Follow-up Thoughts on India’s Grid 2030: A Glass Half Cloudy

Read the paper Balancing India’s 2030 Electricity Grid Needs Management of Time Granularity and Uncertainty: Insights from a Parametric Model.

Our recent study on India’s electricity grid in 2030 showed high renewable energy (RE) is cost-effective for India, even as variable RE (VRE), i.e., before considering storage. The link has a summary of findings. However, based on discussions or comments from multiple experts, a number of people seem to have chosen to catch only one interpretation of the plausible future grid in 2030 (or maybe not read all the gory details).

One could state RE is the answer, or one could state RE is helpful, but fossil fuels remain critical. Both views would be correct.  Another interpretation of our study would be that the optimality of storage with RE suggests the end of fossil fuels, but that is also incorrect. Under almost all scenarios, the output from coal plants will grow in the coming years. It’s only if both RE and storage grow, and many other assumptions align, including on modest demand growth and high RE output, do we see peak coal from electricity before 2030.  All such analyses are only for utility-based power (matching India’s NDC targets), but such a benchmark ignores captive power, which is overwhelmingly coal-based.

A key takeaway this note aims to emphasise is that assumptions matter, and variability and uncertainty are the key issues India’s grid will face in 2030.

A few factors are trends and constraints for a cost-effective electricity portfolio, regardless of uncertainty:

1. RE’s and storage’s costs are declining;
2. India has “enjoyed” the benefits of surplus coal capacity, which meets the peak even with rising variable RE (VRE, i.e., RE that isn’t dispatchable or “firm”). This has come at a cost;
3. Most of the focus (and recent investment) has been on growing RE;
4. Most planning has yet to consider system level issues, including time of day issues, in full.

It is incorrect to consider RE and coal as “either-or”. As we wrote before, it’s going to be a case of how do we manage both in a portfolio? The criteria or objectives aren’t just RE versus coal, but also issues of new builds versus existing, which location (which impacts coal’s marginal costs), and which time of day (solar is expensive in the evening if we add storage).

While RE is important and 450 GW appears cost-effective based on price trends, VRE isn’t enough. The study assumed very aggressive growth of RE – meeting the 450 GW target is itself a challenge, and also assumed forward looking high RE plant load factors (PLFs—also termed capacity utilization factors, or CUFs). If India doesn’t produce as much energy from RE as modeled in 2030, regardless of whether due to delayed capacity growth or the vagaries of generation based on a naturally varying resource (we only used one year [2019]’s data), the insufficiency of RE to meet rising demand would be even higher.  Simply put, the energy from very high RE barely meets rising demand even before we consider time of day constraints.  We also have enormous uncertainty in the trajectory for meeting 450 GW of RE by 2030.[1] If this grows in a CAGR style (growing more and more over time), as opposed to linearly (equally), then this could risk further shortfalls of supply for certain years before 2030.

On the cost front, no one knows how trends will (or won’t) continue over 10 years. We’ve already seen upticks in prices in recent years, blamed on COVID, supply-chain issues, China, and the war on Ukraine, not to mention Indian tariffs on selected imports. An issue that is not widely recognised—in terms of hardware (solar panels), in 2021 India enjoyed the cheapest installed hardware costs in the world. It’s only high costs of capital that prevent it from having the cheapest levelized costs of energy. But the question then becomes two-fold. First, how is hardware so cheap in India? Are panels used elsewhere superior in terms of quality? Second, if India enjoys such low-cost hardware, then does this mean its price reductions over time can’t be as good as the global average trend going forward?

These prices are just based on the current equilibrium. If we consider the enormous scale planned in India (and globally), issues of critical materials and land will grow.  On the other hand, technological and engineering breakthroughs may accelerate price improvements. However, we need to focus on Indian costs. We anticipate more manufacturing in India, but until the key factors (logistics, costs of capital, cost of electricity) improve, no amount of “cheap labour” will make Indian modules as cheap as those from the dominant supplier of today (China, historical supplier of 90% of India’s cells).  And if we rely on global innovation and price reductions, the rupee is likely to depreciate at a few percent per annum at the least. The Reserve Bank of India and experts believe the rupee is over-valued.  This makes the economics even more uncertain.

Out of fossil fuels, a coal plant has high fixed costs, ideal for not just firm (i.e., dispatchable) but so-termed baseload power. That entire concept will need to be revisited in a high RE future, where in the middle of the day coal’s output needs to come down to its technical limits. India’s RE plans are disproportionally solar-driven given its wind resources are not as good as parts of Europe or N. America (and the best sites are already taken, albeit with older technologies, ripe for repowering).

