Beyond RPOs

Policy analysis, compliance and future relevance

Following India’s commitment to reducing carbon emissions under the United Nations Framework Convention on Climate Change, the Indian government announced the National Action Plan for Climate Change (NAPCC) in 2008. A key part of this plan was to increase the share of renewable energy in total electricity consumption. The NAPCC set a target of 5 per cent to be reserved for the purchase of renewable energy in 2009-10, against the then existing level of around 3.5 per cent. This target was to increase by 1 per cent every year for the next 10 years. Going by this calculation, the NAPCC had envisaged that renewables would constitute 15 per cent of the Indian energy mix by 2020. Based on this, in turn, the National Solar Mission had stated that the state electricity regulatory commissions (SERCs) would have to reserve a minimum percentage for purchase of solar energy, which would go up to 0.25 per cent by the end of 2012-13, and further to 3 per cent by 2022. Subsequent phases of the mission document mentioned the need for mandatory renewable purchase obligations (RPOs) for utilities.

The biggest challenge in getting states to purchase renewable energy was the lack of parity in renewable energy potential across states – some states lacked potential while others had it in excess. To this end, the Ministry of New and Renewable Energy (MNRE) undertook a study in 2009 and came up with a conceptual framework for a renewable energy certificate (REC) mechanism. The mechanism was based on the concept that renewable energy projects not only generate electricity but also protect the environment. Therefore, renewable energy project developers could sell two different categories of products: electricity and the environmental benefits associated with them in the form of RECs. The purchase of these RECs could help discoms and other obligated entities meet their RPOs. These policies were set with noble motives, but actual compliance with RPOs has remained dismal through the years.

RPO compliance analysis during 2010-14

A good reference point with regard to compliance with RPOs in the initial years is the Report of the Comptroller and Auditor General of India on Renewable Energy Sector in India (Union Government, MNRE, Report No. 34 of 2015, Performance Audit). This performance audit shows the state of RPO compliance between 2010-11 and 2013-14. Of the 24 states selected for analysis, only six – Arunachal Pradesh, Himachal Pradesh, Karnataka, Meghalaya, Mizoram and Tamil Nadu – complied with the RPO targets set by their respective SERCs. Jammu & Kashmir and Andhra Pradesh reportedly performed poorly. Although Gujarat, Maharashtra and Rajasthan were not able to achieve their RPO targets over the years, they showed a rising trend in the percentage of electricity purchased from renewable energy sources. Punjab, too, reported a rising trend in electricity consumption from renewables, while Assam registered a declining trend.

The performance audit concluded that 95.23 per cent of RPO compliance was through the direct purchase of renewable energy, and the remaining was through the REC mode. While 17 states fell short of meeting their RPOs, only six states reported purchase of RECs, even though RECs were available on the designated exchanges. Gujarat met 43 per cent of its RPO through RECs – the most among the selected states.

Reasons for the lack of compliance

Multiple challenges have hindered RPO compliance by the obligated entities. According to the 2010-14 performance audit, there are three major reasons behind this. The first is the declining trend of projects registered through the REC route. Under the MNRE’s framework, only renewable energy projects with a minimum capacity of 250 kW were eligible for registration under the REC mode initially. It was envisaged that as the REC market matured, off-grid technologies could also be considered for inclusion in the REC mechanism. However, despite the initial surge of RECs registered, interest gradually fell. This led to a chicken-and-egg scenario, as the declining interest in RECs was blamed on poor RPO compliance across states. The second reason is the rise in unredeemed RECs due to insufficient RPO compliance. Such RECs grew from 108 at the end of 2010-11 to 9.365 million as of August 2014. This led to a decline in the planned cash flows of generators that took the REC route, which may have further impacted investments in renewable energy projects. The third is the lack of grid infrastructure for integrating renewable energy.

The performance audit pointed out that the inability of renewable energy-deficient states to meet their RPOs, and the REC route not assisting in improving their compliance, indicated the “poor inclination” of these states to meet their targets. In fact, this poor inclination continued after 2014.

The data provided by the MNRE on cumulative solar RPO achievements up to 2016-17 shows that 27 states/union territories (UTs) failed to comply with their RPOs. Overall, of the cumulative target of 17,660 MW, only 10,803.49 MW was achieved, a deficit of approximately 39 per cent.

