Energy Economics of

Renewables with special

reference to Wind and Solar
Energy

R090107007

MOHAMMED KABIRUDDIN
 Energy Economics of Renewables with special reference to Wind and Solar Energy

Energy Economics provides a serious forum for research papers concerned

with the economic and econometric modelling and analysis of energy systems
and issues.

Contributions to this theme can arise from a number of disciplines,

including economic theory, financial economics, regulatory economics,
computational economics, statistics, econometrics, operational research and
strategic modelling.

A wide interpretation of the subject is encouraged to include, for

example, issues related to forecasting, financing, pricing, investment, taxation,
development, policy, conservation, regulation, risk management, insurance,
portfolio theory, fiscal regimes, accounting and the environment.

The is of interest to professional economists, financial analysts,

consultants, policy makers as well as academic researchers concerned with the
economic analysis of energy issues, broadly interpreted.

There is an important and growing economic niche for renewable energy

systems within the energy sector. This is demonstrated by the fact that over
that past few years, the use of renewable energy technologies has expanded
rapidly.

In 2005, renewable energy technologies, including hydropower,

accounted for 17% of global energy production.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Renewable energy technologies provide a cost-effective source of

electricity in rural areas where distances are large, populations are small, and
demand for energy is low. This is a market that, traditionally, has been very
difficult for developing country governments to serve in a cost-effective
manner.

As a result, a large proportion of households living in rural areas still lack

access to modern forms of energy. However, access to basic energy services
has been identified as a necessary condition for the achievement of many of
the Millennium Development Goals. This is because access to energy can
promote improved outcomes in the areas of health, education, and economic
development.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Indian Government has accorded very high priority to develop and

expand installed capacity base through non-conventional sources of electricity
generation. There is a separate Ministry in the Government of India to
exclusively focus on this important area of power generation. National
Electricity Policy notified in 2005 in pursuance of the Electricity Act, 2003,
prescribes that State Electricity Regulatory Commissions should prescribe a
proportion of power which should be produced and supplied to the grid
through the non-conventional sources.

Some of the Regulatory Commissions have come out with specific policy
guidelines with a different approach on tariff for these plants in order to
encourage these technologies and plants. National Electricity Tariff Policy
mandates that State Commissions should fix such minimum percentage latest
by April, 2006. India has very high potential for these capacities:
Potential (MW) Existing capacity (MW)

Wind 45,000 4,400

Small Hydro (upto 25 MW) 15,000 1,700

Solar (PV) 20 Very little

MW/Sq.Km
Biogas plants 12 million 3.8 million
Urban/Industrial waste based 2,700 Very little
plant

It may be seen from the above that India has achieved substantial success on
wind turbine based power generation. Ministry of Non-conventional Energy

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Sources (MNES) has set a target of achieving at least 10,000 MW capacity

through various non-conventional
conventional sources, by the year 2012.

Electricity Act 2003 has a special provision to promote stand

stand-alone
decentralized distributed generation and supply in rural area. To encourage
these technologies and to mitigate the challenge of rural electrification, for
thesee areas, not only generation is delicensed but generation as well as
distribution is fully delicensed. This enabling framework aimed at removing
entry barrier has a tremendous potential for technologies like biomass, biogas,
micro-hydel etc.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Wind Energy
Wind energy is derived from moving air. A wind turbine typically converts
this kinetic energy into electric energy for local or distributed use. Wind Energy
has a large role in the Renewable Energy sectors in Europe and the United States,
with double digit growth rates during the last 5 years and in 2005, over 47,000
MW was installed. In grid-connected configurations without large storage
possibilities, it is estimated wind energy can provide up to 20% of the total power.

In remote areas, wind energy systems combined with diesel and storage
facilities (also called hybrid systems) can provide an economic alternative to
diesel-only generators.

In larger electricity grids, wind turbines can pose a good addition to

already existing island grids, however with limited capacity, through its
variable output as a function of the wind.

It is the ultimate renewable resource. Wind is caused by differences in

temperature and air pressure (due to the sun's heating the Earth's surface).

Air tends to flow from areas of higher pressure to areas of lower

pressure hence, generating wind. Wind started off, however, as a pipe dream,
a solution for remote communities (i.e., off-the-grid), with expensive electricity
costs. However, wind technology has evolved over the past thirty years, most
notably increasing in scale (and rotor blade size), enabling the construction of
large-scale wind farms capable of truly competing with commercial power
plants.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Around the world, the largest wind producing countries tend to be those
not with the best wind resources, but rather with the longest and strongest
history of wind power subsidies.

