(HT: Chris Blattman)
Thursday, March 18, 2010
Wednesday, March 17, 2010
Multi-tier accounts for the poor
I have blogged and written about the possibility of drawing on financial innovations to help the poor manage their incomes, savings and consumption needs more optimally. One of the most fundamental innovations could involve the use of multi-tier accounts that leverage inflows from wages and other household income with the various government welfare schemes to achieve the aforementioned objectives. Here is how a super-set of such multi-tiered account will look like (the tiers are shown in the boxes)
(please click on the figure to enlarge)
Every poor person will have a single UID-linked bank account which would have multiple functionally (or use-directed) determined tiers. All his transfers from government - wages, pensions, farm loans, Minimum Support Price (MSP) payments, housing subsidies, self-employment loans/subsidies etc - would by default flow into the respective heads within the account. He can also choose to transfer his private wages and other income into the same account, as possible default (or pre-defined) escrows into specific heads.
The member would contribute a specific sum every month to an educational annuity or insurance product which could be matched with a government share. The periodic (monthly/quarterly) contribution can be transferred by default from her savings bank account. The contributions could even be increased with some periodicity, in small increments, as a default option.
The tiers within the account could even be leveraged to access capital from the private market to purchase various consumer durables by EMI-based payments or even raise small business loans and house construction loans. Some of the subsidies and government loans (say for housing or self-employment or health insurance) can even be topped-up with regular financing from banks by dove-tailing repayments from a specific savings tier (within the individual's account).
Here are just two examples. First, a self-employment subsidy of Rs 10,000 and a Rs 25000 margin money loan at a concessional 5% provided under say, the National Scheduled Tribes Development Corporation (NSTFDC), can be leveraged by a credit-worthy individual (who has been using the multi-tier savings account and has an acceptably regular savings patterns) with a private bank to raise another Rs 25000 loan to start a small pickle making unit. A "pickle plant" tier with first charge (default transfer of wage/income inflows) of any income of the borrower can funnel repyments. The details of such accounts are important and should be carefully worked out.
Second, consider a government run pension/health insurance scheme where the government contributes a sum of Rs 20 per month and the beneficiary puts in a matching Rs 20. Now, the beneficiary could choose to increase his contribution to Rs 50 every month and avail of a higher pension or expanded health care benefits. The scheme, run by say LIC, could be very easily administered through a pension/health insurance tier within the beneficiary's account.
(please click on the figure to enlarge)
Every poor person will have a single UID-linked bank account which would have multiple functionally (or use-directed) determined tiers. All his transfers from government - wages, pensions, farm loans, Minimum Support Price (MSP) payments, housing subsidies, self-employment loans/subsidies etc - would by default flow into the respective heads within the account. He can also choose to transfer his private wages and other income into the same account, as possible default (or pre-defined) escrows into specific heads.
The member would contribute a specific sum every month to an educational annuity or insurance product which could be matched with a government share. The periodic (monthly/quarterly) contribution can be transferred by default from her savings bank account. The contributions could even be increased with some periodicity, in small increments, as a default option.
The tiers within the account could even be leveraged to access capital from the private market to purchase various consumer durables by EMI-based payments or even raise small business loans and house construction loans. Some of the subsidies and government loans (say for housing or self-employment or health insurance) can even be topped-up with regular financing from banks by dove-tailing repayments from a specific savings tier (within the individual's account).
Here are just two examples. First, a self-employment subsidy of Rs 10,000 and a Rs 25000 margin money loan at a concessional 5% provided under say, the National Scheduled Tribes Development Corporation (NSTFDC), can be leveraged by a credit-worthy individual (who has been using the multi-tier savings account and has an acceptably regular savings patterns) with a private bank to raise another Rs 25000 loan to start a small pickle making unit. A "pickle plant" tier with first charge (default transfer of wage/income inflows) of any income of the borrower can funnel repyments. The details of such accounts are important and should be carefully worked out.
Second, consider a government run pension/health insurance scheme where the government contributes a sum of Rs 20 per month and the beneficiary puts in a matching Rs 20. Now, the beneficiary could choose to increase his contribution to Rs 50 every month and avail of a higher pension or expanded health care benefits. The scheme, run by say LIC, could be very easily administered through a pension/health insurance tier within the beneficiary's account.
