One of the factors holding back the renewable energy sector, from the kind of unbridled growth that is expected of it, is the somewhat sclerotic tariff structure. Every project is tied to a buyer and a price for a quarter century. True, there are some ‘open access’ solar projects (none wind) which sell power on medium-term contracts, but they are still small, given chiefly, the challenges in funding such open access projects as banks prefer long-term visibility of cash flows.

But two recent developments in the power markets are shining a torch on a new path ahead for renewable energy. One is the introduction of ‘real time market’ (RTM) on June 1, and the other ‘green term ahead market’ (G-TAM) that kicked in last week. There are others in the offing: over-the-counter (OTC) facility, market-based economic dispatch of electricity (MBED) and long-term forward contracts (and possibly, options too) on the exchanges. Though not directly related to renewable energy, they will help the cause of RE because in a free market, the better product will be mopped up first.

In the RTM, a generator can offer to sell power for delivery in the next one hour. The experience with this has been good. The volumes were rich (515 million units in June, 785 mu in July and 580 mu so far in August). “We never expected volumes to be this good,” says Rajesh Kumar Mediratta, Director at IEX, the country’s leading power exchange. The prices have been good too, averaging ₹2.49 a kWhr in July and ₹2.14 in August, but also peaking at over ₹5 at some points in time.

There is also a call that the renewable energy generators, who are now allowed to make revisions during the day in their schedules (wind 16 times and solar 8), should instead be asked to buy from RTM and supply if there is a fall in their generation.

While it is still early to judge, a quick smell test shows that the availability of a liquid market yielding good prices would give confidence for renewable energy companies to put up some ‘merchant’ capacities outside long term PPAs.

The Green TAM is a separate chamber for renewable energy producers and buyers. The ‘obligated entities’ mandated to buy a certain portion of green power as specified by the respective state electricity regulatory commission, can now discharge their ‘renewable purchase obligation’ also by buying green power from the market, in the power exchanges. Here again, since buyers are there to meet their obligations, there is hope for firm prices.

Today, the regulators allow contracts for delivery up to 11 days in the ‘term ahead market’, but this is set to change soon. In the near future, longer duration contracts are possible.

With the RTM and G-TAM in place, “merchant capacities are bound to come,” says Rohit Bajaj, Head - Business Development, IEX. Bajaj notes that ‘open access’ renewable energy plants, such as those owned by Cleanmax Solar, have short term contracts for 1-2 years. Now, once the contract period is over, the power producers will have one more market to sell - the exchange.

Likewise, customers (typically, commercial and industrial), who buy power from the open access generators, can now try green power from the market.

Furthermore, there are a number of renewable energy generators who have been getting paid a fixed ‘feed-in tariff’, whose contract period is coming to an end. These generators are now trying to re-negotiate their contracts with the discoms. With the advent of G-TAM, they now have the additional option of selling their power in the market, notes Bajaj.

Next steps

The next steps are OTC, MBED and derivatives and going by the signals emanating from the Central Electricity Regulatory Commission these are definitely happening. The OTC market, unlike an exchange, is only a buyer-seller match-maker, defined officially as “an electronic platform for exchange of information amongst buyers and sellers of electricity,” rather like the Ministry of Power’s DEEP portal, which itself could become an OTC.

The MBED is an interesting measure, aimed at (eventually) pushing all transactions, including bilateral, to the exchanges, based on the view that the exchanges provide information and transparency and thereby aid price discovery. What shape this will take is as yet unclear, but if renewable energy companies are allowed to offer sell bids on the basis of their negligible variable costs, it would help. Essentially, renewable energy companies now have a widening market, lending bigger wings to the industry.

Two-part tariff

While the authorities are in a reform-mode, one more suggestion has been flagged by experts. The real rocket-fuel to renewables is the abolition of the single-part tariff and bringing in a regime of two-part or multi-part tariff. The move is being advocated by many experts, notably, Sushil Kumar Soonee, a former CEO of and current adviser to the government-owned power systems operator, POSOCO. Their argument is simple: two (or multi) part tariff is more scientific, captures risks better. India moved from single part tariff to two-part tariff for thermal power after much deliberation. “I struggled for it for 15 years,” recalls Soonee. Today, thermal power plants’ tariff include fixed and variable cost components. Why is two-part tariff sensible for thermal but not for renewables, is a question that is floating around today.

In fact, for renewables, the tariff structure could include, as industry demands, a ‘deemed generation compensation’ if the buyer does not pick up the power due to commercial reasons; and another component for making the plant available. A multi-part tariff is more scientific and would discourage curtailment, says Soonee. He feels it would be a positive for the industry. Several experts agree with Soonee. “With growing penetration of RE, curtailment of generation is going to be inevitable. Be it China, Germany, or California, renewables are curtailed to some extent. So, the two-part tariff would be in the best interest of off-takers of renewables as well as investors,” says Vishal Pandya, co-founder and Director, REConnect Energy Solutions.

Despite some hiccups, India’s renewable energy story is a good one. Some data thrown up by JM Research illustrate this: As of June 30, 2020, 35 GW of solar capacity and 38 GW of wind capacity is commissioned. The current pipeline of solar, wind and hybrid projects stands at 47 GW while 24 GW of projects are underbidding phase where tenders are issued but auctions are not completed. Even assuming that all the projects will materialise, these are respectable numbers. What the industry needs is freeing up of markets. By the looks of it, it is happening.

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