The mandate to buy electricity from renewable sources is not as stringent or unworkable as is commonly assumed
The Central government, in its post-policy-paralysis avatar, has been actively promoting the Renewable Purchase Obligation (RPO) scheme, which obligates electricity supply companies to ensure that a specified fraction of their electricity consumption comes from renewable sources. The scheme was announced in April 2010, and, according to media reports, is currently facing “major hurdles”. Almost all state-owned electricity distribution companies (discoms), and obligated entities have failed to meet their RPO obligation for 2011-12. This includes several large entities, including Reliance Industries and Steel Authority of India.
The RPO scheme requires state electricity regulatory commissions to set renewable energy purchase targets for “obligated entities”, typically discoms, consumers with captive plants, and open-access consumers. The obligated entities are mandated to source a prescribed amount of electricity from specified renewable energy sources, i.e. directly purchase renewable energy, generate renewable energy by themselves, or purchase renewable energy certificates (RECs) from generators located anywhere in the country. The scheme is being implemented throughout the country to increase demand for renewable energy.
In several ways, RPO is an exclusive initiative, particularly in the context of India’s renewable energy potential. The legislative support for RPO is reflected in the Electricity Act 2003. Section 86 (1) (e) of the Act promotes electricity co-generation and generation through renewable sources, and subsequent sale by enabling connectivity with the grid. More importantly, it specifies that a percentage of total electricity consumption by obligated entities should come from renewable energy sources. This scheme is intended to generate two distinct sources of income for renewable power producers – from the sale of electricity to the wholesale market and from the sale of RECs.
Obligations are set for each financial year, although the regulatory authority may also consider changing these into quarterly obligations. Starting from the next financial year, the ministry of new and renewable energy (MNRE) may advise all power sector regulators to impose penalties on companies that fail to comply with their renewable purchase obligations. The proposal is to calculate the financial penalty on the forbearance price (the ceiling price in the current price band of renewable power).
RPO as a concept, however, is yet to stabilise in India. The workability of the scheme may not be as irrefutable as some believe. Several challenges need to be addressed, such as the condition of state electricity boards — most of which are either bankrupt or on the verge of bankruptcy; poor policy enforcement; lack of awareness; and lack of a long-term RPO trajectory and monitoring mechanism. The lack of a viable and sustainable funding source is also a limiting factor for RPO compliance. Moreover, the high cost of renewable energy production has led to several states making the RPO scheme only an advisory; very few have declared their RPO trajectory for the current or coming years.
Several discoms also believe that RPO might become an overly ambitious scheme to implement, resulting in significant tariff hike, since solar power costs Rs 10-12 per unit, while electricity from conventional sources costs Rs 4-5. The difference in the cost of electricity generated from the two sources would require another change in the tariff structure, which is unlikely to happen soon. If discoms purchase RECs, they will have to foot the bill, and the purchase will be accounted for only next year, if there is a tariff revision at all. Therefore, the tariff determination will be a significant hurdle, which the government will have to face and should, therefore, be prepared to defend.
A clear view of RPO’s contribution in the coming years is necessary for discoms to plan the fulfilment of their obligations. A system for tie-ups between states to establish facilitating mechanisms, such as long-term power purchase agreements (PPAs) and investment in RECs is also required. A uniform system is also required for RPO standardisation and tariff structure across all state electricity distribution utilities, as well as large-scale integration of renewable energy. There is a general lack of analytical work that estimates the subsidy required to reach targets on renewable energy schemes, such as RPOs. Nevertheless, an incentive grant for grid-connected renewable energy, based on each state’s capacity addition, could provide the impetus for the success of the scheme.
Despite the apparent weaknesses of the scheme, environmentalists in the country are thrilled with a few related events — both legal and regulatory. Recently, the Rajasthan High Court dismissed an appeal by Hindustan Zinc, Ambuja Cements, Grasim Industries, and 14 other companies challenging the RPO regulations enacted by the Rajasthan Electricity Regulatory Commission. According to the Rajasthan High Court judgment, “The objective behind [the] imposition of such renewable energy obligations is in the greater public interest. The Constitution casts [a] duty on the regulatory commission to protect and improve the natural environment. This duty can be imposed on captive power plants and open access as well.” This order is believed to have far-reaching implications for RPO/REC markets, and may act as a precedent for similar court cases in other states — notably Gujarat and Tamil Nadu.
Also, in October, the Delhi Electricity Regulatory Commission, one of the most important state power regulators, has mandated that nine per cent of Delhi’s power supply must come from renewable origins in the next five years. The corresponding mandate in the current financial year is 3.4 per cent, with a 0.15 per cent solar component.
Currently, MNRE estimates the share of renewable-based capacity at 10.7 per cent (excluding large hydropower projects) of total installed capacity, which contributes about four per cent of total electricity generation. India aims to derive 15 per cent of its energy requirements from renewable energy sources by 2020. The national RPO target was set at five per cent for 2010; with a one percentage point annual increase till it reaches 15 per cent in 2020. Of this, 0.25 per cent was solar-specific, with a 0.25 per cent annual increment slated to increase the target to three per cent by 2022.
The ministry has set an ambitious target of producing 10,000 Mw of solar power and doubling India’s renewable power generation capacity by 2017. RPO is one of the important tools for implementing this ambitious goal. India’s emission-intensity reduction target of 20–25 per cent for 2005–2020 will require a reduction of 733 million tonnes of carbon dioxide. Calculated against this required annual emission reduction target, RPO’s contribution – even if executed fully – comes to a paltry six per cent. Seen in this light, the RPO mandates do not look stringent. The majority of the remaining emission reduction is, therefore, left to initiatives yet to be detailed. That is why it is vital for the government to ensure that RPO does not remain an isolated initiative. Given the considerable renewable energy potential within India, a well-designed and workable RPO scheme, with the full support of state and Central policy makers, could result in promoting significant investment in this sector.
The author is senior business analyst with Evalueserve
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