Equity markets update - Shiller Vs Siegel?
The year-long rise in equity markets across the world, especially in developing economies, has ignited intense speculation about whether shares have become over-valued.
Economists like Robert Shiller argue that equities remain at levels higher than their historic levels. They claim that government interventions in the economy and the equity markets in 1998, 2001 and 2008 have kept stocks from fully correcting, and there are ample signs that bubbles are starting to inflate again, notably in certain developing-country stocks. They point to the fact that despite the two bear markets, stocks have spent almost all their time since 1991 priced above historic averages, thereby increasing the probability of declines.
Prof Shiller has compiled market data back to 1881, measuring stock prices month by month relative to corporate profits, and to avoid short-term profit distortions, he uses an average of profits over the previous 10 years. Whereas over the long run, by this measure, stocks trade at an average of about 16 times annual corporate profits (that is, their price-to-earnings ratio, or P/E ratio, is about 16), the current PE ratio is above 20. Of even greater concern is the fact that since 1991 the S&P 500 has spent only seven months, in late 2008 and early 2009, below the average level of 16.
There are other like Wharton's Prof Jeremy Siegel, who argue that the steep correction of 2008-09 means that stocks continue to remain very cheap. Prof Siegel argues that Shiller's use of 10-year average profits works poorly in the current environment, because big financial companies took such heavy write-offs in 2008 and 2009.
In any case, as this graphic (BSE Sensex, NASDAQ, DJIA, and FTSE) indicates, despite all talks of de-coupling, the global equity markets have been strongly coupled over the last two years, in both the meltdown on 2008 and the recovery of 2009.
Update 1 (21/3/2010)
The Times feels that the second year of the bull market rally from March 2010 may not be as productive as the 70% increase shown by the S&P 500 for the same period last year. It points to a Merrill Lynch estimate that the second years of rallies are almost always less fruitful than the first, with only twice the S&P 500 index gaining more than 12% in the second year after a market bottom and the average gain being just 9%. In the second year after the most recent bears in this category — which spanned from 1980-82 and 2000-02 — stocks gained only 2% and 8% respectively.
Encouraging news is that bull market rallies generally go beyond the first year (Merrill's estimate is that in nine of the last 10 market recoveries going back to 1932, stocks gained ground in the second year after a bear market) and two decades of bear market is very rare (The S&P 500 peaked after the long bull market run of 1990s at 1,527 on March 24, 2000. Today it stands 24% lower, at 1,159. The last instance of two decades of bear market happened in 1929).
As aforementioned, Robert Shiller uses the 10-year average corporate profits to calculate the market’s price-to-earnings (P/E) ratio to be 20.6, noticeably higher than the historical average of 16. He finds that in periods when the market’s P/E ratio has been between 19 and 25, the average real return for stocks over the subsequent decade has been 3.8% after inflation. Assuming inflation is around 3%, stocks are likely to return less than 7% for this decade, which is lower than their long-term historical gain of around 10% a year.
See also this Global Investment Returns Yearbook for 2009 from Credit Suisse.
Economists like Robert Shiller argue that equities remain at levels higher than their historic levels. They claim that government interventions in the economy and the equity markets in 1998, 2001 and 2008 have kept stocks from fully correcting, and there are ample signs that bubbles are starting to inflate again, notably in certain developing-country stocks. They point to the fact that despite the two bear markets, stocks have spent almost all their time since 1991 priced above historic averages, thereby increasing the probability of declines.
Prof Shiller has compiled market data back to 1881, measuring stock prices month by month relative to corporate profits, and to avoid short-term profit distortions, he uses an average of profits over the previous 10 years. Whereas over the long run, by this measure, stocks trade at an average of about 16 times annual corporate profits (that is, their price-to-earnings ratio, or P/E ratio, is about 16), the current PE ratio is above 20. Of even greater concern is the fact that since 1991 the S&P 500 has spent only seven months, in late 2008 and early 2009, below the average level of 16.
There are other like Wharton's Prof Jeremy Siegel, who argue that the steep correction of 2008-09 means that stocks continue to remain very cheap. Prof Siegel argues that Shiller's use of 10-year average profits works poorly in the current environment, because big financial companies took such heavy write-offs in 2008 and 2009.
