Energy, Security, and Climate

This is a guest post by Sagatom Saha, the research Associate for energy and U.S. foreign policy at the Council on Foreign Relations. Last week, Westinghouse Electric Company, the firm that once marked America’s dominance in nuclear power, filed for bankruptcy.  Over the decades, the United States has since been reduced to a minor player in the global nuclear market it created. And although some of the world’s largest developed economies like Germany and Japan have taken a step back from nuclear power, in rapidly emerging economies keen on securing clean, reliable, and affordable power, nuclear is poised for growth. In Foreign Affairs, I explain how Russia is benefiting geopolitically in America’s absence. Although emerging economies may want to deploy nuclear power to meet a variety of goals from meeting their climate targets under the Paris Agreement to powering their growing economies, Russia has been aggressively exporting nuclear technologies as a matter of foreign policy. Putin himself has travelled internationally to sign deals to construct nuclear reactors on nearly every continent. As a result, Russia already dominates the global market, and it is poised to increase its market share. Moscow already uses its favorable market position to exact political gains like support within the European Union from Hungary. If this trend continues, Russia could find itself with more allies in the decades to come, and the United States fewer. In the essay, I write: Russia stands to benefit most from the developing world’s increasing appetite for nuclear power. Rosatom currently has export orders valued at more than $300 billion—60 percent of the overall market—for 34 plants in 13 countries. Russia’s share of the global nuclear export market will increase as long as the Kremlin considers it a matter of state policy. Putin’s visit to Hungary was only one stop in an international tour to sign nuclear power deals that resulted in broad agreements on nuclear power with 13 nations on nearly every continent.

This guest post is co-authored by Sarang Shidore, a visiting scholar at the LBJ School at the University of Texas at Austin, and Joshua Busby, associate professor of public affairs at the Robert S. Strauss Center for International Security and Law at the LBJ School at UT Austin. India’s ability to limit its future greenhouse gas (GHG) emissions is critical to achieving the Paris Climate Agreement’s target of containing global temperature rise to 2 C or below in the coming decades. And as we examined in our last blog post, deploying solar energy at scale is critical for India to curb its rising GHG emissions, as well as to enhance its energy security and air quality. Last time we had identified four barriers obstructing solar’s rise in India: too-aggressive bids in auctions for solar power projects, poor financial health of Discoms (power distribution companies, mostly owned by state governments), inadequate grid capacity, and relative neglect of the rooftop segment. Now that a year has passed, what progress has India made on each of these four barriers, and what are the prospects for solar growth, going forward? The Good News: India’s Government Is On It First, the good news. It is now clear that India’s solar capacity additions have been solid. Net capacity installed stands at over 9 GW, with 4 GW added just in 2016, with a further 9 GW slated to be added in 2017. To put this in perspective, the historical pace has been 1 GW per year. In international comparative terms, China led the field by adding 34 GW, followed by the United States, which added 13 GW, Japan 9 GW, and Germany 1 GW in 2016. And the scope of Indian solar auctions has recently widened, as new states from the south have led solar deployment.  Tamil Nadu now leads all states in installed capacity with 1.6 GW, with early movers Rajasthan and Gujarat at second and third place respectively. Rooftop solar has finally begun to take off, with net capacity at 1 GW. As a promising step toward integrating intermittent solar power, India had its first-ever auction for grid-scale storage., Last but not the least, the Indo-French led International Solar Alliance promises economies of scale for innovation, financing, and energy access. A big reason for the successes in the past two years has been the sustained focus of the Indian central government, which has put in place an array of proactive policies to boost the sector. These include capital subsidies, a 10-year tax holiday, credible public sector enterprises as facilitators of central government auctions, a “must-run” status (i.e., preferential dispatch over coal) for all renewables), and the goal of building 33 solar parks which eliminates the problem of land acquisition for project developers. Though the latest budget had only a few new renewables initiatives, market sentiment in Indian solar remains optimistic. Coupled with significant interest from the private sector (much of it domestic), proactive government policies have improved access to finance, at least for the larger solar park projects. Still, high interest rates are cutting into the sector’s potential profitability and large volumes of finance will be required in the future. Obstacles: The Sequel Despite the Indian government’s commitment to solar, the quantity of solar electricity generation in India remains small—only 1% of the total. Achieving the Modi administration’s 100 GW target by 2022 is unlikely. The consultancy Bridge to India projected that, given current trends, India will only reach 57 GW.  