Offtake Concerns

Regulators attempt to balance industry and consumer interests

As part of its efforts to meet the 175 GW renewable energy target by 2022, the government has released a series of central- and state-level tenders over the past few years. However, the actual capacity addition has not been proportional to the capacity tendered. This slowdown in capacity addition and renewable energy offtake  is a result of several regulatory challenges facing the industry.

Of the various challenges, risks pertaining to power purchase agreements (PPAs) have been a key factor preventing the addition of the tendered capacity. While discoms want to purchase power at the lowest possible rates discovered in the recent auctions, developers want to maximise their profits. In this scenario, with developers and discoms unable to come to an agreement, intervention by the regulatory agencies becomes necessary and is in the interest of both the parties as well as the end consumers. “The regulators aim to set the lowest tariffs in consumer interest,” said A.K. Das, member, Orissa Electricity Regulatory Commission. He added that renewable energy tariffs had not yet stabilised and the industry “was still in the discovering phase”.

Owing to the vastly varying resources and policy scenarios across the country, it is difficult for renewable energy developers to quote similar tariffs while bidding for capacities in different states. States where developers anticipate greater risks owing to non-payment of electricity charges by discoms, inadequate transmission and distribution networks and possibilities of power curtailment have seen higher tariffs in auctions. Other factors such as annual demand growth, solar insolation, wind power density and capacity utilisation factor also impact plant performance as well as the returns. Based on these factors, developers quote high or low tariff bids. However, discoms are not willing to purchase power at higher rates when they already have long-term thermal power PPAs at considerably lower rates. Moreover, most discoms are under heavy debt and existing power suppliers have been facing non-payment issues. Although the Ujwal Discom Assurance Yojana was announced to assist discoms, any measurable improvement in discom finances can only be seen in the long run.

In addition, aggregate technical and commercial losses in India are extremely high at 23.37 per cent, which, in turn, affect renewable energy offtake. Reducing these losses requires significant monetary investments. However, this would lead to a tariff hike and consumers are not ready for this. Moreover, old PPAs continue to burden discoms’ finances. Further, due to inadequate transmission capacity and limited connected load, the power grid sometimes faces a situation of surplus generation. To avoid this, discoms have resorted to curtailing renewable power.

Citing these issues, many discoms delay signing PPAs. In addition, renegotiation of tariffs has become a common practice. In light of the latest low bid results, many discoms have refused to sign PPAs with developers who have, in fact, won projects quoting the lowest tariffs in earlier auctions when market conditions were quite different. The trend began with Gujarat’s discoms refusing to honour the bids and demanding a revision in tariffs, which led to an industry-wide opposition from developers. The Appellate Tribunal for Electricity and the Gujarat Electricity Regulatory Commission dismissed the discoms’ claims. However, with falling module tariffs, discoms are not only delaying the signing of new PPAs but are also renegotiating and cancelling the existing ones.

The discoms make the situation worse by asking for a further reduction in tariffs after having already renegotiated them once. The latest example of this “rerenegotiation extravaganza” are Uttar Pradesh’s discoms, which have not yet signed all the PPAs for the 215 MW solar auction held in the state in 2015. Even though the 16 winning project developers agreed to a proposed tariff of Rs 7.02 per kWh, six projects (aggregating 80 MW) that had not attained commissioning status till November 2017 have recently been directed to sign fresh PPAs at a revised tariff of Rs 5.21 per kWh. The Uttar Pradesh Electricity Regulatory Commission (UPERC) states that it has arrived at the latest tariff after taking into consideration the concerns of both the discoms and the developers. While the developers argue that the lower tariffs will severely impact their finances, the commission maintains that in an infrastructure sector such as power, developers cannot be allowed to make enormous profits at the expense of consumers and thus power tariffs of Rs 8-Rs 9 per kWh cannot be justified. Notably, UPERC had permitted higher tariffs for projects that had already been commissioned but did not allow the same for projects with commissioning dates nowhere in sight. Abhishek Srivastava, joint director, UPERC, stated that Uttar Pradesh has one of the highest solar power tariffs in the country and the short PPA duration of 12-13 years has contributed to the high front-loading of tariffs. Despite this, UPERC has not yet faced complaints from developers about the non-payment of dues by discoms.

