Virtual Power Plants: A Key to India's Energy Transition

 Imagine a world where every home, every business, and even your car can be a consumer and a producer of electricity. Consider a neighbourhood where rooftop solar panels, wind turbines, and in-building battery storage all work together in concert, enabled by smart technologies that guarantee the power is there when it is needed. This is no longer a pipe dream; this is the truism about Virtual Power Plants, and they could just hold the key towards India's journey to a sustainable energy future.

What Are Virtual Power Plants?

A Virtual Power Plant (VPP) is a digital solution that connects a network of decentralized energy resources, such as solar panels, wind turbines, and battery storage systems. These resources are spread out across various locations—on rooftops, in fields, or even in our homes—but they are coordinated and managed as if they were a single, large power plant. The magic happens in the software that controls this network, balancing supply and demand, optimizing energy use, and ensuring that the grid remains stable, even when the sun isn’t shining, or the wind isn’t blowing. Virtual Power Plants (VPPs) play a significant role in enhancing grid stability through peak shaving, load following, and providing ancillary services. Peak shaving involves reducing the demand during peak hours by strategically dispatching distributed energy resources, which helps to prevent grid overload and lowers the need for expensive peaking power plants. Load following is another critical function of VPPs, where they dynamically adjust power generation and consumption in real-time to match fluctuations in demand, ensuring a balanced and efficient energy system. Additionally, VPPs contribute to ancillary services by providing critical grid support functions such as frequency regulation, voltage control, and spinning reserves. These services are essential for maintaining grid reliability and smooth operation, especially as the integration of variable renewable energy sources increases. Through these roles, VPPs not only enhance grid resilience but also contribute to a more efficient and sustainable energy system.

How Virtual Power Plants Can Help India's Energy Transition

India is on an ambitious path to revolutionize its energy landscape, aiming to achieve 500 GW of renewable energy capacity by 2030. But with this goal comes a significant challenge: How do we integrate such a vast amount of variable energy into our existing grid without causing instability? This is where VPPs can make a huge difference by bringing Stability to the Grid: VPPs can smooth out the fluctuations in energy supply that come with renewable sources like solar and wind. By intelligently managing when and where electricity is generated and stored, VPPs ensure that power is available even when nature isn’t cooperating.

VPPs encourages both DERs & DREs, and allow us to move away from the traditional model of large, centralized power plants. Instead, they empower communities to generate and use their own energy. This is especially important in rural and remote areas of India, where extending the traditional grid is costly and challenging. With VPPs, we can optimize of our renewable energy resources through intelligently managing the flow of electricity thereby reducing the need for expensive, polluting peaking power plants. VPPs enable higher penetration of renewable energy into the grid by balancing supply and demand in real-time. This reduces the need to "curtail" (or waste) renewable energy, ensuring that every drop of sunlight and breath of wind is put to good use.

                                            

                                                                                                     (Picture Courtesy http://rmi.org)

What India Can Learn from Global Success Stories

Countries like Germany, Australia, the United States, Japan, and Denmark offer valuable lessons for India's adoption of Virtual Power Plants (VPPs). Germany's success is rooted in a supportive regulatory environment and continuous innovation. Australia highlights the importance of consumer engagement through incentive programs. Studies shows that IRR for such investments is around 11% for VPP owners with payback in 8.5 years. The U.S. demonstrates the effectiveness of public-private partnerships in scaling up VPPs. Texas has two Tesla-operated VPPs, In California SunRun VPP often delivered 80 MW at peak times, and Tesla VPP supplied 68 MW, DoE of US estimates that VPP capacity of around 30 GW-60 GW supplies between 4%-8% of peak demand in US. Japan’s focus on energy security and resilience, particularly after the Fukushima disaster, emphasizes the role of VPPs in building a robust grid. Denmark underscores the need for VPPs to participate in both national and international energy markets, maximizing their value. India can draw from these experiences to develop a successful VPP model.