This lack of compliance has continued in recent times as well. For financial year 2018-19 only four states could achieve their RPO target, seven states could achieve more than 60 per cent of their targets and for the remaining states the target achievement was  less than 60 per cent.

Who will set the RPO targets?

The Electricity Act, 2003 puts the responsibility for the promotion of renewable energy on the state regulators. The National Tariff Policy, 2006 also put the onus on “appropriate commission(s)” to fix a minimum percentage for the purchase of renewable energy. Previously, the RPOs of discoms and direct buyers of electricity used to be fixed by the SERCs. In July 2016, the Ministry of Power (MoP) mandated a uniform RPO for all states and UTs for three years from 2016-17 to 2018-19. In June 2018, the MoP released an order extending the uniform RPOs for another three years from 2019-20 to 2021-22.

In the Minutes of the Conference of Power and Renewable Energy Ministers of States & UTs held on July 3, 2020, it is clearly stated that some state governments want the flexibility to fix RPOs to be returned to them, considering the differing renewable energy potential across states. With the aim of providing a level playing field to renewable energy-deficit states, the MoP waived interstate transmission charges and losses to enable these states to buy power from renewable energy-rich states without any extra cost. Also in this meeting, the MoP proposed stricter penalties for non-compliance with RPOs in the draft Electricity Act. Some states opined that these penalties were “very high”.

“I am not in favour of only penalties. A carrot-and-stick policy could be used in policymaking, but more importantly the aim should be to create a positive industry environment,” says Dr Debajit Palit, director, rural energy and livelihoods, The Energy and Resources Institute. It is important to ask who is going to end up paying these penalties. Palit observes that these penalties will be reported as an expense in discoms’ annual revenue requirements submitted to the state regulators. The regulators will consider this and increase the price of electricity. Ultimately, consumers will have to pay for these penalties. If a regulator does not consider this penalty as an expense, the owner of the discom will have to pay for it, which would likely be the state government, as most discoms are state owned. “So, even in this scenario, ultimately it is the taxpayer’s money that is being spent. Meanwhile, a private discom might have to pay these penalties from its own equity, if the regulator does not consider them as expense,” he adds. Moreover, penalties may be unjustified, because insufficient increase in electricity demand is considered as one of the reasons for lack of compliance – which is not completely under the utilities’ control.

Relevance of RPOs in the future

The RPO mechanism was devised when solar and wind tariffs were high compared to coal-based thermal tariffs. Now, solar and wind energy are considered among the cheapest sources of energy, without incorporating storage solutions. Even including storage technologies, the tariff for round-the-clock electricity from renewable sources is comparable to that of coal-based thermal energy. Furthermore, storage costs are expected to fall, which should make even renewable energy coupled with storage cheaper than coal-based thermal energy. Given this scenario, going forward, an obligation to purchase renewables may no longer be needed. Meanwhile, the MoP has now mandated hydropower purchase obligations for discoms as well.

Will HPOs be sufficient to uplift the hydropower sector?

Palit, however, believes that RPOs will be required till such time as a fundamental regulatory issue pertaining to discoms’ long-term power purchase agreements (PPAs) with thermal power projects, which is hampering the uptake of renewables and leading to low compliance of RPOs, is resolved. “These PPAs have a two-part tariff, with a annual fixed or capacity cost and a variable or energy cost. Whether the discoms buy thermal power or not, they have to pay for the fixed charges. The incremental charge that they pay for thermal power is low – sometimes  even lower than the price they pay for buying renewable energy,” he says.

If the regulators resolve this, the discoms will be incentivised to buy more renewable energy to meet their RPOs. Going forward, RPOs can even be phased out as the discoms will genuinely find it cheaper to buy renewable energy rather than thermal power. RECs, however, may still be needed, as some states will continue to face the issue of lack of renewable energy resources, points out Palit. Meanwhile, bulk electricity consumers can continue to be obligated to purchase a certain percentage of their total consumption from renewable sources. In fact, many companies are now voluntarily setting such mandates for themselves.

Given that many state governments are focusing seriously on energy transition, the discoms in those states will be able to provide renewable energy to these institutional customers. Such customers can also set up captive renewable energy projects instead, or purchase renewable energy through the open access route. Therefore, a carrot-and-stick policy, in this case, could be the phasing out of RPOs so that discoms have the freedom to decide their own energy mix, while persuading them to ease the regulations on captive power projects and open access for institutional consumers.

By Sarthak Takyar

 

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