In any case, as this graphic (BSE Sensex, NASDAQ, DJIA, and FTSE) indicates, despite all talks of de-coupling, the global equity markets have been strongly coupled over the last two years, in both the meltdown on 2008 and the recovery of 2009.
Update 1 (21/3/2010)
The Times feels that the second year of the bull market rally from March 2010 may not be as productive as the 70% increase shown by the S&P 500 for the same period last year. It points to a Merrill Lynch estimate that the second years of rallies are almost always less fruitful than the first, with only twice the S&P 500 index gaining more than 12% in the second year after a market bottom and the average gain being just 9%. In the second year after the most recent bears in this category — which spanned from 1980-82 and 2000-02 — stocks gained only 2% and 8% respectively.
Encouraging news is that bull market rallies generally go beyond the first year (Merrill's estimate is that in nine of the last 10 market recoveries going back to 1932, stocks gained ground in the second year after a bear market) and two decades of bear market is very rare (The S&P 500 peaked after the long bull market run of 1990s at 1,527 on March 24, 2000. Today it stands 24% lower, at 1,159. The last instance of two decades of bear market happened in 1929).
As aforementioned, Robert Shiller uses the 10-year average corporate profits to calculate the market’s price-to-earnings (P/E) ratio to be 20.6, noticeably higher than the historical average of 16. He finds that in periods when the market’s P/E ratio has been between 19 and 25, the average real return for stocks over the subsequent decade has been 3.8% after inflation. Assuming inflation is around 3%, stocks are likely to return less than 7% for this decade, which is lower than their long-term historical gain of around 10% a year.
See also this Global Investment Returns Yearbook for 2009 from Credit Suisse.
Tuesday, March 16, 2010
Addressing petroleum and diesel subsidies
I have blogged recently about how developments in UID and TFI opens up considerable opportunities in re-designing various subsidy disbursement channels to both improve targetting and increase its economic efficiency. This includes the possibility of transferring subsidies directly as cash (into the UID-linked bank account of the beneficiary) and thereby dismantle price controls or more accurately target the subsidy (like in case of PDS) towards its intended beneficiaries.
However, addressing the most salient and much-debated petroleum subsidies could be much more difficult. Since petroleum is directly or indirectly consumed by everyone in different forms, accurate targetting becomes very difficult. Apart from the difficulty of estimating the relative impacts of the higher prices, such direct cash transfers are also too complex to administer.
Compounding the problem is that eliminating price controls, while politically difficult, will also have a ripple-on effect on the economy. Unlike all subsidized products, petroleum is a critical input in the production of most other goods and services. Its price is a function of the cost of production of all these goods and services. Most critically (and politically damagingly), a sudden dismantling of the subsidy will surely have a cascading impact on the prices of food and other essential commodities.
Here are a few possible theoretical solutions. The first one to have a dual pricing system (a la PDS for petrol and diesel) and then target the subsidies as cash transfers through UID-linked accounts is both a step backwards and comes up against the aforementioned problem of cascading effect. The second one is to eliminate price controls and disburse subsidies, using the UID-linked bank accounts, as a revenue-neutral cash transfer to an identified group of beneficiaries. This will mitigate any possible inflationary impact of rise in petroleum prices and thereby smoothen the sudden shock arising from it. The cash transfer can have a built-in sunset clause whereby the subsidy would decrease continuously and expire over a period of time.
Another alternative would be prepare a widely-debated (build some level of consensus) self-acting action plan (even a legislation, linked to say the Fiscal Responsibility and Budget Management Act!) to gradually phase out the subsidies. This action plan can be back-ended and fairly long-drawn out to mitigate any adverse impact and manage inflationary expectations. Finally, a more optimistic alternative is to wait for global petroleum prices to fall to $30 a barrel and then use the resultant price cushion to dismantle price controls and thenceforth let the domestic retail market prices respond to the global market prices. But the problem with this approach is that when the reckoning comes, instead of dismantling the price controls, the clamour will be to pass on the benefits of lower price to the consumers!
The government's current policy on petroleum subsidies is clearly to make piece-meal increases when the crisis deepens. Such efforts come up aginst stiff political opposition, even within the ruling party's, and for every successful effort there are possibly three or four failed ones!
