On October 1st India’s Power Minister R.K.Singh was reported to have written to the Finance Minister, saying that the country’s state governments were “not keen on purchasing solar power”, even at prices as low as Rs. 2.44/unit. He warned that – because state DISCOMS are mandated to pay a fixed cost to thermal power developers under a two-part tariff agreement power purchase agreement (PPA) – they effectively have to cough up as much as Rs. 4.04 for each unit of electricity procured from renewable sources, when thermal capacity charges are added in.
Singh argues this is higher than the nation-wide average of Rs. 3.25/unit for a unit of coal-fired power, and therefore adding solar power to their list is burdensome for state DISCOMS – as they are already struggling under sustained heavy losses.
Now it is elementary to assume that no loss-making entity would want to commit to further expenses – without some self-initiative and/or assistance in wiping away its current losses. However, it’s not as if the DISCOMS have a choice.
Unlike some western countries where private DISCOMS hold considerable clout – and consequently some degree of flexibility in where to source power from, electricity distribution in India is almost entirely controlled by the Centre and the state governments. There are numerous political persuasions to be wary of, so Indian DISCOMS must operate as they are ordered to, despite being straddled by national aggregate technical and commercial (AT&C) losses of an entirely unsustainable 23%.
The political power ensures that DISCOMS must honour their older and – in comparison to renewable power – much more expensive PPAs with state-owned thermal power plants (TPPs). However, about 40GW of India’s 196GW of coal-fired capacity is currently classified as “stressed assets”, and almost all of them belong to the state. Several of these are surplus power plants that were built in the anticipation that India’s rapid economic growth would call for an enormous increase in electricity consumption.
The economic growth did happen, but CEA (Central Electricity Authority) data shows that the corresponding spurt in power consumption hasn’t quite materialized. Renewable energy, however, did stride into the limelight at about the same time (2015 onward). Also the Centre’s own policy of transparent, competitive reverse auctions was a key factor in their tariffs tumbling to unprecedented lows (India’s solar tariffs dropped by 80% between 2010-2017). Therefore, it was natural for existing customers to demand more of the cheaper option.
In India, alternatives like rooftop solar are attractive for large commercial and industrial (C&I) customers, as more often than not they have the roof space available to install a captive rooftop solar system. the tariffs to agricultural and residential customers are highly cross-subsidised through considerably higher tariffs to the Commercial and Industrial (C&I) sector. In recent times, the C&I sector has either preferred renewable power purchase agreements (PPAs) through the Open Access route, or installed its own behind-the-meter captive power generation. The latter is made possible by very competitively priced rooftop solar PV capacity entering the equation.
However this is going to reduce their dependence on DISCOMS for sourcing (daytime) power, offer them significant savings in power bills, and is also, unfortunately, lost positive margin revenue for the DISCOMS.
All of this – together with India’s ongoing coal supply crisis – has meant that several of India’s thermal power plants have had to cease operations, because after factoring in capital, fuel and administrative costs, their minimum viable tariffs are simply too high to interest any power off-takers. Complying with stricter emission norms by 2022 will only make matters worse. It’s not surprising that many of the stressed assets have no PPAs at all.
Yet – as the Power Minister suggested – state DISCOMS must continue to pay the TPPs at least the fixed costs outlined in their PPAs predicated on a two-part tariff – regardless of whether or not they lift any power. Thus, it becomes easier to appreciate why DISCOMS may be reluctant to sign PPAs with renewable power developers. In the presence of heavy liabilities and inadequate growth in demand for new power, the finances simply don’t add up.
However, there is also a very real silver lining. In fact in India’s case there are three.
First, the Centre’s highly commendable Ujwal DISCOM Assurance Yojana (UDAY) scheme – that aims to help DISCOMS improve their fiscal discipline, lower their operational losses and restructure a significant portion of their estimated Rs. 4.8 trillion debt. 32 out of India’s 36 states and union territories have already signed up to UDAY. It is likely that the scheme will provide all participating DISCOMS with much healthier balance sheets with which to re-commence operations – and hopefully even reach the holy grail of being able to retail power for a profit. That will give the DISCOMs an incentive to supply more and reduce the massive avoidable disruption of unplanned, but all too regular, blackouts.
Secondly, the country is steadily stepping up its attention towards modernizing its grid, and in building its energy storage capacity. Even though enough renewable power may be produced, an overloaded grid incapable of absorbing that variable power renewable energy calls for either shutting the power plant down (a phenomenon known as curtailment), or in the absence of storage – for the power to be lost altogether.
Curtailment is extremely counterproductive to bringing more low cost renewable power online. Storage options such as pumped-hydro and batteries, as well as flexible gas-fired generation for peak-hour firming capacity and greater interstate grid transmission capacity, must be all looked at to support the integration of increasingly large amounts of variable renewable generation capacity. More storage is also the answer to renewables’ variability in power output.
And lastly, DISCOMS must focus on augmenting supplies to C&I customers. The practice could return them much higher profit margins in the long run. Effective time-of-use pricing – where peak power demand is priced much higher -– will also incentivise the viability of storage and flexible peaking generation capacity.
Also, what works for the DISCOMS is that PPAs with coal-fired power are a roadblock to renewable power only for states with sluggish electricity demand. States with strong electricity demands will still opt for sub-Rs. 3.00/kWh with zero tariff indexation for 25 years.
Massive freight costs also mean that non-pithead and imported thermal power plants are entirely unable to supply power at prices as low as Rs3.25/kWh, unless fully depreciated. So, in our view, the tariff clash is specific to pit-head coal-fired power plants, which have negligible coal transportation costs.
Since there are plenty of Indian thermal power plants that are only cost competitive at tariffs of Rs. 4-6 per unit (that is twice the price of new renewables) – there is a growing realisation that such TPPs are nothing more than stranded assets. They are essentially holding back the transformation and progressive decarbonisation of India’s electricity grid.
Thus, it’s not all gloom and doom. The Centre’s much-needed restructuring of the power sector should progressively give the DISCOMS a new lease of life. And as more outdated coal-fired power is retired (albeit gradually), the wealth of opportunity that cheaper renewable power presents should also be nothing but good news.
In fact, as evinced by more advanced renewable energy markets, India’s DISCOMS must not necessarily be staring at oblivion while the country’s energy sector undergoes a radical shift. However, it will require them to carefully manage this much-needed transition.