Powering renewable energy

Uniform tariffs will address a key problem

The Ministry of Power’s proposal to offer a uniform tariff for renewable energy (RE) procurement by states will address a key pain point that has emerged for such projects in recent years: An uncertain market from buyers, the cash-strapped state-owned distribution companies, or discoms. It will involve the centrally owned SECI (formerly Solar Energy Corporation of India), which is the nodal tendering agency for RE projects, to determine each month an average price that states will pay for all RE sources — solar, wind, hydro, and hybrid. Under the new pricing system, the reverse-bidding process for RE projects by private developers will continue. SECI will pay the final bid-out tariff to the generator and supply it to the states at a uniform price under power-supply agreements. The principal advantage of this two-step process is that it will offer RE projects some measure of visibility and stability in revenues.

Market uncertainties had become a major problem because the successively lower reverse bids on RE projects encouraged states to renege on their power-purchase agreements in anticipation of reduced tariffs in subsequent bids. The upshot of this has been that although RE accounts for 40 per cent of the installed capacity, it generates just 13 per cent of the country’s electricity. Ensuring security of purchase to RE developers, therefore, could kill several birds with one policy initiative. It could encourage greater investment in RE projects and add heft to the Centre’s production-linked incentive scheme for solar panels and modules, creating some relief from the high import duties imposed on these key inputs.

But several questions remain. First among them is how SECI will convert itself from a tendering agency into a power supply intermediary. It is also worth wondering whether the creation of a monopsony in RE power is a healthy development for the long term. Linked to this is the issue of incentivising the states to actually buy RE power. The RE purchase obligations (RPOs) that states signed with the Centre have been observed mostly in the breach (only Gujarat, Rajasthan, and Andhra Pradesh meet their contractual purchases). That is principally because there are no meaningful penalties for non-compliance. The new Revamped Distribution Sector Scheme, which links Central financial assistance to specific efficiency parameters, has focused on reducing losses from unmetered power and raising power tariffs to match the cost of producing and distributing it. Meeting RPOs play a negligible role in this exercise.

To be sure, this may change with the amendments to the Electricity Act, which has more stringent links between financial assistance and RPOs, but that law has now been referred to a standing committee, which is likely to delay it further. But no amount of uniform RE tariffs can address the key question of the discoms’ chronically parlous situation. They are now collectively owed Rs 1.4 trillion by state governments principally for providing free or subsidised power to politically targeted groups such as farmers. Unless this “original sin” of India’s power sector is expiated, the question of reorienting the power generation balance towards RE will remain unfulfilled, no matter how imaginative the solutions on hand.