I. EXECUTIVE SUMMARY

I. EXECUTIVE SUMMARY

Long after the dire health and economic crises associated with the current Covid-19 Pandemic have been overcome, the State of Rajasthan will continue to battle enduring challenges of poverty, poor electricity supply, and water scarcity. These challenges are especially strong for rural populations, and may intensify with global climate change.

Well-intentioned initiatives have sought to confront these challenges, most recently the Government of India’s Kisan Urja Suraksha evem Utthan Mahabhiyan (KUSUM) scheme. Launched 8 March 2019, KUSUM is an ambitious attempt to encourage the solarization of agricultural electricity supply, so as to improve electricity supply to farmers, increase farmer income, relieve state and Discom financial burdens, and better manage groundwater resources.

This report provides an independent assessment of the relative costs and benefits of both solar feeders and grid-connected solar pumps, two agricultural solarization models that KUSUM offers to communities connected to the power grid. Specifically, this report assesses the ability of each model to achieve the desired goals of stakeholders in Rajasthan, offering recommendations to increase benefits, reduce implementation barriers, and mitigate unintended consequences.

This report concludes that although KUSUM has great potential to deliver these benefits, particularly through the use of solar feeders, neither model neither model appears likely to be able to fully deliver on all of these benefits. Critically, neither is sure to improve Rajasthan’s groundwater depletion problem. Despite these caveats, Rajasthan is well-positioned to meet solarization targets and is generally encouraged to embrace the KUSUM scheme, making changes where needed to ensure financial viability, prioritize equity, and minimize harmful side-effects on the social and physical environment.

CONTEXT

Through solarization of groundwater pumps and substation-level feeder power plants, KUSUM aims to give farmers ample, reliable electricity for irrigation. The scheme has two grid-connected models:

• KUSUM A: Installation of 10,000 MW of decentralized, ground-mounted, grid-connected solar power plants with individual plant sizes up to 2 MW.

• KUSUM C: Solarization of 15 lakh grid-connected agriculture pumps, originally intended to connect each individual pump to its own power supply. Recently, KUSUM guidelines have been changed to allow this target to be met by connecting multiple pumps to a single power supply, i.e., by creating solar feeders. KUSUM has many potential virtues. Solar electricity can be generated at low cost and supplying farmers through exclusive channels enables them to more efficiently irrigate their crops, boosting their

productivity and, thus, their income. Net-metered solar pumps also allow farmers to sell surplus power to the grid—a potentially sizable source of secondary income.

Farmers who generate their own low-cost power lessen the need for agricultural electricity subsidies— a driver of high Discom debts and regular state bailouts of the distribution sector. KUSUM intends to help close Discoms’ revenue gaps, helping them on the path to long-term financial health.

Lastly, the grid-connected solar pump model intends to help conserve groundwater, or at least to do no harm. With farmers receiving electricity for free, or nearly so, there is little incentive to prevent them from aggressively pumping, threatening sensitive water supplies. Rather than costs, solar pumps offer revenue to farmers who economize their power use, and as such, their groundwater pumping.

The state of Rajasthan has been an eager first adopter of the KUSUM scheme. Rajasthan was the first state to tender KUSUM A feeders and quickly surpassed targets set by the central government. State government interest in the rollout of grid-connected solar pumps has also been robust, with the state gathering farmers’ consent for participation and subsequently tendering over 60,000 horsepower of solar pumps (roughly 90 MW). This report also notes that:

• Rajasthan is an especially dry and sunny state—ideal conditions for solar PV.

• Rajasthan is highly dependent on farming. 75 percent of its citizens live in rural areas, and over 60 percent earn income from agriculture. 1 Agriculture accounts for 30 percent of the state’s total GDP.2 Improving farmers’ electricity access and raising their incomes are therefore major concerns.

• Rajasthan’s Discoms are highly indebted. The distribution sector’s debts essentially tripled from 2010-2015, eliciting state bailouts. Today, 75 percent of Rajasthan’s energy budget goes toward Discom subsidies.3 KUSUM’s potential to reduce this strain is, thus, very appealing.

• Rajasthan’s water table is critically threatened. Agriculture consumes about 86 percent of water resources, and over-pumping has led to water scarcity.4 Rajasthan’s annual groundwater extraction is 140 percent its annual recharge.5

REPORT METHODOLOGY

This report evaluates (1) the core rationale for solar feeders and grid-connected pumps, and how that rationale is reflected in the scheme’s current design, (2) barriers to the scheme’s future rollout, and (3) the scheme’s potential co-benefits and negative consequences.

