Another Inconvenient Truth
Authors: Yogesh Upadhyaya and Manish Agarwal
There is a trade-off at the heart of almost all climate proposals in electricity. Most climate investments end up making electricity more expensive. Costlier electricity means that running businesses becomes tougher which in turn slows employment growth. Costlier electricity also means that government finances get strained as the consumption of vulnerable individuals has to be subsidized. Yet, almost no one acknowledges this tradeoff let alone try to find out the best solutions for it. This was all right as long as the level of Variable Renewable Energy was low. As this level increases, ignoring this tradeoff would no longer be an option for investors or for academicians and consultants.
Reliable and cheap electricity is key to how societies run. Without reliable electricity, trains cannot run on time, factories cannot produce and children cannot study. India is increasing electrification and rightly so. Nearly 100% of villages are electrified as are our trains. Increasingly, citizens are demanding reliable 24 hour electricity. It is important that this reliable electricity be cheap.
The Ease of Doing Business discourse in India has made many mistakes. The biggest mistake is not considering the costs of doing Business. Running a business is much easier if your costs are low and India is a very high cost environment for business. One of these high costs is the cost of energy. Cost of energy is one of the top two costs for as diverse businesses as cement factories, a theater or a Dhobi. When these businesses have to pay more for energy, they have less money for employing people.
Why the cost of electricity for businesses in India is high is a complex topic. Taxes on coal and transportation costs are big reasons. They make the delivered cost of coal at power plants five times the pit head cost in some cases! Losses of Distribution companies is another. Cross subsidy is a third one. Growth of Variable Renewable Energy projects would be another burden on businesses.
Why does the addition of VRE make electricity costlier and less reliable? There are many reasons such as low capacity factors and longer transmission lines required for VRE but the main reason is that solar and wind energy plants generate electricity when the sun is shining and the wind is blowing and not when we need it. VRE needs to be 100% backed up by another plant. And the system needs to bear the Capital and maintenance costs of the backup plant regardless of how much it is used. If these costs are not incurred, the plant would not be available and we would have power outages. We can see these costs clearly in other countries.
A recent report from Standard and Poors is unambiguous about this. In a section titled “A Good Idea Taken Too Far Becomes Indistinguishable From A Bad One” the report states, “At the heart of the issue is that the generation that renewables are displacing is dispatchable, meaning it can be reliably called on to meet power demand when needed by the grid.” and further on, “one could say that renewables have temporarily become destructively disruptive — they have displaced dispatchable baseload generation without the ability at the present time to supplant them.”The report goes on to show how this unreliability is causing price peaks in the US.
Of course the US is not the only such case. Germany has run the Energiewende program for a long time now. It managed to increase the share of wind and solar to more than 40%. The electricity prices in Germany were among the highest in Europe even before cheap gas supplies from Russia dwindled as a consequence of the Ukraine Russia war. Since the beginning of the war, the German industry has been in real trouble. So much so that the German economy minister asked for subsidies for industry! And all the effort in increasing the share of RE for what? In his book How the world really works, Vaclav Smil states that the fossil fuel intensity of the German economy reduced from 82% to just 76%! Twenty years of enormous investments and that is what they have to show.
There will be those who say, “Oh batteries will fix it.” The first question to be asked is “Fix what?” Intermittency of a few minutes that comes from things like cloud cover or the reliably low generation that happens across seasons? Then we come to the questions, How much time will the fix take and how much will it cost? Who will pay the real cost of expensive and unreliable power in the meanwhile? Will it be another generation of job seekers and business owners? Given the centrality of electricity to development, it is up to the proponent of a VRE investment to show that the systems costs will not increase and the system will not become more unstable.
Policy makers should understand this. High electricity prices could derail programs such as Make in India and could keep employment levels much lower than what they could be. Investors should understand this. When the distribution companies prioritize firm power over VRE because of their own obligations to provide 24 hour electricity, VRE projects will become unviable. At that time, they wouldn’t find politicians rushing to their rescue. Researchers and consultants should ask themselves if their intricate calculations about a single project mean anything in the larger picture. Would they find, as Germany did, that their efforts led to very little difference on carbon intensity but cause a lot of distress to job creators and hence to the job seekers of young India.
The time has come to face this inconvenient truth.
_______________
This story is part of a series called ‘Electricity deep dive’. In the coming weeks, we will be diving deep in many of the issues discussed above.
You can follow AskHow India (@AskHowIndia) or Yogesh Upadhyaya (@YogeshUpadh) on twitter or LinkedIn or on https://t.me/YogeshUpadhyaya
Follow Manish Agarwal (@manishbgagarwal) or find him on LinkedIn
