Akhil Gupta: Let the Sun Free India from a CAD Crisis
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Profile: Akhil Gupta is Senior Managing Director at The Blackstone Group and Chairman of Blackstone India. He previously served as CEO-Corporate Development for Reliance Industries (RIL), focusing on developing RIL’s oil & gas, refining, and telecom businesses. He began his career at Hindustan Lever.
The biggest freedom a country can wish for is freedom from external overdependence. With our humongous current account deficit (CAD), which forces us to depend on volatile capital flows to finance our import bills, the rupee has taken a beating, falling 14 percent in a matter of weeks. But a bad CAD affects more than just the value of the rupee; it imports inflation, weakens government finances by raising subsidies, deters foreign investment and prevents the Reserve Bank from lowering interest rates. Basically, a high CAD sucks the economy into a vicious cycle of high inflation and low growth.
The biggest culprit here is energy imports. Consequently, a solution that kills many birds with one stone is for the government to go big on solar power in partnership with the private sector. The government’s role should be to:
- (a) Act as credit enhancer to tie up facilities from multilateral agencies, the US, Japan and China for the import of solar panels worth, say, $50 billion over the next five years. This will enable the creation of 50 GW of solar power capacity.
- (b) Assure solar developers that anyone who signs a valid power purchase agreement (PPA) with any state electricity board (SEB) will quickly receive a low-interest rupee loan for 70 percent of the total project cost at the same rate in rupee as the dollar interest rate at which government has borrowed.
- (c) Guarantee SEB payments on the solar PPAs against any state defaults and adjust such amounts against disbursements to states. The Central government’s risk will be diversified against 25 states.
- (d) Encourage insurers like LIC to provide takeout financing for fully commissioned projects—this enables recycling of equity to be deployed for the next project, and a steady yield stream for insurers.
- (e) Offer a Re 1/KWH subsidy to SEBs if they pay the solar generators on time. This can be funded by a renewable energy fund already built through a cess on coal production. This subsidy can also eventually be recouped from carbon credits.
All the actions suggested will enable developers to offer solar power to SEBs at a net rate of Rs 5/KWH. This reduction in tariff will ensure faster adoption by states as this form of power becomes immediately competitive with thermal power. In fact, solar, at Rs 8/KWH, is competitive even now as it displaces peak power, with diesel power costing Rs 14/KWH on the margin. The latest long-term PPA bids from thermal power plants were north of Rs 5/KWH. Solar power costs will continue to decrease as panels become cheaper and their conversion efficiency increases; thermal power costs, meanwhile, will continue to rise with inflation. The economics, therefore, are heavily in favour of solar power.
The private sector’s role here will be to: Develop solar projects more expeditiously and cost-effectively, using the latest technology and construction practices; enter into long-term PPAs with SEBs; invest equity (around $20 billion), acquire land and undertake execution risks once they are sure of getting debt financing of 70 percent.
The benefits of this solar initiative will be enormous. It will mitigate India’s CAD issue, resulting in net savings of $500 billion or more in foreign exchange over 25 years. It will help India manage the power crisis sure to loom large in three to four years given that the development of thermal power has slowed down enormously. A solar plant can be built in six to nine months against four to five years for thermal. It will lead to greater energy independence and reduce our carbon footprint.
At the conceptual level, this solution works because the government borrows at 4 percent dollar cost to facilitate solar power development, while the returns in dollar terms are 17-18 percent per year. The government will shoulder the risk but it won’t cost anything in real terms.
Consider the central issue now. To continue growing at 7 percent, India needs a 60 percent jump in power capacity by 2018 from the present 1,78,000 MW. Any deficit needs to be met with diesel gensets, where the marginal cost of power is Rs 14/KWH, without taking into account subsidies and the cost of importing fuel.
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