Germany's system of feed-in tariffs, for example, requires utilities to buy

renewable energy from independent power producers at a favorable rate. As a
result, Germany has the largest installed wind capacity in the world, followed
by Spain, the U.S., India, and Denmark.

The chart to the right shows the degree to which major economies
depend on wind power, and suggests that while still a small portion of total
electricity supply, wind has the potential to be quite a large contributor to
worldwide energy demand. One commonly cited statistic is that current
installed wind capacity amounts to less than 0.1% of total potential wind
capacity around the world-- so there remains a lot of room for growth.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Evolution of Wind Technology over the past 30 years

There are two clear advantages to wind energy for those looking to
invest in new power capacity. The first is that it burns cleanly, and therefore is
eligible for production tax credits as part of the electricity regulations targeting
renewable energy and will benefit from any renewable energy purchasing
requirements or carbon regime in the future.

The second is that large-scale wind farms, even without subsidies, are
cost competitive with fossil fuel powered plants, achieving cost parity with
natural gas and coming close to competing with coal. The chart to the right
shows the classic economies of scale that have been achieved as wind
technology has improved, increased capacity has been installed, and costs
have come down. Also, unlike coal, natural gas, or nuclear energy, wind energy
has zero fuel costs.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

There are two clear advantages to wind energy for those looking to
invest in new power capacity. The first is that it burns cleanly, and therefore is
eligible for production tax credits as part of the electricity regulations targeting
renewable energy and will benefit from any renewable energy purchasing
requirements or carbon regime in the future.

The second is that large-scale wind farms, even without subsidies, are
cost competitive with fossil fuel powered plants, achieving cost parity with
natural gas and coming close to competing with coal. The chart to the right
shows the classic economies of scale that have been achieved as wind
technology has improved, increased capacity has been installed, and costs
have come down. Also, unlike coal, natural gas, or nuclear energy, wind energy
has zero fuel costs.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Among the different renewable energy sources, wind energy is currently

making a significant contribution to the installed capacity of power generation,
and is emerging as a competitive option. The programme covers research and
development, survey and assessment of wind resources, implementation of
demonstration and private sector projects and promotional policies. As a
result, India, with an installed capacity of about 3000 MW, ranks fifth in the
world after Germany, USA, Spain and Denmark in wind power generation.

WIND RESOURCE ASSESSMENT

Onshore wind power potential has been assessed at 45,000 MW

assuming 1% of land availability for wind power generation in the potential
areas. However, technical potential is limited to only 13,000 MW assuming
20% grid penetration, which will go up with the augmentation of grid capacity
in potential states. State-wise gross and present exploitable technical potential
is given in Table II.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

A Wind Power capacity of 496 MW has been added during 2004-05

(upto December 2004), taking the cumulative capacity to 2980 MW. Most of
these commercial projects have been established in Tamil Nadu (1677 MW),
Gujarat (219 MW), Maharashtra (411 MW), Andhra Pradesh (101 MW),
Rajasthan (263 MW) and Karnataka (276 MW). Tamil Nadu is maintaining its
lead in wind installations, accounting for over 50% of total capacity in the
country.

Public sector undertakings, public utilities and corporate houses have

been invited to invest in commercial wind power projects to partly meet their
power requirements. Wind turbines of 1, 1.25, 1.5 and 1.65 MW are being
installed across the country in large numbers. Asia’s largest wind turbine
generator of 2 MW capacity has been installed at Chettikulam in Tirunelveli
Dist Tamil Nadu.

The State-wise break up of demonstration and commercial wind power

capacity is given in Table 2. The State-wise and year-wise installed capacity and
energy generation data is given in Tables 3 & 4 respectively

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Unlike its competitors, however, wind energy suffers from several unique
problems. First, it is intermittent, based on when the wind is blowing, and
therefore cannot be increased or decreased on demand. This problem is
exacerbated by the difficulty of storing wind energy, though some inroads have
been made on this front.

Moreover, wind energy needs to be regulated to ensure that it does not

"over-produce", i.e., providing more energy than the grid requires at a given
point. Companies like Xcel Energy are utilizing massive battery storage units to
save excess power generated by turbines for use when the winds die down.

