Why Solar Power Will Redefine India’s Power Reforms

Since long India's energy portfolio has been dominated by fossil fuels (coal, gas, and oil), which have had availability problems. Rapid economic growth only exacerbated this. Supply continues to struggle to keep pace with demand because of productivity problems, logistics, a lack of accessible reserves, and environmental concerns.

Regulatory controls over prices, production, and allocation of fuel are also leaving a mark on the energy sector, distorting market mechanisms and dissuading significant progress. Almost half of India's energy consumption is subsidized-including power, transportation, and process heat requirements.

This includes subsidies for liquefied petroleum gas (LPG) and diesel, piped natural gas and compressed natural gas that are subsidized by the administered price mechanism (APM), and the cross subsidization of agricultural and domestic power segments by industrial and commercial segments.

In such a scenario it comes as no surprise that the government is looking for cheaper, more sustainable alternatives and is turning to solar power generation in a major way.

Solar power in India is fast becoming a mainstay in the generation segment. Several central- and state-level incentives, including tax holidays, capital subsidies, and attractive feed-in tariffs, have driven the growth.

The government has set aggressive growth targets for renewable energy (particularly solar), even as many cynics consider these targets highly ambitious and unattainable in India. While project execution and policy implementation issues exist, solar energy in India could potentially redefine the future landscape:

Driven by increasing declining capital costs and the rising cost of conventional power, renewable energy sources such as solar are expected to achieve grid parity much sooner than expected, especially compared with high-cost fuels such as LNG and imported coal.

Capital costs have declined over the past few years, driven by technology advancements, economies of scale, and the entry of fully integrated manufacturers. Since 2008, prices of solar modules have declined more than two-thirds.

At the same time, conventional sources of power have become more expensive, due to higher domestic coal prices and greater dependence on imported coal. These rising fuel prices coupled with rapidly falling solar photovoltaic (PV) costs mean that solar power prices could equal prices for conventional sources (particularly high-cost fuels) as soon as 2016. This would significantly alter the market dynamics, shifting the focus toward renewable resources.

An important aspect of this equation has been customers across the spectrum, who have increased their focus on clean energy. In developed markets, more retail customers are demanding green energy in their homes, and Indian customers are also likely to follow suit as they become more attuned to environmental concerns.

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