25GW of merchant renewable energy capacity will come up in 3 years

Due to the coming together of several enabling factors, India will see around 25,000 MW of renewable energy capacity set up on a ‘merchant basis’, said Satyanarayan Goel, Chairman and Managing Director of IEX.

“I am very optimistic about it,” Goel told BusinessLine today. Merchant power plants are those whose electricity generation is not committed to a buyer through a long-term power purchase agreement (PPA); instead, it is sold either via an energy exchange or under short-term contracts.

In India, renewable power plants (mainly wind and solar) have typically come up under the PPA route, because the financiers are comfortable only if there is an assured purchase of the power. However, the tariffs have fallen to very low levels — hovering between ₹2.15 and ₹2.40 a kWhr — but when the renewable energy company sells its electricity through the exchange, they typically get about ₹3.50. 

But this is set to change, said Goel. IEX has been doing ‘advocacy’, trying to convince financiers that, given the rising demand for electricity from electric vehicles to electric cooking, there is no danger of energy not being sold.

Since the price realisation is higher when renewable energy is sold on the exchange, there is in fact a stronger assurance of the financiers getting their money back, perhaps faster. (BusinessLine learns that companies like NHPC, NTPC, and ReNew Power are planning merchant renewable energy capacities.) 

Five strong factors

However, apart from the better economics of exchange-traded power, a number of other factors are coming together, which push demand to the exchanges, laying a strong business case for merchant capacities. There are at least five such factors.

The first is that the government has waived inter-state transmission charges on renewable energy even if bought and sold over the energy exchanges. These charges typically amount to ₹0.5-0.6 a kWhr. 

Second, the country is soon likely to see the advent of ‘virtual PPAs’, which are becoming commonplace in the West. These are power purchase agreements under which no (renewable) power is actually sold. Under a VPPA, a corporate buyer who has vowed to power its operations with renewable energy, would enter into an agreement with an RE developer, to ‘buy’ solar power at an agreed (“strike”) price, say, ₹3 a kWhr. 

The RE developer would sell its solar energy in the market. If the price it gets is less than ₹3, then the corporate buyer If it gets a higher price, then the RE developer could either keep the difference or share it with the corporate buyer, as per the agreement.

Essentially by this, the corporate buyer purchases the ‘green attributes’ of the energy in satisfaction of its commitment to go green. When VPPAs happen, then renewable energy companies would set up merchant power plants and sell the energy over the exchanges.

The third is ‘contract for differences’ which is a similar arrangement to VPPAs. Under this, a government would tell a company (like SECI or NTPC) to set up a renewable energy plant and sell the energy over the exchange — on the understanding that if the price discovered through the exchange is below a certain level, the government would compensate for the shortfall in revenue. 

Goel says the government is warm to the idea, but only needs some convincing that it won’t have to shell out too much. However, IEX believes that the government may never be required to pay anything because the market-discovered price would be high enough.

The fourth factor is the government’s setting up of a National Open Access Registry (NOAR) – an online, automated system of open access applications. If a buyer of power wants to purchase energy directly from a generator (open access), today, he first has to apply for open access; only after getting approval can he purchase power directly. This makes it difficult for those who want to buy energy over the exchanges.

In an automated system (NOAR) the process of approval is streamlined and automated — if transmission capacity is available, the approval is given instantly. This would make buying or selling over the exchanges easier. 

The fifth enabling factor is the proposed change in the ‘deviation settlement mechanism’ (DSM). The mechanism was brought in a decade ago to bring discipline among buyers and sellers of electricity, by binding them to an agreed schedule and penalising them for any deviation from the schedule.

Unhelpful penalties

However, often the penalties were not helpful because the participants found it worthwhile to pay the fixed penalty and deviate from the schedule. In order to tackle this, the government proposes a floating penalty, which is linked to the market price prevailing at the time the deviation occurred.

This is now possible because there is a ‘real-time market’, which gives a reference price to link the penalty too. Because of this stiffer penalty, an aggressive buyer, instead of overdrawing from the grid, would buy from the exchange — effectively moving the demand to the exchange.

This, in turn, would encourage green merchant power plants. Because these factors push buyers and sellers to the exchanges, Goel believes they would help IEX get better volumes. 

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