The residential segment, which has a higher tariff than the industrial segment, will reach parity faster. Also, solar power may not be feasible for power hungry industries or commercial establishments, which require constant and uninterrupted power supply
By Niranjan Suresh
Wednesday, January 15, 2014: Grid parity is achieved when an alternative energy source can generate power at a levelised cost of electricity (LCoE) that is less than or equal to the price of purchasing power from the electricity grid. It is predicted that India will reach grid parity around 2017-19.
Grid parity is impacted by two variables—an increase in the cost of conventional power and a decrease in solar power prices. The rate at which solar prices are dropping is approximately 5-7 per cent per annum. Factors contributing to this include economies of scale, that is, when manufacturing on a large scale reduces the ‘per unit’ cost of a product; advancements in technology and improving efficiency in conversion. Apart from this, tax-free policies and lower financing costs will certainly polarise the market towards solar power in a big way.
Grid parity projections
So when will grid parity occur in India?
Parity at utility level: As the prices of coal vary in different states, a specific year cannot be set for parity at the utility level, as it will vary from state to state.
Parity at retail level: At the retail or consumer level, grid parity is expected to occur earlier. This is because the electricity prices at the retail level are higher than that of utility level. The network costs for the ‘last mile’ infrastructure add to the existing utility prices. Hence, the retail segment will achieve grid parity faster.
Parity in states: Within states, there is a significant variation between the cost of power at the utility input level and at the residential level. The cost is lower in energy-rich states and high in states that import electricity. The level of solar radiation at a particular point also determines the cost. The major demand for electricity comes from the northern, western and southern regions, and accounts for 85 per cent of India’s total energy requirements. For example, Punjab, Rajasthan and Uttar Pradesh require 29 per cent; Gujarat, Madhya Pradesh and Maharashtra also require 29 per cent; and Andhra Pradesh, Karnataka, Tamil Nadu require 27 per cent of the electricity generated in India. The remaining 15 per cent accounts for the requirements from other states.
From past experience, the levelised cost of power (LCP) has increased at a rate of 4-5 per cent. With the weak rupee, the cost of importing fuel will increase further. So with the increasing LCP, utilities can resort to the following two measures to improve their financial performance:
(a) Increase consumer tariffs to reflect the upward trend in the cost of power generated from conventional sources of energy such as coal, oil and natural gas.
(b) Lower dependence on higher government subsidies, which has the negative impact of straining government resources that could be put to use elsewhere.
This points to a situation in which none of the stakeholders involved seem to be winning. The utilities face massive losses in operation, consumers end up paying more, and the government is forced to absorb some of the losses. The increase in the LCP of power generated from coal and other conventional sources will lead to faster grid parity because the rate of the increase in LCP is inversely proportional to the time taken for grid parity. This situation highlights the need to shift to non-conventional sources of energy.
Parity in residential and agricultural segments:Currently, the residential and agricultural segments receive a high subsidy for electricity, leading to heavy losses for the government. In the agricultural segment, diesel and electricity requirements are high. The cost of electricity generation in rural areas increases due to transmission and last mile costs. Many of these regions are off-grid and face erratic supply. Similarly, in the residential segment too, which faces higher costs for reasons mentioned earlier, prices are uneven throughout the country.
Without subsidies, prices in the retail and agricultural segments would be on par with solar prices. Thus, grid parity in these segments will take place much faster, forcing a shift to solar power.
How cost of solar power can be reduced
Factors that can lead to reduction in the cost of solar energy are technological innovation, economies of scale and lower manufacturing costs. Every year, new technological innovations lead to different ways of harnessing energy. Some examples are the organic solar cell and dye sensitised solar cells. To benefit from the economies of scale, production volumes need to increase. But this will happen only when demand increases, which is possible only with more awareness about solar usage and its advantages. Also, without localisation, the percentage of imported technology will increase, which will increase the overall PV cost, as it is influenced by exchange rate fluctuations and interest rates.
Innovative models
Some of the innovative business models of using solar power to reduce costs are solar leasing, net metering and the feed-in tariff method.
Solar lease model is an innovative method that enables a customer to pay a monthly rental, where an external entity installs and sets up the system. The main advantage of this model is that there is no operating charge. The consumer is not responsible for fixing the system, and there is no upfront cost involved. Once the lease period ends, say after 10 to 20 years, the consumer may choose to purchase the solar power system for a small, residual value, renew the lease or even opt to have the system removed. Thus, the solar lease model works out cheaper than the current price of conventional electricity. According to estimates, it makes sense for high consumption customers who are paying Rs 7-10 per kWh, to shift to solar power, which will cost between Rs 9 and 11 per kWh.
In the feed-in tariff model, the government will pay the consumer for generating solar power even if the consumer uses the electricity produced. There is an additional bonus for exporting to the grid. However, the laws are currently not in place in India for the residential segment, leading to difficulty in estimating an appropriate feed-in tariff. Another challenge is the need for higher monitoring, verification and governance. Close to 11 per cent of the meters in Pune show a zero reading, or average billing.
Net metering is a new concept that promises an environment-friendly and power-efficient electricity evaluation system. When a net metering client’s renewable generator produces more power than is being consumed, the electric meter runs backward, thus generating credits. Whenever the net metering customer uses more power than is being produced, the meter runs forward, as normal. Such customers are charged only for the net power that they consume from the electricity service provider that has accumulated over a specific period. The drawback in India is that there are no regulations for metering arrangements of rooftop solar PV. There should be clarification on the meter location, accuracy class, type, sealing, reading requirements for main meter/check meter/standby meter, and a separate metering arrangement for single meters with separate registry for export/import.
Crash in solar PV prices
The current situation suggests that solar power is likely to reach parity in the coming few years. How did this remarkable change come about? Post 2008 crash in polysilicon prices, large-scale manufacturing boomed in China due to low priced local raw materials, experience in electronics manufacturing, low labour costs and government support. It is believed that countries like China, India, US and Japan will fuel the next phase of growth of solar power. The European markets are expected to recede due to caps on incentives and cuts in feed-in tariffs.
The solar industry in India is not yet mature. It is still at the stage that requires a lot of support, in the form of policies and investments. The government must start shifting focus from coal and diesel as an energy source, towards solar. Without government intervention, change is not possible. Procedural hurdles need to be removed and the subsidies on coal and diesel have to come down. Creating awareness on the need to use solar power is not necessary anymore, but awareness of the cost effectiveness of solar over diesel and the concept of grid parity needs to be explained in detail. Policies like net metering, which are successful models in other countries, have the potential to take off well in India. The same applies to feed-in tariffs and the solar lease model.
The author is pursuing his dream of becoming a social entrepreneur in the field of renewable energy.
