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Adjustments to Indian Renewable Energy Policies Could Save India up to 78% in Subsidies

March 23, 2014

Reduced cost, extended-tenor debt is the most cost-effective policy to support wind and solar energy

Mohali, India – Current wind and solar policies in India are not as cost-effective as they could be, says a new study from Climate Policy Initiative (CPI) and the Bharti Institute of Public Policy at the Indian School of Business (ISB).

Given India targets to double renewable energy capacity to 55,000 MW by 2017, the cost of policy support is an important issue. The CPI-ISB report, “Solving India’s Renewable Energy Financing Challenge: Which Federal Policies can be Most Effective?”, which compared a range of policy alternatives, found that a policy that both reduces the cost of debt and extends its tenor is the most cost-effective. For wind energy, reducing debt cost to 5.9% and extending tenor by 10 years can cut the cost of total federal and state support by up to 78%. For solar energy, which is more capital-intensive, reducing debt cost to 1.2% and extending tenor by 10 years can cut the cost of support by 28%.

Alternative policies perform better for a range of goals

However, cost effectiveness is not the only goal outlined in Indian renewable energy plans. Other goals, such as maximizing deployment given a fixed annual federal budget, incentivizing production, and supporting renewable energy without requiring state support, are also important to policymakers. Across these criteria, alternative policies still perform better than current policies.

For example, the federal government’s annual budget may be insufficient to provide reduced-cost, extended-tenor debt. If its goal is to maximize deployment given a fixed federal budget in a given year, other policy options, such as interest subsidies are still more attractive than existing policies. In particular, for wind energy, compared to the existing generation-based incentive of INR 0.5/kWh, an interest subsidy of 3.4% would be 11% less expensive and support 83% more deployment; and, for solar energy, compared with the current policy of 30% viability gap funding, an interest subsidy of 10.2% would be 11% less expensive and support 30% more deployment.

“Although there are no clear winners across all criteria, our analysis presents policymakers with crucial tradeoffs that would enable them to choose appropriate federal policies based on relevant policy goals,” said David Nelson, senior director of research and programs at Climate Policy Initiative.

The report is part of a series on renewable energy financing in India; a second report focused on financing instruments that can facilitate reduced-cost, extended-tenor loans in India, is due shortly. An earlier CPI report, “Finance Mechanisms for Lowering the Cost of Renewable Energy in Rapidly Developing Countries,” examined the challenge of financing renewable energy in emerging economies.

Climate Policy Initiative (CPI) is a team of analysts and advisors that works to improve the most important energy and land use policies around the world, with a particular focus on finance. CPI works in places that provide the most potential for policy impact including Brazil, China, Europe, India, Indonesia, and the United States.

The Indian School of Business (ISB) was established in 2001 with an aspiration to put India on the global map of management education. In less than a decade since its inception, the ISB has successfully pioneered several new trends in management education in India, and firmly established itself as a world-class management institution.