BUREAUCRATIC

and
ORGANIZATIONAL
CHALLENGES in
PROMOTING
PROFITABLE
CLEAN ENERGY
INVESTMENTS
Kanikka Sersia

DELHI SCHOOL OF ECONOMICS

Contents

1. Introduction.................................................................................
2. Global Overview.........................................................................
2.1 Investment trend...................................................................
3. Indian Energy Sector
3.1 New and Renewable Energy (NRE)...................................
4. Bureaucracy and blackouts.......................................................
4.1 Existing policy framework..................................................
4.2 Organizational Challenges and Impediments....................
4.3 Lessons from Japan..............................................................
5. Cost Analysis...............................................................................
5.1 Way Forward.......................................................................
6. Future of Energy is Green.........................................................
7. Conclusion...................................................................................

List of Tables & Illustrations

Figure 1

Estimated Renewable Energy Share of Global Electricity Production

Figure 2

Global Investments in Clean Energy

Figure 3

Sources of electricity in India by Installed Capacity

Figure 4

Renewable Energy Sources by Installed Capacity in India

Figure 5

Comparison of Average Total Costs in long-run

Executive Summary

Renewable energy is the energy du jour.

The existing energy system relies extensively on the use of fossil energy. Given its
skewed distribution, securing their supply for meeting the exponentially growing
demand for energy makes it an essential step to move towards Renewable Energy
Sources and create clean energy policy framework across the globe. We first take a
glance of global energy scenario along with present investments trend. Parallel to it, we
briefly look into Indian context. The reason for low share of renewables throughout is
mainly due to lack of investments by private players in this sector. Huge initial costs
and risk associated with the projects doesnt make it lucrative and profitable venture.
However, renewables enjoy comparatively low or no marginal cost against conventional
energy sources and can be made profitable through economies of scale. The approach
thus emphasized is to ensure that the energy policy framework should create an
enabling environment and provide incentives to private players. The bureaucratic and
organizational challenges need to be wiped out and Government to be an effective
regulator needs to promote credibility and legitimacy of their decision making among
the investors. Renewables may not completely replace the dependence on fossils but
undoubtedly serve a supplement to it contributing towards sustainability.

1. Introduction
The entire edifice of a modern economy is built around production and consumption of
energy. Thereby, there is a serious churning going around the world regarding 'Energy
Transition' which refers to policy adjustment, market and investment orientation,
technological optimization and ergonomical designs to centre-stage Renewable Resources of
Energy. Clean Energy comes in many different flavors including wind, solar power,
hydropower etc.
2. Global Overview
As per Renewables 2014 Global Status Report, renewables have accounted for a growing
share of electricity generation capacity added globally each year. However, due to rapid
increase in aggregate demand, its share is increasing at a slower pace. (Figure 1)

2.1 Investment Trend

According to Bloomberg New Energy Finance, the worlds investment in renewable energy
has shown an increase of 10% since 2013. This is significant, reason being spending on
renewables fell in 2012 and 2013. Investment was driven largely by small solar projects in
Japan and America and by more spending in emerging markets. China, which is supposed to
be world's largest energy consumer, as per Global Status Report, once again led the rest of
the world in renewable energy investment ($56.3 Billion) in 2013. (Figure 2)

3. Indian Energy Sector

Indias energy basket has a mix of all the resources available including renewables having a
significant share of 12%. However, India has had a negative Energy Balance for decades due
to rising demand, which has forced the purchase of energy from outside the country.
(Figure 3)
(Figure 4)

Renewable Energy by Installed Capacity in

7% 0% India

Sources of electricity in India by Installed

Capacity
13%

4%

8%

12%

9%

12% 1%
Wind Power
Small hydropower
Bagasse Cogeneration

68%
Solar power
Biomass power
Waste to power

59%

3.1 New and Renewable Energy (NRE)

Importance of NRE for energy self-sufficiency was recognized after the Oil-crisis of 1970s.
India started its renewable energy program in 1981 with establishment of the Commission for
Additional Sources of Energy. Presently all policy matters come under the purview Ministry
of New and Renewable Energy (MNRE). Indias existing NRE development strategy
prioritizes wind and solar energy. Jawaharlal Nehru National Solar Mission (JNNSM) was
introduced, under National Action Plan on Climate Change, 2008.

17%

Coal
Hydroelectricity
4. Bureaucracy and
Blackouts
Renewable
Energy Sources Natural Gas
The major bottleneck from point of view of investors is the bureaucratic arrangement in a
country concerned.
Especially in developing countries, it requires compliance
Nuclear
Oil through
plethora of legislations. Let's have a brief view of these.

