COVID-19 and Other Inflection Points: Fifth Annual Review of Solar Scale-Up in India

This guest post is co-authored by Joshua Busby, associate professor of public affairs at the Robert S. Strauss Center for International Security and Law at the LBJ School at the University of Texas at Austin, and Sarang Shidore, a senior research analyst and program manager at the LBJ School at the University of Texas at Austin. This blog reflects findings from the fifth annual installment in UT’s assessment of India’s solar trajectory. 

Prior to the COVID-19 pandemic, India was moving to the forefront of the global energy transition, with plans to reach 175-gigawatt (GW) of renewable energy by 2022. Prime Minister Modi’s decisive electoral win in May 2019 seemed to have secured continuation of India’s ambitious solar energy goals, but now the COVID-19 outbreak of early 2020 is slowing and delaying new solar energy construction on top of other challenges the sector faced. The fate of India’s push to clean energy has global implications, since India is a major economy and lowering its carbon emissions is important to global efforts to address climate change.  

Even before the pandemic, India’s solar sector was entering a new more fraught phase. Some states sought to renegotiate contracts with developers to take advantage of falling solar prices, and undermined private sector confidence in the process. Long-standing financial problems of mostly state-owned distribution companies (so-called “Discoms”) continued to dampen their interest in buying power from renewables, leading to payment delays and curtailment.  

Now, new barriers are emerging due to the pandemic-related economic contraction of India’s economy. To begin, COVID-19-related disruptions in the global supply chain for clean energy technology like solar have taken their toll on India’s solar sector with delays in needed imports of components. India’s COVID-19 lockdown led to the disruption of the workforce for new plant construction. The temporary decline in electricity demand has also reduced the scope for new solar installations, while falling fossil fuel prices (though currently mostly neutralized by higher taxes imposed by the government) could make more room for continued use of coal, kerosene, and liquefied petroleum gas (LPG). Domestic public capital will also be more constrained going forward, raising questions about how future government policies will affect renewable energy targets.   

Still, significant amounts of solar (and wind) have been brought on-line: the challenge increasingly is how the grid can integrate larger quantities of variable renewable power. Despite some protection offered by a new import duty, most solar panels still come from China, creating tension between the goals of faster scale-up and the call for more self-reliance on local production in India.  

The Cheap Solar Era 

Since 2014, India has pursued what Varun Sivaram describes as a “vanilla tender” phase focused on lowering the auction prices of solar to make it cost competitive with coal. On some level, that has been incredibly successful. India had installed 35.6 GW of solar capacity at the end of 2019, i.e. about 9.6 percent of total installed power capacity (though this translated to only about 3.6 percent of actual total power generation). Given that the country had only 2.5GW in 2014, this constitutes an important achievement. The government’s goal of installing 100GW by 2022 was always going to be a stretch goal. Prior to the COVID-19 epidemic, India was projected to reach 65GW by 2022 and 82GW by 2024, according to the solar consultancy Bridge to India. Most Indian solar capacity is utility scale, but the rooftop segment has grown a lot in recent years. Still, at roughly 5GW, Indian rooftop solar will likely fall far short of the country’s target of 40GW.  

COVID-19 Impacts on the Electricity Sector 

There is no question that COVID-19 has added to woes of the electricity sector in India writ large, not just for solar. In late March, Prime Minister Modi imposed a harsh three-week lockdown with barely four hours’ notice on all business and transport in the country, which was then extended several times. It was ultimately partially relaxed at the beginning of June in much of the country but COVID-19 cases were still rising. The lockdown led to a steep decline in economic activity and about a 25 percent fall in electricity demand (demand growth had slowed to a crawl even before the pandemic). A precipitous fall in demand, particularly from industrial producers, has had major implications for coal plants, many of whom were already operating at low operating capacity. In recent months, some forty coal plants have temporarily halted operations. Carbon dioxide emissions fell in the country for the first time in forty years. The combined effect of fewer coal plants operating and limited vehicle traffic and construction led to clear skies over many of India’s cities including Delhi, which had been among the most polluted in the world.  

The effect of the COVID-19 shutdown on Discom finance has been be severe. One estimate is a doubling of their annual losses to $15 billion. As a response to the economic downturn from the lockdown, the government offered a stimulus amounting to about 10 percent of GDP. To ease the financial burden on Discoms, the government provided some 90,000 crore (about $12 billion) in liquidity so the Discoms could meet their obligations to power generators. More will likely be needed. 

Though existing solar plants, which have been deemed essential activities during COVID-19, continue to operate, many projects in process have faced disruptions in their supply chains and their labor force and thus are behind schedule on completion of projects. Other developers face problems of getting financing or affordable interest rates for new projects, given the negative effects of the lockdown on India’s banking sector. The availability of affordable finance is a long-standing problem in India, made worse by the effects of COVID-19. Bridge to India estimates that the lingering effects of COVID-19 will diminish solar installation between 2020 and 2024 from the previously projected 43GW to 35GW.  

