397 crores in 2014-15[9] itself i.e. 56.8 times the subsidy that was given to the solar industry over a 3 year period. In other words, at 0.59% of the annual subsidy bill, the annual subsidy given to the solar industry is a miniscule amount. Besides, subsidy given to the solar industry is spent on productive assets that pay-off over the long run while subsidies on food and fuel do not improve productivity in any significant way.

The economic cost of global warming is something that nations in general and India in particular simply cannot afford to ignore in the medium-long term (think flash floods, missing monsoons and submerged cities). Subsidies to the solar space are a very small price to pay to help avert long-term disaster and will not be needed in a few years anyway. While this surely isn’t laissez-faire capitalism, it sure is sensible capitalism.

Ashwini Anand, CFA is an investment professional and Founding Member of Citizens for Accountable Governance and can be reached on Ash dot Pillutla at gmail dot com

[1] Cornerstone Magazine

[2] MNRE, Govt of India.

[3] The Economic Times

[4] IPCC Report

[5] LBL report

[6] The Economic Times

[7] The Indian Express

[8] MSEB Report

[9] Times of India

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