4.1 Existing policy framework

In the past decade, considerable number of efforts has been made in the direction for
increasing investors faith in Renewable Energy. Here are few of them.
China's policy framework includes Eleventh Five Year Renewable Energy Development
Plan (2008) and also Amendment of the Renewable Energy Law (2009) that creates a system
guaranteeing the purchase of electricity generated by using renewable energy. It identifies the
organizations which will supervise these purchases, and establishes a renewable energy
development fund. Brazil and India together adopted National Climate Change Plan (2008)
which identified development of solar energy technologies in the country as a National
Mission. President Obama called for doubling renewable energy within the next three years
under American Recovery and Reinvestment Act of 2009. The UK Government's goal for
renewable energy production is to produce 20% of electricity in the UK by the year 2020. In
addition, renewables have been exempted from the Climate Change Levy that affects all other

energy sources. Thereby, it seems evident that countries across the globe are keenly
interested in developing Renewable Energy Sector.
4.2 Organizational Challenges and Impediments
Inspite of regulated energy sector, investors all around the world experience hindrances in
investment process. Few have been illustrated here

Conundrum is that investors feel policies take time to unfold. Therefore, investing in
renewable energy become favorable only after a time lag. This eventually impedes
those organizations who want to act early (first mover advantage).

A report commissioned by the Renewable Energy & Energy Efficiency Partnership on

BASIC countries found out that for most companies, regulation was a factor in their
investment decision-making. Report also indicated that some companies get involved
in renewable energy investment only as a result of financial sector initiatives.

Access to private finance is crucial for development of Renewable Energy industry,

but due to high current interest rate, low returns on equity and associated risks,
financial institutions and developers remain reluctant to invest.

Even when finance and compliance issues are addressed, lack of transparency in
renewable energy investment market becomes a major barrier that restricts
competitiveness in the sector, and results in rent-seeking and market distortion.

In some developing countries, environmental clearance is a precondition for

considering sanction of loans by the Bank which is aimed at ensuring that public
funds are not used for causing harm to the environment.

Moreover, pressure groups, sentiments of the native population and other stakeholders
together create constraints for corporate houses to initially invest and thereby earn
profitable returns. For an instance, establishment of dams for hydropower generation
firstly requires sizeable confiscation of land but poses them with the liability to
compensate, rehabilitate and resettle the displaced population.

The Waxman-Markey alternative energy bill, USA bestowed incentives for capital
investment in wind, solar and bio-fuel. This initiative had failed to seek legislative
approval and hence show the true picture of constraints surrounding the investment
and application of the alternative energy technologies even in developed nations.

4.3 Lessons from Japan

Japan is the fourth largest energy consumer of the world and until recently, less than 1% of its
energy share was contributed by renewables. After the catastrophic Fukushima disaster, there
has been a paradigm shift in energy policy of Japan. The introduction of Feed-in-Tariff policy
has brought investors scurrying to apply especially for the so-called mega solar projects
making the country one of the world`s fastest-growing users of solar energy. The large scale
solar PV energy generation business rents out the customers, roofs of their factories,
shopping malls and office buildings. Japans solar installations have experienced an

unprecedented spurt of 270% in first quarter of 2013 and soon will be nearly equal to the
capacity of seven nuclear reactors.
5. Cost Analysis
The fundamental challenge is that renewable generators impose high initial costs i.e.
establishment of plants, solar fields and wind farms require huge capital investment. But this
however, is merely a perception and not a universal reality. The high cost to finance such
projects can be re-distributed if such a scheme is developed where investment is made in
smaller area but caters to the regions of high population density. Thereby, investors can
achieve low average total cost as compared to conventional sources of energy. When
economies of scale kicks in, then energy supply could be easily branched out to further far
flung areas that are sparsely populated and in this way making the investments profitable.
Unlike conventional sources of energy, NRE benefit out of low or no marginal cost. There is
no fuel costs associated with solar, wind, hydro, geothermal, tidal and waste-to-energy since
all inputs are free and naturally provided. Their only ongoing costs are maintenance and
operation. In contrast, fossil fuel power stations have significant fuel costs. This makes NRE
an only alternative in the wake of rising global energy prices. (Figure 5)

There is also an associated cost of climate change like greenhouse gas emissions with
combustion of fossil fuels which is not a concern incase of renewable energy. Another
hypothesis is grounded on Robert Solow's model, Backstop Resources theory which states
that alternative resources will become cheaper in comparison with heavily used limited
resource making them viable option especially in long run with technological advancement.
5.1 Way Forward
What clean energy is holds equal importance as that of what Clean Energy means for
investors. Peter Fusaro, founder and chairman of Global Change Associates is the keynote
speaker and thought leader on emerging energy and environmental financial markets. He
commented on the issue saying, We cant just have the rhetoric of green. What we need is
the deployment of capital and finance in green.

