Renewable project developers are wading through multiple challenges in integrating power to the grid efficiently on time. With India setting a target to install a non-fossil energy capacity of 500 GW by 2030, the challenges will only grow. One such problem lies in the draft deviation settlement mechanism (DSM) regulations which could be a huge setback for developers if implemented.
In September this year, the Central Electricity Regulatory Commission (CERC) issued the draft ‘Deviation Settlement Mechanism and Related Matters Regulations, 2021.’
According to the proposed regulations, wind and solar power generators will not have to pay penalties for up to 10% deviation in scheduling power. For deviation beyond 10%, they will have to pay charges at 10% of the normal rate.
Earlier, there was a 30% band – no penalty for deviation of -15% and +15%. But the draft regulations have reduced the band to 10% – no penalty for deviation of -10% and +0%. There is zero deviation allowed on the positive side per the draft regulations. The developer will not be paid for any over-injection of power.
The rationale behind the proposed DSM regulations is grid security and stability. Developers must schedule accurately, or else the DISCOM has to back down other power since renewables have must-run status.
Many stakeholders have raised concerns and suggested changes as part of the feedback to the draft regulations.
Need for standardizing forecasting and scheduling techniques
Renewable sources are intermittent, and variation in power scheduling is inevitable. Power scheduling depends on several factors, and the ever-changing weather patterns make it extremely difficult to schedule power accurately.
Sembcorp Energy, in its submission, said that the proposed regulations do away with the principle of treating over-injection and under-injection equally.
The company criticized the proposal noting that it penalizes solar and wind generators for over-injecting by disallowing tariff compensation. To avoid revenue losses, generators would be compelled to give higher schedules (higher than forecast) and higher available capacity, defeating the whole purpose of DSM.
The meticulously developed forecasting market would be discouraged from investing in better weather forecasting technology. Generators (to avoid over injection) would always schedule more energy than forecasted, removing any incentive or higher performance bonuses being given now by generators to forecasters for accuracy. The company added that it would spell the end to quality forecasting in the country.
Sembcorp suggested the deviation be allowed up to 12% instead of the proposed 10% to avoid excess penalty.
The existing period allowed for the payment of deviation charges is currently 12 days. The developer added that the draft suggests reducing the payment period to seven days, putting undue pressure on generators already facing cash flow issues due to delayed payments by the distribution companies (DISCOMs).
Another developer, Vector Green Energy, suggested that forecasting and scheduling solar and wind power need more time to be standardized. All developers must reach a minimum level of accuracy before any tightening of regulatory compliance.
“The proposed amendments will be a huge burden on the developers who continuously work to improve the forecasting accuracy and save on DSM penalty. It will be an additional burden on developers operating the projects on a very competitive tariff. States like Punjab, Madhya Pradesh, Bihar, Haryana, Uttar Pradesh have not implemented the DSM policy for solar and wind, owing to various reasons. We request CERC to extend the implementation of the current amendment in DSM regulation by a minimum of five years for the forecasting of solar and wind generation to reach maturity,” the company said.
Non-payment for over-injection-a big blow for renewable developers
The day-ahead scheduling process is critical to the operation of the grid. The scheduling process aims at optimal scheduling and dispatch of the electricity for the next day based on the data provided by the generators.
Greenko Energies suggested that the prices are expected to remain highly volatile considering the uncertainty due to the pandemic situation over the next year. Therefore, considering the lowest instead of the highest or fixing the cap to avoid burdening the deviating entity would be ideal.
“Considering the uncertain nature of wind and solar resources, the generator should be paid for any excess generation as per the normal rate or area clearing price. A wind or solar generator is expected to lose around ₹1.2 million (~$15,961)/MW, translating to ₹0.40 (~$0.005)/MW. If not paid for over-injection, it would be a big setback as there are capacity utilization factor (CUF) limits for any contract. Any shortfall will have a financial consequence as well, which will be like a double whammy for the generators,” Greenko said.
Once these regulations are initiated, the ‘Regional Deviation Pool Account Fund’ will be renamed the ‘Deviation and Ancillary Service Pool Account.’
As per the proposed regulations, in case of failure to pay into the ‘Deviation and Ancillary Service Pool Account’ within seven days from the date of issue of statement of deviation charges, the regional load despatch center will be entitled to encash the ‘Line of Credit’ of the concerned regional entity for default.
Azure Power requested the CERC not to impose draft regulations on already operational and bid-out projects. The developer suggested that a penalty based on market-driven rates is unpredictable during the bid submission or auction while determining tariff. It said developers need some certainty and visibility of penalties to consider while bidding.
“Since weighted average ancillary service charges vary and depend on a lot of external sources, renewable energy generators do not have any control. Linking penalty with such mechanism will impact developers negatively and put a huge impact on the viability of these projects,” Azure said.
Need to revise the proposed 10% error band to the 15% band
ReNew Power said that as renewable project developers are heavily dependent on weather conditions, the exact projection of their electricity generation and revenue cannot be ascertained. Reducing the permissible deviation band will result in such projects being economically unviable.
“As solar and wind generators are not supposed to get any receivables as per proposed regulations, the only remedy left with the impacted generators would be to curtail the additional quantum and bear losses for the same, or act irresponsibly and over-schedule in all the times blocks possibly resulting in grid instability. Therefore, we request the Commission to allow payment as per the existing DSM mechanism until 15% of over-injection,” ReNew suggested.
Many stakeholders believe that DSM is skewed, and it becomes all the more pronounced in the monsoon season with changing weather patterns.
The Association of Power Producers said that wind and solar generation are weather dependent, and positive and negative errors are equally probable. The Association added that forecasting and scheduling have improved since 2015 to bring most errors in the acceptable variation band of 15%. Instead of the 10% error, the CERC should consider revising it to 12%, as that would help wind and solar generators quickly adopt the change without having to pay a high penalty.
The Power System Operation Corporation (POSOCO) suggested that the present mechanism in the existing regulations could be retained with the 15% error band reduced to 10% for wind and solar projects.
POSOCO said that deviations by all wind and solar generators that are regional entities should first be netted off for the entire pool monthly. Any remaining shortfall in renewable energy generation must be balanced by purchasing equivalent solar and non-solar Renewable Energy Certificates (RECs) by the National Load Despatch Center. For a positive balance of renewable energy generation, equivalent notional RECs should be credited to the DSM pool and carried forward for settlement in the future.
Over the past few years, central and several state electricity regulatory commissions have issued several forecasting and scheduling guidelines for the industry.
In October this year, the Maharashtra Electricity Regulatory Commission passed an order to resolve multiple issues relating to the commercial implementation of the DSM regulations. The Commission notified that the commercial arrangements specified under the DSM regulations and the related provisions regarding deviation charges and additional charges would come into effect from October 11, 2021.
While there is a need for DSM regulations to maintain grid stability, it is equally critical for the guidelines to address the issues on the ground and consider the concerns of renewable developers trying to navigate their way through a highly competitive environment.