Open or Closed?

Case for third-party sale of renewable energy

By Balawant Joshi, Managing Director, Idam Infrastructure Advisory Private Limited

At present, discoms are the major consumers of renewable power as they are required to comply with renewable purchase obligations. However, for discoms, long-term power purchase agreements (PPAs) are becoming onerous, though that is the only option available to them. However, from a consumer’s perspective, short-term power procurement appears to be the best model as it offers cheap power through traders and exchanges. Hence, discoms are currently at the cusp of a major transition with increasing migration of cross-subsidising sales to open access and captive options. This is forcing the entire sector to re-evaluate the traditional ways of planning, power procurement strategies, tariff design and investments.

Open access market size

While there is rich data available in the public domain on certain segments of the electricity sector, data availability on open access is extremely poor and thus a major hindrance to critical analysis. Further, data specific to renewable energy-based open access (RE-OA) transactions is not uniformly available across states. For example, while the state energy accounts of Gujarat and Madhya Pradesh provide information on renewable energy wheeled through discom networks, this information is not publicly available in Maharashtra. Further, the available data suffers from the lack of standardisation in formats, terminologies and granularity across states.

From the data available for a few states, it appears that the total quantum of OA and the share of OA consumption in the total power procurement have been increasing steadily over the past few years. However, the share of RE-OA in total OA has not been increasing as total energy transactions through OA have increased at a much higher rate than RE-OA. For instance, in the case of Madhya Pradesh, the total OA has tripled as opposed to RE-OA, which increased at the rate of only 4.8 per cent from 2014-15 to 2016-17.

The quantum of RE-OA consumption in the states analysed has increased over the past four to five years. There are multiple factors contributing to the growth of RE-OA such as falling power prices, concessional OA charges and rising consumer tariffs. Between wind and solar, wind power dominated RE-OA consumption in all states except Madhya Pradesh, where solar-based open access accounts for almost 60 per cent of the total RE-OA.

While discussing OA transactions, it is important to distinguish between utility OA and consumer OA. While RE-OA transacted energy has been increasing steadily in recent times, the increase is primarily on account of energy transacted by utilities.

Available incentives

Most of the renewable-rich states provide exemptions or concessional treatment in one way or the other such as exemption in wheeling charges, cross-subsidy surcharge (CSS) and additional surcharge. Some states have also been providing banking facility for RE-OA transactions. The largest component of these charges, that is, CSS, has seen a variety of concessions across states, ranging from full waivers (Rajasthan, Madhya Pradesh), to 75 per cent waiver (Maharashtra) and 50 per cent waiver (Tamil Nadu).

Some states have further differentiated between solar and wind while providing concessions. Gujarat gives full waiver to solar projects, but only 50 per cent to wind projects. Similarly, Karnataka gives full concession for solar, but none for wind power. Andhra Pradesh and Telangana offer full CSS waiver to solar projects for a period of five years after project commissioning. However, the tide is slowly turning against renewables and certain states have started changing their stance about such concessions. In April 2017, Maharashtra became the first state to completely remove concessional CSS.

In case of network charges, some states like Maharashtra and Rajasthan offer no concessions, while Tamil Nadu offers a concessional charge of 30 per cent for solar and 40 per cent for wind. Andhra Pradesh offers complete waiver of such charges. Electricity duty has been waived by many states for open access and captive projects. While Maharashtra introduced electricity duty on captive and open access transactions in September 2016, it soon regranted electricity duty exemption to renewable energy generators and open access consumers. Many other states also offer complete waiver of duty to solar projects.

Barriers to open access

Despite the decrease in renewable energy prices, the implementation of RE-OA faces various challenges and operational difficulties. The biggest challenge is the fluctuating regulatory policies. Currently, most orders or regulations can undergo change with no notice or minimal notice. Further, there is an uncertainty over the methodology used for the calculation of charges including surcharges. This could significantly impact the viability of open access transactions as has been seen in some states. Even when the methodology does not undergo any change, the charges are subject to revision every year by the state regulator. Another challenge is high grid losses and unstable grid supply.

In the recent past, several state regulators have notified forecasting and scheduling regulations for renewable energy transactions as well as deviation settle mechanism regulations. Under these regulations, the generators will have to give a schedule of generation. Idam is supporting several states in implementing these regulations. While these regulations have been notified by the regulators after extensive consultations and considering the views of both generators and utilities, it is inevitable that these would introduce the element of risk for RE-OA transactions.

Unfortunately, open access has not significantly contributed to increased investments in the renewable energy segment. As commented by Prayas, a well known organisation in the power sector, almost 90 per cent of India’s open access demand is short term. By design, short-term open access only benefits a certain section of industrial consumers, the power exchanges and the generators having surplus capacity or those with a completed PPA term. A transition from short-term to long-term OA is crucial to increase investment in the renewable energy sector.

Tariff trends

With increasing retail tariffs for commercial and industrial consumers and a requirement to go green, the market potential for third-party and captive transactions is high. However, the sustainability of the discovered tariffs will be guided by several factors such as the introduction and continuation of safeguard duty, likely revision in governing rules for OA such as banking or wheeling provisions, the implementation of forecasting and scheduling regulations and deviation settlement mechanism for intra-state entities, and full or partial open access transactions. Thus, after factoring in all such regulatory and commercial risks, the sustainability of the present low level of tariff discovery seems quite uncertain.

Many renewable energy rich states provide exemption or concessional treatment to RE-OA. However, with renewable energy tariffs coming at par with the thermal tariffs, such exemptions are likely to be reduced or even eliminated in the future. If the recent bids are any indication, renewable energy technologies will do well without such concessional treatment. But provisions such as supporting forecasting and scheduling regulations, lower open access charges, and banking of energy need to be continued given the intermittent nature of renewable power.

Contract structure

Contracts for the sale of power to discoms vis-à-vis sale under third-party private PPAs differ on several counts such as the tenure of contract, price variation clause, payment security mechanism, applicability of change of law conditions, provisions for termination and buy-out, as well as on technical aspects such as delivery point, metering arrangement, and energy account and crediting mechanisms. The conditions of PPAs for the sale of power to discoms are guided by model PPA agreements based on competitive bidding guidelines with suitable deviations as approved by the appropriate commission, whereas the terms of agreement of third-party PPAs can be mutually discussed and agreed amongst parties, and the role of the regulator is limited to the adjudication of disputes, if any.


Under the present scenario, with even conventional power-based open access transactions facing challenges, the future of RE-OA transactions appears quite uncertain. Most RE-OA transactions are short-term in nature and are still dependent on concessions related to OA charges, energy accounting, the banking regime, scheduling requirements and associated risks. These services were hitherto provided by the host distribution utility. However, with pressure on their own viability and the increasing stranded capacity, a conducive and promotional framework for RE-OA transactions can no longer be taken for granted.

With a high penetration of renewable energy in the grid, it is necessary that even RE-OA transactions are subjected to similar rules of market operations and provided with opportunity for market access in the long run. The demand for bundled products, access to real-time market, and interstate renewable energy transactions will play an important role in deciding the course of future RE-OA transactions. However, several reforms in the institutional, governance, pricing, certification and regulatory frameworks are needed to enable such transactions. A lot of work at the regulation and institutional levels is already underway on this subject.



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