A tipping point in Indian energy

There will be a nonlinear adjustment in India's shift to renewables

First we got a revolution in the prices of solar panels. Now solar generation delivers at ₹2.5 per kWh (kilowatt hour). But the sun shines only for a few hours a day in India. Traditionally this has implied a strong case for coal-thermal plants. Then we got a revolution in the prices of batteries. 

Policymakers in India recently asked a remarkable and unusual question by global standards. Solar Energy Corporation of India (SECI) ran an auction to buy electricity capacity where they (SECI) demanded the availability of a thermal generator. A bidder who plans to use solar or wind is then forced to load up with the batteries required, to charge in the day, so as to deliver thermal-style availability. This auction discovered a price of ₹5.25 per kWh, guaranteed for 25 years (https://bit.ly/ RElikecoal).

It is hard to identify a single comparable price for coal thermal in India because coal-extraction rights are given by the state in non-market ways. But if we look at recent new coal-power contracts in India, they are priced at ₹5.38-6.30 a unit. The SECI-discovered thermal-mimicking price for renewable power is now 10 per cent cheaper than that for new coal. 

This is a historic milestone. Every buyer of electricity in India will now look for ways to replace expensive coal power. The government-controlled electricity system creates friction against this process. It imposes cross-subsidies, levies transmission charges, and erects administrative barriers that protect coal. But a 10 per cent pricing advantage creates the incentive required for firms to find their way out. 

The traditional view was that there is not much give when it comes to buying electricity. You whined about the problems of the grid and left things at that. Now, every buyer has the incentive to think about how to make or buy solar energy and get it transported to the point of use, so as to reduce direct or indirect purchase from coal-thermal plants. 

The most remarkable feature of this situation is that, as they say in American, “You ain’t seen nothing yet.” There are four additional factors that favour the solar path. 

First, the thermal-mimicking price of ₹5.25 per kWh is fixed in nominal rupees for 25 years. It gets cheaper by the Indian inflation rate of 4 per cent every year. The world price of coal (in rupees) grew by about 9 per cent per year in rupees over the last 20 years. The world is rapidly switching to renewables, and therefore there will be a glut of coal. So let us assume that in the future, the price of coal will go up by only 2 per cent per year in rupees. Then we are comparing the 2 per cent cost increase annually, for 50-60 per cent of the cost of thermal electricity, versus a zero per cent price rise for solar. Every year, the coal path becomes more uncompetitive. 

Second, energy-system thinkers never envisaged that the future of electricity involved thermal-mimicking production. Every country is moving towards a market-determined price for electricity, first for commercial and industrial users, and then for all. Under market pricing, the evening price of electricity is higher. The demand side will adjust, so that the coal-style base load is not required. The SECI tender answers an extreme question: Do solar and batteries beat coal at a game defined on the terms of coal? We now know this answer is “Yes”. But the future definitely involves dynamically fluctuating prices in the day. The economic superiority of solar is then even higher. 

Third, the cost gains on batteries and solar panels, through “Wright’s law”, are not finished. In coming years, these price gains will continue. The capital cost of new solar and battery capacity will drop, and the superiority of solar over coal will grow.

Fourth, firms exporting to destinations that have a Carbon Border Adjustment Mechanism will find the superiority of solar to be greater than 10 per cent owing to the wider use of carbon pricing outside India. 

We are all used to the long journey of renewables and decarbonisation. This has slowly moved forward in past decades. While a lot of solar capacity has come up in India, its impact on the energy-generation mix is as yet limited. India remains a country in which about 74 per cent of the electricity generated is based on fossil fuels. The weary, wise, experienced, powerful people believe they have heard the renewables story all their life and things haven’t changed much. 

We have crossed the tipping-point and now things will change. The key thing is economic superiority. As long as solar was expensive, its growth was limited. But now, the economics of solar power has comprehensively beaten that of fossil fuels. Now we will get nonlinear adjustment in prices of financial assets and in the real economy. Now, it is about business sense and not about exhortation. It is not about the terrible carbon-dioxide emission associated with coal. It is not about the terrible air pollution that goes with coal. Every buyer in India that cares about reducing cost will doggedly find ways to get out of buying coal-thermal power and switch to solar power. 

What does this milestone imply for finance and industry? 

First, for firms that buy electricity, energy procurement should not be viewed as a passive administrative function. This now requires attention from boards, business leaders and consulting firms. There are opportunities to navigate grid-access rules to bypass the government system. This may involve mechanisms such as captive generation, group captive structures, routing through the Inter-State Transmission System, etc. 

Second, there are possibilities of investment and growth for renewable-energy firms. Capital will flow to these ventures, driving a boom in finance and economics. 

Third, the value of coal-thermal firms has changed. New investment in coal and some of the existing high-cost coal plants are increasingly priced out and will face declining utilisation and reduced margins. Lenders and equity investors need to reprice these exposures.

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Shah is a researcher at XKDR Forum; Abhyankar and Phadke are with the India Energy and Climate Centre, University of California, Berkeley