Clarity on power costs could speed up India's transition to clean energy

Mint

2 days ago

The government's recent decision to reduce inter-state transmission incentives for renewable energy (RE) from sources like solar and wind is a timely step to reduce distortion in the bills of states that use India's arterial inter-state transmission system (ISTS). Thus far, states using ISTS wires for non-RE supplies more than RE—like Rajasthan and Gujarat, which are both big RE producers—have ended up paying higher bills.
On the other hand, states like Jharkhand and Odisha, which generate plenty of coal-fired electricity but use that network to import large RE volumes, have had to pay less. The revision of a policy aimed at widening RE access will push states to look beyond the low hanging fruit of supply from RE-rich states and develop local rooftop solar capacity and explore other RE options.
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This policy tweak also needs to be viewed in the context of an entire gamut of incentives offered to clean energy along the supply chain from generation to power purchases, an exercise that reveals challenges we must address.
Among others, one of this sector's main scaffolds is the 'must run' priority that RE enjoys in the despatch of electricity under our system. There is no doubt that when the sun shines and wind blows, electricity is produced cheaper than from non-RE sources such as coal and gas. So RE is a good bet for India's climate goals.
On the buyer's side, a key catalyst is the renewable consumption targets given to states. They must either produce RE or buy it from other states. Over the past decade, we have seen a sharp rise in the supply of solar electricity, aided partly by a global slide in solar panel costs. Yet, the vagaries of weather leave RE unreliable for round-the-clock supply.
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The proverbial shoe began to pinch a few years ago.
We saw India's peak-time shortage going up sharply and our shortfall eased only after the public sector NTPC Ltd set up new fossil-fuel plants. This capacity expansion, however, implied an additional layer of embedded subsidy, since fossil-fuel plants end up operating at low capacity, which is inefficient, given the primacy given to RE. The need for grid stability has thus imposed a cost that hasn't been priced into tariffs.
Thankfully, battery storage costs have also been dropping. In response, the government has been inviting bids for bundled round-the-clock RE supplies and the tariffs discovered so far are seen to be lower than those of fossil-fuel plants. For a big difference to be made, this approach needs to be scaled up.
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Costlier transmission across state borders should nudge RE importing states to complement their solar and wind efforts with storage facilities. But let's not forget that low tariff bids also reflect embedded subsidies.
For clean power to dominate India on its own steam, so to speak, penalty pricing of emissions—and the emergence of a dynamic carbon market—will have to tilt the cost dynamics firmly in its favour. Right now, a subsidy maze obscures a clear picture of this sector. To reach our net-zero goal, the path we take should be optimized to ease our fiscal burden as much as possible. And to attract more private investment, states must ensure that what end-users pay reflects true costs to the extent possible. Also, regulation must be transparent. What state coffers shell out should be clear.