In the renewable energy space, most of the development occurs through competitive bidding, which is confined to long-term power procurement by discoms. While this ensures power offtake for 25 years, discoms have a history of not paying their dues on time. At present, a few discoms have payments outstanding for even a year, while others have resorted to curtailing solar and wind power generation. Moreover, the sanctity of contracts is being questioned as discoms in Andhra Pradesh and Uttar Pradesh recently tried to renegotiate tariffs in power purchase agreements (PPAs). All of this has led many renewable power IPPs to sell power through open access, captive, and group captive arrangements to commercial and industrial (C&I) consumers that have high credit ratings and lower risk of payment defaults.
C&I consumers generate significant savings by procuring renewable energy through open access or captive projects vis-à-vis through grid power. In India, most states have significantly higher tariffs for C&I consumers as compared to residential and public sector consumers. Commercial tariffs in Maharashtra, Delhi, Andhra Pradesh, Assam and Rajasthan range between Rs 8 per unit and Rs 10.50 per unit. These states also have high HT industrial tariffs of Rs 7.30 per unit to Rs 9.70 per unit. In fact, the average Indian grid power tariffs during 2018-19 stood at Rs 6.14 per unit for HT industrial consumers and Rs 7.10 per unit for commercial consumers. Meanwhile, solar and wind power tariffs have crossed grid parity. Thus, large industries across all segments and commercial consumers including metro corporations, railways, airports, hotels and multinational corporations are opting for renewable-based bilateral or third-party power procurement arrangements to reduce their operating costs. Depending on the respective states, savings could be minimum Rs 2 per kWh-Rs 3 per kWh under captive mode. Moreover, it helps obligated entities to meet their renewable purchase obligations (RPOs). In addition, it improves the green image of corporates, which have their own sustainability strategies for attracting both investors and clients.
Alternative power offtake options
Renewable power projects can be set up and offered under various business models to clients apart from discom-based PPAs. These business models have different implications on the roles of various stakeholders. First is the traditional open access model where IPPs sell power to consumers from off-site projects through third-party sale contracts. The second is the captive power model wherein consumers set up projects on their own premises. A variation of the captive arrangement is the group captive model under which minimum 26 per cent of the equity is borne by captive consumers and at least 51 per cent of the energy generated is consumed by them. Meanwhile, developers are responsible for construction and operations and maintenance (O&M), and group captive consumers sign a PPA with the developer. This is meant for smaller establishments that cannot afford to set up an entire captive project on their own and enables risk sharing between customers. As per the provisions of the Electricity Act, 2003, cross-subsidy surcharge (CSS) and additional surcharge are exempted for captive and group captive consumers. For open access projects, these charges vary from state to state.
Then there is the capex model in the C&I space under which the consumer incurs capital expenditure and owns the project, and project development occurs on an EPC basis. Another one is the widely adopted opex model where the developer makes the capital investment and owns the project, and is responsible for construction and O&M. In this case, consumers sign a PPA with the developer on a per unit basis. Apart from these, other hybrid models being offered in the market are the lease model and the deferred payment model. In addition, IPPs have the option to sell renewable energy certificates (RECs) to consumers with RPO targets and trade renewable energy in day-ahead spot markets on power exchanges. However, the energy being traded at present makes for a very small share in the country’s total energy generation when compared to global trends. Thus, a dedicated green term ahead market is to be launched in September 2020; this would allow spot trading of renewable energy through power exchanges.
Case for solar
Due to ease of implementation, versatility and negligible operating costs, solar power has become a highly popular choice for corporate PPAs. Thus, the C&I solar market has emerged as an important stand-alone business space in recent years with specialised IPPs offering low-cost solar power on an opex basis to customers without any hassle of upfront capital investments or O&M. It already has the largest market share in rooftop solar deployment today and is becoming increasingly active in the captive and third-party solar PPA segments. The decline in solar power prices vis-à-vis grid power tariffs for C&I consumers have led many of these consumers to adopt solar power for meeting their power requirements through rooftop, captive and open access plants. Comprehensive solar rooftop frameworks with net and gross metering regulations, exemptions on open access charges for solar power in many states, the highly affordable opex model and a streamlined utility interconnection process have given confidence to the industry and led to rapid solar power deployments in the C&I segment.
