Renewable energy faces short-term challenge from global response to energy crisis amid Russia-Ukraine war: International Solar Alliance chief

Ajay Mathur, Director General, International Solar Alliance (ISA)

Solar cell and module prices have been rising and a section of the solar power industry is delaying orders for new projects in the hope of prices softening. But Ajay Mathur, Director General, International Solar Alliance, expects  the uptick in the cost of solar manufacturing to continue till 2024-25.

In an interview with Moneycontrol’s Sweta Goswami and Rachita Prasad, Mathur spoke about ISA’s recently approved ‘Solar Facility’, which is expected to stimulate investments in solar energy. He spoke about the need to set global standards to make solar modules recyclable.

Mathur also talked about how India, as the new G20 President, may push for a Centre of Excellence on green hydrogen in the absence of global standards. Excerpts from the interview:

Do you think the ongoing energy crisis, which has been aggravated by the Russia-Ukraine war, has been regressive for the renewable energy sector as countries are re-starting coal-based power plants?

Yes, there is a challenge as far as short-term responses are concerned. Therefore, those having power stations have started using coal to meet their short-term demand. But let's look at the long-term and at the investments. Last year saw the highest investments ever globally in solar energy, which was about $200 billion. We have crossed that number for this year. But in 2021, 74 percent of this investment went to OECD (Organisation for Economic Co-operation and Development) countries and China. Only 5 percent of the investment went to all of Africa. That is a problem.

Do you think the commercial and industrial (C&I) sectors are finally warming up to renewable energy?

Yes, it makes much more sense for the C&I space to move to renewables because it is now cheaper than conventional energy.

For how long do you see the supply chain issue in solar manufacturing continuing?

For years we had declining solar PV prices and then we saw an uptick and we wondered why this is happening. Upon studying the market, what we found was that the price of freight has increased tremendously. Out of Shenzhen or Shanghai, it cost 40 percent more for a shipload than it did a year ago. This has meant that the prices of solar have increased by 15 percent to 20 percent rather than decreased. If it had decreased, you'd have seen an even greater investment. We see a major need to reduce the length of supply chains to avoid such choke points. This means that manufacturing has to occur over a greatly geographically diversified region, particularly if the demand for solar is going to come from everywhere in the world, which is not the case right now. Today, 85 percent of these solar panels come from one country. So, we are right now analysing what is it that can be done.

Governments need to give incentives in the short-term. India has the production linked incentive (PLI) scheme, the U.S. has the Inflation Reduction Act, under which it is providing tax credits. Consequently, to attract manufacturing, we will need these incentives.

Do you see prices softening anytime soon?

I don’t think the freight choke point is going to disappear in the near future. So, I expect the uptick to continue till about 2024-2025.

In that case, will we see a slowdown in the pace of growth despite an increase in the installed capacity as some players are already deferring projects?

The current trend seems to indicate that personal use C&I like solar pumps will increase. Large solar farms — we are not very clear — may increase, but not at the same pace as  had happened in the past few years. This is the first time that we are seeing a large increase in solar products in the user space. If 100 solar modules have been shipped, approximately 60 have gone into large-scale solar, and 40 are going into smaller-scale applications, which is a new phenomenon.

Could you explain in detail the “Solar facility” that was approved at the recently concluded fifth assembly of the International Solar Alliance (ISA)?

We found that investors need confidence. Their (investors’) greatest fear is that they will not get paid. Therefore, we are creating a payment guarantee mechanism. This payment guarantee mechanism ensures that if they are not paid, there is a payer of last resort. This gives comfort to investors. That’s the first part. The second fund takes care of other forms of risks, like what technology doesn’t take off, that’s where the insurance mechanism comes in. What happens in these countries is that because there are fewer and smaller projects, the premium is very high. So, we will help in meeting the premium in the first few years.

The duration of such financing will essentially be till the project is completed and the loan is repaid. And then we expect the governments to be able to charge maybe something of the order of a rupee, a cent, which can be put into the fund to rebuild it. So, that newer project can also get the benefit. We will provide the seed money to make it happen.