Granting that the target was too ambitious to begin with, multiple challenges remain if solar is to make an appreciable contribution to India’s energy security and environmental goals. Competitive Bidding: The Down Side of Down We identified several barriers to scaling up solar last time. The first was the potential for competitive auctions for solar power projects to yield too-aggressive bids. In theory, the framework of competitive bidding for commissioning solar projects is advantageous in two ways. First, it is a rational price discovery mechanism that promises to deploy solar at the lowest costs. Low costs are critical as the Indian electricity sector is highly tariff-sensitive, and solar still costs more than domestic coal. Second, it is aimed to eliminate rent-seeking—an important consideration in India with major corruption scandals in coal mining and telecommunications still fresh in public memory. However, competitive-bidding can also trigger an unhealthy race to the bottom, in which bidders with less-than-stellar project credentials pull out all stops to win bids with the aim of cornering market share or banking land. Although many bids do have penalty structures in place for project overruns, they may still ultimately fail to deliver. Two ameliorating factors have somewhat lessened concerns over the viability of competitive bidding. The first is the continuing trend of falling module prices. Imported Chinese panel prices have fallen 30% in 2016, more than anticipated. This means that projects bid earlier in 2016 or before have their real profit margins enhanced. The second factor is on-going market consolidation. This allows for cost savings through scale and again makes lower bids more robust. On the flip side, however, on-going court battles in the coal domain may have adverse knock-on effects in the solar space. In 2014 India’s top electricity regulator had allowed two major generating companies to raise tariffs retrospectively for coal-fired plants running on imported coal, claiming expansive powers derived from its regulatory role. The generators had gone to court, in the wake of the rise in the price of imported Indonesian coal, to seek modifications to tariffs arrived at through competitive bidding. The key Indian judicial body in electricity matters, the Appellate Tribunal for Electricity (APTEL), allowed the tariff hike, but under the narrower Force Majeure clause (normally invoked due to extraordinary events such as war, riots, or natural disasters) in the contract. The Indian Supreme Court will issue a final ruling soon on whether retroactive tariff hikes are permissible—a ruling that could have implications for whether solar developers can change their bids after winning contracts at rock-bottom prices. However even if the court rules in favor of the more restrictive APTEL judgement, the viability of the competitive bidding framework may be weakened. If contractual prices discovered by bidding are subject to change downstream due to input cost increases, even if narrowly defined, the market potentially gets neither the upfront security of feed-in-tariffs nor the consumer savings of sustained lowest costs. India needs a better bidding process that discovers truly sustainable prices that are not subject to re-litigation downstream. UDAY: Will Discoms Rise from the Depths? We had identified the financial health of Discoms as another major demand-side challenge; indeed some analysts consider this as the primary challenge in the entire electricity sector. Poor Discom health leads to adverse climate and air quality impacts for two reasons. First, low demand due to under-buying has reduced the Plant Load Factor (PLF) of coal-fired plants to below 60%, well below normal levels of 80-85%. Operation at such sub-optimal levels produces more pollutants and carbon per unit of electricity generated. Second, Discoms are forced to seek power at the lowest possible cost to stem their losses. This makes solar electricity less competitive. The central government has unveiled a bailout plan with the acronym UDAY, aimed to fix Discom financial health. This is the third such plan over the past fifteen years. The plan is an improvement over previous attempts. It gets the states to take over 75% of the Discom debt, which they will then issue as interest-bearing bonds. Effective interest rates of repayment will be reduced from 14-15% to 8-9%. Discoms will eliminate the gap between cost and revenue to zero by 2018-19 through quarterly tariff revisions and a reduction of operating losses to 15%. The central government will provide some incentives for states to comply with their commitments and deadlines. However, UDAY does not provide for any penalties to states for non-compliance. Levying penalties is constitutionally difficult as distribution companies are under the purview of state governments, which in India’s federal system zealously guard their powers. UDAY also does not provide any upfront funding for investing in India’s creaky distribution infrastructure. This is critical to reduce technical losses, or the losses in power as it travels through the dilapidated power grid, as UDAY has targeted. UDAY also does not concretely address the fact that financial losses at the Discom end of the electricity chain are partially a reflection of inefficiencies further upstream – specifically, in coal mining, transport, and electricity generation – and a more holistic approach is required to solve the insolvency problem. Early results from UDAY are mixed. Of the five biggest loss-making Discoms, two have missed their targets by wide margins. Two others have shown improvements, while the fifth has been poor at providing timely data. If states don’t eliminate Discom deficits by 2018 as planned, the debt will appear on their books, substantially damaging some of their balance sheets. 