Barriers to uptake
The Electricity Act, 2003 laid down the provisions for open access. However, even after more than 15 years, open access is facing tremendous challenges in its actual implementation. The major issue for the open access space at present is the increasing reluctance of discoms to permit these projects. While most states have clear open access regulations and policies in place, developers face difficulties and risks in their on-ground implementation. The regulations, charges and exemptions associated with open access keep changing every few months across states as discoms do not want to lose their high-paying C&I consumers. Discoms fail to understand that load management can be improved with excess solar capacity generated under open access. Thus, there are often delays in getting open access, metering, interconnection and evacuation approvals from discoms, and the reason often cited for denial of permission is the technical inability of local substations.
Consequently, third-party power sale projects are only being implemented in states with favourable regulations, such as Tamil Nadu, Andhra Pradesh, Haryana and Uttar Pradesh. This is because high open access charges in many states leave no room for savings against grid power. States such as Maharashtra and Karnataka have open access charges that are more than Rs 3.50 per unit; this is mainly due to the high CSS, which makes open access projects unviable in most cases. Hence, in these states, developers and consumers mostly opt for captive and group captive projects, which are free from CSS. Thus, CSS remains a key determining factor whether one opts for captive or open access in most states. A few states have discontinued waivers in open access charges with many likely to follow suit. The withdrawal of open access waivers has led to the transition from third-party PPA models to group captive arrangements. Moreover, there is no clear consensus between policymakers and state regulators, and no uniformity across the country on the various provisions for rooftop solar as well. Every state has its own net metering regulation, just like the one on open access. For instance, in Andhra Pradesh and Telangana, one can get net metering fairly fast. However, in other states, it can take a considerable amount of time. In some states such as Uttar Pradesh, the net metering policy is being reversed to gross metering. In addition, net metering is highly restrictive in India, with some states having allowed it only for projects of up to 1 MW.
The way forward
According to experts, medium- and long-term group captive transactions dominate the C&I space as of today due to the favourable regulations and economic viability in most states. Haryana has even opened doors for discoms to meet their RPOs by leveraging corporate PPAs. A similar approach by more states can help in attracting more renewable energy investments. For discoms’ benefit, exemptions on charges could be removed. This would prevent delays faced by IPPs. However, there should be no caps on installed capacity. This can create a win-win situation for both developers and discoms, as the key issue being faced by IPPs is not the charges but bureaucratic hurdles. Moreover, a centralised open access policy instead of various state-level frameworks can greatly improve implementation. It is expected that the upcoming green term ahead market would allow corporate consumers to buy renewable energy directly from the power exchanges without getting into lengthy PPA processes. In addition, the highly anticipated Electricity Act amendments should solve a number of issues. Stricter compliance with RPOs will make discoms keen to explore new avenues of sourcing renewables. Similarly, distribution sub-licensing will do away with discoms’ monopoly over power distribution and might open the market for open access transactions.
Finally, in the face of the unprecedented challenge posed by the coronavirus outbreak and the subsequent lockdown, renewable energy projects including those in the C&I space are being impacted. Supply chains have been disrupted and imports halted. Under-construction projects are stranded due to issues in getting approvals, equipment and labour, and are incurring incremental running costs. Meanwhile, O&M has become difficult due to labour scarcity. Experts believe that the immediate impact is going to be significant, especially for under-construction captive projects, which would be able to resume work only after access is granted to client premises. However, in the long run, tariff hikes are expected as discoms make efforts to curtail losses. Thus, going forward, a greater transition to renewable energy captive and open access projects is expected as corporates look to reduce operating costs and strive for greater sustainability.
Based on inputs from Renewable Watch’s webinars on Renewable Options for Captive Power, and Open Access and Energy Trading
By Khushboo Goyal