Rational Exuberance for Renewable Energy

The infant industry argument has persisted through most of industrial era history in one form or the other. While in the mercantilist era, government intervention through subsidies, tariffs, quotas and other fiscal measures, and through non-tariff barriers to imports, has been justified by the face-off between the “developed” and the “developing” worlds, the virtual collapse of national borders and the consequent vertical-disintegration-of-production-processes has spawned new theories. The lines of reasoning have shifted to “mature industries versus emerging technology” or between the so called entrenched “old economy” sectors against the sunrise “new economy” sectors.

The introductory chapter lays out the theme, and more importantly, sets the tone for the ensuing portions of this book. In keeping with traditional wisdom the next chapter stresses that ‘direction is more important than distance covered’ and is intended to exhort policy makers to ‘begin with the end in mind’ so as to define and achieve the goals of positive development policy within prescribed time limits and within budgeted costs. Given the different approaches to market stimulation adopted for each, the Indian markets for solar photovoltaic (PV) and solar thermal (solar water heating systems: SWH) systems are compared. The conclusions relating to the delivery channels for product, service and financing, the incentive structures and most significantly, the overarching targets relating to consumer empowerment would, however, apply across technology options, market geographies and consumer segments.

The previous chapter dealt with the power of choice and concluded that development policy should ensure that the end-users are adequately informed and empowered to make choices for themselves. In the medium-term, fiscal and financial incentives should be geared towards bringing about sufficient awareness and in supporting, rather than supplanting, existing distribution channels for technology options or for financing. In a similar vein, the next chapter analyzes the power of scarcity and highlights the backward drift of surpluses to the owners of the scarce resources: sugarcane farmers in the case of the sugar industry. Even as the sugar industry is studied in detail, the central theme pertaining to scarcity rents is equally applicable to the solar PV industry (silicon wafers), wind energy sector (turbines and sites), small hydro sector (hydro-mechanical equipment and sites) etc.

Liquid biofuels—ethanol and biodiesel—are widely recognized, technically feasible alternatives to fossil fuels. Even as the jury is out to determine the environmental footprint of biofuels, the surrounding frenzy has often led to the announcement of unsustainable support prices for feedstock and unviable procurement prices for the finished product. Taking on from the discussion on scarcity in the previous chapter, this chapter makes a detailed assessment of incentive structures facing agriculturists, refiners and the consumers. Data from the Indian market are employed to illustrate the power of substitutes.

Financial support and other incentive structures need to necessarily mirror the maturity of the industry segment under consideration. As a market matures, service provision and financing are likely to represent significant revenue opportunities while dwindling margins on module/equipment manufacture would expedite formation of vertically integrated energy service delivery chains. Following the discussion on the power of scarcity, and the role played by substitutes, we apply the product life cycle framework to analyze the impact of global trends on the photovoltaic industry and for the solar thermal/water heating sector. End-users would be required to pay for the power/service alone while energy service providers would own and operate the generation equipment, much as utilities own generation assets in centrally generated, grid-supplied power systems. The first part of this chapter discusses global trends in solar PV module production and attempts to chart a course for the Indian industry. The latter sections deal with appropriate financial support to help the transition from one stage in the life-cycle to the next, employing the solar thermal industry as an illustrative case.

Renewable Energy programs are often sought to be justified on the basis of the private benefits and costs accruing to the individual households, in terms of providing improved lighting, superior cooking fuel, improved indoor air quality and the like. Benchmarking electric power or other services against their respective closest substitutes, namely power from coal fired plants or services provided by burning fossil fuels is incomplete if the differences in environmental impact are not taken into account. This chapter discusses the positive environmental externality accruing from domestic RE programs, to demonstrate that economic surpluses from domestic programs are realized beyond narrowly defined project boundaries. Employing biogas programs to illustrate, it is shown that the economic value addition from the consumptive use of the biogas for cooking, and the non-consumptive and indirect value derived from the biogas plant, viz., providing feedstock for other processes and other such benefits as greenhouse gas mitigation (positive externalities) need to be accounted for. The process approach adopted herein enables an integrated view of the value chain and consequently, a mechanism to reallocate costs and to distribute such surpluses.

Through most of the length of this text, we have discussed the significance of economic variables such as prices, fiscal incentive structures and of the importance of tailoring financing structures to suit the product and the stage in its life-cycle. In this chapter we discuss the role played by micro-finance institutions in enhancing the uptake of (primarily standalone) RE technologies. Micro-banking facilities have helped large numbers of developing country nationals claw their way out of abject poverty, specifically by supporting the establishment and growth of microenterprises. And yet, the microfinance movement has grown on the back of passive replication and the movement now needs to be revitalized with new product offerings and innovative service delivery. Domestic RE systems may not inherently be income generating, and returns on such investments accrue, primarily, from cost avoidance. By definition, and often by explicit regulatory limitation, domestic RE applications do not qualify for micro-funding. ‘Quality of life’ investments such as RE systems, funded through non-self-liquidating loans, reflect borrower maturity and simultaneously contribute to MFI sustainability. Larger loan amounts and longer tenures reduce credit appraisal and service delivery costs per dollar lent. By promoting the consumption of RE systems, MFIs would be contributing to environmental conservation, as well. Innovative institutional structures need to evolve to facilitate the progression of the MFIs into more formal outfits, capable of accessing refinance and capital from banks and commercial investors, and of providing larger loan sizes for longer tenures.

Ethanol as a fuel/fuel-blend has been a success story in Brazil and select other countries; ethanol is an octane enhancer and fuel-ethanol blends help reduce hydrocarbon, carbon-di-oxide and nitrogen oxide emissions. In addition such fuels reduce emissions of benzene and butadiene, sulphur-dioxide and particulate matter. In summary, ethanol’s credentials as a fuel additive with superior environmental outcomes are unchallenged. Sale of ethanol also represents an additional stream of cash-flows for the sugar mills that produce it. However, besides being a fuel additive, ethanol finds application in several other industry sectors, with the potable alcohol segment being among the largest consumers.