The Path Forward: Regulatory Frameworks and Challenges

A Qualified Coordinating Agency (QCA), as defined by the Central Electricity Regulatory Commission (CERC), is somewhat similar to a Virtual Power Plant (VPP), but they serve different roles. A QCA's main job is to manage scheduling, forecasting, and grid compliance for small renewable energy generators, ensuring they meet grid requirements and avoid penalties. In contrast, a VPP has a broader role, optimizing not just scheduling but also energy production, storage, and consumption in real-time. While QCAs focus specifically on small solar and wind plants, VPPs manage a wide range of energy resources, including battery storage and electric vehicles, and actively participate in energy markets to maximize efficiency and grid stability. To make VPPs a reality in India, we need the right regulatory frameworks. Some key areas to focus on are as follows:

- Grid Integration Standards: A clear standard from CEA is needed to ensure that different energy resources within a VPP can seamlessly interact with the grid. This includes communication protocols, data sharing, and interoperability between various systems.

- Regulation of Aggregators: Aggregators, who manage and control distributed energy resources, will be essential to the success of Virtual Power Plants (VPPs). To support this, we need clear regulations from CERC/SERCs that define the roles, responsibilities, and interactions of these aggregators with both energy producers and consumers. Additionally, there is a need for regulations that address demand aggregation as a resource for ensuring Resource Adequacy.

- Market Participation and Pricing: For VPPs to thrive, they need to be able to participate in energy markets, including spot markets, ancillary services, and capacity markets. Dynamic pricing mechanisms can incentivize the use of VPPs to balance supply and demand.

- Cybersecurity and Data Privacy: With the increasing digitalization of the energy sector, cybersecurity and data privacy regulations are essential to protect against potential threats and ensure the safe operation of VPPs.

- Incentives for Distributed Energy Resources: To foster the growth of Virtual Power Plants (VPPs), India already has supportive policies and regulations in place, such as the PM Surya Ghar Muft Bijli Yojana and PM KUSUM Yojana. These initiatives incentivize the deployment of distributed energy resources like solar panels and battery storage, laying the groundwork for a strong and expansive VPP network across the country.

Balancing the Costs and Benefits

Implementing VPPs comes with costs, but the benefits far outweigh them. Setting up a VPP requires significant initial investment in digital infrastructure, including software platforms, control systems, and communication networks. However, these are one-time costs that pave the way for long-term savings. VPPs will also require ongoing maintenance and operation costs, including the management of digital infrastructure and compliance with regulatory standards. But these costs are manageable and can be offset by the efficiency gains and cost savings VPPs bring.

Cost Savings: The load duration curve in India indicates that top 10% of load is present for less 2% of the time. The Gas based or thermal peak power plants have high operating cost. By optimizing the use of distributed energy resources and reducing reliance on expensive peaking plants, VPPs can lead to significant cost savings of around 40% in comparison to these peaking plants for both utilities and consumers.

Virtual Power Plants (VPPs) are set to revolutionize India's energy transition by harnessing distributed energy resources to integrate renewable energy into the grid, enhancing resilience, and reducing greenhouse gas emissions. They empower consumers to participate in energy markets, offering opportunities to earn from their own energy production and storage systems. However, to fully unlock the potential of VPPs, India needs a strong regulatory framework that ensures security, interoperability, and fair market participation. As India advances in its energy journey, VPPs could become the foundation of a greener, more decentralized future, where every rooftop, battery, and solar panel contributes to powering the nation.

Deepening of Power Market - Challenges Ahead

India's power sector is experiencing a major transformation, driven by policy reforms, technological advancements, and the pursuit of sustainable growth. The landscape of India's power sector is gradually shifting from traditional base-load and peak load patterns to flexible generation and flexible load. This transition is driven by the increasing integration of renewable energy (RE) sources into the grid and the growing demands from electric mobility and industrial decarbonization, which are imposing new requirements on the power grid.

In 2023-24, the country supplied a total of 1,617.04 billion units (BUs) of electricity. Of this, 86.96 BUs (5.3%) were transacted through bilateral trade, while 123.11 BUs (7.6%) were traded through the three power exchanges. The remaining 87% of power were transacted through Power Purchase Agreements (PPAs) by the discoms. However, there is a strong push to increase the share of power traded through exchanges to enhance efficiency, competitiveness, and transparency in the electricity market. Achieving this objective requires addressing several key challenges, including the need for a robust financing framework, the lack of long-term products in exchanges, and the evolving demands on the power grid.