Second, wind is not omni-present. It is most common in windy areas

along the coasts and high plains, and importantly, even in high wind areas,
siting of wind turbines is crucial. Detailed and lengthy anemometer studies
(essentially, poles with wind meters to measure directionality and wind speed)

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

need to be undertaken prior to investing in wind projects, and even then, it is

not 100% guaranteed that wind speeds will meet expectations.

Small wind energy systems, namely water pumping windmills, aero-

generators and wind-solar hybrid systems can also be used for harnessing wind
power potential, in addition to the large capacity wind turbines. These systems
have been found to be very useful for meeting water pumping and small
power requirements in decentralised mode in rural and remote windy areas of
the country, which are un-electrified or have intermittent electric supply. The
Ministry has been implementing a programme on “Small Wind Energy &
Hybrid Systems” for promoting these systems in the country through the State
nodal agencies.

The main objectives of the programme are:

(i) Field testing, demonstration, strengthening manufacturing base, training

and awareness of water pumping windmills, aero generators/ hybrid systems,
and

(ii) Undertaking research & development for improvement of designs and

efficiency of these systems, and also to make them cost effective.

During the year 2004-05, implementation of the programme was

continued through the State nodal agencies as well as the manufacturers of
water pumping windmills, who are also eligible to market the systems directly
to users. The central financial assistance (CFA) is provided only through the
State nodal agencies. Presently, the programme is being implemented mainly
in the States of Bihar, Goa, Gujarat, Karnataka and Maharashtra, owing to the

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

felt need for water pumping and small power generation. The programme is
being extended to other potential states also.

On global scenario we have

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Economics of wind energy

(1) Cost of installation -

With zero fuel costs, the economics of wind energy are similar to nuclear
energy,, in that the cost of installation represents the bulk of power generation
costs. These costs include the turbine (typically, 70% of total
total installation costs),
rotor, construction, and, critically, connection to the grid. Grid connections, in

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

particular, can be very expensive, and therefore, wind farms typically are
located relatively near a grid interconnection.

Wind turbines do, however, have the lowest installation costs of any of
the renewable’s, especially with large wind installations, which take advantage
of economies of scale to reach lows of $800 per kilowatt installed. Small wind
farms and individual turbines can cost up to $3,500 per KW installed, which is a
bit higher than the average geothermal plant, at $2500 per kilowatt installed,
but still less expensive than the $8,000 per kilowatt installed associated with
photovoltaic’s. Wind farms also have the capacity to generate much more
electricity than geothermal or solar installations. Wind rivals natural gas
($1200 - $1600 per kilowatt installed) and is much less expensive than a coal
plant that has all the emissions retrofittings ($2,200 - $3,700 per kilowatt
installed, though gas and coal plants generally take up much less land than
wind farms with equivalent capacities.

(2) Utilization –

After investing all that money in build-out, it is crucial that the wind
turbine is actually turning as much as possible. On average, win only produces
for 35% of the day. Therefore, both the utilization of the turbine (think of it as
what percent of the time the turbine is spinning) and the wind speed are
critical to the economics of wind power plants. For this reason, project
developers must choose their sites carefully.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

(3) Tax credits –

Historically, wind energy has benefited from an investment tax credit,

which saw a host of installations of wind turbines in the 1980's. Unfortunately,
these turbines never need to actually generate power in order to receive the
credit. The second round of tax subsidies for wind has focused on the
Production Tax Credit (PTC), currently at 1.9 cents per kwh produced. This tax
credit has been very beneficial for wind production, encouraging new
investment and fulfilment of power production expectations. The chart to the
right demonstrates the degree to which, at least historically, investment in
wind energy has depended on tax credits.

Wind energy, despite not requiring a raw material fuel source other than
high and low pressure zones, has suffered from the same shortage of raw
materials that has plagued natural gas, coal, nuclear, and solar power plants. In
the case of wind, the shortage has centred around the availability of
components to complete a wind installation, especially gearboxes and castings,
which are highly engineered. Additional components required include rotor
blades, a tower (on which to place the rotor), and a generator. For this reason,
the wind industry has seen some vertical consolidation, for example, Suzlon's
recent acquisitions of Hansen and RE power.

(4) Financial perspective:

The economics of grid connected wind power depend very much upon
the perspective taken. How quickly investors want their loans repaid and what
rate of returns they require can affect the feasibility of a wind project: a short

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

repayment period and a high rate of return pushes up the price of electricity
generated, as shown below.