The research team organized along these lines and applied a variety of analytical frameworks to assess KUSUM from the ground-up, using Rajasthan as the venue of observation. The team used standard discounted cashflow analyses to compare KUSUM’s possible benefits for farmers, developers, and Discoms in order to judge whether current tariffs and financial incentives motivate participation in

the scheme. Rollout was assumed to hinge mostly on the indigenous capacity of key industrial supply chains, given the central government’s requirement that all KUSUM components be domestically manufactured. A supply chain analysis was thus used to locate weak links that might prevent Rajasthan from meeting its solarization goals.

Data from these analyses was largely publicly available using government resources. Throughout the project, the research team consulted Indian stakeholders via video-conference, including the Rajasthan Renewable Energy Corporation; NGOs, such as Prayas Energy Group and the World Bank (whose scholarship and differences of opinion informed much of this project’s scope); and solar experts from both India and the Princeton University campus. Stakeholders’ willingness to engage the research team in spite of difficulties imposed by the ongoing Covid-19 Pandemic attests to the profound interest in agricultural solarization, the KUSUM scheme, and its potential ramifications in Rajasthan.

ANALYTICAL FINDINGS

Despite KUSUM’s anticipated benefits and the success of initial pilots, progress in Rajasthan

has stalled. Solar feeders have yet to be implemented in ways that markedly increase farmer income or conserve groundwater, and risk-averse banks are not lending sufficient capital to developers. Solar pumps, meanwhile, have not caught on with farmers hesitant to self-finance participation costs, even when subsidized. The research team’s analyses have identified shortcomings in KUSUM’s design that limit the scheme from delivering on the full spectrum of possible benefits:

• Solar feeders are more likely to attract private capital than solarized pumps. As it stands, our analysis suggests that only the solar feeders’ tariff structure will sufficiently incentivize private developer investment.

• Solar feeders have greater potential to raise farmer income than solar pumps. Analysis finds that current solar pump feed-in-tariffs are too low to benefit farmers selling power back to the grid. Unless tariffs or subsidies for solar pumps are increased, solar feeders can offer farmers greater income through land leases to feeder developers.

• Anticipated Discom savings are similar with solar feeders and pumps, but the benefits of deploying solar pumps are more uncertain. Cashflow analyses in this report reveal that with solar pumps, Discoms’ savings erode as farmers sell more electricity to the grid. Further, tariffs cannot be raised to benefit farmers, or to incentivize decreased groundwater pumping, without reducing Discom savings.

• Solar pumps are slightly likelier to reduce state subsidies than solar feeders. Accounting for initial capital subsidies, solar pumps will likely yield modest net savings for the Government of Rajasthan over 25 years, compared to solar feeders, where relief hinges on tariff correction (and, thus, is more uncertain).

• Both solar feeders and pumps pose unknown threats to groundwater. Low feed-in-tariffs mean farmers may prefer to sell excess water rather than surplus electricity when using solar pumps, which would therefore fail to prevent water overextraction. Solar feeders have no price signal in KUSUM guidelines, although they do offer flexibility to implement concurrent water conservation policies. Regardless of any advantages one solarization model might have over another, the KUSUM scheme may need to come to terms with some implementation realities:

• Domestic content requirements are unlikely to constrain Rajasthan from meeting its solar targets. Even in conservative scenarios, Rajasthan’s share of India’s likely PV industrial supply should be sufficient to meet its distributed power target of 4 gigawatts (GW) by 2025.

However, current domestic content requirements for solar cell components may impede the meeting of national solar targets.

• Financial and technical capacity limitations inhibit farmers from becoming renewable power generators. Although KUSUM guidelines indicate a preference that solar feeders be developed and operated by farmers and farmer cooperatives, farmers generally lack financial and technical capabilities to do so. Beyond leasing land to feeder developers, farmers who do not own feeders cannot earn secondary income from feeder-level generation.

• KUSUM will leave Rajasthan a substantial waste problem. Solar PV produces substantial waste in the form of spent modules. India has no disposal strategy for module waste that will be generated by KUSUM. Long-term management of the KUSUM scheme must also account for unintended consequences:

• Both solar feeders and solar pumps might exacerbate equity issues. Grid-connected and land-holding farmers, the likeliest beneficiaries of KUSUM, are commonly wealthier and come from higher castes. Unequal access to the scheme might deepen social cleavages, particularly if water resources are not appropriately managed.

