Centre for Science & Environment comments on the draft policy document of the Jawaharlal Nehru National Solar Mission, Phase II

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1 Centre for Science & Environment comments on the draft policy document of the Jawaharlal Nehru National Solar Mission, Phase II A) Grid connected solar programme under the national solar mission 1. Summary of recommendations 2. Financing 2.1 Viability gap funding 2.2 Generation based incentive through National Clean Energy Fund 2.3 Bundling 3. Schedule and technology 4. Domestic content requirement and manufacturing 5. Land policy and financial aid to solar parks 6. Merging solar cities and rooftop PV & small solar power generation programme 7. State incentives 8. Comment on issues left unmentioned in the draft B) Offgrid solar programmes under the national solar mission 1. Summary of recommendations 2. Key lessons from Phase I 3. Energy access scheme 4. Financing off-grid lighting a) Subsidies b) Benchmarking costs for subsidy disbursement 5. Performance of systems 6. Monitoring and evaluation 7. Promoting social entrepreneurship 1

2 A) Grid connected solar programme under the national solar mission 1. Summary of recommendations A. Replace the Viability Gap Funding (VGF) in favour of a GBI (Generation Based Incentive) funded by the National Clean Energy Fund (NCEF). The GBI should be able to recover the funds invested by the Centre when the average purchase price of electricity becomes higher than the tariff to solar developers. B. If thermal power for bundling is unavailable, then this quota should be put under the GBI quota. C. Delay solar thermal batch until to evaluate commissioning and 1 year of generation data of 1st phase of solar thermal. D. Create a more even market-demand; spread PV allocations out over 3 years instead of 2. E. Some type of Domestic Content Requirement (DCR) is needed; evaluate the impact of different DCR options, create a plan for the future of the Indian solar manufacturing industry and tie up DCR with a demand for research and Development (R&D) investments of manufacturers. F. Improve financing available for developers wanting to procure Indian solar technology. G. Create a model where private individuals can become 'solar farmers' by leasing out their land for a monthly rent for the life of the plant, either based on land value or units produced per month. H. Rajasthan should end the subsidized land policy as it leads to an over-use of land and distorts the competition between states. I. NCEF funds presently proposed for solar parks should instead be funding infrastructure for a large scale roll-out of canal-top solar in India during the second phase. J. The Solar Cities programme and the Rooftop PV and Small Solar Power Generation Programme (RPSSGP) should be merged. With 60 Solar Cities each city could get a possible capacity of 1 MW of rooftop solar. This could still be bid on by developers but with a rider that it must be placed on rooftops and must be placed in that specific Solar City. K. The Ministry of New and Renewable Energy (MNRE) should mandate that for a state to be eligible for Centre-funded projects (from the batch in and beyond) the state must have shown that they enforced and fined any lack in solar Renewable Purchase Obligations (RPOs) among utilities and captive users in the previous year. L. Accelerated Depreciation should not be accepted in the National Solar Mission. M. The MNRE should adopt a policy similar to that of the Karnataka Solar Policy where movement between the government agency handling bidding and solar developers is restricted. 2

