Revisiting National Renewable Energy Policy
Renewable energy (RE) is an important element of India’s energy security
system. Under, Intended Nationally Determined Contribution (INDC), India plans to
reduce its emissions intensity by 33 - 35% between 2005 and 2030. To this effect,
it is focusing on accelerating the use of clean and renewable energy by 40% by
2030. To say something tangential to the national RE policy during current
Covid & Galwan period, requires courage and conviction unless it is based
on facts and figures.
The
central government notified a Renewable Power Obligation (RPO) in 2011 which
mandated obligated entities (primarily
power distribution companies) to purchase not
less than 5% of its total annual consumption of energy from renewable
energy till 2015-16. In 2018, this RPO target has been enhanced to
21% to be achieved by 2022. As a consequence, the share of grid integrated RE,
primarily Wind and Solar, have been increasing at a rapid rate. The present
share of RE Sources is 87GW (23%) in total installed capacity of 370GW. This
includes 37.7GW (10.1%) of wind and 32.3GW (8.7%) of solar energy. In 2015, the
total installed capacity was around 275 GW which included 23 GW (8.3%) wind
& 3.8GW (1.3%) of Solar. Besides environmental benefits, the lower cost of
generation makes it a preferred source for the policy makers. While there is no
denying that there are many benefits associated with RE sources and India
should continue to endeavour to reach its INDC, nevertheless while doing so,
one must also keep in mind the associated cost of present full throttle “one
size fits all” RE Policy on the consumers and the economy. This is especially
valid as India has now surplus power generation capacity.
Wind
and Solar generation, unlike the conventional sources, are less predictable,
intermittent in nature and are location specific but still have “must run
“status over conventional sources of power. The financial Impact of Integration
of Renewable Energy Sources (IRES) is more complex requiring the grid side dynamic
management with economics of Renewable Energy Sources (RES). Prices of renewals
have also come down significantly in recent years where average Solar &
Wind prices are hovering around Rs. 3 per unit with around 10% variance
depending upon geographical & techno-commercial factors. On face of it, RE
prices appear to be cheaper than other contemporary conventional power plants.
But there is another perspective, that of RE grid integration cost, which is
not widely discussed. If we glance at the country’s Power/Energy Demand-Supply positions
(compiled from data from Ministry of Power and MNRE Websites), it becomes clear
that this growth in RE power is taking place at the cost of
existing conventional power plants.
Power Demand-Supply
Scenario
Item
|
2015-16
|
2019-20
|
Avg. Annual
Increase (%)
|
Peak Demand
(GW)
|
153
|
182.5
|
3.85%
|
Total Energy
Generation (BU)
|
1107
|
1252
|
2.6%
|
Avg. PLF
(Thermal-%)
|
62.3
|
56
|
-2.2%
|
Energy
Requirement (BU)
|
1114
|
1290
|
3.16%
|
RE Generation
(BU)/Share in Total Energy Generation (%)
|
32.8 BU /
(2.96%)
|
114.4 BU /
(9.13%)
|
49.75%
|
RE Share (%)
|
2.96
|
9.13
|
41.68%
|
Followings
are some of the unintended collaterals of RE grid integration:
•
Additional energy availability from generation of Solar &
Wind exceeds the growth in energy demand thereby is causing backing down of
conventional power plants to accommodate “Must Run” RE. As we are adding more and more RE Sources, average
Plant Load Factor (PLF) of Thermal Power Plants is reducing. Currently, the avg.
PLF of thermal PPs is hovering around technical minimum of 55% whereas around
10 years ago, it was a healthy 75%.
•
While cost of RE generation appears to be less than thermal
as discovered in tariff based competitive biddings, the associated balancing
costs in form of higher transmission charges (due to lower utilization of green
corridors etc.) has been camouflaged by
exempting inter-state transmission charge on RE and loading it on others.
•
Discoms continue to pay for the fixed charges to the gencos for
the stranded thermal capacity caused due to backing down because of their long-term
capacity contracts or PPAs.
•
Average Power Purchase Cost
(APPC) and Average cost of supply (ACoS) are increasing and adversely affecting
the affordability of consumers to pay for expensive power. This in turn is
increasing the financial stress of discoms and contagion is being passed on
through defaults by Discoms to Gencos and thereafter to the banks NPAs &
economy.
Costs
involved in the IRES into the existing grids depend on the factors like variability
of RES, lesser predictability & difficult forecasting of RES and location
specific costs and subsidy costs. A broad classification of the various costs
involved with the IRES into the grid are addressed in National Electricity Plan
(NEP- 2018) published by Central Electricity Authority (CEA). They
include (a) Grid connection and
up-gradation costs incurred on to the grid infrastructure that needs to be in
place in order to integrate the RES , (b) Grid connection costs for setting up
the new transmission/distribution infrastructure for the evacuation of the RES
generation, (c) System operation costs which is a combination of (i) System
profile costs caused due to intermittent nature of the RES during which the thermal power plants need to
back up the RES during their unavailability, (ii) Short term system balancing
because RES are variable in nature,
there must be adequate storage capacity from the conventional plants and (d)
Higher reserve capacity for up and down regulation is required with increasing
share of RES into the generation mix and Higher variations in the RES
generation during the day also requires more frequent plant/unit start-up and
shut-downs for conventional plants which increases the operating costs.
