With Low Demand and Cheaper Power on Exchanges, DISCOMs Flouting Solar’s ‘Must Run’ Status

According to Mercom Capital Group’s latest report, India Solar Quarterly Market Update, the power deficit numbers in India do not paint the full picture. Though low power deficit and even a surplus situation is touted by a Central Electricity Authority (CEA) report, large populations in India are still without electricity and power cuts are still part of daily life in urban areas and more so in rural areas. The reduction in the power deficit we are seeing is largely due to a combination of a drop in power demand in the commercial and industrial sector, and the financial health of DISCOMs. Falling demand has led to record low prices on the power exchanges.

To download a copy of the report, visit: http://bit.ly/MercomIndiaAug2016Form

According to CEA, plant load factors have fallen by 20 to 30 percent due to the drop in power usage from commercial and industrial customers, a major source of revenue for DISCOMs. These customers also usually end up subsidizing residential and rural customers for whom DISCOMs refuse to increase tariffs in line with costs, leading to massive losses year after year.

DISCOMs, which continue to have financial struggles, are purchasing cheaper power from the exchanges, which is resulting in curtailment issues for solar power. Some DISCOMs are simply resorting to power cuts as they cannot afford to even purchase power at low rates on the exchanges. Some states have surplus power but still don’t supply power 24/7 for fear of losses due to low tariffs from residential and agricultural customers.

“Total new renewable energy capacity addition has increased to 30 percent as of calendar year July 2016 with intermittent renewable energy capacity additions including wind and solar accounting for almost 28 percent (solar accounted for 16 percent), a huge positive largely due to government’s push for renewables,” said Raj Prabhu, CEO of Mercom Capital Group. This increase in renewable energy addition has caused some solar power curtailment issues in Rajasthan and Tamil Nadu where DISCOMs have flouted the ‘must run’ status of solar power thereby negatively affecting developers. However, based on our discussion with developers and state agencies, curtailment is still not widespread, but the issue needs to be addressed immediately before it starts to hurt investor sentiments in the sector. The problem is more pronounced in Tamil Nadu, especially in high wind energy density areas when wind and solar generation peak simultaneously. In Tamil Nadu curtailment is mostly due to the utility opting to buy cheaper power from the exchanges rather than paying Rs.7 (~$0.1045)/kWh for solar (the state has signed PPAs for that rate).

While grid congestion due to a lack of transmission capacity and integration of intermittent energy sources is an issue, the more challenging issue right now is the lack of power demand and the financial health of DISCOMs.

The UDAY program was set up to fix the financial health of DISCOMs but turnaround has not been immediate. Unless states increase power tariffs on residential and agricultural consumers to reflect present costs it will not take much time for these DISCOMS to be back in financial trouble again which will be bad news for renewables and especially solar which is growing at the fastest pace.

Image credit:  Oran Viriyincy, Flickr. Licensed under Creative Commons CC-By-SA 2.0.