However, addressing the most salient and much-debated petroleum subsidies could be much more difficult. Since petroleum is directly or indirectly consumed by everyone in different forms, accurate targetting becomes very difficult. Apart from the difficulty of estimating the relative impacts of the higher prices, such direct cash transfers are also too complex to administer.
Compounding the problem is that eliminating price controls, while politically difficult, will also have a ripple-on effect on the economy. Unlike all subsidized products, petroleum is a critical input in the production of most other goods and services. Its price is a function of the cost of production of all these goods and services. Most critically (and politically damagingly), a sudden dismantling of the subsidy will surely have a cascading impact on the prices of food and other essential commodities.
Here are a few possible theoretical solutions. The first one to have a dual pricing system (a la PDS for petrol and diesel) and then target the subsidies as cash transfers through UID-linked accounts is both a step backwards and comes up against the aforementioned problem of cascading effect. The second one is to eliminate price controls and disburse subsidies, using the UID-linked bank accounts, as a revenue-neutral cash transfer to an identified group of beneficiaries. This will mitigate any possible inflationary impact of rise in petroleum prices and thereby smoothen the sudden shock arising from it. The cash transfer can have a built-in sunset clause whereby the subsidy would decrease continuously and expire over a period of time.
Another alternative would be prepare a widely-debated (build some level of consensus) self-acting action plan (even a legislation, linked to say the Fiscal Responsibility and Budget Management Act!) to gradually phase out the subsidies. This action plan can be back-ended and fairly long-drawn out to mitigate any adverse impact and manage inflationary expectations. Finally, a more optimistic alternative is to wait for global petroleum prices to fall to $30 a barrel and then use the resultant price cushion to dismantle price controls and thenceforth let the domestic retail market prices respond to the global market prices. But the problem with this approach is that when the reckoning comes, instead of dismantling the price controls, the clamour will be to pass on the benefits of lower price to the consumers!
The government's current policy on petroleum subsidies is clearly to make piece-meal increases when the crisis deepens. Such efforts come up aginst stiff political opposition, even within the ruling party's, and for every successful effort there are possibly three or four failed ones!
Monday, March 15, 2010
Solar energy : Photovoltaics Vs solar thermal
Even as the Government of India initiates efforts to aggressively promote renewable energy sources, it would do well to keep an eye on the experiences from across the world.
Countries like Spain have miscalculated hugely and make a headlong plunge into setting up solar plants with generous tariff incentives. The result is a number of poorly designed, low quality solar plants. The lavish subsidies meant that even inefficient and poorly designed plants made profits, and fuelled a speculative bubble in solar building permits.
Europeans have promoted solar and other wind power by using feed-in tariffs, under which governments pay a hefty premium for electricity from renewable resources. Feed-in tariffs are simply payments per kilowatt-hour for electricity generated by a renewable resource, and have been adopted in Spain, Germany, and France. In contrast, the regulators and governments in the US have favored indirect incentives like mandatory provisions on utilities and municipalities to buy a progressively rising share of their consumption from renewable energy firms.
Solar power generators are generally of two types - the ones using semiconductor photovoltaic (PV) panels to directly generate electricity and the thermal solar plants which typically uses hundreds of mirrors to concentrate the sunlight for boiling some type of liquid for producing steam, which then drives an electricity generator.
It has been argued that concentrating solar thermal parabolic troughs (CST) have a lower levelized cost of energy (LCOE) per kilowatt-hour (kWh) than PVs. However, since PV has a faster cost reduction curve than CST and concentrating PVs (CPV) are a distinct possibility in the future, PVs may emerge cheaper than CSTs. CPVs use mirrors or lenses to focus the sun’s rays on small, high-efficiency solar panels, and has the potential to deliver cheaper power than conventional photovoltaics, while using considerably less land than thin-film solar panels.
However, unlike PVs, CSTs have certain inherent advantages like the ability to generate during periods of high demand, including into the evening. With present technology PVs require approximately 1 km² for every 20–60 megawatts (MW) generated, whereas CST plants require far less area. CST projects can offer both better peak capacity characteristics, with 6-8 hour thermal storage, as well as a smoother short-term fluctuations. Intermittent clouds going over a PV system will cause output to spike widely. But with a CST plant, which has thermal inertia in the heat transfer fluids, an operator can have some warning of the clouds, slow the fluid flow rate, which increases the fluid temperatures, and ride through short-term cloud events.