3 2. Financing 2.1 Viability Gap Funding The draft suggests financing the majority of the proposed 2600 MW of solar energy in the second phase, which is the domain of the Central government, through VGF, which in turn is funded by the NCEF. CSE Comment: The Centre for Science and Environment (CSE) recommends that the usage of VGF should be scrapped and the GBI model should be used. VGF, a capital subsidy, does not incentivise developers to build and operate the most efficient power plants possible. Capital subsidies, such as VGF, have been experimented with in the past by the renewable energy sector and are no longer in vogue globally because of the poor/ sub-par performance of plants. The draft itself recognizes the drawbacks of VGF. It states, "If VGF is provided as upfront capital assistance, there is a possibility that project developers would bid aggressively ignoring the long term plant performance" (Page 44). The performance is hardly ameliorated by paying out 25 per cent of the VGF after one year; even with substandard equipment a plant can operate well for one year, but it will hardly do so for 15 or 25 years. VGF gives an incentive to set up plants with as low capital expenditure as possible, using sub-standard raw material and engineering costs to make the subsidy as large a part of the project capex as possible and to be able to bid for the lowest possible VGF. Under " Key Learnings from Phase-1" the draft states that one of the lessons that should be 'imbibed' is the need for "Better system designing and construction is required to meet challenges of the local conditions." With VGF, better system design and construction will not happen in the second phase and this experience will not be optimally utilized. GBI on the other hand incentivizes the construction of efficient plants that generate as much as possible in order to increase the income. Capital subsidies for renewable energy have been abandoned in favour of some kind of GBIs in almost all parts of the world. All large renewable energy projects in Germany, UK and Italy rely on GBI, and so is the case in Japan, China, India (JNNSM Phase 1 and for wind power projects) and other developing nations like South Africa, Brazil and Peru. In fact, there is no major renewable energy policy using capital subsidies internationally, as they were proved to be inefficient during the 1980s and 1990s. Public-private partnerships using VGF have been severely criticized in other sectors like water supply, airports, roads etc. as it has led to companies setting up the infrastructure but not being able to properly operate and maintain it. Re-negotiation of terms is very common, leading to unforeseen public expenses. Capital subsidies have been used before for renewable energy projects in India. At the start of the windpower push in India, capital subsidies were given which led to low-quality turbines being set up and hence the capacity utilization of Indian wind-sector is below the international average. Capital subsidies lead to rent-seeking behaviour; with clear subsidies given there is a serious risk that developers will be pushed to 'share' the subsidy to get necessary permits. We have already observed malpractice in effect in the first phase of the solar mission with state nodal agencies giving commissioning approval despite the fact that the plants were far from operational. We have also seen developers acquiring a larger share of the market than allowed. These kinds of issues will only become more common with a VGF 3

4 model where the benefits of circumventing the rules are more direct and obvious. A VGF model would attract more fly-by-night operators who would outbid serious long-term power plant operators Generation based incentive through National Clean Energy Fund The draft gives GBI a minor role in financing 60 or 200 MW of capacity. The draft seems to presuppose that the NCEF cannot be used for GBI. The NCEF from which the money for the VGF is supposed to come from is handled by the Ministry of Finance. The fund takes in money through a Rs. 50 cess on each ton of coal sourced in India. So far the fund has collected about Rs crore and is estimated to take in almost Rs crore just in Comment: The NCEF does not have to restrict itself to giving capital subsidies like the VGF. Even though VGF is set as its preferred choice, the National Solar Mission is a large enough programme investment that the NCEF and the Ministry of Finance should discuss it further. The discussion should centre on whether the NCEF can contribute through more efficient and adaptable methods. It should be obvious that the largest fund for clean energy in India, NCEF, must be used wisely for the largest and arguably the most strategically important clean energy programme in India the JNNSM. It would not be sensible to ruin it on a technicality in the guidelines set up during the first meetings of the Inter-Ministerial Group managing the NCEF. Looking at the investments done by the NCEF to date, multiple projects have received 100 per cent financing. An alternative to VGF financing directly through NCEF would be for Indian Renewable Energy Development Authority (IREDA) or the Solar Energy Corporation of India (SECI) to set up a financing mechanism that applies for, and receives fixed funding and/or a loan from NCEF either just once or every year and then use this funding to give a GBI (set through reverse bidding) to projects on a monthly basis. This way the NCEF would only have to give the JNNSM funding once for each batch and the mechanism of how this money will be used could be left to SECI or IREDA. A GBI mechanism can be structured in a way that the ministry and the NCEF are able to recover the money paid out in the long run. If SECI/IREDA sign contracts with State Power Utilities (SPUs) stating that the SPU will pay whatever is their averaged pooled power purchase price (as set by the SERCs) and if the rest of the tariff to the developer is made up of the GBI from the Centre, then the GBI will decrease as the pooled power purchase price increases each year. When the averaged pooled power purchase price exceeds the tariff to the developer (as set through reverse-bidding), the difference can be paid back from the state power utilities to the SECI/IREDA managed fund, which in turn could dispense back to NCEF. According to CSE calculations, the 1520 MW of PV solar now set for VGF would draw about Rs crore rupees from the NCEF with no returns. 1 A reversible GBI could on the contrary end up making a compounded total of Rs crore rupees 2 (assuming a 5.86 per cent increase in average power purchase cost per year as calculated by the Planning Commission). 1 Assuming a 25 per cent VGF needed to get projects down to Rs. 5-6/KWh accepted by power purchasers according to the draft and a cost per MW of Rs. 8 crore for solar PV as per CERC benchmarks 2 Assuming a reverse bidding price averaging Rs. 7/KWh, an average power purchase cost for SPUs of Rs. 3.31/KWh in and an increase in power purchase cost of 5.86 per cent per year as per Planning Commission figures. Further assuming 1.66 MU per MW per year production as per CERC figures and a 0.5 per cent degradation of module output per year. 4