Whether the financial lifeline offered by the government will give Discoms confidence to procure new power from renewables is uncertain, particularly if demand recovery is sluggish and Discoms continue to face problems of payment collection. There are wider calls for using the moment to push for more sweeping changes in Discoms and power sector reform. A draft Electricity Amendment that seeks to address long-standing problems may centralize some functions in Delhi but faces headwinds from states who worry about it infringing on Indian’s constitutional federalism. In any event, there are no guarantees that the center can solve problems of the electricity sector any better than states. 

With COVID-19 cases in India rising rapidly, India’s economic recovery could be slow, with lingering effects on depressed energy demand. Slower growth in India could result in some closures for coal-fired power plants, but it could also impede the construction of new capacity in renewables. 

After COVID-19: Make in India and Solar Power 

India faces other pressures. In 2014, the Modi government initiated a “Make In India” campaign to enhance domestic manufacturing and employment, which has generally failed thus far. There is an attempt now to realize its goals through solar manufacturing. At present, about 80 percent of the solar modules and inverters used in India are imported from China, and this is increasingly seen as a national vulnerability.  

In 2018, India sought to buttress domestic solar production with a duty on imported panels that was designed to decline over time. At the same time, the government grandfathered solar projects that had been under development when the duty was announced, making them eligible for compensation for any increased costs on imported panels they faced. As in other areas, developers faced significant payment delays for reimbursement.  

The COVID-19 crisis disruptions in the solar supply chain have reinforced India’s interest in developing and supporting a domestic industry. India is likely to impose a basic customs duty (BCD) on solar imports, to replace the safeguard duty, which would increase over time to try to support local manufacturers and wean the country off Chinese imports. Along with a measure requiring the government to buy from a list of approved solar suppliers, the new tariff could signal India is entering a new phase where it ends up paying more for solar electricity to promote local production. Current market conditions however could make this goal a challenge as the buyers are Discoms whose fortunes are only getting worse. It also remains to be seen whether Indian manufacturers, whose output is still far behind Chinese firms in technology, productivity, and economies of scale, can catch up quickly enough. 

Continued Government Commitment 

Renewables broadly, and solar in particular, retain support from India’s government. In September 2019, Prime Minister Modi more than doubled the country’s renewable energy target from 175GW by 2022 to 450GW by 2030. 

While it is less clear how that ambitious clean energy goal will translate into policy, India is experimenting with new models in the solar space that could prove important. As variable renewable energy grows, balancing the load across distance and time to ensure reliable service could become more challenging. To that end, India has held two auctions which pair renewables with storage. In May 2020, ReNew Power won a tender offering to provide “round-the-clock” power combining wind and solar from different sites, backed by battery storage. Though the price was higher than “vanilla” tenders for solar or wind on their own, it was reportedly 35 percent lower than the average cost of coal. The success of efforts like these will likely be important for whether India can move beyond thermal power, which still provides about three quarters of India’s electricity generation. 

Concluding Thoughts 

India has immense solar potential, and the sector retains high-level political support from the Modi government. India continues to reap global reputational gains from the solar sector, not only because of its domestic solar programs, but also through the India-led International Solar Alliance (ISA), which has worked with the World Bank to pool credit risks among twenty-two African countries, valued at $333 million (though the ISA needs to overcome several serious challenges to achieve its goals). The ISA is also moving forward on plans to bring down the costs of solar pumps.  

In June 2020, India announced a call for consultants for its so-called “One Sun One World One Grid” program which seeks to knit regions together through integrated grids and renewables. With relations poor or under stress with its neighbors however, questions remain about the viability of any cross-border regional integration scheme for electricity.  

India’s solar experience thus far raises interesting questions about what, if any, role the United States could play going forward, particularly if a new administration is committed to addressing climate change. From a climate perspective, the United States should want India to succeed in renewables integration and displacement of coal. The long-run potential for demand growth in electricity in India remains as the country gets wealthier and citizens demand amenities such as air conditioning and private mobility. 

As part of its commitments under the Paris Agreement to provide more finance to developing countries, the United States could support India’s clean energy transition. India could be a good site for testing and deploying technologies at scale such as battery storage, though that is starting to happen already. For its part, India could also continue to benefit from U.S. technical expertise when it comes to grid integration of renewables and efforts to address air pollution. Moreover, both the United States and India are reliant on imported solar panels from China. If the bilateral relationship between the United States and China continues to deteriorate (let alone the India-China relationship), the United States could consider supporting the production of panels and inverters in India as well as solar technological development as a means of reducing their mutual dependence on Chinese products. This could be secured through the new Development Finance Corporation (DFC) which could provide financing for American firms to play a more direct role in supporting solar development in India. While the politics of DFC financing could be difficult on both sides, India will likely need external support – lower cost finance in particular – to move more decisively on a low carbon trajectory.   

For the time being, with the COVID-19 crisis in full swing (and getting worse in India), these questions may be on the backburner, India will inevitably be faced with major challenges in transitioning its electricity sector both during the current moment and beyond. If and when the United States decides to play a more active role in global climate action, how the two countries work together to solve the challenge of a clean energy transition will be crucial , not just for India but for the world.