Let it Go

Government intervention in the form of RPOs has lost relevance

By Sarthak Takyar with inputs from Dr Debajit Palit, Director, Rural energy and livelihoods, The Energy and Resources Institute

When the Indian government announced the National Action Plan for Climate Change in 2008, the key objective was to increase the share of renewable energy in total electricity consumption. Accordingly, the National Solar Mission mentioned that the state electricity regulatory commissions (SERCs) would have to reserve a minimum percentage for the purchase of solar energy. The need for mandatory renewable purchase obligations (RPOs) for utilities was highlighted in the subsequent phases of the mission document. This policy was a significant government intervention to increase the uptake of renewable energy.

However, the lack of parity in renewable energy potential across states was a key obstacle in enabling all states to purchase renewable energy. Thus, the Ministry of New and Renewable Energy (MNRE) came up with a conceptual framework for a renewable energy certificate (REC) mechanism in 2009. The purchase of RECs could help distribution companies (discoms) and other obligated entities (in states with limited renewable energy potential) to meet their RPOs. While these policies were set with noble motives, the actual compliance with RPOs remained low since its inception.

According to the Report of the Comptroller and Auditor General of India on Renewable Energy Sector in India, between 2010-11 and 2013-14, only six states (of the 24 states selected for analysis) could comply with the RPO targets set by their respective SERCs. Overall, an interesting conclusion of the report is that renewable energy-deficient states had a “poor inclination” to meet their RPO targets. This dismal trend continued post 2014 as well.

As high as 27 states/union territories (UTs) failed to comply with their RPOs according to the MNRE’s data on cumulative solar RPO achievements up to 2016-17. For the financial year 2018-19, the story is not different. Only four states could achieve their RPO target and just seven states could achieve more than 60 per cent of their targets. The target achievement for the remaining states was less than 60 per cent. The lack of compliance in 2018-19 happened even though the MNRE created a compliance cell for RPOs in the same financial year.

Instead of questioning whether RPOs are still relevant, the policymakers took the path of most resistance. In the Minutes of the Conference of Power and Renewable Energy Ministers of States & UTs held on July 3, 2020, the Ministry of Power (MoP) proposed stricter penalties for non-compliance of RPOs in the draft Electricity Act. In the minutes, some states have clearly mentioned that these penalties are “very high”.

Anyway, with strict penalties gauged as the possible solution to improve RPO compliance, it is pertinent to highlight that ultimately the taxpayers/consumers will be hit hard. Dr Debajit Palit, Director, Rural energy and livelihoods, The Energy and Resources Institute observes that these penalties will be reported as an expense in discoms’ annual revenue requirements submitted to the state regulators. The regulators will increase the price of electricity for consumers after considering it as an expanse. On the other hand, if a regulator does not consider this penalty as an expense, the owner of the discom will pay the penalty. As most discoms are state-owned it will be the state government using taxpayer’s money. For a private discom the penalties will be paid from their own equity (if the regulator does not consider them as an expense).

With strict penalties gauged as the possible solution to improve RPO compliance, it is pertinent to highlight that ultimately the taxpayers/consumers will be hit hard

In addition, penalties on state-owned or private discoms are unjustified as according to the third report of the standing committee on energy (2019-2020), insufficient increase in electricity demand is cited as a key reason for lack of RPO compliance. The utilities have no control over this and perhaps lack of manufacturing base and an economic slowdown which started even before the pandemic may be blamed.

In fact, a fundamental reason why compliance has remained poor is that discoms have long-term power purchase agreements with thermal power projects. In addition, in a two-part tariff, an annual fixed cost needs to be paid by the discoms whether or not they buy thermal power. And the incremental charges that discoms pay for thermal power is low (often even lower than the price of renewable energy). This limits the incentive to procure more renewables. Again, the discom’s should not be blamed for this reason which has impacted compliance. The policy-makers and regulators need to think of solutions to this regulatory issue and some discussion is ongoing as well.

A fundamental reason why compliance has remained poor is that discoms have long-term power purchase agreements with thermal power projects

The learnings from the lack of RPO compliance through the years seem to have been ignored by the government. This is because the MoP has now mandated hydropower purchase obligations for discoms as well. There is a question mark regarding the compliance of such obligations. Still, the positive is that government and industry stakeholders are looking for innovative ideas with respect to RPOs. In the “Draft Electricity (promoting renewable energy through Green Energy Open Access) Rules, 2021” circulated by the MoP on August 16, 2021 it is mentioned that the obligated entities may also meet their RPOs by purchasing green hydrogen. The quantum of green hydrogen will be computed by considering the equivalence to the green hydrogen produced from 1 MWh of renewable energy or its multiple.

An obligation to purchase renewable energy has lost its relevance and the MoP is well advised to start preparing a phase-out plan for such obligations

The RPO mechanism was initiated by the government when solar and wind tariffs were high compared to coal-based thermal tariffs. Over the years, standalone solar and wind energy tariffs have fallen drastically to become among the cheapest sources of energy. By including cost of storage technologies, the tariff for round-the-clock renewable energy is comparable to that of coal-based thermal energy. Going forward, storage costs are expected to fall further, making round-the-clock renewable energy cheaper than coal-based thermal energy. Therefore, an obligation to purchase renewable energy has lost its relevance and the MoP is well advised to start preparing a phase-out plan for such obligations. The phase-out will give the state governments/utilities the freedom to decide their own energy mix in a better manner and in fact focus more on emerging clean technologies like green hydrogen.

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