5 The management of a reversible GBI would arguably be more complicated than a VGF but the large potential gains of thousands of crores along with potentially higher output from plants warrants a more complex management apparatus. In essence the method now used by NVVN with bundling could be used for the GBI where the SPUs pay the developers and then turn around and get funds from NVVN. A reversible GBI through 3 steps 1. Project Developer is paid per KWh tariff, as decided through reverse bidding, by the SPU each month. 2. State Utility receives/pays difference between Average Pooled Power Purchase cost and the tariff to project from/to central SECI/IREDA financing mechanism 3. SECI/IREDA financing mechanism receives/pays back funding from/to NCEF Step 3 can either be implemented on a yearly basis or once in the beginning for each solar batch and then at the end of the 25 year lifetime. In this way the income would be stable for the developer and the electricity would not cost more than the average for state utilities while the Centre, which is putting up the extra funds (the GBI) will be able to recover those funds in the long run Bundling The draft assumes that 800 MW can be generated through bundling. In the second phase, because of the decrease in cost of PV solar, it is assumed 2 MW of solar can be bundled with 1 MW of unallocated coal thermal capacity from NTPC. Bundling 800 MW of solar PV would mean there would be a need for 400 MW of unallocated coal thermal power. The draft text makes it clear that there is no certainty on whether there is actually 400 MW that can, and will, be made available for the solar mission. If there is not enough coal thermal power to bundle with the solar capacity, should be put under the GBI scheme described above. 3. Schedule and technology The draft aims for the creation of solar on-grid/ power plants with a capacity of 9000 MW split between the Centre and the State governments. The state governments will finance 2520 MW of solar Photovoltaic cells (PV) and 1080 MW of solar thermal. Most of the PV capacity is slated to begin development in while some PV and all the solar thermal is set for Comment: CSE believes that the inclusion of solar thermal projects in the second phase must depend on whether the projects in the first phase are successful. The majority of the projects would need to be commissioned and a year of generation data would be needed to ascertain if solar thermal technology is viable in India. So far only 2.5 MW of solar thermal (out of 30 MW) capacity has been commissioned and serious issues with generation have been observed. If solar thermal can reach efficiency levels of 23 per cent as the Central Electricity Regulatory Commission (CERC) benchmarks it at and at least one project shows the possibilities of the success of storage technology then solar thermal should be promoted. The solar thermal batch should therefore be delayed until to be able to determine whether first phase 5

6 is successful, to if necessary. If the first batch is not successful then the sized solar thermal batch should be reduced and replaced with PV capacity. In the last CERC capital cost benchmarking for , the cost per MW for solar thermal projects was found to be 50 per cent higher than that of solar PV projects Rs. 12 crore/mw for solar thermal versus Rs. 8 crore/mw for PV. Higher efficiency and storage capability of solar thermal is not enough to warrant a large allocation in the second phase before first phase solar thermal projects are completed and shown to work. The draft proposes to begin development of all solar PV projects in and ; this may create an uneven market where demand will be huge for two years and then face the risk of plummeting again if state projects do not begin development in and To create a more even market demand for manufacturers and developers, part of the solar PV quota should be launched in Draft proposal for schedule of development Total per financing mechanism: GBI for Rooftop and 100 MW PV 100 MW PV 200 MW Small Solar Grids Bundling 800 MW PV 800 MW VGF 750 MW PV 770 MW PV and MW MW Solar Thermal (CSP) Total per year: 1650 MW 1950 MW 3600 MW CSE Proposal for schedule of development Total per financing mechanism: Rooftop Generation Based 60 MW PV 60 MW Incentive (For Solar Cities) Bundling 800 MW PV 800 MW GBI 1100 MW PV 560 MW PV and 1080 MW Solar Thermal 2740 MW (dependent on 1st phase success) Total per year: 860 MW 1100 MW MW 6

