Solar and Wind Power Procurement Situation is a Mess

State-run distribution companies (DISCOMs) and negligent state electricity regulatory commissions (SERCs) are creating an obstacle in the path of India’s solar story, according to a letter written by R. K. Singh, Minister for Power, to Minister of Finance, Arun Jaitley.

The contents of the letter portray the reluctance of state-run DISCOMs from procuring solar even at rates below ₹3 (~$0.040)/kWh and the neglect of SERCs towards meeting the renewable purchase obligations (RPOs).

In his letter, Singh wrote, “States already have pre-existing power purchase agreements (PPAs) with different thermal generating units to meet their power requirements. Payment for thermal power is made on two-part tariff; fixed cost per unit is ₹1.60 (~$0.021)/kWh and the variable cost is ₹1.65 (~$0.0222)/kWh. Average unit cost for thermal comes to ₹3.25 (~$0.0437)/kWh.”

Further elaborating, he asserted that if DISCOMs do not purchase thermal power according to PPA, they still have to pay the fixed cost of power. “When DISCOMs buy renewable energy, they have to curtail equivalent amount of power from thermal power generating projects. Even if the DISCOM purchases solar at ₹2.44 (~$0.0328)/kWh, it still has to pay an extra ₹1.60 (~$0.021)/kWh as fixed cost of power to thermal power generators. For the DISCOM, the total cost of power is ₹4.04 (~$0.0544)/kWh. Solar is also intermittent in nature and is not available during peak hours,” the letter stated.

Singh wrote that this has led to a situation where DISCOMs are unwilling to buy cheap solar power. Despite the renewable purchase obligation (RPO) mechanism, the DISCOMs are unwilling to buy and the sole reason is that the SERCs are negligent in penalizing DISCOMs that have not met their RPOs.

Singh warned Jaitley that if rates of solar go even a bit higher, the Solar Energy Corporation of India (SECI) would find it tough to execute PPAs as states will flatly refuse to enter the agreements.

DISCOMs are the primary reason why rooftop solar installations have grown only sluggishly in India as they have been reluctant to properly implement net-metering and lose their valuable customers. The financially burdened DISCOMs are now likely to inhibit the growth in large-scale solar sector also unless policy changes are made.

When contacted, an official at Maharashtra State Electricity Distribution Company Limited (MSEDCL) told Mercom, “In purchasing power, the reliability factor of power source plays a big role. In some states, the demand is not increasing by that much, but due to obligations when DISCOMs have to purchase solar or wind they have to curtail from thermal power sources, and this leads to extra cost for DISCOMs. This may be inhibiting them from entering PPAs for large capacities even at rates below ₹3/kWh. Having said that, I would like to say that in Maharashtra this is not the case. We are focusing on solar chiefly for new power capacity addition, so issues like these do not crop up.”

Using battery energy storage for solar and wind would make them more reliable and viable for DISCOMs because even during peak hours, DISCOMs can depend on cheap solar and wind. Until this is done, some problems will surface every now and then in a few states, added the MSEDCL official.

Mercom also contacted a  Tamil Nadu Generation and Distribution Corporation (TANGEDCO) official to shed some more light on the issue. “We DISCOMs have to pay fixed price to thermal generators. As the addition of power generating capacity initially did not have renewables in mind, most DISCOMs have long-term PPAs with conventional power generators – chiefly coal-fired projects. Now, thermal has two-part tariff fixed and variable. In case new renewable energy capacity is added, it does not ensure that much power supply round the clock. In such a scenario, the DISCOM must also constantly engage with coal-fired projects. So, say for a few hours during the day, DISCOM draws cheap solar or wind, for that duration it is also paying fixed tariff for thermal as thermal is the mainstay for peak hours,” he said.

“Two things need to be done, firstly coal-fired projects should be shelved gradually, and new capacities not allocated for a few years. At the same time, most renewable energy projects must opt for energy storage. This will give DISCOMs the option to rely on them [renewables] even during peak hours, and then they would not need to pay extra to thermal power producers,” added the TANGEDCO official.

“The current procurement situation needs a long-term solution as energy storage is still not affordable especially in the India. However, while a national energy storage policy is the need of the hour, lack of power demand and coal PPA issues need to be resolved immediately for India to reach the installation goal of 100 GW of solar by 2022,” said Raj Prabhu CEO of Mercom Capital Group.

India meanwhile has committed to generate 40 percent of its electricity from non fossil-fuel based sources as part of the Paris climate change agreement.

According to Mercom’s Q2 2018 India Solar Market Update, India installed 1.6 GW solar in Q2 2018. Cumulative solar installations have crossed 25 GWs.