There have been intense activity in the development of concentrated solar thermal plants which use power tower platforms where a field of swiveling mirrors reflects sunlight toward a central tower with a receiver. Companies like eSolar and BrightSource have been at the forefront of this race.
Last month, in a possible breakthrough deal for solar thermal technology, the United States Energy Department offered a $1.37 billion loan guarantee to BrightSource Energy of Oakland, California to build a 392-megawatt Ivanpah Solar Electric Generating System in the Southern California desert. This plant will deploy thousands of mirrors called heliostats that focus the sun on three towers that each will contain a water-filled boiler and the resultant heat creates steam that drives an electricity-generating turbine. Bechtel is building the plant. China has plans to build 2,000 MW of solar thermal power in collaboration with eSolar.
PVs are faster to install and can be deployed on residential and commercial rooftops as well as be mounted on the ground. Since they can be installed on the top of houses and other small vacant space close to the load center or consumption points, they offer huge potential for the development of a network of distributed generation systems (The Sacramento Municipal Utility District granted Southern California Edison permission to install 500 MW of solar on commercial rooftops). Distributed solar is faster on permitting, on environmental issues and interconnection to the grid. Apart from the cost of panels they do not require any expensive plant construction or recurring costs on fuels. Further, spurred on by the Chinese manufacturers and a boom in panel manufacturing, the cost of PV panels have been falling at a rapid pace.
One estimate of the costs of solar energy in the US has found that a small, residential solar-panel system costs about 40 cents per kilowatt-hour over the system's lifetime while larger solar-panel system would cost 20 cents per kilowatt-hour, while a solar-thermal power plant could cost 18 cents per kilowatt-hour over the power plant's lifetime, a figure that would include the cost of land. In comparison, electricity from coal-fired power plants costs about 5 cents to 6 cents per kilowatt-hour.
Last year, India unveiled its $19 bn Jawaharlal Nehru National Solar Mission that seeks to achieve 20 GW of solar power capacity by 2022 in three phases; create favourable conditions for PV and solar thermal manufacturing capability and fiscal incentives for local manufacturers; achieve 15 million sqm solar thermal collector area by 2017 and 20 million by 2022; and deploy 20 million off-grid solar lighting systems for rural areas by 2022. It contains a Renewables Purchase Obligation (RPO) that mandates all utilities and states to progressively increase their share of solar power from 0.25% in the phase I (2009-12) and to go up to 3% by 2022. The Central Electricity Regulatory Commission (CERC) has already been fixing feed-in-tariff every year for purchase of solar power based on current cost and technology trends.
It also proposes bundling of solar power along with power out of the cheaper unallocated quota of Central stations and selling this bundled power to state distribution utilities at the CERC regulated price. This is expected to bring down the gap between average cost of power and sale price of power. This bundling and re-sale will be done through the NTPC's trading arm, NTPC Vidyut Vyapar Nigam Ltd (NVVN). It will enter into PPAs with solar power developers in accordance with the tariff and PPA duration as fixed by the CERC and the Government will allocate to NVVN equivalent megawatt capacity, from the Central unallocated quota (from NTPC power stations) at the rate notified by the CERC for bundling together with solar power.
The push for renewables in India will suffer from major challenges. On the one hand, the artificially low prices of electricity means that high cost renewables start with an enormous disadvantage. Any carbon tax to neutralize the cost advantage of carbon fuels looks impossible to push through. The limited domestic manufacturing base for solar power components makes the industry dependent on imported parts and affects their cost-effectiveness. Proportionately higher feed-in tariffs will be difficult to justify given the wide differential with (the already very low) regular tariffs.
Update 1 (20/3/2010)
SolFocus, a Silicon valley startup, is building America's first concentrating PV (CPV) project, a one-megawatt solar farm northeast of Los Angeles. These panels, though more expensive than conventional solar cells, contain small mirrors that concentrate sunlight onto tiny, high-efficiency solar cells, and use a fraction of the silicon and land space to produce more electricity.