7 4. Domestic Content Requirement (DCR) and Manufacturing The draft provides six options for how domestic content could be promoted in the second phase: A. For all PV projects, cells and modules produced in India shall be used. B. Price preference for domestically manufactured cells/ modules. C. Percentage of domestic content in cost terms (say 50 per cent) for both PV and thermal technologies. D. Percentage of cells manufactured in India. E. Some batches with 100 per cent domestic content requirement. F. For thermal technologies material equivalent to 50 per cent of supply costs (excluding land, taxes, construction, financing, soft costs etc.) should be manufactured in India during Phase II. The draft also reiterates the aim for a "domestic manufacturing capacity across value chain" (p.52) capable of producing 4-5 GW per year. Comment: The international solar manufacturing market is far from an open market, with each country giving preferential treatment to technology produced in their home market. The U.S. has already put penalties on Chinese solar equipment because the Chinese state offers low-interest loans, land and export credit to their manufacturers while the U.S. itself offers low-interest export loans to their own manufacturers and brands it as climate change aid. Some European countries give higher tariffs if a developer buys European solar equipment. With each country aggressively backing their manufacturing base in a market that is still driven mainly by national and state level subsidy policies, India must be able to create its own modern manufacturing base that can in the long run compete in what will hopefully become an open market. Some type of DCR is therefore necessary but it must be tied to performance and improvements in Research and Development (R&D) by manufacturers. MNRE needs a proper plan for the future of the Indian solar manufacturing sector with an aim not only to increase production capacity but to increase efficiency and quality of what is produced. "Across the value chain", as mentioned in the draft, in solar manufacturing would mean from polysilicon to modules in module manufacturing as well as inverters, control equipment and solar thermal components such as tubing, heat receivers and mirrors. There is however no plan on how the second phase options for how the DCR has the potential to create an Indian manufacturing industry that can expand beyond cell and module manufacturing. The DCR options use terms as "say 50 per cent" which shows that there has clearly not been any economic analysis of how any of the DCR options will impact the market. Percentages are set arbitrarily. In Option D no actual percentage is even defined, there is a world of difference between ten and ninety per cent and a proper study must be done on the impact on developers and manufacturers for each alternative. To be able to create a manufacturing base that can in the long run compete internationally, any push for DCRs must be tied up with a strong and thoroughly thought through R&D component. CSE recommends that whatever options the MNRE takes up for DCR, it should be coupled with a requirement for the Indian cell and module producers to improve the efficiency of their cells and modules through an increase in R&D investments. For an Indian cell and module manufacturer to qualify to sell to developers in the quotas or 7

8 batches reserved for domestic manufacturers, they would have to show a certain yearly investment in internal R&D. Because of its focus on R&D in clean technologies the NCEF should be leveraged to improve the R&D of solar manufacturers. What is needed is a change in NCEF guidelines to make it more accessible to manufacturers. According to key findings of the first phase "Provision of requirement of domestic content for setting up solar power projects was kept in the guidelines for Phase-I with a view to develop indigenous capacities and generate employment. It was noted that the production capacities for solar PV cells and modules have expanded in the country." (Page 22). The draft recognizes that the manufacturing base has increased, but that only means that there is more production capacity. If that production capability is not able to compete on the international market through scale and R&D improvements there is little gain in the long run. The Indian solar manufacturing industry also needs to be able to compete with American manufacturers that are eligible for low-interest U.S. Exim bank financing. Financing on par with the U.S. Exim bank must be made available for developers who purchase solar cell manufactured in India and modules and other solar technology. 5. Land policy and financial aid to solar parks MNRE will support large solar parks (over 250 MW and 600 hectare) with up to 16 crores for civil infrastructure, technical assistance etc. and over and over this, will pay for 40 per cent of the transmission infrastructure cost. The cost of the transmission infrastructure will come out of NCEF. The draft calls for states to offer land at subsidized rates for solar power parks. Comment: More large-scale solar parks will take away one of the biggest benefits of solar power - its spread out distribution. Instead of supporting the tail-end of the distribution network, large solar parks instead lead to more issues with transmission networks and a risk of overloading sub-stations and generating more power than is needed in the local area at peak production. Instead of financing large solar parks MNRE should look into how to create a model where private individuals can become 'solar farmers' by leasing out their land for a monthly rent till the plants continues to be operational, either based on land value or units produced per month. The involvement of locals in the process of setting up solar power plants would further improve the community s opinion of solar power plants. The draft states, "Most of the projects so far have been coming up in few states, like, Rajasthan where high solar energy potential combined with cheap land and favourable State Government policies are in place." (Page. 22). Rajasthan has given land at highly discounted rates, which has distorted competition. Instead of other states imitating the measure, Rajasthan should end the discounted land policy as it leads to an overuse of land by developers and doesn't reward technologies that minimize a solar projects land footprint. Instead of using NCEF funds for solar parks, which will lead to large-scale land use, these funds should be used to finance transmission and civil infrastructure for large canal-top solar PV projects. These projects 8