A
recent study by the CEA has estimated the additional costs of the RES
generation for the scenario of FY 2021-22 was estimated to be Rs. 1.11 /kWh (spread
over the RES generation) as per the following table:
SN
|
System
Operation Cost
|
Rs/Kwh
|
1
|
Total
balancing charge for gas-based station (fixed +fuel charge)
|
.04
|
2
|
Impact of DSM
per unit
|
.30
|
3
|
Stand by
charge (fixed costs for generating capacity for balancing intermittent RE
generation, assuming 10% of maximum RE generation in MW)
|
.5
|
4
|
Extra
transmission charge
|
.26
|
5
|
Total Impact
(Spread Over RE Generation)
|
1.11
|
Besides
these costs, there is an element of Stranded Capacity Charges which is not
widely discussed. Almost all the conventional power plants (except the merchant
plants) have long term PPAs tied up with procurers (discoms) based on
availability based tariff regime meaning that if the plant is available, the
procurer has to pay for the fixed charges (interest, depreciation, Return on
Equity, O&M etc.) irrespective of scheduling of the plant and if the plant
is scheduled to supply energy by the Load Despatch Centre, the procurer has to also
pay for the energy charges or the variable costs like fuel costs etc. With
higher grid integration of RE, the PLF of conventional thermal plants has gone
down from 75% in 2011 to 56% in 2019-20. Most of the thermal plants are now
operating at the technical minimum of 55% below which the O&M cost
increases and life of the plant is adversely affected. Since procurer or the
discoms have contacted long term PPAs prior to RPO regime with conventional plants
and now also have to buy RE power under RPO regime, it is double whammy for
them. They are forced to pay for the fixed capacity charges to the conventional
power plants despite not buying energy from them. These stranded capacity
charges , in turn, are passed on to the consumers as regulated expenditure. This
is the main reason why the APPC, ACoS and the retail consumer tariffs are
continuing to increase despite falling cost of renewable generation.
The
financial impact of stranded capacity charges are an eye-opener. Capacity
Utilization Factor (CUF) of the RES is typically low compared to that of the
conventional sources, around 18-20% for Solar and 32-35% for wind energy
sources. While the total installed capacity of country is 370 GW, the peak
load has never exceeded 185GW. This means that rest of capacity is not put in
economic use and is sunk cost. Assuming Plant Capacity Utilization Factor
(CUF) for solar to be 20%, 32.2GW of added solar capacity has stranded around 6.44
GW of thermal PP capacity. Assuming Rs.7 Crore per MW as capital cost, Rs. 45080
Crore of investment in conventional Power Plants is stranded due to addition of
32.2GW of solar capacity. Similarly, 37.7GW
of wind energy at CUF of 35% has replaced 13.2 GW of conventional power plant
causing stranded investment of Rs. 92,360 Crore. Thus total stranded investment
due to Solar & Wind capacity additions so far is around Rs. 1,37,450 Crores
which is contributing to the fiscal stress of the discoms and in turn NPAs of
the Banks. Imagine the level of financial stress & NPAs in 2030 when the RE
Share rises to 40% from around 9% at present.
Yearly
cost of such stranding would be around Rs 17,524 Crores (amortization of the
stranded cost of Rs.1, 37,450 Crores over 25 years of plant life @12% interest)
which translates to around Rs 1.05 per kWh (spread over generation life of the
power plant). As such, overall additional cost would be Rs. 1.05 per kWh over
and above the CEA’s working of Rs 1.11 per kWh (spread over renewable
generation) making total spread of around Rs. 2.16 per KWh. This makes the effective cost of grid
integrated RE as Rs. 3.0+ Rs.2.15 = Rs. 5.15 which is higher than APPC of the
distribution companies. Currently, CERC has notified APPC at Rs.3.6 per Kwh
(excluding Transmissions Charges). If total transmissions charges are assumed
as Rs.0.75 per Kwh, the energy cost still will be only Rs.4.35 per Kwh for the conventional
power. Even after taking into account likely FGD cost of around Rs.0.4-Rs.0.5
per kwh, it is still likely to be cheaper. Therefore, the need of revisiting RE
policy is urgent and genuine.
Going forward,
Government of India should adopt its original UNFCC stance of environment as a
“Shared Concern with differentiated responsibility” for the states also and
revisit the RE policy to change it from the existing “one size fits all”
approach. Logic of “One Country-One
Policy” makes sense for political, social or legal matters but not is economic matter;
otherwise “One Nation-One Income” will also become an agenda besides power
being a concurrent subject in Indian Constitution. Best way forward for the states
is to have their own respective RE absorption trajectory depending upon their socio-economic
conditions , per-capita income, Tax to GDP ratio, load profiles & capacity
& willingness of the consumers to pay, availability of RE sources etc., so
that RPO does not become a prohibitive & unintended Green Tax on consumers
specially of low income states. Also, addition of Renewables (Solar & Wind)
should be limited to the replacement of the retiring thermal or Rankin cycle
power plants; and to meet the future growth in energy demand so that economy
could sustain the RE integration. Further, at least 10-15% of RE capacity should
be coupled with storage systems to provide RTC (round the clock power) for meeting
the peak demand.
If the
government timely recalibrates it’s RE Policy, the damage to the financial
viability of Power Sector would be repaired and harmonise with current economic
mood of the nation and foreign policy post Galwan. This will be a win-win for
economy, environment & politics.
About
the Author:
Raj
Pratap Singh retired from IAS has worked at senior positions at Central &
State Government including PMO and World Bank. Presently he is Chairman of UP
Electricity Regulatory Commission.
Disclaimer:
Views expressed in this article are author’s personal opinion.