Meanwhile, in Karnataka, following the Rs 3.42 per kWh bid discovered in Tamil Nadu’s recently held reverse auction for wind projects, the Karnataka Electricity Regulatory Commission (KERC) passed an order to lower the wind feed-in tariff in the state to Rs 3.74 per kWh in September 2017 from the earlier rate of Rs 4.50 per kWh. As a result, about 599 MW of wind capacity with PPAs awaiting KERC’s ratification were put in limbo. Eventually, developers had to agree to the new lower rate to get their PPAs signed. Similar issues have been faced by developers in states such as Tamil Nadu, Andhra Pradesh and Jharkhand. If the developers do not agree to the lower tariffs, the PPAs would have to be cancelled and the capacity scheduled for retendering, resulting in a waste of time, effort and money.

Dishonouring signed agreements, renegotiating or cancelling PPAs, and refusing tariffs obtained through standard and fair policies have created a negative atmosphere in the Indian renewable energy sector. So far, the regulatory commissions have been largely successful in creating a fair balance between the interests of developers as well as discoms. But what happens when the regulatory authorities themselves decide to implement major changes that threaten the offtake of renewable power by discoms. In August 2017, the Madhya Pradesh Electricity Regulatory Commission faced major industry opposition for suggesting the withdrawal of must-run status for renewable energy. The proposal had to subsequently be removed from its final regulations. Taking away such an arrangement can have an adverse impact on project viability and hence on future capacity addition.

Potential solutions

There is a consensus amongst developers on the key role of renewables in the future Indian energy sector. However, to facilitate capacity addition, many loopholes in the regulatory and policy structure need to be plugged. Currently, there is a lack of accountability in the sector. PPAs are not being honoured by both power purchasers (discoms) and developers. The Ministry of Power’s proposal to impose penalties to ensure stricter enforcement of PPAs and renewable purchase obligations (RPOs) is a welcome step in this direction. The Ministry of New and Renewable Energy should also encourage the states that have met their RPO targets to add capacity beyond the minimum compliance levels to drive renewable energy offtake. In addition, industry experts have suggested levying deviation settlement mechanism charges and mandating forecasting and scheduling of renewable power instead of removing the must-run status of renewables.

According to Das, in the rooftop solar segment, distributed generation should be supported with system/network changes such as faster implementation of supervisory control and data acquisition systems and smart grid infrastructure, along with accurate scheduling and forecasting mechanisms. Since most states have a cap on the rooftop solar plant size at a single location, many organisations that have larger spaces available cannot utilise these under the current regulations. Although states like Uttar Pradesh have allowed ordinance factories, Indian Railways, Hindustan Aeronautics Limited, etc. to set up larger rooftop systems on a case-to-case basis, there is a need to address this issue at a policy level.

Regulators are also concerned that many micro- and minigrids may not remain sustainable with the centre’s Saubhagya scheme for ensuring last-mile connectivity. According to Srivastava, there should be an inclusion of exit schemes for microgrid operators in the form of sale of equipment (solar, wind, biomass, etc.) to discoms, and a facility to operate as an independent power producer instead of an NGO where applicable as well as use the grid as a bank for power. Moreover, regulators feel that apart from solar and wind, other renewable energy sources such as municipal solid waste have a large untapped potential. Since most states are offering a good tariff for these technologies, they should be promoted and developed to help achieve the renewable targets. Finally, higher renewable energy offtake can be ensured by improving energy accounting in discoms and increasing industrial demand in proportion to capacity addition. n

Based on remarks by A.K. Das, Member, OERC, and Abhishek Srivastava, Joint Director, Generation, Planning and PPA, UPERC


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