Renewable energy is poised for a global breakthrough. During the last decade, a number of countries have developed sizeable markets through targeted policies and resulting reductions in the cost of solar and wind energy. As a result, in regions with scarce fossil fuel resources, renewable energy is already the low-cost option.
India has tremendous potential for renewable energy expansion. The country is short on electric power ? supplies have improved since the 1990s, when frequent blackouts hampered production just as the economy was taking off. But many regions still face unreliable service or remain off the grid completely.
India?s energy demand is expected to grow rapidly ? over 3% per year over the next 25 years, requiring a six-fold increase in electricity generation capacity by 2030. And the country relies heavily on imported fossil fuel, which account for 25% of its energy needs. These imports are increasing, leading to the twin challenges of rising consumer energy prices and increased local and global pollution.
Developing domestic sources of renewable energy, including wind, solar and biomass, offers great promise to address these challenges. India has abundant renewable energy resources ? by some estimates, solar power has the capacity to replace up to 30% of imported coal in the next decade. Expanding renewable energy would also lead to reduction in air pollution. Further, due to their distributed nature, renewable energy resources allow India to meet rural development goals. In a country where as much as 45% of rural inhabitants lack access to electricity, expansion in distributed solar power can play a vital role in energising communities.
The Indian government recognises the multiple benefits that renewable energies deliver, and has taken bold steps to develop a domestic industry through a mix of policies, including Renewable Purchase Obligations for energy providers, feed-in tariffs and tax incentives, and the National Solar Mission (NSM) which aims to develop over 20 gigawatts of solar power by 2022. The government has also introduced innovative market-based policies to ensure that subsidies stimulate development at the lowest cost to the government.
As a result, India now has the fifth largest wind market in the world, and Suzlon has become a global wind energy leader. There has also been strong early investment in solar power to meet the NSM targets. However, more needs to be done if India is to achieve its ambitious renewable energy goals. There are two key areas of focus. First, given the limited capacity of government to pay for renewable energy subsidies, India must attract increased private domestic and international investment. Second, there are small, but important, policy changes that are needed to create a more attractive investment environment.
The ability to finance solar projects through the private sector is a vital element of delivering a sustainable national solar industry. The total investment needed for the NSM until 2022 ranges between $20 billion and $30 billion. The limited history of project financing in India and the novel nature of solar technologies has contributed to a risk premium that limits wider investor interest. The government must create a policy landscape to unlock new sources of private investment. To address this concern, the Indian government, donor governments and private financiers have formed innovative public-private partnerships to design new financing mechanisms and risk mitigation tools. For example, the Asian Development Bank has created a new guarantee to cover the risks encountered by solar projects. Further, together with the UK government, the World Economic Forum is leading a group of international investors to design innovative mechanisms that attract private capital.
Further, while the Indian regulatory environment for renewable energy is maturing, challenges remain, including the lack of dedicated land for solar and wind parks, the lack of a guarantee to sell power back to the electricity grid, and a lack of transparency on solar resource and project development data. The national and state governments are aware of these issues and are taking proactive steps to work with private investors and developers to develop solutions.
Investors are hopeful that given India?s abundant renewable energy resources and its proven track record in developing entrepreneurial solutions, it will address these challenges. By reducing the risk of renewable energy development, the government can help to bring down the cost of financing and accelerate the growth of renewable energy. In this way, India can demonstrate to the world that renewable energy goes hand-in-hand with affordable sustainable development.
The writer is Director, Climate Change Initiatives, WEF