Simon-Erik Ollus
Posted by: Simon-Erik Ollus
13.8.2015Ollus_Intia

I visited again India in early August. One cannot be other than impressed by the phase of development there. When I first time visited the country the national solar PV target was 3GW, last time 30GW and now already 100GW by 2022. The solar target has grown over thirtyfold in just five years.

Also Fortum has proceeded with our solar plans. We finalised early this year our second Solar PV plant of 10MW in the village of Kapelli, in the region of Madhya Pradesh. Visiting the plant was again eyes opening – a power plant in full silence and no moving parts. The only noise is the sound of the inverters. A true future generation technology compared to any conventional technology production: safe, fast to construct and CO2 free.

India with great solar radiation conditions has a natural advantage in increasing solar power compared to, for example, Northern Europe. At the same time, India has notable power supply deficit, which the country tries to tap by increasing renewables and coal fired generation. The renewables are taking a larger role and already with today’s technologies the production and capital cost per MWh of wind and solar in India is about on par with a new coal fired station.

However, wind and solar are intermittent generation forms, as they only produce when weather conditions allow. Likewise wind and solar cannibalize the other generations forms’ economic competitiveness by decreasing their running hours. In the past a coal block had an average of 75% utilization ratio (75 % of annual hours) in India. Today it has dropped to 60-65 % and is likely to decrease more when RES growth accelerates. The lower utilisation rate will naturally decrease the profitability of conventional generation and need to compensate becomes eminent. Excessive subsidies again pose a threat to consumer as their electricity bill can grow further.

Consequently, also India finds itself in a debate where there are strong forces in favor and against RES expansion and the sustainability of the current support mechanism and market models.

It is interesting to reflect our role in this discussion. In India, Fortum can be a small RES developer, which cherry picks good locations and subsidy regimes, without a holistic system responsibility of the increased back up need and weakening frequency quality. In our core European home markets it is more difficult for conventional utilities like us: we have conventional generation which competitiveness decrease due to subsidized RES and we  tend implicitly to take the system responsibility: we are concerned on how will power system manage such a quick increase of intermittency in the system.  Are there enough backup, who backups and what about the grid frequency?

Some part of our concern is correct. Without a holistic approach, we can endanger the good aims to decarbonize through expanding renewables. However, sometimes we utilities also tend to be too concerned. Sure, we have increasing challenges and they need to be addressed.

How – I do not actually know, but I believe the markets, consumer behavior, technologies and business models will evolve and the system will find a new equilibrium.

For me the confrontation of new  RES vs. conventional generation is artificial and we need to align interest and go forward. I believe that the more we learn on the new technologies, power market designs and support schemes need to evolve from today’s status. I prefer equal merits for both more RES and conventional generation where decarbonisation is the prime driver of the power market design and support schemes. An equal level playing field for all forms will implicitly anyhow mean that a major part of all nearly all new investments will be in renewable generation, as their production and capital cost competitiveness will continue to decline the fastest. This will become a global trend.

Renewables are likely to change the landscape quickly, and it can well be that with more and more RES, energy as such will not be a scarce resource in the future. If this is the case, we will instead face the scarcity of available capacity of energy at a given point of time. This will also mean that power markets, business models and support schemes should actually go from energy  to capacity optimisation. Strangely like its sounds – both India and Europe have exactly the same challenge ahead.

Simon-Erik Ollus
Chief Economist

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