• KUSUM may seriously alter Rajasthan’s energy politics. Parties vying for farmers’ vote bank have historically used subsidies as bargaining chips. By proposing to reduce or eliminate these, KUSUM disposes of this source of leverage and becomes itself a political rallying point.

How parties come to organize around KUSUM is yet unknown, and its effect on groundwater resources could create new political currents more difficult to navigate.

RECOMMENDATIONS

In order to deliver the KUSUM scheme’s full suite of benefits for stakeholders in Rajasthan, including farmers, Discoms, and the state government, this report advises the following:

• Explore legal, regulatory, and policy mechanisms that would position solarization to incentivize groundwater conservation. Rajasthan should explore direct benefit transfers to reward farmers who conserve water, especially in areas served by feeders. Other co-measures should include accessible training in crop selection and communal water management.

Alternatively, legal reforms might be pursued to impose costs on the overuse of groundwater, or costs and benefits might be imposed simultaneously. • Raise the upper limit on solar feeder installation capacity. The current 2 MW maximum does not allow solar feeders to meet the full agricultural demand in most cases. Based on the distribution of connected agricultural demand in Rajasthan, only 60 percent of the loads served by a substation are below 2 MW based on Rajasthan’s sizing criteria. Increasing the upper limit could enable Rajasthan and Discoms to maximize cost savings from the scheme, by supplying a greater share of agricultural load with lower cost power. • Focus implementation on solar feeders, which seem to offer more benefits for farmers and developers; less risk for Discoms and GoR. Rajasthan could also explore higher state subsidies to make solar pumps viable for both farmers and Discoms. Analysis in this report suggests the solar pump model will not be viable for farmers unless the tariff is increased to ₹9.91/kWh, which is higher than Discoms’ already unsustainable average cost of supply. While a higher feed-in tariff may raise farmer incomes and mitigate water risk by increasing benefits for conservation, Discoms would lose money on the scheme. However, given the dire status of groundwater exploitation, Rajasthan might consider whether subsidies to cover this higher feed-in tariff are a sacrifice worth making. • Develop an initial, small-scale rollout of the KUSUM scheme to mitigate water-related risks and collect empirical data on the scheme’s effects on groundwater extraction. It is unclear how electricity offered by solar feeders and solar pumps will change farmers’ water usage. To avoid possibly dire consequences of further groundwater depletion, KUSUM should be scaled as methodically as the need for rapid solarization will allow, and policies like drought premiums should be explored to control irrigation at sensitive times. If able, Rajasthan should track groundwater extraction with direct pumping measurements where the scheme is being implemented. This small-scale rollout can also be used to track other key uncertainties such as impacts on farmer incomes and Discom finances. • Implement KUSUM in ways that affirm the inclusion of marginalized groups. KUSUM does not, as designed, include specific provisions to ensure small and marginalized farmers— including those with pumps outside the sizing guidelines, or no pumps at all—can access its benefits. To ensure all farmers share in the opportunities afforded by this ostensibly universal scheme, feeders in population centers with high proportions of marginalized groups should be prioritized going forward, and educational barriers to entry reduced.

GENERAL CONCLUSIONS

The KUSUM scheme has enormous potential to deliver benefits to Rajasthan. At present, however, the scheme design does not deliver benefits to the fullest extent possible. While both solar feeders and solar pumps can connect farmers with reliable electricity, this analysis indicates that solar feeders are more viable than solar pumps from a benefit-cost standpoint, and thus have greater potential to raise farmer incomes and welfare writ large. As now regulated under KUSUM, solar pumps are not viable financially, and thus fail to deliver desired benefits. Discoms do benefit from both solarization models, but benefits from solar feeders appear more reliable. Critically, neither model’s effects on groundwater are well-understood and rollout should thus proceed with caution.

Implementation will pose a challenge for Rajasthan, but not an insurmountable one—industrial supply and support services are generally available. Of greater concern are the unintended consequences that rollout might elicit, including political and equity outcomes and other potential negative externalities, such as waste accumulation, political disputes, and the worsening of socioeconomic divides. Policies should tackle these problems and others more fundamental to the KUSUM scheme; namely, that solar feeders lack mechanisms to conserve electricity and water, and that guidelines for solar pumps are not well-calibrated to do the same. Focusing on obstacles and opportunities identified in this report should reinforce KUSUM, amplifying its beneficial effects on national development and climate change, and ameliorating its potentially negative impacts.