Renewable energy has emerged as a key component of India’s energy strategy. For a long time now, the government has been supporting renewable energy development through an attractive mix of fiscal and financial incentives. These include capital/interest subsidy, accelerated depreciation (AD), zero/concessional excise and customs duties on equipment imports, generation-based incentives (GBIs), feed-in tariffs (FiTs), and waiver on transmission/wheeling charges and open access charges in several states.
These instruments and incentives have been introduced owing to the change in industry dynamics as well as the need to bring about a change in market forces. For instance, GBI was introduced to cater to the needs of the wind power industry and facilitate the transition to large-scale project development led by independent power producers (IPPs). Meanwhile, the decision to phase out AD benefits was driven by the need to weed out the non-serious players and provide an impetus to IPPs focusing on efficient wind generation.
While the sector has made significant progress, there are many hurdles in the way of achieving the tall target of 175 GW of renewable energy capacity by 2022. These include issues in grid integration, curtailment and counterparty risks, and high cost of finance and imbalance charges. Market creation has not been easy but the regulators are acting on this as well by devising tighter compliance standards and fine-tuning the renewable energy certificate (REC) trading mechanism.
As the sector scales new heights, it will be interesting to take a closer look at the ongoing regulatory and legislative changes that are likely to make a difference in the market and lead to industry growth…
Forecasting, scheduling and imbalance handling
Renewable energy penetration in India currently stands at 5-6 per cent. The government’s target is to increase it to 15 per cent by 2020. While increasing the capacity from the current 46 GW to 175 GW by 2022 in order to achieve the 15 per cent target is a mammoth task in itself, integrating this capacity into the grid is no less challenging.
To achieve this, several actions have to be taken. These include bringing flexibility in conventional generation, ensuring frequency control, maintaining generation reserves, introducing ancillary services, scheduling power, implementing the deviation settlement and balancing mechanisms, putting into place robust data telemetry and communication systems, establishing renewable energy management centres, augmenting and strengthening the transmission system, and ensuring compliance with regulations and standards by renewable energy generators.
The most important step is to arrive at accurate forecasts as this will help in scheduling power supply effectively besides reducing the occurrence or the length of curtailments (which translates into cost savings) as well as in mitigating the physical impact of extreme weather conditions on solar and wind power systems. Further, better forecasting will drive renewables’ growth and help increase its share in the country’s energy mix. Advanced and forecasting and scheduling techniques have been adopted across renewable-rich countries and have proved to be highly successful in managing the high penetration of solar and wind power into the grid.
The concept of forecasting and scheduling of wind power generation and the deviation settlement mechanism were first introduced in the country by the Central Electricity Regulatory Commission (CERC) through the Indian Electricity Grid Code (IEGC), 2010. The Renewable Regulatory Fund mechanism was planned to be implemented from January 1, 2011. However, owing to implementation issues, it was never made operational.
After a series of discussions and industry consultations over a period of three to four years, the commission finally issued draft amendments to the IEGC Regulations, the Deviation Settlement Mechanism and Related Matters Regulations, and the Terms and Conditions for Recognition and Issuance of Renewable Energy Certificate for RE Generation Regulations. Based on the comments of various stakeholders, the CERC published the CERC IEGC (Third Amendment) Regulations, 2015. In the same month, it issued the second amendment to the deviation settlement mechanism regulation.
Unlike earlier, when a large number of industry players opposed these regulations owing to disagreements with certain clauses in the old framework, today the market seems to be willing to work with the regulators to implement the new norms. Various state electricity regulatory commissions (SERCs) too have started coming onto the same page as the CERC. Karnataka and the Joint Electricity Regulatory Commission of Manipur and Mizoram have already issued final forecasting and scheduling regulations while states such as Rajasthan, Madhya Pradesh, Tamil Nadu, Jharkhand, Odisha, Chhattisgarh and Andhra Pradesh have issued draft regulations and are soon likely to finalise these.
