Is India Ready to Be a Solar Power Leader?

Is India ripe for a renewable energy revolution? Foreign investors certainly seem to think so, and renewables have been a signature issue for Prime Minister Narendra Modi. But if revolution is indeed underway, it isn’t a spontaneous one. And taxpayer money — not just from India — is fueling the surge.

New Delhi’s renewable energy aspirations recently received a major boost when Japan’s SoftBank announced a joint venture with Indian conglomerate Bharti Enterprises and Taiwan’s Foxconn Technology Group to create a new, Japanese-owned company that will bid on power contracts in India’s growing solar sector. Renewable energy, including solar, is a priority for Modi and has been since before he became the country’s leader last year. “The time has arrived for a saffron revolution, and the color of energy is saffron,” he said on the campaign trail in 2014, attempting to symbolically link the sacred color of Hindus and his Bharatiya Janata Party with his energy dream. This joint venture is the first major announcement by a foreign investor that could help make that dream a reality.

India’s renewable dreams predate the Modi government. The previous Congress-led government promised to boost the country’s solar power capacity from its existing level of three to four gigawatts up to 20. But after taking office, Modi audaciously raised the stakes, quintupling that goal to 100 gigawatts by the year 2022, or more than 30 times the country’s installed capacity. To reach that ambitious target, the government estimates it will need some $100 billion in new investment. Much of this proposed new capacity will necessarily rely on foreign investment and foreign technology. That was the rationale behind India’s Re-Invest, a major renewable energy investors’ summit held in February and kicked off by Modi himself.

Global finance has heeded Modi’s call and is bullish on solar power in particular. In 2014, Deutsche Bank predicted what it called a “second gold rush” in the solar power industry. Given Modi’s commitment to renewables and solar in particular, many companies and countries — including the United States — want a piece of the action.

During President Barack Obama’s visit to India in January, he pledged $2 billion of support to India for renewable energy, in the form of loans to be leveraged through the U.S. Trade and Development Agency. This comes on top of the $1 billion in credit facilities pledged last fall by the U.S. Export-Import Bank in the renewable energy sector, as well as $227 million of financing from the U.S. Overseas Private Investment Corporation, also aimed at expanding renewable energy and infrastructure in India.

Funds from these U.S. agencies are intended to help foreign companies purchase products, equipment, and expertise from U.S. companies. At the moment, two big American solar power companies, SunEdison and First Solar — major beneficiaries of U.S. government largesse — have a sizable presence in India. For that matter, the Indian government itself is offering incentives to solar companies, both domestic and foreign, in the form of concessional duties, accelerated depreciation allowances, and tax holidays.

Most recently, First Solar committed to producing 5 gigawatts of solar capacity and is considering setting up its own manufacturing plants in India over the next five years. This followed hot on the heels of a major $4 billion deal between SunEdison, a Missouri-based solar energy company, and India’s Adani Enterprises. This venture, which will manufacture solar photovoltaic modules — key components of solar power-generating plants — is expected to set up shop in Modi’s home state of Gujarat. SunEdison is already a major player in India, with successful projects in the southern state of Karnataka and in Rajasthan. Building on all this, SunEdison committed to a total of 15.2 gigawatts of solar and wind capacity in India over the next five years at the Re-Invest summit. The gold rush appears to be on.

But there’s a big difference between a real gold rush, where prospectors unearth the precious metal from deep beneath the ground, versus an artificial one, where power companies dig up money planted by American, Indian, and other governments. Given that solar power is intermittent (the sun doesn’t shine all the time) and costly compared to nonrenewable energy sources like coal, natural gas, and nuclear energy, a big rush towards solar (and wind) would be implausible, if not for generous subsidies and government-backed loans. Factor in the intrinsic uncertainties and cumbersome realities of doing business in India, a country that ranks near the bottom of the World Bank’s Ease of Doing Business index, and a surge in renewables seems far less likely.

For one thing, solar power plants require large parcels of land. By some estimates, all of the solar projects currently under consideration could require as much as 500,000 acres of land. That presents a considerable difficulty in India, as the land needed for a project is often dispersed among several small landowning farm families. The resulting negotiations typically lead to delays and cost overruns, raising the cost of projects and making them economically unviable. What’s more, the sorry condition of state-owned electricity boards, which operate in a heavily regulated market and are largely insolvent, reduces the likelihood that they would purchase much solar power, even though they are the logical buyers. That makes it unlikely that there will be much of a demand even if the supply is forthcoming, given that India’s electricity retailers have accumulated losses of about $40 billion and continue to lose approximately $11 billion per year.

So, why are large multinationals like SoftBank venturing into such uncertainty?

The most straightforward explanation: These firms are looking to a future where solar power is cheaper than power from non-renewables. Another piece of the answer is all of the sweeteners that India provides, which will remain enticing for private investors. Apart from the usual subsidies and tax breaks, the Indian government is even considering letting state electricity distributors set prices in dollars, with the government bearing the exchange rate risk if there are big fluctuations in the value of the Indian rupee.

A clear signal that this is part of what’s happening is that SoftBank’s chairman and CEO, Masayoshi Son, suggested that if the Indian government made the necessary land available, the three-nation joint venture might consider manufacturing solar panels in India rather than importing them.

Whether or not such projects come to fruition, there’s a short-term public relations gain for India in the run-up to the United Nations climate change conference in Paris later this year. India faces intense pressure from the United States and other advanced economies to make tangible commitments to reduce carbon emissions. Announcements such as the SoftBank investment in solar power will almost certainly figure prominently in India’s claim that it’s taking climate change seriously.

And it will surely strengthen the hand of Indian negotiators. They’ll be able to claim that Indian per capita spending on renewable energy compares favorably to that of EU countries and is greater than that of China, and use this to extract concessions, as researchers Samir Saran and Vivan Sharan of the Observer Research Foundation, a New Delhi-based think tank, have argued.

There’s no doubt that the zeal for renewables has been driven largely by government incentives. But if the investments don’t make underlying economic sense and are either left unfinished or not fully realized, it’ll be taxpayers in the United States, India, and elsewhere, who’ll be left holding the bag. The end result for India could be a glut of unused solar capacity, exceeding what the market is able to absorb. That might sound unlikely, but something similar happened in Spain in 2009, which, like India, had offered extremely generous incentives to invest in its solar industry.

In the United States, there are already grumblings. Congress, buoyed by Republican opposition to Ex-Im, didn’t bother to reauthorize the bank’s mandate before skipping town for the July 4th recess. That means that the bank effectively ceased to exist at the stroke of midnight on July 1 when its funding dried up. Now, funds committed by Ex-Im Bank to renewable projects in India are in jeopardy, although OPIC funds will remain unaffected. Meanwhile, in India, the Modi government’s controversial but necessary land acquisition bill, which would speed up the process by which companies could acquire land, remains stalled in the Indian parliament and is unlikely to have an easy ride in the upcoming session.

While Modi believes solar power will usher in a “saffron revolution,” it might be more accurate to say that the solar industry is painted green — and not just because it’s environmentally friendly.

Photo credit: STRDEL/AFP