9 have been shown to reap multiple benefits by using minimal land, lowering water evaporation and increasing output of the solar modules. NCEF funds presently proposed for solar parks should instead be used for funding infrastructure for a large scale roll-out of canal-top solar in India during the second phase. 6. Merging Solar Cities and Rooftop PV and Small Solar Power Generation Programme (RPSSGP) The draft proposes to continue the RPSSGP with 60 MW of capacity for states thatwere not allocated any projects under the first phase of the programme. This would be financed through a GBI. Solar Cities were introduced in the 11th fiveyear plan, aiming to lower energy use of cities by 10 per cent through energy efficiency measures and renewable energy. Comment: Because of the proliferation of different solar programmes, there has been an administrative problem and some programmes have ended up receiving more attention than others, hence CSE recommends that the Solar Cities programme and the RPSSGP should be merged. CSE believes that any continuation (continuation in what sense please rephrase) of RPSSGP should mandate rooftop placement of the projects. These projects could be spread evenly over the existing and new Solar Cities. Even though the draft states that "small rooftop plants of capacity less than 2MW each were also allotted under GBI scheme in Rooftop PV and small Solar Power Generation Programme (RPSSGP)" (Page.12), the reality is that almost all projects under RPSSGP are ground-based. With 60 Solar Cities each city could get a possible capacity of 1 MW. This could still be bid on by developers but with a rider that it must be placed on rooftops in that specific city, much like the Gandhinagar solar rooftop scheme. The Indian Solar industry needs experience in developing rooftop projects and Indian cities need to curtail the growth in energy use, which can be made possible through a combined Solar Cities and RPSSGP scheme.. 7. State incentives 5400 MW of on-grid solar power is left to state policies and the Renewable Purchase Obligations (RPOs). The policy mentions that if RPOs are enforced and increased by 0.25 per cent per year then it will push states to install more than 9000 MW capacity until Comment: The experience of non-solar RPOs is not encouraging as it hasn't been enforced and SPUs are not able to fulfil it and states are loath to fine their own, already heavily indebted entities. The Centre, through the MNRE has not been able to push states to enforce the RPOs. And there is no reason that the Centre would be better at enforcing solar-rpos than non-solar RPOs There is no clarity on whether states will increase their solar RPO at the rate that the draft discusses, which is at 3 per cent by However, the order in which states need to increase their solar-rpos is not stated, hence, they could theoretically go from a 0.25 per cent increase in 2021 to a 3 per cent increase in RPOs aside, or perhaps because of anticipation of a need to fulfil RPOs, a full 5220 MW capacity has already been announced to be set up under state solar policies until How much of this will actually be realised is unclear. As states are able to fulfil their solar-rpo through the Centre s second phase on-grid solar scheme, the MNRE should mandate that for a state to be eligible for Centre-funded projects, thestate 9