Batteries aren’t cheap, and will not be in the near future.  If they’re used as peakers, they can be cost-effective in a system that has coal – specifically, existing coal – filling in the evening and nighttime baseload.  It’s a myth to consider batteries as cheaper than coal. Recent “round the clock” (RTC) bids for power were not designed with storage as the key – they were oversized to produce the required availability, with surplus available for sale to third parties.  One has to be cautious of taking lithium pricing data like from BNEF that focus on automotive batteries. These are designed for much lower cycle life, and also lack an inverter. Even at $100/kWh total costs for a battery (with inverter), which is some years away, this costs over Rs. 4/kWh just for the storage, excluding the RE to charge the battery. More importantly, this number is the levelized cost of energy, assuming full usage (about 90 or 95%) every day. But a battery isn’t required in all time periods, so in other periods its value is much lower, equal to the fossil fuel it displaces at the margin.

One more point about the economics as analysed in our Grid 2030 study (and also a policy question that depends on markets or contracts). We assumed that all the RE being curtailed could be used at zero marginal cost by a battery to the extent it matches a daily charge/discharge cycle. This is correct from an aggregate system accounting (i.e., ignoring sunk costs) but it is not clear any practical transaction framework would necessarily operate this way.  It’s only under a framework of liquid, competitive markets (with clearing prices based on marginal costs) would the sale value of surplus RE become zero. But to a consumer (like a storage provider) the value isn’t zero, and one could also have contracts (including special PPAs, or power purchase agreements) that keep the value of all RE above zero. Thus, the economics of storage would be a bit higher than in the study. However, estimates indicate storage would still be cost-effective for meeting the residual (otherwise unmet) demand profiles as based on extrapolating planned (RE, nuclear, hydro) and existing (fossil fuel, less any retirements) capacity for 2030.

India’s grid can handle a fair amount of RE growth before we need major overhauls, massive transmission or storage. But it’s not too far away when VRE won’t be enough to meet demand. The real issue is figuring out why aren’t we growing VRE fast enough? It’s not because storage is too expensive since storage isn’t the bottleneck yet.

If we examine the national solar pipeline, the ambition and plans are far higher than the volumes that reach commercial closure. Top-down bids (especially by central entities, instead of state) are quite cost-competitive, but even after discovering a “low price”, we don’t have sufficient off-takers (states/discoms) willing to sign a power supply agreement or power purchase agreement.  This isn’t due to counter-party risk since supply bids have come in, but rather a reflection of where many states are – with surplus capacity and existing PPAs for much of the day, and visible-on-the-horizon shortfalls at times where solar won’t suffice.

Improving long-distance transmission helps overcome state-level limitations, but national limits will soon emerge. Transmission also doesn’t come free, even if today we are waiving such costs to RE developers. We’re also socializing or transferring other system level costs of high VRE such as impacts on other generators who have to ramp up and down more, or operate at part-load output, at inherently poorer efficiency. Other improvements to help grow RE will involve wholesale price signalling for time of day (and eventually consumer time of day signalling as well).

It seems premature to put all our eggs in the battery basket with a blanket edict “no more coal plants”. The high RE without storage model (i.e., VRE) makes sense, more so if prices stay as low as recent times, even without further major declines. It’s the “what beyond VRE” that is still murky. We should revisit the plans for RE+storage (and coal) every 2 years, based on updates to demand, technology trends, etc., while increasing domestic production of clean technologies.

Isn’t there a risk that waiting till 2024 to think of “more coal” may be too late (for example, if storage technologies don’t improve enough by then)? After all, it takes at least 4-5 years to build a coal plant. The right answer to this is to be ready to finish building under-construction coal plants “on time”, working backwards from when they might be needed. If we still need more coal plants, then building brownfield coal plants makes the most sense, i.e., at locations where more units were planned to be set up in phases. These locations already have coal logistics and transmission in place.  This framework can still be viable even if we don’t need so much coal capacity growth down the road – the newer (and more efficient) capacity can displace older (and dirtier/less efficient) coal plants. One downside to such plans is these may create distortions or a slightly uneven playing field across generators, but such issues can be dealt with through economic instruments, allowing us to first focus on resource adequacy. Resource adequacy also guides us to focus on having sufficient domestic coal – more mining won’t raise emissions – these would first displace more expensive imports.

China exemplifies the “both” approach. It is the world leader in clean technologies, but it still continues to use and even grow fossil fuel usage, especially coal. One thing that China has focused on recently is cleaning up its coal. Not only does it have stringent norms for air pollution from coal power plants, but it has also mandated an efficiency of 0.300 kg/kWh in terms of specific coal consumption by 2025. India’s specific coal consumption has been close to 0.62 kg/kWh, and 2022 appears worse. Even when we normalise for coal quality (energy per kg fuel), China would still only be about 0.4-0.45 kg/kWh based on Indian coal. We are far less efficient. We need to understand the reasons,[2] and fix these.

Like China, India should aggressively go down the RE path, but not focus on just RE. Energy efficiency, smart systems, energy security, local manufacturing, livelihoods, fiscal balances, etc. are all very important. And while we push forward with RE, we should also keep our options open for using domestically available fossil fuels at the highest efficiency and cleanliness. Ideally, this would be based on more intensive use of existing capacity, but even with a small amount of total growth if required.  India’s net-zero ambitions by 2070 should allow us sufficient time to grow RE and allied technologies, and gracefully phase down coal.