2017 will be critical to assessing whether UDAY is working as planned. The Grid: Will Slow and Steady Lose the Race? Ultimately, ambitious expansions of solar supply will be of little value until there is requisite demand to buy all this power. We had identified grid integration as a major demand side barrier for scaling up solar. The geographies of solar in India are distinctly skewed. Only seven states account for more than 80% of generation, but those states represent less than 40% of demand, which leads to localized power surpluses that cannot be easily transmitted to external sites of consumption. The ambitious Green Energy Corridor (GEC) project is aimed to strengthen both inter-state and intra-state transmission, with loans of $1 billion and Euro 1 billion from the Asian Development Bank and Germany’s KfW respectively. The project includes not just new transmission lines but also Renewable Energy Management Centers to better forecast the actual generation from a given solar site. The project completion deadline is March 2020, with all inter-state transmission lines to be commissioned by the end of 2018. However, according to the market research firm Mercom Capital, progress in the Green Energy Corridor has been disappointing. There is poor coordination between government agencies and regulatory commissions, and the build-up of new grid capacity is simply not keeping pace with the large infusions of new supply coming online. The central government, however, has insisted that the GEC is on track to meet its deadlines, while admitting land acquisition delays in some states. The history of most large infrastructure projects in India is one of delays and inconsistent execution. Therefore, it is more likely than not that GEC will miss its targets, and curtailment issues with solar may persist for several more years. Rooftop Solar: The Sun Begins to Shine 40% of India’s solar target is in the rooftop segment, and when we examined it in our last post, the sector was sluggish with myriad problems. 2016 however may have been the turnaround year, with net rooftop capacity now at 1 GW, most of which was added this past year. An additional 1.1 GW forecast is to be added in 2017, an appreciable portion of it from central government institutions. Most of the rest is likely to be in the Commercial & Industrial (C&I) segment, dominated by the third-party ownership model in which third-party developers own and operate the system on the customer’s premises and realize steady revenue streams. Net metering, in which owners of rooftop solar systems can offset their bills by exporting solar power to the grid, is formally in place in most states but is still failing largely due to state government resistance and poor Discom health. A recent modest incentive scheme is unlikely to be adequate. The failure of net metering has not deterred C&I firms from installing rooftop solar, but is a serious barrier for scale-up in the residential segment of rooftop market. Ironically, if C&I rooftop solar continues to grow, it will further degrade Discom finances because C&I customers pay the highest tariffs. Debt financing also remains a concern in the rooftop space. Miscellaneous Challenges Finally, there are various miscellaneous challenges that also obstruct the rise of solar in India. For example, the roll-out of solar parks has been plagued by delays,  there is ongoing uncertainty over the Ministry of Environment’s order on shutdown of old coal plants, and debt financing for solar projects is not always easy. There are also concerns over the quality of solar panel imports, some of which are from lower-tier Chinese manufacturers. A draft regulation on testing the quality of imports has been released by the government, but it needs to be implemented robustly. Conclusion The bottom line in India’s push to deploy solar power is that a commendable push by the central government has not yet been able to overcome a number of serious barriers. The most critical areas to watch are government efforts to restore Discom solvency and those to shore up the health of the grid. Solar will continue to expand in India at a solid pace, but unless further major policy initiatives are implemented, India will fall well short of its ambitious targets.            

This is a guest post by Joshua Busby, Associate Professor of Public Affairs at the University of Texas at Austin and author of the CFR discussion paper, Water and U.S. National Security. It’s official – scientists have confirmed that 2016 was the hottest year on record, the third consecutive year to reach that alarming milestone. Climate change drove more than just high temperatures in 2016, however. Droughts from California to southern Africa and floods from Louisiana to China disrupted agriculture, uprooted thousands of people, and slowed economies around the world. While shared interests have historically led countries to cooperatively manage water resources, the future could look dramatically different. Climate change and population growth could combine to make disputes over water more likely, including in regions where the United States has critical security interests. In a new CFR discussion paper, Water and U.S. National Security, I argue that Washington has paid too little attention to this growing threat. Responsibility for anticipating and managing water risk is spread out over multiple agencies, with imperfect coordination among them and insufficient funding to ensure an effective response. The government has also not fully utilized the many non-governmental capabilities available through U.S. and international civil society, universities, and the private sector to anticipate and address water-related problems. With timely and cost-effective interventions now, the United States can minimize the risks for the future. As the incoming administration shapes its national security team, it should ensure that water has an appropriately prominent place in its planning. Improved data sources and methods, including satellite data collected by U.S. government assets, now make it possible to identify fragile states and river basins where water problems are most likely. The administration should seek more support for data collection, analysis, and early warning efforts. It should also make use of public-private partnerships to increase water supplies and water conservation, and to waterproof at-risk infrastructure. Finally, Washington should build and strengthen legal and political institutions governing water resources within and among countries. These institutions are essential to minimizing the risk of conflict. Investments in them now will pay dividends – in better water management, more stable relationships, and more prosperous countries – in the future. To read the full discussion paper, click here.