Thursday, October 10, 2013

Solar Power - Lessons for Gujarat from Spain

In the second half of last decade, Spain witnessed massive investments in renewable energy. This was underpinned by a policy of  feed-in-tariffs (FIT) which assured very generous (44 euro cents per KWh) tariffs for 25 years or the project life. This led to a massive spurt in investments, raising the share of non-hydel renewables in the country's electricity supply from 13% to 27% in the 2007-12 period. This predictably led to the emergence of a large tariff deficit, or the difference between the cost of purchase (or the assured FIT) and the price consumers pay. The cumulative subsidy burden from this tariff deficit is now about 26 billion euros (or $35 bn), with the deficit this year estimated to be 2.5-3 bn euros.

In July this year, the Spanish government issued a decree aimed at bridging the tariff deficit. The decree mandates that instead of an assured FIT, solar generators have to sell their electricity on the open market like other generators and receive additional "fair" compensation based on their investment. That compensation will be linked to 10 year sovereign bonds, plus 300 basis points, implying an annual return currently of about 7.5%. This will apply to even existing generators who have been guaranteed very profitable 25 year FIT subsidies.

The Spanish experience assumes great relevance for countries like India which has aggressively sought to promote investments in renewables. The Gujarat Solar Policy is the one which bears the greatest resemblance to the Spanish story. In 2009, the Gujarat state government announced attractive FIT's, Rs 13 (for those commissioned before 31.12.2010) and Rs 12 per KWh (commissioned before 31.03.2014) of solar PV power supplied for the first 12 years.

It met with immediate success as generators rushed in to set up solar plants. The state now accounts for more than half the solar installed capacity in India as a wave of solar power plants have been commissioned in recent years. In fact, the Gujarat Urja Vikas Nigam Ltd (GUVNL), which buys the solar power, has so far signed power purchase agreement under the Policy with 88 developers for about 971.5 MW. These agreements, worth Rs 15000 Cr of investments, were signed without any competitive bidding and on a direct nomination route under the Policy. Commentators have rushed in to advocate the Gujarat model as an example worthy of emulation.

In fact the aggressive policy of Gujarat government has been in stark contrast to the more measured approach of the central government. Instead of a head-long plunge, it has preferred a phased expansion. Interestingly, in the first two auctions held under the National Solar Mission, developers have quoted far lower prices than the FIT's assured by the Gujarat state government. The steep drop in solar panel prices has enabled a much faster convergence between solar and thermal prices, thereby leaving the Gujarat government to saddle a very high tariff deficit and subsidy burden.

Now, in an acknowledgement of the mis-judgement with its Solar Policy, the Gujarat state government is exploring ways to restrict the period of the FIT. The GUVNL recently petitioned the state electricity regulator to lower the FIT under the Solar Policy to about Rs 9 per unit ($0.15), comparable to the prices received by the Government of India in its auctions. Clearly Gujarat ignored the lessons from Spain, which were already widely known by 2009, and choose to go ahead with aggressive tariff subsidies. Even with the lower tariffs, given the pace of solar-thermal convergence, the Gujarati tax payers will end up subsidizing the solar generators. 

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