By Sarthak Takyar
Mandating the purchase of renewable energy has been a key policy tool aimed at increasing its uptake. The government announced the National Action Plan on Climate Change (NAPCC) in 2008, following the country’s commitment to reduce carbon emissions under the United Nations Framework Convention on Climate Change. A key component 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 stated that the state electricity regulatory commissions (SERCs) would have to reserve a minimum percentage for the 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 highlighted the need for mandatory renewable purchase obligations (RPOs) for utilities.
As per the Tariff Policy, 2016, it was decided that the Ministry of Power, in consultation with the Ministry of New and Renewable Energy (MNRE), would prescribe the long-term growth trajectory for RPOs. Pursuant to this decision, the government prescribed RPOs several times. In 2018, the central government notified the long-term growth trajectory for solar as well as non-solar RPOs. These were uniform for all states and union territories (UTs), reaching 21 per cent by 2022 (10.5 per cent for solar-based electricity). In 2022, the central government again mandated uniform RPOs, which are expected to reach 43.33 per cent of the total energy consumption by 2029-30.
Several policy modifications have been made in this space. In 2021, the hydropower purchase obligations (HPOs), announced in 2019, were notified. In 2023, distributed renewable energy was added to the RPO trajectory. A separate set of energy storage obligations (ESOs) have also been announced. Given the high solar capacity additions in the country, solar has been clubbed under other RPOs, while wind, hydro and distributed energy have separate obligations. Wind RPOs are to be met by projects commissioned after March 31, 2022, and HPOs are to be met by energy produced from large hydro projects (LHPs), including pumped storage projects (PSPs) commissioned after March 8, 2019. Other RPOs are to be met by any renewable energy source apart from wind and hydro, including solar and bioenergy.
Any shortfall in meeting the other RPOs in a particular year can be met through either the excess energy consumed from wind projects beyond the wind RPO for that year or excess energy consumed from eligible LHPs (including PSPs), beyond the HPOs for that year, or partly from both. Meanwhile, any shortfall in meeting wind RPOs in a particular year can be met through excess energy consumed from hydropower plants, which exceeds the HPOs for that year, and vice versa.
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, MNRE undertook a study in 2009 and developed 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 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 RPO compliance has remained dismal through the years.
Falling short: RPO performance audit
The report of the Comptroller and Auditor General of India on the renewable energy sector (central government, MNRE, Report No. 34 of 2015, performance audit) mentions the RPO compliance of states in the initial years – from 2010-11 to 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 achieved 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 REC purchases, even though RECs were available on the designated exchanges. Gujarat met 43 per cent of its RPO through RECs – the highest among the selected states.
The data provided by MNRE on cumulative solar RPO achievements up to 2016-17 shows that 27 states/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. For financial year 2018-19, four states could achieve their RPO targets, seven states could achieve over 60 per cent of their targets, while the remaining states achieved less than 60 per cent. According to a Rajya Sabha question answered on January 1, 2019, 26 states and UTs had a compliance level of less than 60 per cent.
Low compliance issues have persisted till 2022-23. According to a Rajya Sabha question (August 1, 2023), only four states/UTs had a total RPO compliance of more than 60 per cent. These were Sikkim (88.4 per cent), Himachal Pradesh (78.7 per cent), Chandigarh (76.2 per cent) and Uttarakhand (60.4 per cent). Meanwhile, 25 states/UTs had a compliance of less than 30 per cent.
Low RPO compliance: Key reasons and concerns
Multiple challenges have hindered RPO compliance by the obligated entities. According to the 2010-14 performance audit, there are three major reasons for this. The first is the declining trend of projects registered through the REC route. The second reason is the rise in unredeemed RECs due to insufficient RPO compliance. 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 noted that the inability of renewable energy-deficient states to meet their RPOs and the REC route not improving compliance indicated the “poor inclination” of these states to meet their targets. In addition, insufficient increase in electricity demand is considered one of the key reasons for the lack of RPO compliance. Going forward, it is believed that the stalling of hydro projects may become yet another reason for low HPO compliance.
India’s skewed distribution of renewable energy resources means that RPO compliance in some states will remain low and will have to be met through either the purchase of RECs or green energy from the markets. However, both REC and green power markets are not yet fully mature. In fact, procurement from actual renewable energy projects is also a challenge due to the slow penetration of distributed renewables and open access projects, as well as implementation challenges for utility-scale projects, owing to grid and land concerns, delays in signing of power purchase agreements (PPAs) and tariff approvals, and slow tender activity, especially for wind projects.
Discussion points and the way forward
One of the key discussion points with respect to RPOs is whether the state regulators should have the freedom to decide the RPOs for each category or the central government should set a uniform RPO for all states. Previously, the RPOs of discoms and direct buyers of electricity were fixed by state regulators. Since July 2016, the central government started mandating a uniform RPO for all states and UTs. A discussion on this issue is crucial, given that some state governments have stated a desire to regain the flexibility to fix RPOs themselves, considering the differing renewable energy potential across states. However, several industry stakeholders believe that a key reason to centralise the planning of RPOs is that states were not serious about complying with the targets when they were given the responsibility. It is essential to debate if the reasons for not meeting the RPO targets were beyond the control of the state discoms. If yes, then does it make sense to give the freedom back to the states to decide on RPOs?
