02/06/2013 11:33 am ET Updated Apr 08, 2013

Making Solar Energy Policy Work in India: Solar Is the Answer but What Is the Question?

The global solar energy business has seen massive turbulence and changes in the past few years. Countries like India, which have ambitious solar power programs, have to rework and re-engineer strategies in this changing world. The country has installed some 1,000 MW of solar power in the past two years. The Ministry of New and Renewable Energy has set a new target of 9,000 MW of solar power by 2017.

First, the good news: The price of solar energy has come crashing down in the past two to three years. But this is only one part of the story. The first bad news is that there is no money to pay for the second phase of solar power development. In the first phase of the national solar mission, one unit of expensive and clean solar power was bundled with four units of cheaper and dirtier coal power to pay for the price difference. But this was when the country had unassigned electricity from coal-based thermal power plants. Now there is an energy shortage. Bundling is not possible.

Second bad news is that 90 percent of domestic solar manufacturing has closed or filed for debt restructuring. This is when the country's national solar mission has specified domestic content requirement to encourage local industrial growth. But there is a glut in global solar module market. China has built a huge capacity, which has no buyers in the increasingly cash-strapped world. Countries like Spain, Italy and even Germany are pulling back on their ambitious solar targets. In this over-supplied market, the price has come crashing down. It is estimated that in 2011, PV modules cost 60 percent less than what they did in 2008. The price goes down each day.

All over the world solar manufacturing industries are feeling the heat. In just the last year over two-dozen ­companies have filed for bankruptcy in the U.S. and Europe. In this situation dumping and protection is the name of the game. Already the U.S. and Europe have imposed hefty anti-dumping duty on Chinese solar imports. India is reportedly contemplating a similar move.

But this is not the only issue at hand. The Indian solar industry, in fact, has less to do with China and more to do with the U.S.. The bulk (no exact estimates exist) of the commissioned plants have been built with low-interest loans (at 6 to 8 percent) from the U.S. Ex-Im Bank. These loans came with conditions that procurement will be from U.S. manufacturers only. The Indian manufacturing industry is hit hard.

This is not the only injury. Under the climate change agreement, industrialized countries have agreed to provide fast-track financing to developing countries. To fudge accounts, the U.S. has added these commercial and conditional loans provided by U.S. Ex-Im Bank to Indian solar industry as part of its contribution to climate change finance. So, there is double benefit for the US--its domestic industry benefits and it gets accounting advantage in climate negotiations.

More bad news in the solar sector development is of even more fundamental nature. The fact is that grid-based solar power continues to reach only those households that are connected to energy supply. In fact, what it does is to subsidize expensive solar for the already-reached population.

So how will solar energy be made to work in India? This is when costs of solar are definitely down and the costs of energy through all other sources like coal or gas are definitely going up. But the problem remains that the average pooled power purchase cost -- the price utilities pay for power -- remains still lower than the cost of solar energy.

The only option is to build a feed-in tariff mechanism, which will pay the differential costs, with guarantees of no default. The National Clean Energy Fund -- built by collecting Rs 50 per tonne of coal or lignite mined (roughly US $1) or imported into the country -- can be used to pay this cost.

But this is also related to the second question about who should benefit from solar energy. Should we continue to invest in large, grid-based solar projects, which feed the already fed? Or should be find innovative ways of upscale decentralized solar energy -- rooftop panels and mini-grids -- to reach the remote villages and institutional users? Currently, when we think of this option we tend to think small, literally. So we think of distributing individual solar lamps or panels that can light a few bulbs or power a fan. These are essential but do not match needs or aspirations. In other words, solar is considered only a transitional solution; it is for the poor, when they are poor. This is a limiting option and will not work.

The best option would be to build grid-interactive mini-power plants -- also funded through a feed-in tariff paid through the National Clean Energy Fund. But these installations cost more and in addition the purchasing power is low in remote villages. Therefore, the differential will have to be paid partly through generation-based incentive and partly through tariffs collected locally by the developer. But the key is to provide viable opportunity for investment in providing clean energy to the very poor. A similar model should be evolved for rooftop solar as well. Getting this right would be the real game changer.

The third big question is how to incentivize domestic manufacturing in an over-supplied global market. One option is to mandate domestic procurement. There is another option as well. Today, Indian solar developers buy U.S. products, not because they are cheaper or better, but because they get loans at low interest on the condition of buying U.S. products. Since the cost of capital determines their project viability they accept the condition. The Indian government should do the same -- provide low-interest loans to companies and mandate domestic equipment procurement. Surely, this is not too high a price to pay for triple benefits: clean energy, growth of domestic manufacturing and most importantly, meeting the energy needs of all, not some.

Solar is clearly the answer. But only if we know what is the question.