Public authorities and energy planners tend to assess different energy

sources on the basis of the levelised cost. These calculations do not depend
upon variables such as inflation or taxation system. However, the perspective
of private investors or utilities is different, and takes into account the variables
introduced by government policy and shifts in financial and foreign exchange
markets. These investors make decisions on project cash-flow and payback
time.

Public authorities and energy planners require the capital to be paid off
over the technical lifetime of the wind turbine, i.e. 20 years, whereas the
private investor would have to recover the cost of the turbines during the
length of the bank loan. The interest rates used by public authorities and
energy planners would typically be lower than those used by private investors.

The rising star of the wind power world is China. It registered by far the
highest growth rate among the world's top ten markets. They represented
about 90% of the new installations last year. Provisionally, China reports 3450
MW of new wind power capacity brought online in 2007, representing an
eyebrow-raising 130% improvement on its performance in 2006.

But in terms of total megawatts installed, it was the United States that
came top for the second year running, bringing over 5350 MW online in 2007,
more than twice that achieved in 2006 and notching up a 45% increase in its
cumulative wind power capacity. Spain came next, with 3500 MW, up 30%,
followed by China.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

After the top three came India and Germany, each with around 1600
MW, though Germany had a nose in front. It still leads the world in total wind
capacity, with over 22,000 MW, but that position is likely to be usurped by the
United States, if not this year then next. Other strong performances came from
France, up 900 MW, or 61%, Italy, up 600 MW, or 28%, the UK, up nearly 500
MW, or 24%, and Portugal, up 400 MW, or 25%.

With strong growth in North America and Asia, Europe's share of global
wind capacity fell from about 66% to 61%, continuing a trend. European
capacity increased by 8600 MW, 1000 MW more than last year, to over 57,000
MW. The entire Asia region (minus Japan) jumped by 5000 MW, or 57%, and
now contributes more than 14,000 MW.

Offshore wind capacity, all in Europe, has increased to around 1140 MW since
the start of this year with Sweden and the Netherlands officially bringing 230
MW online in two big projects that were unofficially feeding into the grid
before the turn of the year. In Denmark, the Horns Rev wind farm
demonstrated the good offshore resource by achieving a capacity factor of
47%, almost double the onshore average. Another 850 MW should be coming
online off Europe's coasts this year, mainly in Britain but including Germany's
first project.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Solar Energy

Love doesn't make the world go round. The sun does. Literally. It's the
gravitational pull of the sun on the earth that keeps our planet moving. The
sun also, directly or indirectly, provides all the energy we consume on this
planet, from causing the tidal currents that drive hydroelectric dams to feeding
the photosynthesis of plants to generate carbohydrates to be consumed by
plants, animals, humans, and our SUVs. Of course, the sun's energy can also be
captured directly by photovoltaic cells, which are semiconductors that can
then convert that energy into electricity.

Solar energy has been used for centuries in a wide range of applications,
ranging from heating to cooking to electricity generation. For investors in solar,
though, the holy grail is solar power for on-grid electricity generation-- i.e.,
solar as a replacement for the coal, natural gas, and nuclear energy that
typically provide electricity in the developed world.

While other applications of solar energy, especially off-grid electricity

application (e.g., for remote residential consumers or industrial consumers) or
for consumer electronics, have been cost competitive for many years, only
recently have the economics of on-grid solar energy become attractive enough
to warrant commercial consideration.

The appeal of solar energy is obvious. It is a virtually limitless resource.

It's free of greenhouse gas emissions, widely thought to contribute to global
climate change. In developed countries using lots of air conditioners, it
generates more electricity exactly when you need it-- at times of peak

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

electricity usage (e.g, you run your air conditioners more during the hottest,
sunniest days of the summer time).

Once installed, solar systems can function for 30 or more years with little
maintenance or oversight. Solar comes with limitations, however, most
notably the poor efficiency of PV modules, which is further reduced by the
need to convert DC from solar cells into AC current. Moreover, solar is weather
dependent and intermittent, requiring storage or back-up systems to
supplement during times of weak generation.

