The solar lessons

The “Cobra Effect” is a well-known and beloved anecdote in the annals of unanticipated consequences. The narrative unfolded during colonial India, when the British encountered an escalating menace from cobras in the capital city of Delhi. As the snakes posed a significant threat to the residents, British authorities devised what they believed to be a simple solution: a bounty for each cobra captured.

Astute members of society identified a potential financial gain in this strategy. Why not produce cobras, considering their monetary value? Subsequently, they executed the task by establishing Cobra farms, populated by reptiles kept for government coffers rather than for their flesh and venom. Because reimbursements increased in tandem with the success of cobra plantations, the government authorities were pleased with their cobra control programme.

Despite this, an unexpected turn of events was nonetheless imminent. The fraud came to light due to the British government’s choice to conduct an audit of their extraordinarily prosperous programme. They renounced the bounty scheme upon becoming aware of the cobra farms.

Economically speaking, the cobra breeders acted prudently by releasing the snakes, as there was no justification for their continued existence. The ultimate outcome? There has been an increase in the population of cobras writhing through the streets of Delhi since the bounty was benevolently offered.

Goodhart’s Law, a principle with profound implications in economics, business administration, and policy formulation, warns us about the dangers of using a single metric as a target. As the economist who coined this Law, Charles Goodhart, pointed out, ‘When a measure becomes a target, it ceases to be a good measure.’

This is a crucial lesson for policymakers, emphasising the need to consider the broader implications of their targets, as it can lead to unintended consequences.

The foundation of Goodhart’s Law is the observation that when a particular metric is designated as the principal indicator of success and the focus of efforts to enhance it, it gradually forfeits the attributes that initially rendered it a valuable measure.

This transpires because individuals will begin to optimise for that specific metric, frequently neglecting other critical yet less quantified facets of performance. This Law has become the centre of attention after the mushroom growth of solar rooftop projects and the prepositions forwarded by the various stakeholders to curb this so-called crisis.

In 2015, the regulations put in place by power regulator NEPRA to encourage small-scale renewable energy began to accelerate the development of net metering. Under these regulations, customers with three-phase connections might offset their own power usage by feeding extra power back into the system.

Rooftop solar power added 141 MW to local grids by 2020, a significant achievement. However, growth was initially restrained because of the high price of installations, highlighting the challenges. Nevertheless, there was a marked uptick in engagement when a policy revision in 2017 improved the licencing process and agreement terms.

Subsequently, with the help of declining solar equipment prices and escalating grid electricity prices, there was a substantial surge in solar rooftop installations. According to the most recent data, the imported solar equipment capacity has surpassed 6,000 MW, while the installed capacity via solar rooftops has surpassed 1,000 MW.

While discussing possible regulatory measures to control the fast spread of individual solar installations, the energy minister brought attention to the topic, illustrating the ongoing complexities of policy implementation.

The increasing integration of rooftop solar systems has introduced a range of economic and operational challenges. As more households and businesses opt for solar solutions, there has been a notable decrease in demand for electricity from the grid, particularly during daylight hours when solar production is at its peak.

This shift has led to significant underutilisation of the installed capacity from traditional power sources. The government’s financial obligations under “take or pay” contracts with the IPPs, which require payments regardless of electricity dispatch, exacerbate the situation. Such agreements contribute to the burgeoning circular debt and result in escalating electricity prices as the costs of unused capacity are transferred to consumers.

This energy production and consumption disparity has also created an imbalance in demand patterns. While rooftop solar reduces reliance on grid electricity during the day, it does not provide power in the evening when solar generation ceases.

As a result, there is still a significant demand for electricity from conventional sources during peak hours, placing a substantial burden on the grid. Distribution Companies (DISCOs) face the challenge of managing this variability, with low energy requirements during the day followed by a sharp increase in the evening.

Furthermore, the financial burden of transitioning to solar energy is not evenly distributed across all socio-economic groups. The high upfront costs associated with installing rooftop solar systems mean that primarily wealthier households can afford them.

These households, which traditionally have been significant contributors to DISCOs’ revenue, now generate their own electricity, reducing their reliance on grid power. Consequently, poorer consumers who cannot afford to install solar systems end up bearing a disproportionate share of the costs associated with grid maintenance and electricity supply, aggravating economic disparities.

In the pursuit of renewable energy, we must acknowledge and confront the intricacies that arise from the swift implementation of rooftop solar systems. The Cobra Effect and Goodhart’s Law provide valuable reminders that the efficacy of policies is contingent not only on the objectives established, but also on the unanticipated consequences that may ensue.

While the government is looking at implementing regulatory changes, it is imperative that it develops approaches that promote sustainable energy expansion while also preventing the worsening of economic disparities and inefficiencies in infrastructure. Achieving this equilibrium necessitates a sophisticated strategy that takes into account the wider socio-political and economic ramifications. This way, one can guarantee that the transition to renewable energy sources does not inadvertently compromise the stability and fairness of the country’s energy system.

Copyright Business Recorder, 2024