Hidden costs of renewable power in compulsory purchases of RE for discoms

Synopsis: As India is pushing towards its renewable energy target, it also needs to look at the way the new capacity is being added and the existing power purchase mechanisms.


India’s renewable power programme, with tariff bids for solar power hitting new lows every few months, is coming up at the cost of thermal power. The idea is to do exactly that and replace the dirty carbon-fuelled coal power generation with green options. But the manner in which this is being achieved is raising costs for renewable power purchases.

Why coal-generated power is still necessary?

The importance of coal-generated power lies in providing the base load for a country as big as India.

Base load implies the bare minimum needed to keep the power grids functional and supply reliable, which is a challenge for renewable power.

For instance: In India, the base load necessity for coal was reflected in the recent crisis that gripped the power sector in August-end, with power stations reporting bare minimum coal stocks. The Union government instructed power producers to immediately go in for coal imports.

This experience during the receding monsoon season puts a question mark on whether the country’s increasing reliance on renewable energy can improve the power supply situation for India.

Moreover, discoms have to  pay more for green power.

Why the overall cost of buying green power is more?

Certain utility-scale renewables enjoy a “must-run” status. Must-run status means that power distribution companies (discoms) are obligated by regulation to pay for green power even if they do not need or use it. But this, in turn, means that a discom has to ask the thermal plant to back down. This translates to paying for renewable power and also paying the fixed cost for thermal power; so there is an enhanced cost for buying renewable power.

This reality behind the purchase of renewable power makes the overall cost of buying green power higher than the tariff at which it was agreed to be bought.

Note: ‘Must-run status’ means that utilities, state load dispatch centres (SLDCs) and distribution companies (discoms) have to prioritise the evacuation of the generated power from renewable energy.

What are the challenges?

States command leverage: The states feel that they should not pay a higher price when they have agreements with thermal units tied up for 25 years. Therefore, each time the discovered tariff for solar is lower than earlier, some discoms do not honor earlier green power purchase agreements (PPAs).

States also do not want to give up thermal Power Purchase Agreements (PPAs) signed even when they are trying to meet the country’s target of 175 GW of renewable installed capacity. The reason being the cost it would entail because of contractual obligations.

The challenge at this stage of renewable power induction, therefore, is to see whether the low tariffs are truly reflective of the cost that state discoms additionally pay for thermal power they are not using.

What is the way forward?

A universal look at generation capacity addition and power purchase mechanisms is needed rather than just a source-based approach to power sector planning.

Source: This post is based on the article “Hidden costs of renewable power in compulsory purchases of RE for discoms” published in Business Standard on 6th Sep 2021.

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