Policy shift can help reduce subsidies to renewable projects by 78%, says study

India’s ambitious target of doubling renewable energy capacity to 55,000 MW by 2017 needs a shift in policies for these projects to become viable, according to a study by the Climate Policy Initiative and the Bharti Institute of Public Policy at the Indian School of Business. “Long-term, debt-related policies are more cost-effective than the existing policies,” according to the study.

The paper says that for wind energy a loan at 5.9 per cent interest with a tenor extension of 10 years could cut the total subsidies (from Central and State Governments as well as tax sops) by 78 per cent compared to the most cost-effective version of the generation-based incentive of Rs2.03/unit.

“Unsubsidised renewable energy is still 52-129 per cent more expensive than conventional power,” the study notes, adding that unfavourable debt terms (high interest rates, short tenor and variable rate of interest), raise the cost of renewable energy by 24-32 per cent compared to similar projects in the US. Structure of incentives India is estimated to have a total energy capacity of about 200 GW currently and the country’s renewable energy potential is pegged at 150 GW.

The study notes that the structure of incentives under various renewable policies is an area of concern since they give incentives for capacity creation and not for energy production. This, the study notes, can be misused. “An interest subsidy is not provided in a single period; rather it is spread out over the loan period of 10 years. Hence, it shows high potential for incentivising production,” the paper says. Extended-tenor debt has the highest subsidy-recovery potential, the study says.

(The Hindu Business Line, 03/24/2014)