10 must show that they enforced and fined the SPUs and users for any lack in solar RPO in This might not be possible for the allocations but could be a demand for the allocations going forward. States that announced solar policies, which have not been fulfilled State Unfulfilled policy goals (in MW) Year Tamil Nadu Andhra Pradesh Chhattisgarh Rajasthan Karnataka Total: 5220 (counting minimum of Chhatisgarh policy) 8. Comment on issues left unmentioned in the draft 1. The draft says nothing about how to decrease land usage for solar power or anything about alternative models of land leasing for solar power. 2. There is no discussion on the financial health and ability to pay by SPUs. 3. Water usage of the solar thermal plants and PV plants are not covered in the policy. There is an urgent need for a study on how much water is actually being used by PV plants in construction and for cleaning. 4. Accelerated Depreciation is only mentioned in passing and seems to be implicitly accepted. Accelerated Depreciation is a capital subsidy, which doesn't promote generation. It has shown in wind-power to lead to inefficient technology being used. Accelerated Depreciation should not be accepted for solar power. 5. Canal-top projects are not even mentioned in the draft policy. Canal-top projects should be encouraged along with roof-top solar. 6. Nothing is mentioned about anti-corruption measures. MNRE should adopt a policy similar to that of the Karnataka Solar Policy where (what kind of movement are you referring to? Please be more clear) between the government agency handling bidding and solar developers is restricted and there are severe punishment for any attempt at bribery. 10

11 B) Off-grid solar programmes under the national solar mission 1. Summary of recommendations A. There is a lack of clarity in the off-grid programmes in the draft policy document. B. The MNRE should learn from the past consolidate all the successes and failures of the past especially the Remote Village Electrification Programme and the Phase I of the solar mission. A detailed analysis of what has worked and what has not, needs to be worked. C. The promotion of grid interactive mini-grids is necessary. But the financing model needs to be creative in order to sustain and upscale the operation at a commercial level. Capital subsidy based model will not work. There is no need to specify and restrict the loads of the customers as the developers have the ability to provide for the needs of the households according to their purchasing power, household structure, and capacity of the mini-grid. What the government needs to specify is the minimum electricity that it is willing to subsidise. Extra electricity should be paid by the consumer. D. Off-grid solar lighting needs better financing mechanism in order to reach the poorest of the poor. Interest based subsidy coupled with marginalized down payment (less than 20%) provides a strong sense of ownership, and promotes longer relationship between the financing institution and the end user. The periodic cash flow from the end user would only be a replacement of cash earlier used on kerosene for lighting. E. The systems could be rated according to their performance. However, it is very important to include practitioners, manufacturers and technical suppliers who are familiar with the technology that is available in the market. F. Lax monitoring in the previous decade has resulted in unsustainable implementation due to inefficient maintenance and corrupt practices. The MNRE needs to analyse the previously available monitoring reports and continue with a stronger regular monitoring practice. This would help them identify loopholes and promptly rectify them. The state nodal agencies need to monitor and evaluate the performance of projects. They need not be direct implementers. G. There is a need for promoting entrepreneurship at least in Phase II. Innovation can help in market growth. The private sector is mature to identify and satisfy the needs of rural households. Implementation of projects needs to be passed on to the private sector and the government should take the role of monitoring the execution of projects and thereby securing the sustainability of the programme. 11

