Solar heat: A market waiting to be created

Many industries use diesel and gas to generate heat for their production processes. The use of coal should be discouraged, ideally prohibited, to reduce dangerous levels of air pollution in the country. Solar thermal systems provide heat directly, using the energy from solar radiation, offering a viable and sustainable alternative.  

This is a proven technology, capable of providing round-the-clock supply of solar energy where required. Industries that can use solar thermal energy for meeting their heat requirements include dairy, food processing, textiles, pharmaceuticals, and chemicals. For these industries, their operating costs would be substantially lower if they used solar thermal systems, as solar radiation is free unlike diesel and gas. However, the transition from diesel and gas to solar thermal systems has yet to begin in India. 

This is a classic case of “market failure”. There are no large firms in the market offering these systems and trying to create demand. These systems also need to be designed for each industrial unit to meet its specific heat requirements and are not suitable for mass standardised production, marketing, and sales. In the absence of supply and promotion, there is no demand.  Such cases of market failure require the government to take leadership to steer market forces. A suitable strategy would have to be designed. There is no one-size-fits-all solution.    

We have the experience of remarkable success in getting all households to use energy efficient LED bulbs instead of the traditional incandescent bulbs and save on their electricity bills. Energy Efficiency Services Ltd of the Ministry of Power and the Bureau of Energy Efficiency bought LED bulbs in bulk repeatedly, bringing down prices dramatically. 

It partnered all the discoms, the electricity distribution companies, which gave the LED bulbs to consumers, recovering the cost in instalments that could be easily paid from the savings in electricity bills. This innovative programme design, without needing any subsidy, led to the transition being completed in just about five years, a global record. 

One way forward for solar thermal would be for a state agency to demonstrate the reliability and cost savings of these systems across industries by setting up pilot projects. To illustrate, a new unit being built in a dedicated industrial zone, say a textile park, is identified and persuaded to get its process heat from a new solar thermal heat system designed to meet its needs. This could be done by offering to supply the heat through a contract with guarantees and liability. To meet this obligation, bids may be invited for supply with the standard long-term “take or pay” contract. With these back-to-back contracts for the purchase of heat and its supply, the agency would be assuming only contingent liability. By doing so, it would overcome the risk perception of industrial units regarding guaranteed supply, and of the supplier regarding assured offtake and payment.  Partnership with industrial park developers would be needed for the provision of space for these solar thermal systems to be installed in a modular fashion as production and demand grow in the park in the future. 

As the first set of pilot projects are seen as succeeding by providing reliable supply of process heat at a substantially lower cost, competitive market forces would begin to operate. Demand would grow. The need for a government agency to provide risk mitigation would decline and then cease altogether. Increasing scale and competition can be expected to result in movement down the cost curve for the manufacturing, installation and maintenance of these systems.  

The government could further incentivise this transition by bringing these systems into the lowest goods and services tax rate and by providing a higher depreciation rate. The number of new units using solar thermal energy would initially rise slowly and then gather pace as confidence in their reliability increases.  Existing units would see the cost benefit, and some may start switching over. As with other major transitions, initial progress driven by the government would be slow till a critical mass is reached, after which market forces would take over. If we begin now, completing this transition fully in the first half of the next decade could be a realistic goal. 

The use of solar thermal energy would lower costs for industrial units, increasing their competitiveness. It would result in substantial decarbonisation. Another potential benefit for the units using solar thermal energy would be that their exports, directly or as part of a supply chain, to the European Union (EU) under our free-trade agreement would not attract import duties under the Carbon Border Adjustment Mechanism (CBAM) regime in the EU. Under CBAM, if the carbon emissions in the production of goods being imported exceed prescribed standards, then these goods attract import duties.  

The government could steer this transition without needing to provide subsidies from the Budget. A major milestone in the journey to net zero would be achieved and the cost of production in a large growing segment of industry would decline, truly a win- win for all.    

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The writer is distinguished fellow, Teri, and the author of Rising Ambition: Carving New Pathways—India's Energy Transition