Commercial and industrial (C&I) users consume approximately 51 per cent of the electricity generated in India, but only 5 per cent of the energy procured by them comes from renewable energy sources. This has created a huge untapped potential in the C&I renewable energy market, which has emerged as an important stand-alone business segment in recent years. Even though the present market size is small, specialised developers catering to C&I consumers have emerged, with innovative business models and competitive prices. The C&I segment already accounts for 70-80 per cent of the country’s rooftop solar installations and is making headway in the utility-scale solar space as well through open access and group captive routes.
Solar power is preferred to other renewable energy sources by C&I consumers due to its ease of implementation, versatility and negligible operating costs. Moreover, solar power prices have declined significantly over the past few years, making it more affordable for C&I consumers. In contrast, state discoms continue to charge C&I consumers very high tariffs as compared to residential and public sector consumers so as to provide subsidies to agricultural and below poverty line consumers. The average C&I grid tariff is Rs 6.19 per unit, while the average solar tariff in the case of rooftop solar and captive solar is in the range of Rs 3.34-Rs 3.24 per unit. Thus, large industries across all segments and commercial consumers including metro corporations, railways, airports, hotels and multinational corporations can generate substantial savings through solar power-based captive, group captive and open access projects for meeting their power requirements.
With the increasing global focus on climate change, consumers are making environment-friendly choices. To attract these customers and project themselves as environmentally conscious, corporate establishments are also switching to more sustainable strategies. Thus, of late, more and more corporates have started opting for renewable power to meet a part of their energy requirements in order to improve their green image for attracting both investors and clients. RE100, a global leadership initiative that brings together corporates committed to 100 per cent renewable electricity, has over 280 members today. Many of these are recent entrants in the renewable energy space while others have already made significant progress. Indian businesses such as Dalmia Cement, Mahindra Holidays and Resorts India, and Tata Motors are also members of this coalition.
Further, comprehensive rooftop solar frameworks with net and gross metering regulations, exemptions on open access charges for solar power in many states, adoption of 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. Another driver of renewable energy technologies is renewable purchase obligations (RPOs) mandated for large captive power producers. In the future, the development of energy storage systems required to integrate solar power into the grid will enable the replacement of diesel generator sets in the C&I segment.
On the sellers’ side, it is often argued that project developers generate minimal returns on renewable power projects when set up through the auction route, where power is sold to discoms under 25-year power purchase agreements (PPAs). The tariffs are low and there have been increasing risks regarding payment delays. Thus, many IPPs prefer to sell power to C&I consumers, making them less dependent on discom-tied PPAs or even completely independent of them. Moreover, C&I consumers offer better PPA contract prices as compared to the highly competitive tariff-based auctions under central and state schemes.
At a virtual conference, “Commercial and Industrial Solar Market in India”, organised recently by Renewable Watch, senior executives from leading development firms, big corporates procuring solar power, financial institutions, regulatory agencies, utilities and consultancies talked about the emerging trends in the C&I solar power space, the risks that stakeholders need to watch out for and the outlook for the segment. The following are the key takeaways from the discussion…
A growing market
Various attractive business models have emerged to sell power to non-discom clients and each of these has different implications for the roles of various stakeholders. First is the traditional 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 a 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. These group captive consumers sign a PPA with the developer, which is responsible for project construction and operations and maintenance (O&M). 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. According to Gaurav Arora, director, deal advisory, M&A Consulting, KPMG, “In the group captive model, a captive customer will invest only 26 per cent of equity and consume minimum 51 per cent of the energy generated. This project becomes an investment decision for the customer.”
The second is the open access model, wherein IPPs sell power to consumers from off-site projects through third-party sale contracts. Although the concept of open access was introduced under the Electricity Act, 2003, uptake in the solar segment has been quite slow, despite the high potential. This is because open access projects incur a cross-subsidy surcharge (CSS) and an additional surcharge, and these vary from state to state. These charges often form a significant portion of the overall open access charges and are less predictable than technical charges such as those for power transmission and wheeling. In fact, the past two years have seen the withdrawal of open access waivers for new third-party PPAs across multiple states. For this reason, states such as Karnataka, Tamil Nadu, Maharashtra and Gujarat, which were preferred destinations for open access projects earlier, have now been replaced by states such as Uttar Pradesh, Haryana, Madhya Pradesh and Rajasthan, which have fewer regulatory hurdles. In contrast, CSS and additional surcharge are exempted for captive and group captive consumers. For this reason, there has been a clear shift from third-party PPAs to group captive PPAs in the past two years.