Centre-staging this ideology, there is a need to take some concrete steps so as to ensure long
term and un-interrupted investment flow in the NRE sector and to cater to the ever increasing
appetite for energy across the globe. There is an unquestionable need to build confidence
among the investors. Most of the above policy deterrents can be removed through proactive
engagement in regulating, monitoring, evaluation and impact assessment.
Firstly, the Government needs to develop a strengthened regulatory framework which
clearly defines the entitlements and obligations at the part of investors, companies
and Govt. itself.
The initial investment can be either made wholly by government institution or be
encouraged by entering into Public Private Partnerships (PPPs). This would enhance
financial security among investors.
To further promote the financial interests of companies, lucrative offers of subsidies
and grants should be introduced time and again. The hypothesis of tax distortion can
be misleading in this case since the total energy cost will come down considerably.
The only associated cost that of revenue strains and operational risks should be left to
be managed by the private players since they are expected to do it better.
A credible commitment would be made possible through Power Purchase Agreement,
providing them with land etc. That would immune the investors from political
instability or other domestic upheavals.
Bureaucrats across the hierarchy need to be sensitized regarding need for favorable
administrative arrangement and facilitate efficient G2B governance. All policy
matters regarding Renewable Energy would be better addressed if categorized under
Priority Area. This would restrict delayed movement of files and ensure speedy
delivery of decisions.
Government to be an effective regulator needs to promote credibility and legitimacy
of their decision making among the investors, restructure labour laws, ensure real
time information dissemination through periodic reports that stakeholders can trust
and realize the strengths and limitations of each technology as policies matures with
time.
Models that have been successful in the world like that of Japan should be introduced,
(well accustomed to the local conditions of the country). NGOs can play a pivotal
role in implementation of such policy changes that involve technical knowledge and
G2C interaction.

To get cost effective and optimized allocations, one need to resort to appropriate
simulations models, where the results of econometric model forecasting future
demand can be used as an input. MARKAL (MARKet ALlocation) is a widely
applied bottom-up, dynamic technique by ETSAP (Energy Technology Systems
Analysis Program) of IEA (International Energy Agency) that provides policy makers

and planners in the public and private sectors with details on technology and
understanding of the interplay between the macro economies and energy use.
In a nutshell, investors require to be facilitated with a comprehensive domain of sound
legal, political, economical and social environment. There is no zero-sum-game for the
govt. if the private players are allowed to make reasonable profits since the very edifice
of growth and development rests on the bedrock of energy sector.
6. Future of Energy is Green
The evolution of renewable energy over the past decade has surpassed all expectations.
Global installed capacity and production from all renewable technologies have increased
substantially, and supporting policies have continued to spread to more countries in all
regions of the world. Reason being, fossil-based prices are on a cost curve that goes up,
renewable prices are on this march downward. The resources to be used as input for
renewables energy are freely available and that of needed for fossil industry revolves around
applying technology to tapping resources that are much harder to extract. Hence, fossil fuels
tend to be more volatile in price. And also it contributes to emissions, a situation that is not
sustainable.
One may argue that there has been an increasing inclination towards the use of nuclear power
as an alternative to fossil fuels. Reason being, Nuclear Energy provides for efficient energy
supply and have capacity to feed the growing energy demand at minimal variable cost. But
some countries are doing recognizing potential threats attached to it. Recently, Germany
government has announced plans to shut all of the nations nuclear power plants within the
next 11 years, in the wake of Fukushima disaster of Japan. It however intends to expand the
use of renewable resources to provide 35 percent of its electricity. Switzerland too lately has
decided to abandon the setup for newer nuclear plants and will phase out the existing ones
soon.
No matter that even today, both developing and developed countries have binding
dependence over conventional fossil fuels. But the fact that in long run, when all the oil
reserves will dry up, coal mines will exhaust, and further extraction becomes enormously
costlier, renewables sooner or later will be undoubtedly the only alternative to mankind.
However, due to umpteenth number of factors responsible for price fluctuation including
technological advancement, global peace, world market scenario, the future of overall energy
prices is yet to maintain ambiguity.
6. Conclusion
It can be concluded that Renewables may not have enough potential to out rightly replace the
dependence over Conventional sources of energy. But surely, they would act as a sufficient
supplement. Relating the race to Renewables will require creative manoeuvres and bundling
of interests and policies to promote investors interests and make renewable sector a profitable
venture. A strong nexus of faith between regulators and corporations is required so that they
step forward for social wellbeing and save the mankind from probable energy crisis.
What the world needs is an energy revolution!

B i b l i o gr ap h y

1. R E NEW A B LE S 2 014 G LO B A L S TA T US R EP O R T
ww w. r en 21 .n et / r en 2 1a ct i vi t i e s/ gl ob al st a t us re po rt .a spx

2. A r ep or t com m i s s i on ed b y R EE EP (R en e wa bl e En e r g y & En er g y
Ef fi ci en c y P a rt n e rs hi p ) ww w .r e e ep .o r g/

3. TH E EC ON OM IC S O F R E NEW A B LE E NER GY - W o rki n g P a pe r 15 08 1

ht t p: / / w w w. nb e r.o r g / pa p er s/ w15 08 1

4 . EN ER GY S T AT IS T IC S R ep or t 2 01 3
M i ni s t r y o f S t at i st i c s and P ro gr am m e Im pl em ent at i on ,
Gov t . o f In di a

5. Th e E co nom i st