In conventional solar thermal plants, parabolic troughs focus sunlight on liquid-filled receivers suspended over the mirrors to create steam that drives an electricity-generating turbine. Now Alcoa are testing a new technology where the glass in parabolic troughs is replaced with the reflective aluminum and integrated the mirror into a single structure. They estimate that this all-aluminum Alcoa parabolic trough, which would replace the current solar troughs that use glass mirrors that are formed in the shape of a parabola and then attached to a support structure made of aluminum or steel, will cut the price of a solar field by 20% due to lower installation costs.
Countries like Spain have miscalculated hugely and make a headlong plunge into setting up solar plants with generous tariff incentives. The result is a number of poorly designed, low quality solar plants. The lavish subsidies meant that even inefficient and poorly designed plants made profits, and fuelled a speculative bubble in solar building permits.
Europeans have promoted solar and other wind power by using feed-in tariffs, under which governments pay a hefty premium for electricity from renewable resources. Feed-in tariffs are simply payments per kilowatt-hour for electricity generated by a renewable resource, and have been adopted in Spain, Germany, and France. In contrast, the regulators and governments in the US have favored indirect incentives like mandatory provisions on utilities and municipalities to buy a progressively rising share of their consumption from renewable energy firms.
Solar power generators are generally of two types - the ones using semiconductor photovoltaic (PV) panels to directly generate electricity and the thermal solar plants which typically uses hundreds of mirrors to concentrate the sunlight for boiling some type of liquid for producing steam, which then drives an electricity generator.
It has been argued that concentrating solar thermal parabolic troughs (CST) have a lower levelized cost of energy (LCOE) per kilowatt-hour (kWh) than PVs. However, since PV has a faster cost reduction curve than CST and concentrating PVs (CPV) are a distinct possibility in the future, PVs may emerge cheaper than CSTs. CPVs use mirrors or lenses to focus the sun’s rays on small, high-efficiency solar panels, and has the potential to deliver cheaper power than conventional photovoltaics, while using considerably less land than thin-film solar panels.
However, unlike PVs, CSTs have certain inherent advantages like the ability to generate during periods of high demand, including into the evening. With present technology PVs require approximately 1 km² for every 20–60 megawatts (MW) generated, whereas CST plants require far less area. CST projects can offer both better peak capacity characteristics, with 6-8 hour thermal storage, as well as a smoother short-term fluctuations. Intermittent clouds going over a PV system will cause output to spike widely. But with a CST plant, which has thermal inertia in the heat transfer fluids, an operator can have some warning of the clouds, slow the fluid flow rate, which increases the fluid temperatures, and ride through short-term cloud events.
There have been intense activity in the development of concentrated solar thermal plants which use power tower platforms where a field of swiveling mirrors reflects sunlight toward a central tower with a receiver. Companies like eSolar and BrightSource have been at the forefront of this race.
Last month, in a possible breakthrough deal for solar thermal technology, the United States Energy Department offered a $1.37 billion loan guarantee to BrightSource Energy of Oakland, California to build a 392-megawatt Ivanpah Solar Electric Generating System in the Southern California desert. This plant will deploy thousands of mirrors called heliostats that focus the sun on three towers that each will contain a water-filled boiler and the resultant heat creates steam that drives an electricity-generating turbine. Bechtel is building the plant. China has plans to build 2,000 MW of solar thermal power in collaboration with eSolar.
PVs are faster to install and can be deployed on residential and commercial rooftops as well as be mounted on the ground. Since they can be installed on the top of houses and other small vacant space close to the load center or consumption points, they offer huge potential for the development of a network of distributed generation systems (The Sacramento Municipal Utility District granted Southern California Edison permission to install 500 MW of solar on commercial rooftops). Distributed solar is faster on permitting, on environmental issues and interconnection to the grid. Apart from the cost of panels they do not require any expensive plant construction or recurring costs on fuels. Further, spurred on by the Chinese manufacturers and a boom in panel manufacturing, the cost of PV panels have been falling at a rapid pace.