12 2. Key lessons from Phase I Phase I of the National Solar Mission failed to focus on off-grid solar penetration although there was a clear mention about promoting off-grid systems through various business models in the stated objectives of the off-grid solar photovoltaic program in In August 2011, a document was released regarding the targets achieved by the Ministry of New & Renewable Energy (MNRE) in the first year of the National Solar Mission with regard to the off-grid solar Photovoltaic sector. However, the document was - removed from the website and there has been no data available from the ministry with regard to the completed projects under the solar mission. The current draft policy of the solar mission states the following on Page 10 under the mission objectives: The first phase (up to 2013) focused on capturing of the low hanging options in solar; on promoting offgrid systems to serve populations without access to commercial energy and modest capacity addition in grid-based systems. In the second phase, after taking into account the experience of the initial years, capacity will be aggressively ramped up to create conditions for up scaled and competitive solar energy penetration in the country. However, in the subsequent paragraphs of the draft policy, only the status of the large-scale grid connected solar sector is discussed. The current status under the National Solar Mission for the off-grid sector is ignored. No analyses of the past projects have been taken into consideration. CSE suggests that the past lessons need to be considered especially since the policy and programme have been in effect in the sector for more than a decade. The current phase indicates that the Remote Village Electrification Programme (RVEP) will be replaced by the Energy-Access scheme. The RVEP has been active for more than a decade. However, no analyses have been done on what was successful and what failed especially in terms of financing the projects under the RVEP. The MNRE has tried capital based subsidy, and a mix of capital subsidy and interest subsidy while both of them have neither been analysed nor discussed in detail in the draft document. Banks were expected to play a major role in Phase I of the off-grid program. The extent of the success or failure has not been examined. 3. Energy access scheme Two to five light points (around 9W each) and one to three sockets for operating electronic gadgets to each of the willing households in the village may be provided through mini-grid mode (from more than 10 kw to 500 kw per site) or micro grid mode (up to 10 kw) through various renewable energy resources depending upon the availability of resources and load requirement. The new scheme would involve all census unelectrified villages, un-electrified hamlets of electrified census villages and also covering electrified villages and hamlets where power availability is less than 6 hours per day averaged over the year. Special emphasis would also be laid for promotion of mini grids in rural areas. The implementation of micro and mini-grids has been successful in the state of Chattisgarh. However, the current financing mechanism does not enable commercialization and upscaling. The MNRE targets about 20,000 villages under the scheme. These include remote villages where the grid cannot reach and villages that already have grid connections but have poor supply. It is important to target remote villages under the current mechanism because in the RVEP, villages that were easily accessible by road and closest to the grid were only targeted, behind the remotest of villages. 12

13 CSE s recommendations for the Energy Access scheme are as follows: Focus should be on interest-based subsidies. There is no need for capital subsidies if the down payment is marginalized. Priority should be given to remote villages, which are farthest away from the tail end of the grid. The MNRE need not specify the technical details of required for each household. The end user should have the option to choose according to his purchasing power, and his requirement. Individual home lighting systems should be considered only in areas where a mini or a micro grid is considered uneconomical. When mini-grids are set up they should be technically made possible to be interactive with the conventional grid when it reaches. This will ensure that the tail end of the grid is not weak and help in strengthening the supply in a decentralised manner. Financing mini and micro grids under the energy access scheme In the case of mini and micro girds the funding mechanism has not been presented in detail in the document. There is only a mention of 90 per cent capital subsidy. There is little scope for commercialization at this level. Currently, the MNRE has benchmarked the price per watt of solar PV at Rs. 270 per watt peak with battery. If the 90 per cent capital subsidy is utilised, the centre will have to shell out at least about Rs. 5,000 crores to achieve the proposed target of 20,000 villages. 3 CSE proposes the following model for a more stable funding option for the commercialization of mini-grids: Capital costs: The project developer should bring in equity amounting to 20 per cent of the entire capital cost. The rest (80 per cent) would be financed through soft loans at a 5 per cent interest rate. Tariff structure: This would be divided into two segments household level contribution and generation based incentive (GBI). The households can be charged on a flat rate basis the price they have been paying for kerosene or lower. The households should be able to meet their basic electricity needs at this rate, say two light points and a socket. If they require more electricity, they should be charged at the conventional electricity tariff prevalent within that state. The difference between the generation cost and the amount collected from households would be the GBI that the project developer could be eligible for. This amount could come from the National Clean Energy Fund passed on through the distribution companies at the local level. The project developer should include the residents of the village in training and should be able to transfer the operation, maintenance and ownership of the mini-grid to the distribution company once the grid reaches the village in which the mini-grid is in operation. A local technician should be trained to handle minor repairs and an operator should be hired by the project developer before transferring the system to the distribution company. This would also help in generating employment within the community. Just like in large scale grid connected projects, there should be a reverse bidding process that would help in identifying the developer. Operation and maintenance costs should be included within the bidden tariff. 3 Assume a minimum of 10 kw solar mini-grid capacity for a village 13

