Are rooftop solar projects driving India towards a ‘utility death spiral’?

Shivanshu Thaplyal / Abhijit Mukherjee | Updated on September 27, 2020

A robust net metering regime which would provide a level-playing field for Discoms and RTS project owners is critical

Recent technological and regulatory developments around electricity generation, and in particular, the solar sector, are creating sustainable platforms for electricity consumption and generation by consumers. In fact, in certain instances, electricity generation and consumption do not require grid connectivity and are completely “off grid”.

Consumers are incentivised to set up their own electricity generation units owing to lower energy bills and the creation of environment-friendly ecosystems for electricity generation and consumption. So, an increasing number of consumers disconnect themselves from grids and turn to non-conventional sources (like solar).

This forces power distribution companies (Discoms) to recover losses from a smaller pool of consumers, leading to even more consumers opting out of electricity grids. This vicious cycle, which could result in Discoms going bankrupt, is what the term “utility death spiral” refers to. The Indian energy markets are regulated and if ‘utility death spiral’ becomes a reality, it would amount to a significant loss to the public exchequer.

Does increase in rooftop solar (RTS) projects lead to a Discom death spiral?

No. RTS plants help Discoms reduce transmission and distribution losses as power consumption and generation are co-located. These projects are also useful in tackling daytime peak load as solar generation profiles match peak loads during the day, reducing the investment required for upgrading the distribution system by the Discoms.

States and Union Territories have adopted ‘net metering’ for RTS projects, which allows an RTS project owner to sell excess electricity to the grid in lieu of monetary compensation or electricity credit. This ensures that RTS project owners are incentivised for remaining connected to the grid.

To reconcile the interest of the Discoms and the RTS project owner, certain State governments are encouraging Discoms to procure electricity from RTS projects which would be considered as deemed fulfilment of Renewable Purchase Obligations (RPO) targets for Discoms.

Further, the Centre’s ‘Sustainable Rooftop Implementation for Solar Transfiguration of India’ (SRISTI) initiative ensures that Discoms remain the key implementing bodies for the RTS projects. The Ministry of New and Renewable Energy, in August 2019, listed out tasks that Discoms will undertake with respect to RTS projects. They include providing dedicated manpower for RTS implementation, rooftop assessment, bid process management to empanel system integrators along with rates, technical studies, ensuring availability of net meters and ensuring grid connectivity.

Further, Discoms would be incentivised by way of performance-linked incentives for undertaking these tasks as an implementation agency for the RTS project.

Net metering (a billing system where consumers who generate their own electricity are credited for the power they add to the grid) is one of the most essential requirements for implementation of a successful RTS regime.

While most States have approved net-metering, in a survey conducted by consultancy Bridge to India, it was found that despite most States announcing net-metering policies for RTS projects, the overall implementation is patchy across the country due to: (a) an inadequate policy framework; (b) opposition from Discoms; and (c) lack of training and protocols at the local level.

Adding to the agony, some States are proposing to withdraw net metering benefits available to consumers. Maharashtra plans a system where consumers will supply power to the grid at a fixed grid tariff and draw power at a higher tariff, placing the Discoms at a financial advantage.

Consequently, RTS projects will slow down and in turn will impact the overall estimated targets under the RTS programme.

While these short-term measures may result in financial advantage to the Discoms, in the longer run these would certainly encourage consumers to move away from grid-connected projects. That’s perilous for the debt-ridden Discoms.

The road ahead

A death spiral may not be an immediate concern for Discoms in India. However, if Discoms continue to perceive RTS projects as a threat, our policymakers will have to address their concerns quickly and satisfactorily.

A robust net metering regime which would provide a level-playing field for Discoms and RTS project owners is critical. While policy initiatives like SRISTI and RTS programmes are a step in the right direction, creative solutions and a focus on education, training and dialogue can avoid a utility death spiral in Indian energy markets.

Thaplyal is a Partner and Mukherjee is a Principal Associate at Khaitan & Co. The views are personal

Published on September 27, 2020

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