India's markets in electricity are roiled by low and unstable prices, with uneven service quality.
Shyam Ponappa | July 1, 2021
Is it good for consumers when prices crash? After an intuitive “yes”, reflection on one’s own and society’s long-term interests, as in the example below, may lead to the realisation that quality cannot be sustained below a reasonable price. In the same way, overambitious targets without detailed plans and unrealistic policies create turbulence and instability, such as financing not being available for constructing coal-based power plants. This will mean shortages unless sufficient power is available from new sources.1
Energy considerations are simultaneous problems, and solutions must consider interconnected factors. A third issue is bringing order and stability to electricity markets, for which India needs investors with significant capital willing to invest at scale for slower payback than in high-tech aggregation, for example. The groundwork must be done to handle large-scale targets and projects, because big players operate at scale, avoiding smaller projects. The opposite aspect is the integration of rooftop solar for net metering,2 which has been capped this year at 10 kW, thereby excluding the most promising upscale residential and corporate categories. Another aspect that needs resolution is the financial capacity of distribution companies.
The case of SoftBank’s investment in solar power in India and its exit is an example of the difficulties of bringing order and scale to India’s power sector.
SoftBank’s Solar Gambit in India
In 2015, Japan’s SoftBank Group CEO Masayoshi Son announced the intention to invest $20 billion in India in solar projects through SB Energy (SBE), a venture with Bharti Enterprises and Taiwan’s Foxconn. It seemed ideal for India. With abundant sunshine and a big potential market, the logic for large solar projects was always compelling. Prime Minister Narendra Modi had raised the solar target for 2022 from 20 GW to 100 GW. India had about 4 GW largely from rural and rooftop projects, priced 50 per cent higher than power from coal. Despite a good start, in time, SoftBank’s price expectations proved to be too high.
Prices fell thereafter because of cheap solar modules from China, and increasing competition, perhaps influenced by SoftBank’s exuberant presence. SBE’s winning bids dropped from Rs 4.63/unit in December 2015 in Andhra Pradesh to Rs 2.45/unit in Rajasthan in May 2017, which SBE maintained was profitable. Solar power became half that of coal. Bids dropped as low as Rs 1.99 in December 2020, as lower-cost pension funds bid aggressively. However, prices firmed up this year, and winning bids in May ranged from Rs 2.51 to Rs 2.69.
Meanwhile, SoftBank could not get the government to offer a massive tender of 900 GW, more than double India’s capacity, despite announcing an increased investment intent of $60-100 billion.
Facing regulatory problems such as land not allocated for transmission lines, delays in payments, and attempts at renegotiation of its power purchase agreement in Andhra Pradesh, SoftBank began losing interest. Ironically, prices now are near the Rs 2.70 that SBE had bid in 2018 for 1 GW of a tender where the government expected a much lower bid from SBE for the full 3 GW tender, and rejected other similar bids, accusing SBE of cartelisation. Last month, SoftBank sold its solar assets to Adani Green Energy Ltd (AGEL) and shifted its solar focus to the US. It continues to invest actively in Indian high-tech, however, committing $2 billion in 2021 by the end of May.
This is insufficient solar capacity from an environmental perspective as well as in terms of opportunity cost, i.e., the available solar energy. The short point is that India needs investors like SoftBank, with the capacity and willingness to invest in slower-payback infrastructure.
The government could not entertain large bids to the extent that SoftBank was willing to invest (assuming a tender for 100 GW, of their expressed interest in 900 GW). The preponderance of coal will continue because the current annual tendering capacity is 6-8 GW. This means higher costs and carbon footprint until the government is able to accommodate larger-scale investor interest. It will require resolution of a serious obstacle, the stressed financials of state distribution companies, realistic tariff expectations, and larger tendering capacity.
SBE focused on quality and scale, outsourcing its clean design and installation to high-quality Engineering, Procurement and Construction contractors. Its low-cost finance and capacity were offset by a high cost structure, in a low-bid environment. India may not be ready for such investors, because price trumps quality, even if quality is reasonably priced. But we do need to nurture serious investors willing to invest in electricity and other infrastructure.
Our markets in electricity, telecom and broadband are roiled by low and unstable prices, with uneven service quality. Our interests would be best served if our policies aim for integrated, stable services at reasonable prices that might not necessarily be least cost in the interests of efficacy. This is what we need to drive the economy in a sustained manner, to provide its foundation and fuel its growth.
Government policies and regulations need to be configured towards overarching objectives that are aligned or at least not contradictory. Various streams within and across sectors must be integrated, such as fuel sources and electricity generation, to converge towards objectives. This will require Central and state governments to evolve integrated plans and develop interdepartmental coordination processes to steer the energy sector.3 A prerequisite is resolving the financial problems of state distribution companies, including payment discipline.
If a genuine effort is made to work through these and scope a large, practicable solar tender (of 5 GW or 10 GW), with a process of repeating/escalating it over time, the government could seek to initiate discussions for such contracts with two or three select investors.
Shyam (no space) Ponappa at gmail dot com
1: "Does India need more coal power?"
2: See “The economics of ‘net’ and ‘gross’ metering: The Punjab example”: https://carboncopy.info/rooftop-solar-and-discoms-a-case-of-putting-the-cart-before-the-horse/
3: India had an Integrated Energy Policy, compiled by the Planning Commission for 2006 to 2030: (http://niti.gov.in/planningcommission.gov.in/docs/reports/genrep/rep_intengy.pdf). If discontinued, this needs updating with probabilistic modelling, and conversion to action plans through interdepartmental processes empowered to execute these plans