Followings are some of the key issues & challenges which needs to be addressed for deepening of power market in India:

Legal and Regulatory Framework

Legal and regulatory barriers have been addressed with the Supreme Court's order clarifying the roles of the Central Electricity Regulatory Commission (CERC) and the Securities and Exchange Board of India (SEBI) as regulators for the forward market and derivatives, respectively. Furthermore, the Central Electricity Regulatory Commission (Connectivity and General Network Access to the inter-State transmission System) Regulations, 2022 ("GNA Regulations") and the Central Electricity Regulatory Commission (Indian Electricity Grid Code) Regulations, 2023 ("IEGC Regulations") have been implemented, which provide for short-term TGNA up to 11 months besides medium and long-term access.

Volatility in Spot Power Prices

Spot power prices exhibit significant volatility, especially during peak periods and seasons, resulting in a high standard deviation. Recent exchange prices have shown dips during solar hours and spikes hitting the price cap of Rs. 10 during non-solar peak hours. These trends highlight the need for the development and deepening of forward and derivatives markets. Introducing forward markets will help mitigate spot market volatility over the medium to long term, reducing price risks for participants.

The Current Financing Framework and Its Impediments

One of the main challenges to increasing the volume of electricity traded on power exchanges is the current financing framework. The power sector's normative debt-to-equity ratio of 70:30 is relatively high, making it difficult for projects to secure necessary funding. High debt-to-equity ratio means projects are heavily dependent on borrowed funds, increasing financial risk and leading to stringent conditions from lenders. Financial institutions, cautious of the associated long-term risks, often require significant comfort before extending debt. This comfort usually comes in the form of long-term Power Purchase Agreements (PPAs), which guarantee lenders that at least 85% of the generated power will be sold through long term PPAs, ensuring steady cash flows for debt servicing. The requirement for a long-term PPA as a precondition for financing creates a bottleneck for projects aiming to participate in power exchanges, where contracts are typically shorter-term and more flexible and even volatile.

Dependence on Long-Term PPAs

Long-term PPAs provide the financial stability that lenders seek, but they also lock in power producers into fixed contracts that may not be conducive to trading in power exchanges unless there is procurers event of default. This reliance on long-term agreements reduces the liquidity and flexibility of the market, as power producers are less able to respond to short-term price signals and market dynamics. Furthermore, the long terms PPA’s are available to the discoms on credit where as for the exchange traded power, upfront liquidity is required for settlement.

 Absence of Long-Term Products in forward market in Power Exchanges

Another significant challenge to increasing the market share of electricity traded on power exchanges is the absence of long-term or forward market products. In India, power exchanges primarily offer short-term contracts, ranging from day-ahead to a few months. This limited range restricts the ability of market participants to hedge against long-term price volatility and effectively manage their financial risks.  Electricity forward contracts involve a commitment to buy or sell a specified amount of electricity at a predetermined price, known as the forward price, at a future date (referred to as the maturity or expiration time). Essentially, these contracts are customized agreements between a buyer and a seller, where the buyer is obligated to receive the power and the seller is obligated to supply it.

Currently, forward contracts available on power exchanges are limited to three months, which falls short of meeting the diverse short-term power purchase requirements of distribution companies (Discoms). These needs range from day-ahead planning to a minimum of 1-3 years. Although the DEEP portal/OTC facilitates price discovery for such power procurements, the commercial terms and conditions of trades must be bilaterally settled between the involved parties over the counter.

Forward markets will also provide forward price signals, which can serve as benchmarks for evaluating investment decisions. Discoms and other buyers will be able to assess the reasonableness of their purchase agreements against these prices. Additionally, there is a need to study the impact of introducing forward products and their efficiency.