Another discussion point is regarding the complexity of regulations, as different renewable energy sources have separate RPOs. Additionally, there is complexity regarding a deficit in one source to be covered by a surplus in another. Therefore, it is crucial to debate how to simplify this regulation and have a composite RPO, wherein discoms have the freedom to choose which sources to tap in order to meet their obligations. In addition, there is a need to explore how more flexibility can be introduced in this particular policy to incentivise discoms to meet the RPOs by promoting emerging clean technologies. “Resource endowments, the consumer mix, the portfolio of existing and pipeline PPAs, power system constraints and the financial status of discoms influence their ability to expand the share of renewable energy systems. While a common national-level target is specified as a long-term trajectory, flexibility to fulfil this across a basket of renewable energy sources would help discoms economise their cost of compliance, keeping in mind power system constraints (including flexibility). Innovative products such as G-DAM, G-TAM and renewable round-the-clock contracts, which enable greater renewable penetration, are not bound by a technology-specific renewable energy mix. Fungibility of RECs has also imbibed compliance,” says Dr Anoop Singh, Professor, IIT Kanpur, and Founder and Coordinator of the Centre for Energy Regulation and Energy Analytics Lab.
Another key discussion point is the penalties for missing RPOs. Again, some states have clearly stated that these penalties are “very high”. For example, the total RPO penalties imposed on distribution licensees in Delhi (BSES Rajdhani Power Limited, BSES Yamuna Power Limited, Tata Power Delhi Distribution Limited, and New Delhi Municipal Council) in 2017-18, 2018-19 and 2019-20 were Rs 15.99 million, Rs 196.1 million and Rs 269.7 million respectively. While some believe that strict penalties are needed to make discoms comply with the RPOs, others believe that incentives and a positive industry environment are crucial for ensuring compliance with targets since many of the reasons for non-compliance are beyond the discoms’ control. Further, there is a high chance of these penalties being indirectly borne by the taxpayer through increased tariffs. Hence, a pertinent question going forward is whether penalties are justified for non-compliance with RPOs.
According to the Energy Conservation (Amendment) Bill, 2022, failure to meet the obligation for the use of energy from non-fossil sources will incur a penalty of up to Rs 1 million, in addition to up to twice the price of oil equivalent of energy consumed above the prescribed norm. Therefore, there is no scope for the removal of monetary penalties for obligated entities in the near future. However, alternatives to monetary penalties do exist. “Renewable energy sources, particularly solar and wind, are characterised by variability and uncertainty. A policy for banking and roll-over of RPOs/RCOs for a period of one year, up to a pre-defined level (say 0.5 percentage point) will help accommodate such uncertainty and provide a better compliance framework. Higher incremental RPOs, say 1.1 times, for a shortfall of the previous target, would be added to the RPO target for the next compliance year. Any shortfall beyond the limit (say, 0.5 percentage point of the RPO), should attract a financial penalty, which could be arrived at by using suitable economic valuation approaches. Such (limited) flexibility for the overall RPO target would give the obligated entities some time and flexibility to plan their energy mix,” says Singh.
Another discussion point pertains to the relevance of RPOs going forward, given the falling solar and wind tariffs vis-à-vis conventional power. Given this scenario, will an obligation to purchase renewable energy be needed, or will discoms be naturally incentivised to purchase it over conventional energy? “I feel that RPOs will have relevance going forward, for several reasons. One, India’s climate commitments define a greater role for renewable energy. Two, integrating more renewables leads to higher costs for the power system as a whole as it demands greater system flexibility and a role for economical storage solutions. Third, discoms are locked in long-term PPAs for thermal sources of electricity generation, which entail a commitment to capacity charges. A long-term RPO trajectory should enable discoms to study and plan for a portfolio of power procurement that allows them to meet their obligations but with the least impact on the tariff to be paid by end-consumers,” says Singh.
Going forward, planning for necessary capacity expansion of renewable energy in a state or buying surplus capacity from other states for meeting RPOs are key. To this end, NITI Aayog released a report in February 2024 titled “Renewable Energy Resource Adequacy Planning to Meet RPO by the States in India.” According to the study, to meet the RPO target in 2029-30, 269.79 GW is expected to be mobilised by tapping the states’ renewable energy potential, while certain states will need to procure 69.81 GW from other states. Of 30 states/UTs, 21 will be able to meet the RPO target by mobilising the potential within the state, while nine states will need to procure renewables from other surplus states. In addition, over 48.5 GW of capacity needs to be installed each year in line with the MNRE’s bidding calendar estimate of 50 GW. In terms of adherence to individual RPO targets, seven states need to procure wind, five states need to procure hydro and eight states need to procure solar from other states. The storage requirement for meeting the RPOs is 59.73 GW (41.13 GW of five-hour battery storage systems and 18.6 GW of pumped hydro). To meet the RPO target in 2029-30, an investment of Rs 18.55 trillion-Rs 24.9 trillion is required.
All in all, RPOs are considered a key policy tool to boost the uptake of renewables; however, low compliance has plagued the policy since its inception. Hence, going forward, significant policy and regulatory modifications, capacity addition planning, and detailed discussions among sector stakeholders are pertinent to fulfil the desired policy goals.