India, being a tropical country, is blessed with plenty of sunshine. The

average daily solar radiation varies between 4 to 7 kWh per square meter for
different parts of the country. There are on an average 250 to 300 clear sunny
days a year. Thus, it receives about 5,000 trillion kWh of solar energy in a year.
It is environment friendly and is freely available locally. In spite of the
limitations of being a dilute source and intermittent in nature, solar energy has
the potential for meeting and supplementing various energy requirements
such as heating, cooking, lighting, drying, pumping, desalination, space heating
and power generation etc of the people.
Solar energy systems being modular in nature could be installed in any
capacity as per the requirement. As a result of sustained research and
development, several technologies have already been commercialised while
some technologies are still under development.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Economics of solar energy:

Solar Home Systems are the least cost method of houshold lighting and
electricity. Rural households that currently use kerosene lamps for lighting and
disposable or automotive batteries for operating televisions, radios, and other

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

small appliances comprise the principal market for Solar Home Systems.
Families are spending up to thirty dollars per month on home energy services,
depending primarily on income levels and fuel prices. A 1993 World Bank study
from a dozen countries found that the average monthly expenditure for
lighting and entertainment communications alone ranges between $2.30 for
low income families, to $17.60 for upper income families.

These expenditures are similar to the monthly cost of a SHS. A family in

the middle, or upper-income brackets could have an SHS for less than they are
already currently spending for energy services.

Comparisons between the different sources should also be made in

terms of lighting-services provided per dollar. Because a SHS includes highly
efficient compact fluorescent lights (CFL), it can provide lighting services for a
lower cost per unit of light delivered.

A family using 6 kWh per month to power 9 watt CFLs would need over
30 kWh to receive the same amount of light from 60 watt incandescent bulbs.
The average 50 Wp SHS provides approximately 200 watt hours a day, or six
kilowatt-hours (6 kWh) per month. Based on the price of SHS components, and
cost of relative fuels in its country markets, it is estimated that using 8 watt
fluorescent lights generating 400 lumens, a $500 SHS can provide high quality
lighting at an average cost of $7.15 per million lumen-hours. For diesel
generator lighting 60W incandescent bulbs, this figure is $28.77 per million
lumen-hours. A kerosene lamp can provide lighting at $400 per million lumen-
hours.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

To judge accurately the affordability of Solar Home Systems in rural

areas, one must look not only at comparative lighting costs and how much
families are already paying for energy services, but how much more they
would be willing to pay for electricity from a Solar Home System. While a
simple price comparison is useful in showing that PV is comparable to existing
household expenditures for lighting, and the least-cost means of delivering
household lighting, it does not convey the higher value placed on electricity
over kerosene lighting, or the environmental benefits of solar-based
electrification.

Solar power generation has several unique features. Because it does not
need to be connected to the grid, it can compete with retail energy, rather
than wholesale--therefore, to be cost-competitive, solar only needs to be
cheaper than what you pay your local utility company on your monthly utility
bill. Like nuclear energy, the major driver of solar energy generating costs is
the capital cost of installing the solar system. Unlike nuclear energy, however,
the driver of the cost of the solar system (more than 50% of total cost of the
system) is the photovoltaic (PV) module, which can be manufactured. As a
result of the high capital cost of solar, solar power generation experiences
significant economies of scale-- as solar demand ramps up, and manufacturers
of PV modules are able to increase their production, the cost at which they can
produce PV modules declines, so the end-user cost of solar systems declines.
Cambridge Energy Research Associates estimates that every doubling in
production capacity of PV modules should result in a 20% cost decline,
prompting comparisons to personal computers and semiconductors, both of
which have benefited from Moore's Law.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Governments have leveraged these facts to implement powerful

incentives to develop the solar industry. Germany, for example, has created a
"feed-in" tariff system that requires utility companies to purchase solar energy
from generators at the price of Euro 0.57/kwh (in 2004), or more than five
times the maximum retail price for electricity in Germany. Essentially, this
allows individuals and businesses to install solar systems and sell their solar
energy back to the grid. U.S. encouragement for solar has been more subtle,
focusing on tax breaks for the capital cost of installing solar systems and, in
some states such as New Jersey, Renewable Portfolio Standards to ensure that
solar constitutes a certain percentage of energy purchased by utilities.

The chart illustrates the battle that solar continues to face, especially in making
inroads into the wholesale (i.e., on-grid) electrical market. However, the next
chart illustrates the trend in solar pricing, and gives optimism to those making
long term bets on the industry.