14 Loads: Households should be given load as per their demand, say 2 light points (9W each) and socket (40W) in any combination, on a flat rate basis. The households should have the option to increase their consumption, given their purchasing power. 4. Financing off-grid lighting a) Subsidies The (energy access) scheme shall be more focused towards targets which are product linked and also enhances the income generation activities. The scheme shall encourage replacement of non-renewable energy sources like fossil fuels, kerosene and diesel with solar energy to meet the requirements. The scheme would support up to 90 per cent of the cost of systems for generation of electricity in off grid areas. The use of capital subsidies has been deterrent and a bottleneck for implementation in states. The endusers lack a sense of ownership and the supply side of the market lacks any incentive to perform. Due to disbursement of capital subsidies several issues arise non performance of the suppliers with regard to maintenance in order to reduce costs; illegal selling off of systems; and corruption at the final implementation level. In such a capital subsidy intensive framework, the private sector is not free to innovate and work on models that can suit the purchasing power and lighting requirements of the households. CSE suggests the use of interest based subsidies for individual lighting systems which can help an end user finance his or her power needs. This would give him/her a sense of ownership. The user would pay as long as the service is good. In the existing business models, defaulters in the micro finance scheme emerge when their systems are of poor quality or if the after sales service is bad. The rural households require energy for basic lighting needs and are willing to pay for it provided that service is good. The monthly payment is usually very similar to their existing kerosene-for-lighting expenses. The initial down payment required for purchasing individual household level solar home lighting systems should also be reduced so they can become accessible to the poorest of the poor. For mini and micro grid models, CSE recommends interest subsidies that will help a developer in lowering the cost of financing his project. b) Benchmarking costs for subsidy disbursement In current mechanism Rs.270 per Watt peak is the benchmark cost for PV systems. Normally, this cost varies for different sizes and configurations. Phase II will focus on benchmarking of costs every year and subsidies will be calculated linked to such annual benchmark cost values to allow reduction of prices. The system of benchmarking clearly does not incorporate the regressive nature of the price per watt of solar PV when there is an increase in the capacity of the panel. CSE suggests that the system of benchmarking be removed. The role of banks, especially cooperative banks and societies, in delivering subsidies to rural areas is crucial for the implementation of off-grid lighting. They need to be included in the implementation -plan of the mission. 14

15 CSE suggests the need for capacity building in the banking sector as the current Indian banking professionals are neither convinced nor pro-active when it comes to funding off-grid solar to rural households. Although, the off-grid sector has been brought up to the priority sector lending as per the RBI guidelines, the banking community requires training and awareness programmes to familiarize themselves with the sector. 5. Performance of systems At present, there are different types of solar devices available in the market, with different brands and with lots of variation in costs of the products. Every product has a different performance level. With this backdrop, Phase II would focus on development of star rating systems which will facilitate customers in buying efficient products at standard costs. The document suggests the need for a star rating system based on the performance of the systems. It also mentions developing standards for the system components and other devices. CSE suggests that involving practitioners, technical suppliers and manufacturers in the process as there are a number of players and the market is mature in terms of technology and business models. 6. Monitoring and evaluation "Information and Communication Technology would form the backbone of monitoring system. Phase II would also focus on development of IT enabled monitoring systems. This would facilitate monitoring and verification of use of subsidies with programme administrators and various channel partners. CSE suggests that monitoring should be done on a regular basis. It should be mandatory to use these reports used while making policy decisions. A number of third party monitoring reports already exist under the remote village electrification programme, they indicate lax maintenance on the part of the suppliers. However these issues have not been probed by the MNRE. It is important that the ministry set up a clear mechanism for monitoring as well as post implementation evaluation for understanding the ground realities of their programmes. 7. Promoting social entrepreneurship The draft policy document does not mention the need for encouraging social entrepreneurship in the sector. This was one of the primary objectives of the first phase. There has been no detailing on how many such players have been created in the off-grid sector through implementation in Phase I. It is important to steer away from capital based subsidies to promote space for entrepreneurs as they are keen innovators and market drivers. Off-grid solar applications can be promoted as a regular commodity to satisfy the needs of the poorest of the poor if there is space for entrepreneurship that is capable of providing good quality products at reasonable prices. The accreditation mechanism did not encourage new entrepreneurship but promoted the large scale capital intensive players who usually have relatively low penetration in rural areas. This needs to be addressed in Phase II. 15