However, along with issuing regulations, there is also a need to address state-level challenges. This requires preparedness at the state level, in terms of the need for visibility, robust communication facility and a uniform settlement mechanism. Unless all aspects of scheduling and deviation settlement are in place, the result of such an elaborate exercise will not be positive.
Changing regime: From FiTs to competitive bidding
In the past decade, the wind power segment has made significant progress, with the installed capacity having more than doubled between 2008 and 2016. This can be largely attributed to preferential tariffs, which are further supplemented by AD and GBI benefits.
However, fixed tariffs, popularly known as FiTs, can have certain disadvantages. First, these are determined on a cost-plus basis, which may result in inefficient cost of generation due to asymmetric information on market and technology conditions. This can also lead to unrealistic benchmarking of input assumptions such as the capacity utilisation factor, thus resulting in higher prices for consumers and inefficient utilisation of the finite resource. Second, the benefits accruing from technology improvements such as installing taller turbines with larger rotor diameters, are not captured in the actual performance or indexing parameters used to calculate costs. Lastly, the FiT regime can also create windfall profits for developers when tariffs are set too high, or limit the entry of players in the market when set too low.
The aforementioned concerns and the proven success of the reverse bidding mechanism under the Jawaharlal Nehru National Solar Mission have led some states (such as Karnataka, Rajasthan and Madhya Pradesh) in the past to attempt discovering the lowest price for wind generation through reverse bidding. This, however, met with no success. According to experts, the states as well as the industry were not prepared to participate in the reverse bidding mechanism.
In spite of this, the government has been persistent in its efforts to bring in a reverse bidding mechanism for wind project allocation. To address the concerns of all stakeholders, the Ministry of New and Renewable Energy has notified a reverse auction scheme for 1,000 MW of wind projects. In line with this, the Solar Energy Corporation of India has floated a tender to auction wind power capacity. Unlike earlier, when the majority was not in favour of competitive bidding, now a large proportion of the industry is willing to accept the new regime.
The scheme targets 1 GW of wind power plants connected to the interstate transmission system. The winning projects will be selected through competitive bidding followed by e-reverse auctions. They will sign 25-year power purchase agreements at the winning tariff, while the buying entities will sign contracts at a pooled price of the total bids selected. The new scheme seems stronger in that it takes care of the two major risks associated with wind power projects – offtakers’ risk and evacuation risk. The power generated from these projects will be fed into the central transmission utility’s (CTU) network.
As the market prepares itself to participate in the reverse auctions, the government has reportedly already started preparing for the next round of auctions for 5 GW of capacity. If successful, this will not only help the sector in meeting the 60 GW of wind capacity target but will also ensure project continuum, which will, in turn, positively impact investor sentiment and give a boost to manufacturing.
While FiTs and reverse auction-based renewable project allocations have occupied the limelight, there are some other interesting trends and niche markets emerging too. These markets are typically driven by favourable end-user economics and require less government support. Depending on the quality of the local grid, policy support and availability of on-site space, end-consumers can explore open access-based projects. These projects can thrive in states where power tariffs are high, the grid is robust and regulations are favourable.
Open access projects are typically set up for supplying power to industrial consumers, who pay higher tariffs for often-erratic power supply from the grid. The concept of open access was introduced in the Electricity Act, 2003, which allows a buyer with a connected load of more than 1 MW to procure power directly from the market through the grid. For using the grid, the power producer (and ultimately, the power consumer) has to bear the cost of transmission and distribution losses, as well as wheeling and banking charges.
The rationale behind open access power transactions is to encourage competition in the power market and allow customers to select from among a number of power suppliers rather than from only the local utility. Most of the current open access solar and wind projects are based in Rajasthan, Madhya Pradesh and Andhra Pradesh, as these states provide the most favourable regulatory environments. They offer exemptions in transmission and wheeling charges as well as in cross-subsidy surcharge. States where open access projects are not viable due to high grid losses and grid instability include Uttar Pradesh, Bihar, Tamil Nadu, Odisha and West Bengal.