Of all energy sources, Solar Energy arguably has the potential to create
the most positive impact on local jobs of any energy source. Depending on the
commercial arrangement between the solar companies and the Utility almost
all the costs could bemanaged locally. At one end of the scale, the jobs impact
will be equipment installers on local buildings and homes. at the other end of
the scale, local production of solar cells may occur, where all manufacturing
activities (with exception of the raw material itself) in this fast growing high
technology industry can occur locally. The latter opportunity is driven by the
size of the local market. Most solar cell manufacturing plants require a hurdle
of 20 Megawatts per annum of production to yield the majority of "best
economies of scale" efficiency curve. This is a very small increment when

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

compared with the size of the energy supply load that most Utilities typically
manage.

Solar Energy carries most value as a distributed energy source.

Distributed energy means energy produced at or close to the point of use.
Utilities place different values on "central" verses "distributed" energy sources.

Solar Energy reduces the cost of investment in grid transmission

extension, which carries both an economic cost and a time element associated
with capital investment and planning approvals. Solar Energy can also be
introduced in small increments to closely match the load requirements.

Solar energy versus other green energy:

The relative economics of Solar Energy verses other Renewable Energy

sources will depend on country or regional specific factors. Solar Energy
economics are at their best in Regions with high solar radiation factors.
However, solar programs have been successful in Japan and Germany, both of
which have less than optimal solar conditions.

Where hydro-electric and wind farms have been constructed, their

economics have often been preferable to solar energy. This is also true of
biomass. Obviously, not all regions have suitable conditions to access the
former two technologies and most examples require distribution infrastructure
to bring the energy to the users.

Sometimes, utilities in one region have the opportunity to access these

renewable energy sources from another Region through green power

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

exchangemarkets.

Solar Energy comes in to its own through its freedom to choose the site of
energy production and its ability to directly match individual (residential or
commercial) customer loads. It therefore has the flexibility to create greatest
local economic impact of any energy source and also benefits from its ability to
utilize "free space" on roof tops or vertical walls of buildings.

During the period that solar energy costs are still above other energy sources,
but are starting to approach the point where substantial niche markets will
emerge, partnership between economic motivations of Utilities, the Solar
Industry and Government will capture all the elements of value necessary to
show a return on solar energy programs.

Solar, like all sources of energy other than perhaps wind, does require
valuable raw materials, whose scarcity can often increase costs. In the case of
solar, this raw material is silicon, which is used to make the thin wafers for
crystalline solar cells. Scarcity of silicon, which is also used to make wafers for
microprocessors in your PC, has mitigated the downward spiral in the cost of
solar systems. See, for example, the chart of the retail price of solar modules
over the past six years.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Drivers
 Renewable Energy Demand

Shifts in energy demand are a major driver for the solar market as a whole;
increasing demand for alternatives to oil, coal, natural gas, and other fossil
fuels have the potential to cause a paradigm shift for the renewable energy
industry as a whole, and solar is well prepared to ride the wave. Two major
drivers of this shift, climate change and peak oil, are becoming increasingly
important in the eye of the public.

 Climate Change

With Al Gore and the IPCC winning the Nobel Peace Prize in 2007 for their
work spreading awareness about climate change, more people than ever are
aware of global warming and its potential effects, and fear of the
repercussions of a carbon-based energy scheme is driving consumer demand
for alternatives like solar.

 Peak Oil and Energy Independence

Oil prices are at record highs and it is becoming more and more difficult to find
oil and coal reserves. Many suspect that we have reached or will soon reach
peak oil, a condition that will drive energy prices through the roofs.
Furthermore, a large part of the world oil supply can be found in politically
turbulent countries; with OPEC having dominant control over world oil supply

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

(and, therefore, prices), many countries desire energy alternatives in order to

break dependence on geopolitically unstable nations.

 Economies of scale

As illustrated by the cost curve for solar power, economies of scale are a
powerful force in driving both the historical and future prospects for solar
power. As solar reaches "critical mass," these economies of scale should offer a
powerful lever to drive down solar costs.

Witness, for example, the rise of Suntech Power, the low-cost

manufacturer of PV cells in China, which could not exist without large-scale
customers around the world.

 Technology

Technological advancement in solar power is coming at a rapid fire

pace. All along the value chain, manufacturers and suppliers are pushing to
squeeze more solar energy out of every dollar invested in solar equipment.
Innovation has focused thus far on incremental improvements to the
crystalline silicon manufacturing process for the typical PV cell.

