Acknowledging the sustainable development goals as set by the Paris Climate Agreement in 2016, the entire world is now moving towards a greener, more sustainable future. India too is no stranger to this change and is witnessing a government push towards green energy adoption. In a significant development, the Central Electricity Regulatory Commission (CERC) has approved the trading of renewable energy on the Indian Energy Exchange through green term-ahead market contracts, further accelerating the country’s sustainable development efforts.
Global paradigm shift
For some years now, climate change has been a cause for apprehension in economies all over the globe. It has significantly altered the global energy landscape. Countries such as Sweden, Finland and Denmark have a high share of renewable energy at 54.6 per cent, 41.2 per cent and 36.1 per cent respectively. With the declining cost of battery energy storage systems, hybridised power models are being preferred to address renewable energy intermittency. According to BloombergNEF, battery prices fell 87 per cent in 2019 from more than Rs 80,000 per kWh in 2010. By 2023, prices are expected to reach close to Rs 7,000 per kWh. The levellised cost of stand-alone battery energy storage systems to manage peak demand is about Rs 7 per unit on an average at present. It is expected to go down to Rs 4 in the next three years.
The development of virtual power plants and peer-to-peer energy markets, along with intelligent controlled systems and other smart technologies, has given an impetus to this change. It has brought in greater efficiency and flexibility, and the freedom of choice, thereby optimising the cost for ecosystem players. Furthermore, various supportive policies have led to the reduction of renewable energy costs for consumers, thus encouraging the adoption of sustainable energy. For instance, the current levellised cost of energy for a large-scale solar plant has come down to Rs 2.50 per kWh from Rs 12 per kWh in 2010. In a recent development, the Abu Dhabi Power Corporation (ADPower) announced the lowest tariff for solar power in the world at AED 4.97 per kWh (Rs 1.10 per kWh) on a levellised electricity cost basis.
Owing to these developments, we are expecting a significant rise in the share of renewable energy in electricity generation. Globally, renewables are expected to account for 86 per cent of total electricity generation by 2050 as compared to about 28 per cent in 2020.
Criticality of India’s green commitment
Owing to its commitments under the Paris Agreement, India has to increase its renewable energy capacity from 35 GW in March 2014 to 175 GW by 2022. There has been a rise in the share of renewables in the past five years, from 11.8 per cent to 23.4 per cent. Owing to growing government and regulatory support, India has installed
87 GW of renewable capacity as against a total power capacity of 370 GW. According to a study by IEEFA, solar tariffs in India are now in the range of Rs 2.50-Rs 2.87 per kWh, 30 per cent lower than the existing cost of thermal power. India has seen very significant growth in installed renewable energy capacity over the past five years, registering a CAGR of 17.33 per cent between financial years 2016 and 2020. Currently, India stands fifth globally in terms of installed renewable energy capacity. Given the promising renewables scenario, the country’s aim to increase the renewable energy capacity to 450 GW by the year 2030 seems achievable.
In India, the government has been moving in the right direction to address various structural, operational and financial challenges in the power sector. This paradigm shift is market oriented and allows for greater competition, efficiency and transparency, supported by simple and minimal regulations. With the country’s renewable energy capacity having doubled in the past five years, the power sector in India is set to witness a repositioning when it comes to power procurement dynamics. Besides bringing flexibility to utilities and generation companies, and reducing their reliance on long-term PPAs, the expansion of these markets will be pivotal in the integration of renewable energy.
Green energy markets
In order to achieve its renewable energy targets, India, the country must follow a market-based approach. It has been seen that countries with a higher renewables share in their energy mix have deeper market penetration. For example, in Germany, 50 per cent of the generation is based on renewable energy, which is routed through the exchanges. The majority of generated renewable power in countries such as France and the UK is also procured through the power exchanges. The green markets can provide an incentive to this energy shift by allowing customers to procure green power on an immediate short-term basis instead of through long-term power supply agreements.
With this increase in renewable energy, there is an urgent need for a framework whereby various sources of energy can be integrated on the exchanges to seamlessly meet the demand. Going forward, the introduction of new green market segments such as the day-ahead market, long-duration green contracts and contracts for difference (CfD) will play a key role in ensuring that the renewable energy generated within the country is despatched in a most efficient manner through a pan-Indian energy market.
Market-based models such as the CfD mechanism for renewables can be used for trading and scheduling of power at the exchange at market prices with guaranteed revenue to the generator. Currently, in India, all the renewable energy capacity is tied up in long-term PPAs. Hence, customisation of the CfD model is required to bring it at par with the existing market model.
The green market will encourage renewable energy generators to adopt part-market and part-PPA models. For example, there should be a system where a part of renewable capacity (two-thirds of the total value) is procured under PPAs and the rest is routed through markets.
The recent regulatory amendments to the CERC Inter-State Transmission Charges and Losses, Regulations are a significant step towards expediting the adoption of renewables in India. From the government point of view, we should aim to achieve a 100 per cent market-based model. The energy markets will ensure that consumers have many choices and will enable a demand-supply equilibrium at the most competitive prices. The recently launched real-time electricity market along with the green market will offer an ideal solution to distribution utilities for the integration of renewable energy.
Moving forward, the green markets are pivotal to shaping India’s energy future. The Covid-19 pandemic has paved the way for India’s economic revival in a green and sustainable manner, and the role of power markets will be crucial in this journey.
By S.N. Goel, Chairman, Indian Energy Exchange Limited