8 Ways Policy Continues to (Inadvertently) Favour Coal over Renewables

I write frequently how RE + storage is much cheaper and more reliable than coal, and, judging from the public announcements, it seems like the government is supportive of Renewables. I therefore am often asked why do I keep saying more needs to be done to promote Renewables.

Fundamentally, I believe people continue to see coal as essential for the development of the nation, whereas RE is continued to be seen as niche/CSR/good for PR. I don't think any of the below policies are created with the explicit intent of favouring coal, rather they are the result of treating coal as essential and RE as non-essential. It is high time*** we start treating RE as just as important as coal, and the 8 policy double standards below are a good place to start.

1) L1 matching for Renewables + storage vs. state-level approval for thermal (without technology-neutral auctions). L1 matching is deeply flawed from an auction theory 101 perspective*, but the results speak for themselves. In the same year coal plants were built at a cost of Rs. 5.0-5.5/kWh, Round-the-clock RE tenders at Rs 3.2-3.5/kWh were rejected. Even the recent MoP order on RTC only permits RE + storage to cost up to 2-3% higher than the L1 cost. Meanwhile, coal plants can be built (or PPAs extended eg. Dadri at Rs. 6.95/kWh) at a cost premium of 60%-120%. Ideally, RE + storage could be built so long as it is below the Average Purchase Cost (APPC) of Rs. 3.85/kWh, substantially cheaper than new coal being built as we speak.

2) Direct procurement of coal. Earlier this year, the central government directed SOEs such as NTPC, DVC and state gencos to import 76 million tons of coal, at a cost of over $11 billion to avoid power shortfalls this year. Could you imagine if the government directed SOEs to purchase $11 billion worth of solar modules (over 20 GW), regardless of cost or country of origin, and mandated that they be installed to avoid power shortfalls next year?

3) Availability requirement is much higher for renewables than for coal. For example, in the recent RTC order, RE+ projects must meet availability requirement of 90% annually and for 11/12 months per year. Given that the average coal plant availability factor is 74%, very few coal plants would meet this target.

4) GST on coal is 5% vs. 12% for solar and 18% for batteries

5) DISCOMs prioritize payments to coal generators (primarily because they are state-owned) and de-prioritize RE generators (primarily because they are privately owned)

6) Coal plant capital cost overruns and fuel price increases can be passed on to DISCOMs, whereas RE developers must absorb cost overruns (in many cases, this has led to projects being canceled entirely when module prices rose, even if the adjusted prices would have still been far cheaper than coal). This has some truly absurd results where, for example, Adani Mundra was able to renegotiate prices from its coal plants to Rs. 10-11/kWh to account for coal cost increases, whereas if a solar developer agrees to Rs. 2.2/kWh, it cannot even negotiate to Rs. 2.4/kWh to account for module price rises.

7) Import tariff (BCD) of 25-40% on solar vs. BCD of 1% on coal (Obviously this is to encourage domestic manufacturing of solar, but should not the same logic then apply to coal to encourage domestic production?)

8) Environmental standards. Though officially renewable projects have fast-tracked environmental clearances, in practice thousands of MW have been delayed due to the GIB issue alone, despite estimates of 2-18 birds killed per year by related transmission lines. In contrast, a single coal plant can be responsible for destroying the livelihoods of hundreds, if not thousands of local farmers, fishermen, etc. from land and water pollution (and direct deaths in some cases ), and still get environmental clearance in the name of progress. This is on top of hundreds of human deaths in coal mining and tens of thousands of human deaths from air pollution. Unfortunately, India seems to have adopted the "worst practices" of the West** when it comes to prioritizing the lives of animals over people.

In summary, many of the above policies are well-intentioned (eg. encouraging local solar manufacturing, trying to get the lowest possible prices for consumers, upholding strong environmental standards), but the cumulative result is a strong bias toward coal-based power projects. Fundamentally, we must start viewing Renewables as essential to economic development as coal-based power.

*A brief note on auction theory. Typically for "bucket-filling" auctions (like in capacity auctions anywhere in the world, or even energy auctions in India itself eg. through IEX), all sellers of power receive the "clearing" price (ie. the highest price that fills the auctioned amount). For some reason, for RE auctions in India only, the remaining buckets are not cleared unless the L2, L3, etc. bidders "match" the L1 prices. In addition to creating distortions in the bidding strategy, it also means the auctions effectively go unfilled, even if the L2, L3, L4 prices are far cheaper than the alternative cost (in this case APPC or even new coal). I think this policy is a well-intentioned effort to get the "best price" for consumers, but it has the perverse outcome of reducing the amount of RE that is built in favour of much more expensive coal, resulting in much higher prices for consumers.

**Many people also ask me why I criticize Indian policy when other countries have equally ridiculous energy policies (eg. Germany and Japan closing nuclear power plants, the challenges in environmental permitting for wind and solar in US and Europe, the slow build of RE in countries like Indonesia and Philippines, etc.). The short answer is that I live in India and have the best grasp of Indian policies. Absolutely similar distortions in other countries should be addressed as well!

***Another comment people often make is that yes India is moving toward Renewables, just be patient, it will happen eventually. Renewables have been cheaper than coal since 2017. It is 2022 and coal plants are still being built (at a much higher cost) and RE is still not getting built at the pace it needs to be to support the economic development of India.