Advancements have included increasing cell energy efficiency and

utilizing thinner wafers. Going forward, however, the advancement of string-
ribbon technology and thin-film technology, two new manufacturing processes
designed to drastically reduce the silicon required to make PV cells, could
dramatically decrease the cost of new PV cells.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

 Trends in the Solar Market

The solar industry is faced with a huge oversupply of solar panels

planned for production in 2008. However, shares in many solar companies
such as Evergreen Solar (ESLR) , First Solar (FSLR), SunPower (SPWR), and
Suntech Power Holdings (STP) have surged with the booming solar market.

In the past few years, we have witnessed a stampede of startups

entering the solar cell market using thin film technology because of a shortage
of polysilicon material used to make crystalline cells.

At the same time, existing thin film solar suppliers have announced large
expansions as a means of reducing production costs and gain a competitive
edge. This has resulted in thin film solar panels reaching 9.4% of the 3.8
gigawatts [GW] of power generated worldwide in 2007, up from 7.6% of 2.5
GW produced in 2006. In 2008, worldwide solar power generation will grow
50% to 5.6 GW, but thin films as a percentage of panels will grow to 14.4%

At the same time, polysilicon suppliers have also initiated competitive

capacity expansion plans. 2008 will be the turning point when polysilicon
capacity actually exceeds demand by a mere 4,700 metric tons using a
calculation that thin film panels at 14.4% of the market.

If thin film solar continues at its same growth rate, in 2009 thin film will
make up 17.8% of all solar power generation. That would leave a capacity of
polysilicon exceeding demand by 17,000 metric tons, based on capacity
expansions announced by the polysilicon manufacturers.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Traditional monocrystalline and polycrystalline silicon solar panels with

efficiencies between 15% and 22% compare to thin film amorphous silicon of
6% to 7%, which will possibility increase to 10% efficiencies in 2009 using
bilayer micromorph structures. CdTe (cadmium telluride) technology, led by
First Solar, is already achieving 10% efficiency. Thus, amorphous silicon is two
years behind CdTe.

Moreover, its estimated that in 2008, the production of polysilicon

would be such that even if all the upcoming solar panels were made of
polysilicon, 5000 metric tons would still be in excess.

Plus, the high equipment costs to make an amorphous silicon thin film
panel. Up the food chain, solar thin film equipment suppliers such as Applied
Materials (AMAT) of the U.S. and Oerlikon of Switzerland are selling
amorphous silicon technology.

Equipment costs in the neighborhood of $200 million to make 60 MW of

panels. Add to that the costs of consumables. Cost to manufacture panels of
amorphous silicon is about $1.70 per watt, depending of the size of the factory
(First Solar, which uses cadmium telluride, has reduced its cost to $1.20 per
watt).

The profit for a panel selling for $2.50 per watt would be $0.80 per watt
or $50 million per year. But with the equipment costing $200 million, it would
in reality take 4 years just to recoup the equipment costs. And as more
capacity is added, competitive pressures will drop the selling price further, not
to mention Chinese manufacturers selling their product at under $2 per watt.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

The overcapacity should impact equipment and materials sales in the

amorphous silicon thin film area. As the shortage of polysilicon dissipates, due
to ramped production and a semiconductor slowdown, prices of mono and
polycrystalline silicon solar panels will drop and become even more
economically competitive with thin film technology, further exasperating thin
film equipment sales and the thin film solar market. With the industry having
twice the capacity as it needs, expect some rethinking on the part of investors.

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 Energy Economics of Renewables with special reference to Wind and Solar Energy

Refrences
1. IREDA
2. UREDA
3. MNRE
4. CDMINDIA.ORG
5. www.indiastat.com/India
6. www.windpowerindia.com/statwind.asp
7. www.awea.org/newsroom/pdf/070202__GWEC_Global_Market_Annual
_Statistics
8. www.ecobusinesslinks.com/wind_energy_association.htm
9. www.indiacore.com/bulletin/03jul-wind-energy-potential.html
10.www.eia.doe.gov/emeu/cabs/India/Profile.html
11.www.renewingindia.org/news1/news1_solar_harness.html
12.www.indiaenergyportal.org
13.finmin.nic.in/
14.www.worldbank.org.in/.../INDIAEXTN

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