Why surge pricing can spark a brighter future for solar power

A consistent level of electricity into the night involves a very high escalation of cost. The use of a price system might offer a better solution.

27 December, 2023
The Print

Record electricity consumption isn’t perhaps something that will come to most readers’ minds as the highlight of 2023. And yet, on 1 September, the demand for electricity was the highest ever at 240 GW. If we had abundant supplies of coal and didn’t care about climate transition or had mechanisms to use renewable sources, high demand wouldn’t be something to write about.

However, it is evident that keeping up with such demand is already a challenge. The Union government mandated all power plants running on imported coal to operate at full capacity until June 2024. And in October the Karnataka government required all private power generators to sell electricity to the state utility.

Policy decisions should be made with the expectation that demand will continue to rise in 2024 so that we avoid situations like those in 2023. For example, the share of renewables will increase over time. A policy of “surge-pricing” in electricity would allocate demand and also incentivise the development of storage technology.

The potential for storage

One of the disadvantages of solar electricity is that it is unavailable at nighttime. The obvious next step is to develop storage solutions to store electricity for use at night. How much will this cost?

Let us first look at the time-of-day pattern of insolation and consumption. For simplicity, assume the sun shines at a fixed rate for 10 hours a day from 8 am to 6 pm. After the sun goes down, humans stay awake for five more hours. So, we want storage to extend the solar energy until 11 pm.

Let’s start with one solar panel that makes 1,000 watts (i.e. pushes out 1,000 joules per second). Let’s assume that we sell 665 W every hour and store 335 W. Over 10 hours, the stored energy is 3,350 Wh. We will use this up in the last five hours, i.e. deliver 670 W per hour. We will assume that there are no losses at the battery. This delivers the illusion of a combined SPV+ storage facility that delivers 665-670 W for 15 hours per day.

The first cost of this system is that of the solar panel itself. We require a panel that generates 1,000 W. The price of a 10 kilowatt (kW) panel is $28,500. This gives us a price of $2.85 per W. Therefore, our panel of 1,000 W capacity will cost $2,850.

The second cost in this system is that of storage using lithium-ion batteries. We need 3,350 Wh of battery storage. The price is approximately $139 per kWh. We require 3.35 kWh, which gives us a cost of $466.

Our total cost for this 15-hour solar-powered electricity is $2,850 + $466 = $3,316.

Price volatility and storage

Can the price of electricity be brought down further? The solution is to allow prices to reflect the availability of electricity. Surge pricing is not new to customers. When fewer taxis are available, we see a rise in their prices. When the onion crop fails, we see a rise in the price of onions. With surge pricing in the world of solar power, the price of electricity will be lower in the daytime and higher in the nighttime. Here is how the cost would work out.

At an extreme, let’s assume that we don’t store electricity at all, and there is no electricity available after 6 pm. A world that consumes 665 W during the day with no storage costs us $1,895. These are useful numbers—a world without storage costs us $1,895, while a world with storage costs us $3,316. Thus, we get a 75 per cent increase in the cost of electricity because we require storage.

In reality, we will not inhabit a world without electricity consumption after 6 pm. We may require more electricity during the day because more activity has shifted to when solar power is available. If all activity is shifted to the daytime, and we consume 800 W instead of 665 W, the cost increases to $2,280 (from $1,895). If we were to add a limited storage capacity of 200 W per hour for the five hours at night, we would add a storage cost of $139. Our total cost would then be $2,419 ($2,280 + $139). A world with an equal amount of electricity supply through the 15 hours is still 37 per cent more expensive than a world where electricity prices fluctuate, and power consumption adjusts so that less is required when electricity is expensive.

Cost-effective solutions

Discussions at the 14th Emerging Markets Conference earlier this month focused on the importance of storage technology to make solar power more accessible. These back-of-the-envelope calculations provide us with one key additional insight. Given the high cost of storage, a consistent level of electricity into the night involves a very high escalation of cost. The use of a price system might offer a better solution.

