Promoting Pumped Hydro

CSTEP study on the pricing mechanism for PHES in India

India plans to raise its non-fossil fuel-based energy capacity to 500 GW and meet 50 per cent of its energy requirements using renewable energy sources by 2030. A key issue with traditional renewable energy sources such as solar and wind is their intermittency, meaning that power cannot be despatched on the basis of real-time demand. This underscores the need for large-scale energy storage technologies to better manage the grid. A ma­ture technology in this space is pum­ped hydro energy storage (PHES), which can be developed to tap its 96 GW potential, according to the Central Electricity Autho­rity of India. PHES not only generates and stores electricity but also has other use cases such as round-the-support, load following, energy arbitrage, peak shaving, renewable energy smoothening and ancillary services.

The Center for Study of Science, Techno­lo­gy and Policy published a report titled “Study on Pricing Mechanism for Energy Generated by Pumped Hydro Energy Storage in India” in November 2021. Rene­wable Watch provides an extract from the study, covering tariff computation for different use cases along with case studies of the Tehri and Pinnapuram PHESs in Uttara-khand and Andhra Pradesh respectively, and the key recommendations to promote this technology…

Tariff computation for energy arbitrage, peak load shaving and load following

PHES systems are used as merchant power plants in the market. They are operated in the power markets of India, such as the Indian Energy Exchange (IEX) and Power Exchange India Limited. According to the study, the primary input requirements for the tariff computation method are day-ahead real-time market prices, market buying and selling volume, and the load profile of the state. The dispatch strategy of PHES in the market can be either pumping during low prices and generating during high prices, or pumping during low prices and discharging/ generating during peak load.

Therefore, the pumping cost of PHES is the weighted sum of the off-peak prices in the market depending on pumping re­­quire­ments. The generation cost is the wei­ghted sum of peak prices in the market de­pending on generation requirements. The revenue earned by the PHES developer will be the price differential between peak and off-peak prices.

Case study of Tehri PHES, Uttarakhand

The Tehri PHES plant in Uttarakhand is to be commissioned by 2022. The plant has to follow the CERC tariff regulations since it will provide power to more than one state: Delhi, Haryana, Uttarakhand and Rajas­than. Uttarakhand comes under the N2 region in the IEX market.

The plant has a capacity of 1,000 MW with a round-trip efficiency of 80 per cent. The annual generation and consumption of the plant will be 1,321.8 GWh and 1,651.6 GWh respectively. According to the analysis, the profit earned while operating the pla­nt for the profit-maximising scenario is Rs 3,825,323 with an average peak tariff of Rs 3.94 per kWh and an off-peak tariff of Rs 2.15 per kWh. Similarly, the profit earned while operating PHES as a peak-load-shaving asset is Rs 1,634,214 with an average pe­ak tariff of Rs 3.32 per kWh and an off-peak tariff of Rs 2.15 per kWh. There is a clear re­du­ction in profit when the PHES plant is operated in the market as a peak-load-shaving asset. In both cases, the point of connection charges, transmission losses and IEX fees are considered. Fur­the­r­more, on some days the price-minute curves re­ma­in constant, resulting in a loss for the PHES developer. To tackle the price varia­bility, the PHES plant should not be operated on some days, as doing so will incur losses.

When tariffs are calculated through a differential pricing mechanism in the market, the Tehri PHES plant earns a net profit of Rs 1,570 million and Rs 700 million, based on the 2019 and 2020 market clearing prices respectively. The revenue generated through such differential pricing can be used for recovering the capacity charges or the annual fixed cost, which works out to be around Rs 10.172 billion. The profit earned would provide a fixed-cost recovery of 16 per cent and 7 per cent in 2019 and 2020, respectively.

Tariff computation for renewable energy smoothing

Grid-connected PHES plants that utilise renewable energy for their pumping requirements require a different tariff computation method. In this scenario, the input requirements for computing the tariff are the renewable energy profile (solar and wind) and the load profile of the PHES plant. PHES utilises the excess renewable energy available to charge and discharge during low renewable energy instances and high load, thereby helping the renewable energy plant provide dispatchable power. This will also help avoid the cost of renewable energy curtailments and help discoms meet their renewable purchase obligations. In this case, PHES plants can enter into long-term contracts or bilateral trade with discoms.