Then there is the capex model, under which the consumer incurs the capital expenditure and owns the project, and project development occurs on an EPC basis. Apart from these, there is the widely adopted opex model, under which 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 and are free from any installation, financing and O&M issues. This model proved to be a game changer in the rooftop solar space, attracting companies such as Indian Railways, metro corporations, large industries and many others. Other hybrid models being offered in the market are the lease model and the deferred payment model.
A major consumer in this space is the Delhi Metro Rail Corporation (DMRC), which has been actively using the opex model to decarbonise its energy mix and already has more than 30 MWp of capacity installed under this model. According to Surendra Gupta, senior deputy general manager, DMRC, “In the future, we hope to cut down the energy costs for the Delhi metro through renewables. Our rooftop solar target has been revised to 50 MWp by December 2022. Further, the DMRC plans to explore the use of integrated renewable energy with stand-alone storage projects.” In a landmark deal, the metro corporation became the first commercial consumer of its scale and size to procure solar power from another state through the open access route. Under the deal, it started procuring 345 MUs of solar power from the Rewa Ultra Mega Solar Park in Madhya Pradesh in April 2019. the DMRC’s green energy initiatives have set an example for various other consumers of its size, showing scalable and affordable solutions for procuring solar power.
Both mid-sized, large and specialised developers such as ReNew Power, Hero Future Energies, Amp Energy, SunSource Energy, CleanMax and Cleantech Solar have been competing for market share in this attractive business proposition, especially as the payback period for solar projects is gradually shortening with the declining cost of equipment. In the rooftop solar space, payback can be realised within four years under the capex model. With the entry of these specialised developers and IPPs in this segment, investments have expanded, leading to an increase in the average project size in the C&I segment (20 MW and more), especially in the open access space, which had historically been highly fragmented with small project sizes (1-5 MW). Further, these specialised developers are backed by large international investors, which help them undertake large contracts.
At a time when utility-scale solar projects with discom PPAs are witnessing a slowdown on account of transmission constraints, land acquisition issues, lack of contract sanctity and delayed payments, C&I solar projects can contribute significantly towards achieving the target of 100 GW of installed solar capacity. However, like the utility-scale segment, the C&I solar space too is plagued with challenges, and similar to the utility-scale segment, the crux of the issue here as well is poor discom health. Due to operational inefficiencies and inability to increase tariffs, discoms’ financial health has suffered, making them increasingly reluctant to let go of their high-paying C&I consumers. Ravindra Kadam, adviser, renewable energy, Central Electricity Regulatory Commission, echoes the sentiment, “The poor financial health of discoms remains a key challenge for rooftop solar deployment. Further, discoms may be reluctant to lose C&I consumers, which are a large source of revenue. There are various challenges in the solar open access market. These include inconsistent solar policies across states, delayed discom approvals, power curtailment, lengthy arbitration process, delayed payments and imposition of surcharges.”
For instance, open access provisions were laid down in the Electricity Act, 2003, and even after more than 15 years, developers are facing major challenges in its actual implementation. Obtaining an open access licence from discoms is a key hurdle as most discoms do not want to let go of their C&I cash cows. So, a discom often makes the approval procedure convoluted in order to discourage consumers from moving away from their network. Further, there is a lot of uncertainty regarding the future charges for cross-subsidy, wheeling and transmission, banking and transmission losses, which keep changing every few months across states. This increases the risk profile of open access projects, and discourages developers and consumers from procuring power through this route. “Clear and visible policies are needed for us to make a robust energy transition strategy. Currently, frequent changes in policies are impacting our business models. Going forward, more clarity is needed from the regulators and the policy should be visible for the next 10 years,” says Rangacharya Meemanshi, head of power management, ACC Limited.