In such a system, the price of electricity will go up in the evening. Consequently, people will pull back on their requirements, and the costs will be lower. Electricity policy should focus on bringing about demand-side adjustments through electricity price fluctuations. This will also incentivise investments in storage technologies.

RBI’s leap into cloud services is a step back for innovation, competition & regulation

The RBI claims its cloud facility will boost the security & integrity of financial sector data. But why is a central bank competing with private players that are already in the market?

20 December, 2023
The Print

The Reserve Bank of India is establishing a cloud facility for the financial sector. But why does the central bank need to involve itself in ‘providing’ a service that banks can buy from the private sector? The proposal needs to provide details on the rationale behind this move. Instead of transitioning public sector banks away from government ownership, we are moving towards including non-bank services into the production function of government. This does not bode well for either competition or effective regulation.

The lack of a rationale

Governments often engage in producing goods and services that the private sector is unable or unwilling to provide, usually because it is not cost-efficient to do so. This, however, does not apply in the case of a cloud facility. The RBI press release states that banks and financial entities are “maintaining an ever-increasing volume of data” and that many of them are “utilising various public and private cloud facilities for this purpose”. It then notes that the “proposed facility would enhance the security, integrity and privacy of financial sector data. It is also expected to facilitate scalability and business continuity.”

If the RBI recognises that public and private service providers are already in the market, why does it feel the need to compete with them? The facilities of the existing service providers may not meet the security, integrity, and privacy standards desired by the RBI. However, what would be the comparative advantage of an entity set up by the central bank over the market players today? There is no evidence to suggest that the building of a cloud facility is in and of itself a guarantee of additional security or privacy.

A decision as big as starting a new business line despite existing alternate service providers should come after a detailed explanation of why it makes sense, what this step hopes to achieve, and how it justifies the expenditure of public money. The press release does not provide any such detail.

State ownership of production

In India, we have a history of either the government producing goods and services or heavily licensing private sector production. This led to decades of inefficiency as the system could not respond with agility to changing market dynamics. Government processes leave little incentive for the management to innovate to gain market share. As a result, we shifted from such a centrally planned economy to a market-based economy in the 1990s.

But decisions such as the RBI setting up a cloud facility raises questions about whether we have come very far from the world of service production and provision by the government.

The RBI says its cloud facility will be set up and initially operated by the Indian Financial Technology & Allied Services (IFTAS), a wholly-owned subsidiary of the central bank. Eventually, the cloud facility will be transferred to a separate entity owned by financial sector participants. IFTAS, a Section 8 company, already seems to have a cloud computing ecosystem for banks. However, is it the skill-set of a central bank (or its subsidiary) to compete effectively with market players with much more experience in providing cloud services? Each such choice by the bank will remove its focus from its core function—ensuring price stability. As the owner of IFTAS, the RBI will have to channel its energies into overseeing the governance and administration of this entity. This may not be the core competence of a central bank.

The rationale for transferring the facility is also unclear, especially because the proposal envisages the eventual creation of a new entity that will be owned by financial sector participants. If the choice of ‘financial sector participants’ is restricted to banks, then the new entity will again primarily be public sector-dominated because most banks in India continue to be government-owned. Further, financial sector participants may also find it in their interest to “buy” services from a separate firm, instead of “owing” the entity that provides the service.

Implications for regulation

More important than the competence of a regulator-owned subsidiary is the question of conflict of interest. For example, the regulator could potentially either mandate or gently nudge banks to only transact with its favoured service provider. It could devise policies that are advantageous to the “national champion” at the cost of other private sector players. This is detrimental to the industry, and to the potential for innovation, as firms may not be incentivised to invest in such a market, beyond a bare minimum.

Sometimes, the existence of a government-owned entity biases the regulator in either designing or enforcing regulations in favour of the state entity. Several sectors in India, with a large state-owned player, have seen instances of such behaviour playing out— such as in the electricity sector where the regulator often rules in favour of the state-owned distribution utility. This undermines the credibility of the institution in the long run.