The phased introduction of forward market products for periods up to 11 months initially, with the durations increasing as the market matures, can significantly enhance market liquidity and participation. Forward market deepening will facilitate price discovery and enhance hedging opportunities, leading to price convergence among different market segments. In India, prices between the bilateral and spot markets continue to remain divergent; therefore, forward market deepening will be instrumental in bridging this gap.

Absence of Hedging & Speculation Opportunities (Futures & Options) in financial market

Without financial derivatives or futures and options products, power producers and consumers cannot effectively hedge against future price fluctuations. This inability to hedge complicates long-term financial planning and commitments in the financial market, leading to reduced participation in power exchanges. Furthermore, the absence of these financial instruments eliminates opportunities for speculators to participate in the power market, which would otherwise provide liquidity and contribute to better price discovery. Financial uncertainty is detrimental to both power producers and consumers. Producers are hesitant to sell a significant portion of their output on the exchange without price stability, while consumers are reluctant to rely on the exchange for their long-term energy needs due to potential price spikes.

Impact on Investment

The lack of long-term products also affects investment decisions in the power sector. Investors are more likely to support projects with stable and predictable revenue streams. The inability to secure long-term contracts through power exchanges makes it challenging to attract investment for new generation capacity, particularly from renewable sources that are crucial for India's energy transition.

Discoms' Preferences and Short-Term Contracts

At present, approximately 87% of the Discoms power requirements are secured through long-term PPAs. To address short-term needs, Discoms resort to sourcing power for up to three months from the Spot or Term Ahead Market (TAM) on power exchanges. For the period spanning three months to one year, they utilize the Discovery of Efficiency Electricity Price (DEEP) Portal, operating under the Short-Term Bidding Guidelines of the Ministry of Power, Government of India.

Discoms are displaying a preference for firm contracts limited to 1-3 years. This inclination towards shorter-term agreements provides greater flexibility to Discoms and eliminates the obligation to pay fixed charges under a contract for an extended duration. As a result, navigating this evolving energy landscape poses challenges, emphasizing the need for a more resilient and adaptive approach in addressing the dynamics of the power sector to absorb the URS power, merchant, and new capacities being added.

Absence of Capacity Market in the Power Sector

A capacity market is a mechanism designed to ensure the reliability of the electricity supply by providing financial incentives to power plants for being available to produce electricity during peak demand periods. In a capacity market, electricity generators are paid not just for the actual energy they produce, but for their available capacity to produce electricity when needed, regardless of whether they end up generating electricity. It ensures that there is enough generation capacity available to meet peak demand by Providing financial incentives to power plants to remain operational and available through market mechanism in which Capacity is typically auctioned off to the highest bidder, and those who clear the auction are paid a capacity payment.

Necessary Products for a Capacity Market are:

a) Capacity Certificates: Tradable certificates representing the commitment of a power plant to be available to generate electricity during peak demand periods.

b) Capacity Auctions: Mechanisms for procuring capacity from power producers through competitive bidding. Auctions can be designed for different timeframes, such as annual, seasonal, or monthly.

c) Capacity Contracts: Agreements between power producers and the market operator or regulatory authority, detailing the terms of capacity availability and payments

d) Demand Response Products: Programs incentivizing consumers to reduce their electricity usage during peak demand periods in exchange for financial rewards.

e) Ancillary Services: Services necessary to support the transmission of electricity and maintain grid stability, including frequency regulation, voltage support, and operating reserves.

Introducing a Capacity Market in India involves several steps and considerations like Regulatory Framework, Market Design & Develop the necessary technology and infrastructure to support the capacity market operations, including auction platforms and monitoring systems

 Conclusion

Increasing the market share of electricity traded in power exchanges in India requires a multifaceted approach that addresses the underlying financial challenges, the absence of long-term products, and the evolving demands on the power grid. By reforming the debt structure, introducing innovative financial instruments, strengthening the regulatory framework, promoting both short-term and long-term contracts, and improving market infrastructure, India can move towards a more efficient, competitive, and transparent electricity market. This transformation will not only benefit power producers and consumers but also contribute to the overall growth and sustainability of the power sector.