Although the open access market has started to grow, it still faces challenges. Key among these is the uncertainty about future open access charges and grid losses. These charges are subject to revision every year by the respective SERCs. This makes it difficult to assess the financial viability of long-term open access solar projects and affects the bankability of such projects. In most states, utilities lobby hard with the SERCs to increase open access charges in order to reduce competition for their most high-value consumers, who pay high industrial and commercial tariffs. One way to address the issue of lack of interest by states to allow open access is to bypass the state’s involvement, as has been the case in the recently issued wind tender for 1 GW of capacity wherein the power will be fed into the central grid. However, this cannot be a permanent and long-term solution. State regulators need to work proactively to facilitate open access for the larger benefit of the industry as well as end-users.
REC mechanism: Limited success so far
India has so far introduced three market-based mechanisms to fight climate change. These are trading in RECs, the launch of the first phase of the Perform Achieve Trade scheme for 2012 to 2015, and a pilot emissions trading scheme (targeting air pollution) launched in Gujarat, Tamil Nadu and Maharashtra. Of these, only the REC scheme has been fully functional since its inception. Under this scheme, utilities have to purchase a certain proportion of their power from renewable energy producers. If they are not able to do so, they can make this up by buying RECs.
While this is theoretically a good scheme, it has not achieved much success. As of end-November 2016, the REC inventory pile-up at the two power exchanges – the Indian Energy Exchange and Power Exchange India Limited – stood at 18.2 million. Even though the renewable purchase obligation (RPO) compliance levels have been increasing, this is not on account of enhanced REC trading. Obligated entities prefer to directly source renewable energy from power producers. As a result, new investors are discouraged from setting up REC-based plants.
RPOs: Need to ensure compliance
Over the years, RPO compliance has improved in some states. However, the sector is far from meeting the national RPO targets. Based on the study of state tariff orders, it is found that the discoms of only a few states were able to meet their RPO targets for 2014-15. While Tamil Nadu, Karnataka and Odisha achieved their RPO targets, a few wind-rich states like Maharashtra, Rajasthan and Gujarat reported a shortfall. The compliance improved in 2015-16, but only marginally as the targets too increase on an annual basis.
Going forward, the SERCs should bring their RPO targets in line with the national target, issue RPO compliance orders annually, invoke the provisions of enforcement in case of non-compliance, and strengthen compliance monitoring of other obligated entities. In addition, web-based tools should be explored to monitor and report the RPO compliance status of obligated entities. This will bring greater transparency in the system.
UDAY: A game changer?
One of the key reasons for RPO non-compliance is the poor financial health of discoms. In this context, the government launched the Ujwal Discom Assurance Yojana (UDAY) in November 2015. So far, the scheme has received a positive response from industry observers and from the states (16 states, accounting for more than 90 per cent of discom losses, have joined UDAY). These include most of the large energy-consuming states as well as most of the large renewable energy-rich states. Notable exceptions in the renewable-rich category are Tamil Nadu and Karnataka.
Over the longer term, an improvement in discom finances will have a major, positive impact on the renewable energy sector. Many discoms continue to give short shrift to renewable energy owing to the perception of its being costly and infirm. The easing of their financial situation will not only improve the payment cycles for renewable energy generators but also give the requisite push to the REC market.
However, as with previous discom packages, this scheme too runs the risk of failure due to political reasons. In the past, while discoms have enjoyed the funding that such packages bring, state politicians have not allowed tariff increases or long-term changes. Nevertheless, as compared to the previous discom packages, the new scheme appears to have more checks and balances with the state governments being the bond issuers.
The imperative to add substantial new generation capacity to meet social and economic needs is driving the need to redefine the country’s energy mix to increase the share of renewables. The aforementioned regulatory reforms indicate that the country is headed in the right direction to achieve the targets set.