At present, there is no uniformity across the country on the various provisions for group captive or third-party sale, cross-subsidy surcharges, scheduling requirements, and banking and treatment of excess power. There is no clear consensus between the national policymakers and the state regulators on the various provisions for rooftop solar as well. In addition, net metering is highly restrictive in India, with some states having allowed it only for projects of up to 1 MW. Further, every state has its own net metering regulations, which change frequently and the variations in the metering policy frameworks have led to complexities and uncertainties in the segment. For instance, in states such as Uttar Pradesh, the net metering policy has been withdrawn and only gross metering is allowed for C&I consumers after various rounds of deliberation. Further, in Karnataka, net metering permissions are not given for installations financed by a third party, but allowed only if the project is self-financed. Similarly, in Kerala, discoms provide net metering arrangements to consumers only on a first come, first served basis, thereby limiting its uptake.
Discoms fail to understand that load management at the local grid level can be improved with excess solar capacity generated under open access and captive solar projects. In fact, very few discoms have taken any significant steps to promote even rooftop solar in their areas. One discom that has made some headway in the space is BSES Rajdhani Power Limited (BRPL), which has launched the Solar City Initiative. Although it covers only apartment complexes in certain areas of Delhi, it sets a precedent for other discoms to manage peak demand through solar energy while also meeting their RPO mandates. In fact, according to Abhishek Ranjan, head, renewables and DSM, power planning and scheduling, BRPL, “Utilities can benefit from distributed solar systems. Therefore, a utility-facilitated hybrid model to tap smaller-size solar rooftop installations in the residential sector is recommended. Utility-anchored business models, especially those focusing on the residential segment, will do wonders. For medium and small enterprises, offering some benefits to compensate for their lower credit worthiness is recommended. The biggest opportunities in the rooftop solar space include offering connections in areas with congested networks, widespread use of battery storage and its synchronisation with electric vehicle (EV) charging.”
Impact of Covid-19
The year 2020 brought with it an unprecedented challenge in the form of the Covid-19 outbreak, which led to a nationwide lockdown, impacting renewable energy projects including those in the C&I space. Supply chains were disrupted, imports halted and under-construction projects were stranded due to issues in getting approvals, equipment and labour. While these projects incurred incremental running costs, O&M also became difficult due to labour scarcity. The immediate impact was significant, especially for under-construction captive projects, which were able to resume work only after access was granted to client premises.
It is too early to gauge the impact of the Covid-19 pandemic in the long run. However, experts have identified some broad trends that may emerge in the near future. First and foremost, consumers would want to reduce their capital expenditure, which will lead to a further decline in project installation under the capex model. Tariff hikes are also expected as discoms make efforts to curtail revenue losses incurred during the lockdown period. Discom resistance might increase as they make efforts to reduce losses. At the same time, consumers will continue to adopt solar power solutions with developers offering attractive and viable options. Thus, it is expected that the demand for C&I solar projects is going to increase, although driven largely by group captive projects.
The way forward
Clearly, there are plenty of opportunities in the C&I solar segment with attractive business models for both consumers and developers. However, there are several issues that need to be tackled for sustaining this growth. Policy stability is required to provide clear visibility for large investors. For this, long-term regulatory provisions and clarity should be provided regarding net metering and open access charges. Moreover, policy is meaningless without proper on-the-ground implementation. Thus, bureaucratic hurdles should be minimised and approvals granted in a timely manner so that projects can be installed without delays.
The government, discoms and industry should work together to develop business models that are beneficial to all stakeholders. Solutions need to be developed to minimise the impact on discoms of the growing migration of C&I consumers to solar power. Awareness creation amongst discoms regarding the benefits of localised generation, utility-centric business models and their possible role as integrated utilities should be encouraged.
Net, net, owing to favourable cost economics, the C&I solar segment is poised to grow, despite the challenges. If the roadblocks are removed in a timely manner, this segment can provide the much-needed impetus to the country’s capacity augmentation and decarbonisation efforts, and accelerate the energy transition in this mainly discom-based power market.
By Khushboo Goyal