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Reaching India’s Renewable Energy Targets Cost-Effectively

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Published: April, 2015

Executive Summary

India has ambitious targets for renewable energy growth. As part of its Union Budget 2015-2016, India aims to install 60 GW of wind power capacity and 100 GW of solar power capacity by 2022, which is more than six times the current installed capacities of approximately 22GW and 3GW, respectively.

This important task is made difficult by the government’s limited budget, which is constrained by a large fiscal deficit and multiple development priorities. Since government support is required when renewable energy is considered more expensive than the fossil fuel energy it would replace, there is a need for an objective comparison between the levelized costs of electricity from renewable energy and fossil fuels.

This project investigates not only this comparison but also how much it would cost the Government of India to reach its renewable energy targets. We answer this by comparing the levelized cost of electricity from renewable energy to a baseline fossil fuel in absence of any subsidies – whether explicit or implicit; estimating the total cost of support for renewable energy under accelerated depreciation, which is the most cost-effective of existing policies; and investigating federal policy options to make this support even more cost-effective.

We use the levelized cost of electricity from imported coal as the baseline for this comparison because this is the fuel, rather than domestic coal or natural gas, that renewable energy is likely to replace. While natural gas is the most expensive fossil fuel, it has very limited availability. Imported coal is the next most expensive fossil fuel, and is also projected to account for 18% of India’s total generation, higher than India’s target of 15% of generation from renewable energy by 2020 (NAPCC, 2008).

Compared to imported coal, the cost of wind power is already competitive, thus requiring no additional support, and the cost of solar power will be competitive by 2019.

We find that wind power is already competitive (see ES Figure 1), meaning the levelized cost of electricity from wind power is the same or lower than that from fossil fuels, and would not require any government support. For solar power, the levelized cost of electricity was 11.79% higher than imported coal in 2015.

However, this gap will narrow over time due to learning effects that drive solar capital costs down while fossil fuels become progressively more expensive, primarily due to inflation and increased transportation costs. By 2019, solar power is expected to be cheaper than imported coal-based power.

Under current federal policies, the cost of support for meeting India’s renewable energy targets is INR 2.71/W.

Since the cost of electricity from wind power is already competitive with fossil fuels, the corresponding cost of government support is zero. Solar power will continue to require policy support until 2019. Under existing federal policy which allows developers to use accelerated depreciation for renewable energy assets, in today’s values, the cost of supporting 20GW of utility scale solar by 2022 is INR 46.97 billion (INR 2.71/W).

The cost of support needed to achieve India’s renewable energy targets can be lowered by 96% by using reduced cost, extended tenor debt.

We find that, in place of existing federal policy, a combination of reduced cost and extended tenor debt, where the government provides debt at lower cost and higher tenor than markets, can lower the cost of support by over 96% to INR 0.1/W. Reduced cost, extended tenor debt also has the advantage of enabling the government to recover the cost of support over time through loan repayments, making it possible to reuse this capital to support other projects.

The cost of support can be further reduced by accelerating wind deployment in the near term and gradually ramping up solar deployment.

Since wind power is already competitive with fossil fuels, the government should focus on supporting rapid deployment of capacity in the near term to minimize its cost of support. Solar power will become competitive with fossil fuels in 2019. Therefore, in order to minimize the cost of government support, solar capacity deployment should be scheduled such that a larger part of the deployment target is met after 2019.