One estimate of the costs of solar energy in the US has found that a small, residential solar-panel system costs about 40 cents per kilowatt-hour over the system's lifetime while larger solar-panel system would cost 20 cents per kilowatt-hour, while a solar-thermal power plant could cost 18 cents per kilowatt-hour over the power plant's lifetime, a figure that would include the cost of land. In comparison, electricity from coal-fired power plants costs about 5 cents to 6 cents per kilowatt-hour.
Last year, India unveiled its $19 bn Jawaharlal Nehru National Solar Mission that seeks to achieve 20 GW of solar power capacity by 2022 in three phases; create favourable conditions for PV and solar thermal manufacturing capability and fiscal incentives for local manufacturers; achieve 15 million sqm solar thermal collector area by 2017 and 20 million by 2022; and deploy 20 million off-grid solar lighting systems for rural areas by 2022. It contains a Renewables Purchase Obligation (RPO) that mandates all utilities and states to progressively increase their share of solar power from 0.25% in the phase I (2009-12) and to go up to 3% by 2022. The Central Electricity Regulatory Commission (CERC) has already been fixing feed-in-tariff every year for purchase of solar power based on current cost and technology trends.
It also proposes bundling of solar power along with power out of the cheaper unallocated quota of Central stations and selling this bundled power to state distribution utilities at the CERC regulated price. This is expected to bring down the gap between average cost of power and sale price of power. This bundling and re-sale will be done through the NTPC's trading arm, NTPC Vidyut Vyapar Nigam Ltd (NVVN). It will enter into PPAs with solar power developers in accordance with the tariff and PPA duration as fixed by the CERC and the Government will allocate to NVVN equivalent megawatt capacity, from the Central unallocated quota (from NTPC power stations) at the rate notified by the CERC for bundling together with solar power.
The push for renewables in India will suffer from major challenges. On the one hand, the artificially low prices of electricity means that high cost renewables start with an enormous disadvantage. Any carbon tax to neutralize the cost advantage of carbon fuels looks impossible to push through. The limited domestic manufacturing base for solar power components makes the industry dependent on imported parts and affects their cost-effectiveness. Proportionately higher feed-in tariffs will be difficult to justify given the wide differential with (the already very low) regular tariffs.
Update 1 (20/3/2010)
SolFocus, a Silicon valley startup, is building America's first concentrating PV (CPV) project, a one-megawatt solar farm northeast of Los Angeles. These panels, though more expensive than conventional solar cells, contain small mirrors that concentrate sunlight onto tiny, high-efficiency solar cells, and use a fraction of the silicon and land space to produce more electricity.
In conventional solar thermal plants, parabolic troughs focus sunlight on liquid-filled receivers suspended over the mirrors to create steam that drives an electricity-generating turbine. Now Alcoa are testing a new technology where the glass in parabolic troughs is replaced with the reflective aluminum and integrated the mirror into a single structure. They estimate that this all-aluminum Alcoa parabolic trough, which would replace the current solar troughs that use glass mirrors that are formed in the shape of a parabola and then attached to a support structure made of aluminum or steel, will cut the price of a solar field by 20% due to lower installation costs.
Comparing economic impact of recession on Canada, Australia and New Zealand
The debate about whether monetary policy can be an effective (or more effective than fiscal policy) instrument to combat recessions continues. Nick Rowe has a comparative analysis of the relative economic performances since the summer of 2008 (when financial markets froze and recession hit) of three countries with small open-economies and inflation targetting central banks - Canada (2%), New Zealand (2%) and Australia (2.5%).
Since Australia and New Zealand had high interest rates to start with, despite cutting rates aggressively since the second half of 2008, they did not face the Zero Lower Bound (ZLB) in interest rates, whereas Canada (which started with a lower 3% rate cut its rate to 0.25%. While all three were facing inflation rates higher than target in the summer of 2008, they have been brought within target now.
However, in terms of economic growth and unemployment, though Australia did the best, New Zealand did worse than Canada (on both counts) despite not facing the ZLB which constrains central banks from loosening monetary policy any further to boost aggregate demand.
As Nick admitted, his comments section offers more valuable explanations. One important missing element in the story may be the relative importance of the influence of China (and its stimulus spending and rebound in growth) on commodities-rich Australia and US (with its weak demand and ailing financial markets) on the closely integrated Canadian economy. Further, being small economies, all faced (and maybe the impact was greater on resource-poor and import dependent New Zealand) the brunt of the exogenous global economic shocks. And it did not benefit from the anchoring effect of China. And finally, the relative strenghts of the fiscal stimulus spending (which was strong and immediate in Australia, compared to the apparently feeble effort in New Zealand) may have some explanation for the respective economic outcomes.