The pumping cost of a PHES will include the renewable energy cost along with intercon­nection charges. The generation cost will include the pumping price and certain incentives for providing grid flexibility such as:

  • Compensation for avoiding renewable energy curtailment: In case of a transmission constraint, low system demand, or grid security issue, the supply of renewable energy is curtailed from the grid. As renewable energy has been gi­ven “must-run” status, any curtailment has to be appropriately compensated for. Since PHES would help in reducing curtailment by using excess renewable energy for pumping, the same compensation has been considered as the incentive for PHES.
  • Avoided cost from high-priced purchase of thermal or gas plants: PHES integrated with a renewable energy plant wo­uld be able to supply firm, reliable and round-the-clock power. This would help discoms avoid the cost of power purchased from high-priced thermal power plants. This avoided cost can be used to incentivise PHES.
  • Grid flexibility compensation: PHES is capable of dealing with the challenges associated with the intermittent and variable nature of renewable energy. This service provided by PHES needs to be accounted for through grid flexibility in­cen­tives. A Re 0.5 per unit incentive is provi­ded for ancillary services towards grid flexibility. A similar compensation has been considered for PHES.
  • Generation-based incentive (GBI): A minimum and maximum value of 0 and Re 1 per unit respectively has been con­sidered for GBI to attract investments in the sector.

Case study of Pinnapuram PHES, Andhra Pradesh

The tariff computation method discussed above can be used in the case of the Pin­napuram integrated renewable energy storage project in Andhra Pradesh. The project plans to install a 2,000 MW solar plant, a 400 MW wind plant and a 1,000 MW PHES plant. The annual power generation and consumption of the plant will be 2,774 GWh and 3,645 GWh, respectively, with a round-trip efficiency of 76 per cent.

In this case, the excess renewable energy is used for pumping, while during low re­newable energy periods and high dema­nd, the PHES plant generates energy. To compute the compensation under “avoided cost from high-priced purchase of thermal or gas plants”, the study ana­lysed the specific case of the Pinnapuram project from the Andhra Pradesh tariff order. As it turns out, the cost that discoms would avoid by not purchasing power from thermal plants is in the range of Re 0.37-Re 0.91 per unit.

The minimum and maximum renewable en­ergy cost considered for the scenarios is Rs 2 and Rs 3 per unit respectively. Similarly, an in­­terconnection charge of Re 1 per unit is also assumed and added to the pumping cost. Hence, the profit earned by the Pin­n­a­­puram project will be in the range of Re 0.37 to Rs 4.41 per unit with a capacity ch­arge recovery of 10 per cent to 122 per cent.

The way forward

With the high degree of penetration of renewable energy in India, utility-scale storages such as the PHES system are re­qu­ired to balance the grid. However, the gro­w­th of PHES has been tepid because of the high cost associated with its commissioning, its long gestation period (caused by delays in obtaining environmental clearances) and the poor recovery resulting from the existing pricing mechanism.

The issues of high cost and environmental clearance can be resolved by employing a closed-loop and smaller capacity PHES system that uses less water. Such a system would mitigate delays, and avoid cost overruns, legal hurdles and protests rega­r­ding environmental clearances. To resolve the issue of low recovery from the existing pricing mechanism, it is important to exp­lore a new pricing mechanism as well as consider alternative funding mechanisms.

The study makes the following key recommendations regarding the pricing mechanism:

  • A differential pricing mechanism should be employed to calculate different pumping and generation prices, instead of one that considers only generation-based energy charges.
  • The profit generated from the differential pricing mechanism should be used for fixed-cost recovery.
  • The pricing mechanism for a PHES plant should be based on its specific use cases.
  • With respect to financing mechanisms, the key recommendations in the study are:
  • Viability gap funding (VGF) for PHES projects, as India has considerable ex­perience with the VGF mechanism for large-scale renewable energy projects.
  • The use of an expense distribution mo­del through a collaboration between the local government and the developers. Within this framework, use of public-private partnership models and the utilisation of unused assets and infrastructure such as open-pit coal mines and beneficiary-owned lands can be thought of in a bid to reduce the risks associated with energy pricing and energy volume, and enable a stable cash flow.
  • A greater focus on attracting more foreign direct investment in this space through government initiatives to set up more energy storage projects.

PHES is being considered vital in meeting India’s climate goals. Therefore, concerted efforts by policymakers are needed to ensure that proper incentives and tariff mechanisms are in place to support this technology.

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