We have been hearing that developed countries would provide $100 billion a year. We hope to attract some of it this way. The best money is not used, but is there as a guarantee. We're also looking up to the Green Climate Fund, the Global Environment Facility, the European Investment Bank or actually the European Commission to be able to get resources for this.

The $100 billion, of course, is a big commitment. With COP27 coming up, do you think there will be added pressure on them?

The greatest problem in the $100 billion commitment is that there is a lack of agreement on what it means. In the eyes of many developing countries, particularly as far as the last OECD report was concerned, any money that went from developed countries to developing countries for Zero Carbon projects was part of this 100 billion. So, if somebody built a wind farm or a solar farm in India, and there was money coming in from the US or from Denmark, it was counted in this.

Now, we say, yes, of course you invested, but you get paid for it in return as well. So, it's a commercial transaction. If there is a risk guarantee or if there is a concessionality, that is what should be counted in the 100 billion. So, there is a real difference of opinion regarding what this 100 billion is.

Would you also be looking at environmental, social and governance (ESG) funds for the Solar Facility?

As of now, we are looking at multilaterals and bilaterals. But yes, ESG funds could possibly be also tapped here.

In a global perspective, clearly, support for all renewables is needed. There’ll be some where the support may dry up sooner. For example, in solar, I expect there will probably not be a need for explicit support beyond 2027-2028 in almost any geography. That’s the time when solar and storage would probably become cost effective against any other source of electricity. But as far as other technologies are concerned, they would continue to need public handholding.

How far are we from resolving the issue of round-the-clock availability of renewable energy in terms of its cost and economic viability?

There has been about an 89 percent decline in battery prices between 2010 and 2020. If we get another 20 percent decline, we should be at a stage where solar plus batteries plus whatever is existing in other areas such as hydro should be able to provide cost effective electricity. We are, therefore, looking at 2023, 2024 and 2025 as the years in which solar plus storage will become cost-effective in most countries around the world. This is happening because we are seeing two trends in the battery sector: first, efficiencies are increasing and prices are decreasing. This is particularly true as far as lithium is concerned — lithium-ion batteries. But in those batteries, there is great concern about the source of lithium.

The second aspect is the emergence of liquid metal. Liquid metal batteries — they could be nickel, sodium or sulphur —  will be an element found much more commonly. We are now seeing a new generation of batteries coming up and there are companies now supplying such liquid-metal batteries. So, my view is that we will see a much larger percentage of liquid-metal batteries in the market in the near future. Therefore, there’ll be competition also between lithium-ion batteries and liquid-metal batteries, and this will spur the price reduction even more.

Do you see micro-grids coming up in a big way in the coming years?

States like Uttar Pradesh and Bihar have already started it. Microgrids give the power to negotiate prices. So, if the grid comes and the grid wants to supply electricity, there is a price at which the grid will buy from the solar mini-grid. This obviously provides comfort to investors. Regulatory clarity has helped so many mini-grids to come up in UP and Bihar. In places where there is both regulatory certainty and there is low reliability, microgrids make sense. We also have seen a huge amount of interest from many of ISA’s member countries as their rural electrification is poor. So, whether it is Ethiopia or Rwanda or Uganda, all of them have an interest in this.

What is the biggest concern you have for the solar industry?

I think there are two. One is, will batteries become cost-effective soon? That's a very important issue. But the overarching issue that we are thinking about is the management of solar waste. If we have to manage solar waste, we have to recycle it. That means the materials have to be separated. If the materials have to be separated, then when they are being manufactured they have to be manufactured in a way that they can be dismantled. This means standards. So, we are working on bringing out standards. Very soon a large number of new solar plants will come into place and we don’t want them to be installed or operated without standards. Globally there are no standards as of now for this.

Do you think we also need global standards for green hydrogen as well?

Yes, absolutely. If there is no global standard, creating markets for green hydrogen is going to be very difficult. Setting prices is going to be amazingly difficult. So, my own goal is that we should use the one-year window that we have as the G20 President to establish a G20 Centre of Excellence on hydrogen standards.