Too close to the sun

14/01/1995
Down To Earth

Too close to the sun WITH charges of skewing up national priorities and rendering them fanciful, the first ever Global Environmental Facility (GEF)-World Bank (WB)-assisted programme on developing the market for solar photovoltaic (SPV) systems has fallen flat on its face. After 2 years of the launch of the US $195 million renewable energy programme, investors have kept away because of the stringent terms, high interest rates and the almost sadisticaly complex procedures involved in international bidding.

Unable to lure investors, the WB is turning the screw on the Indian government to reduce subsidies for its own programmes and shift the focus from rural to urban markets to ensure better returns.

This is in serious contravention to the national priorities set by the Planning Commission. Unhappy with the proposed shift, G V Ramakrishna, member (energy) of the Planning Commission, comments, "The GEF funding should be used to meet energy needs of hilly and remote areas where it is too expensive to draw electricity from the grid. Urban areas should be accorded a lower priority."
Angling for easier terms Alarmed at the flat response, the Union minister of state for non-conventional energy, Krishna Kumar, has rushed to Washington to wrest easier terms from the WB. Kumar will be angling for simpler procedures for project clearance, lower interest rates and lowering the limit of project amount to qualify for international bidding in order to give a chance to indigenous manufacturers. He will also explore the possibility of channelising the credit directly to the Indian Renewable Energy Development Authority (IREDA) -- the financing arm of the Union ministry of non-conventional energy (MNES) -- instead of the channelising it through the finance ministry.

MNES officials, however, do not expect any dramatic concessions from the WB as a result of Kumar's visit. "Decision on the GEF funding can only be taken in the Conference of Parties in March, 1995. Whether India will be able to influence the debate remains to be seen," says an IREDA official. Unfortunately, there has been no effort to coordinate between concerned ministries to take serious note of the situation and initiate the diplomatic process to reform the GEF system to address these problems. It is being dismissed as departmental affair of the MNES. Says a senior official of the Union ministry of environment and forests, "It is an MNES programme. They are looking into the issue."

With the GEF's contribution limited to only US $26 million, it is the WB with the fat roll of US $115 million which calls the shots. The overall objective of the renewable energy programme is to commercialise renewable resources technology and, most important, support marketing of SPV products on a commercial basis. An additional US $54 million grant from Denmark and Switzerland supplements the loan. The investors' contribution is expected to be 25 per cent of the total package. Notably, under the current renewable energy programme, US $42 million is being invested to generate 2.5 MW of energy through SPVs, compared to US $78 million being spent to generate 85 MW of wind energy.

MNES officials are apprehensive that loans for similar projects to be financed by other agencies already in the pipeline are likely to be modeled after the GEF-WB pattern. Already, the Asian Development Bank has promised assistance to the tune of about US $100 million but is insisting on the same unfavourable terms and conditions.

IREDA officials, responsible for channelising funds for the GEF-WB programme, are trying to put up a brave front. "Although the WB has not yet committed anything, they have indicated that their approach in future might be more flexible," says M Ramchandran, general manager of IREDA.

But this hollow assurance fails to hold water because the WB packages its soft loan with GEF assistance and is already armtwisting the Indian government into accepting substantive reforms in its subsidy package for the national renewable energy programmes. This despite the fact that the bank realises that high cost options such as SPV systems have to be supported by high levels of subsidy. What the bank apparently resents is that the MNES subsidy for its own programmes is as high as 70 per cent along with soft loan at 5 per cent interest. Against this, the International Development Agency loan is available at 10.3 per cent without any subsidy backup.

Clearly under pressure, the MNES has started dismantling its subsidy package to the renewable energy sector. L M Menezes, secretary, MNES, admits that the ministry is "geographically segregating the market and limiting subsidies to backward states". Officials concede that they have little option in the face of WB's threat to transfer the programme to other countries if the status quo prevailed.

"It is really a case of one set of subsidy against another," says I J Raju, energy consultant who developed the operational manual for the GEF-WB assisted SPV programme. Experts feel that although the GEF itself is acting as a subsidy for the development of alternative energy technology, it cannot at the same time compete against existing national energy programmes simply because these are already enjoying state subsidies.

There has been other problems, too. The programme was based on premise that once information on the new technology spreads, the market will develop on its own to make the technology affordable. "But this has been proved wrong in the case of SPV. People have kept away from it as the costs continue to be prohibitive," says Chandra Shekhar Sinha, an energy expert.

The project managers have already spent about US $1 million in market surveys and promotional campaigns to sensitise the market to SPV system without any visible impact. The market of for SPV products have always been suspect. Sinha alleges that the WB in its preliminary surveys had relied on simplistic statistical assumptions on expenditure on fuel and lighting in rural areas and assumed a vast untapped market for SPV systems.

Experts feel that it will be misleading to cite steep increase in turnover in the SPV industry in past few years to give an impression that wide market exists. They point out that the industry is heavily dependent on the assured market from the state-supported programmes in the telecommunications, railways, defence and other sectors. "Even that market is stagnating because of the ongoing attempts at reducing subsidy," warns T K Bhattacharya, an photovoltaic consultant who drew up performance specifications for the SPV market development programme.

As all hopes of meeting one of the core objectives of developing the market in the "agricultural sectors" for SPV look increasingly bleak, the WB is switching to urban markets. Bhattacharya points out, "The Bank's survey indicated that the market for SPV products was limited to urban areas with higher purchasing capacity. But unfortunately, the programme is not taking off even in urban areas."

While the SPV programme has fallen flat, the other 2 components of the GEF-WB assisted renewable energy programme -- wind energy and small hydro project -- have performed better because they enjoy greater market support. Against zero utilisation in the SPV programme, utilisation in wind energy and small hydro sector is 19 and 17 per cent respectively. "Wind energy has attracted investment from the corporate sector because the pay back period is short, there is an attractive tax shelter and the quantum of power generated justifies the cost of risk involved in switching over to an alternative energy source," maintains B V Rao, manager, IREDA.

But even these firms find the GEF-WB package less attractive as it is easier to obtain credit from Industrial Credit and Investment Corporation of India and Industrial Development Bank of India because of their simpler procedures even though the interest rates are higher. Large Indian manufacturers of wind electric generators and solar cells like NEPC-Micon, BHEL and CEL even generate funds from internal sources.

Threatened protection
But the large Indian public sector companies which developed under a protected market are critical of the GEF-WB programme as they feel threatened by the influx of foreign competition abetted by the WB. Complains Brig Naraynan, "We have sensitised the market for wind energy for nearly a decade. Why take away the market from us?"

At the same time, some large and medium private manufacturers are ready to jump into the fray provided the deal comes to them at easier terms. Demands Raju, "Many of these firms will come forward if the WB allows IREDA to soften its terms for the manufacturers." The private manufacturers have already tabled their demand for loans at a much lower rate of interest, depreciation rate allowed for investments in SPV systems be taken up to 200 per cent and that manufacturers be allowed to act as financial intermediaries so that they can directly lease out SPV systems.

Whether India will be able to influence the GEF to address its national concerns more appropriately is still to be seen. As of now, the GEF is within its mandate in pushing for high cost options. But S K Sharma, director, energy research centre of the University of Punjab at Chandigarh, warns, "The WB by using the GEF mandate of promoting environmentally-sound investment may push environmentally-benign technology to create more markets for the North."

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