Since Australia and New Zealand had high interest rates to start with, despite cutting rates aggressively since the second half of 2008, they did not face the Zero Lower Bound (ZLB) in interest rates, whereas Canada (which started with a lower 3% rate cut its rate to 0.25%. While all three were facing inflation rates higher than target in the summer of 2008, they have been brought within target now.
However, in terms of economic growth and unemployment, though Australia did the best, New Zealand did worse than Canada (on both counts) despite not facing the ZLB which constrains central banks from loosening monetary policy any further to boost aggregate demand.
As Nick admitted, his comments section offers more valuable explanations. One important missing element in the story may be the relative importance of the influence of China (and its stimulus spending and rebound in growth) on commodities-rich Australia and US (with its weak demand and ailing financial markets) on the closely integrated Canadian economy. Further, being small economies, all faced (and maybe the impact was greater on resource-poor and import dependent New Zealand) the brunt of the exogenous global economic shocks. And it did not benefit from the anchoring effect of China. And finally, the relative strenghts of the fiscal stimulus spending (which was strong and immediate in Australia, compared to the apparently feeble effort in New Zealand) may have some explanation for the respective economic outcomes.
Sunday, March 14, 2010
Incentivizing off-grid solar energy generation
One of the critical components of Government of India's recently announced Jawaharlal Nehru National Solar Power Policy is the promotion of off-grid solar power through the establishment of photovoltaic panels on roof-tops and other vacant locations.
In this context, a widely praised program model, called Property-Assessed Clean Energy (PACE), under implementation in 18 US states, which seeks to encourage homeowners to add solar panels and make their houses more energy efficient, is worthy of emulation. This model overcomes the problem of high up-front costs, which often deters people from making such investments, by allowing homeowners to pay for the panels and renovations gradually, through higher property taxes, which can also be passed on to subsequent owners if the house is sold.
The initial cost is covered by the municipality, generally through a bond issue. The financing is repaid over a set number of years through the "special tax" or "assessment" only on those property owners who voluntarily choose to attach the cost of their energy improvements to their property tax bill. The financing is secured with a lien on the property and in the event of foreclosure, the energy financier is paid before other claims against the property. If the property is sold before the end of the repayment period, the new owner inherits both the remaining repayment obligation and the financed energy improvements. Here is a snapshot of the financing elements.
This site has resources on how to lauch a PACE program in a locality, inlcuding enabling legislations. See this guide to energy efficiency and renewable energy financing districts for local governments.
Update 1 (18/10/2010)
The U.S. government has two programs to help the industry: a cash grant that pays 30 percent of project costs for plants under construction by Dec. 31, and a loan guarantee program that covers as much as 80 percent of project costs.
In this context, a widely praised program model, called Property-Assessed Clean Energy (PACE), under implementation in 18 US states, which seeks to encourage homeowners to add solar panels and make their houses more energy efficient, is worthy of emulation. This model overcomes the problem of high up-front costs, which often deters people from making such investments, by allowing homeowners to pay for the panels and renovations gradually, through higher property taxes, which can also be passed on to subsequent owners if the house is sold.
The initial cost is covered by the municipality, generally through a bond issue. The financing is repaid over a set number of years through the "special tax" or "assessment" only on those property owners who voluntarily choose to attach the cost of their energy improvements to their property tax bill. The financing is secured with a lien on the property and in the event of foreclosure, the energy financier is paid before other claims against the property. If the property is sold before the end of the repayment period, the new owner inherits both the remaining repayment obligation and the financed energy improvements. Here is a snapshot of the financing elements.
This site has resources on how to lauch a PACE program in a locality, inlcuding enabling legislations. See this guide to energy efficiency and renewable energy financing districts for local governments.
Update 1 (18/10/2010)
The U.S. government has two programs to help the industry: a cash grant that pays 30 percent of project costs for plants under construction by Dec. 31, and a loan guarantee program that covers as much as 80 percent of project costs.
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