When Germany's largest utility E.ON decided to spin off its conventional power generation business in November 2014 to focus on renewable energy, it was one kind of response to an altered market scenario where renewables are a significant part of the generation mix and wholesale power prices are at record lows, partly as a consequence of that.
Bloomberg New Energy Finance has analysed utilities in various countries that have seen a surge in renewables, and observed them picking up one of the following three responses, or a combination thereof:
n fight against the changes in the power system by seeking regulatory intervention, imposing levies on renewables or creating other obstructions to prevent the growth of renewables
n attempt to ignore the changes in a response termed flight
n embrace the changes; adapt itself to profit from the changes by setting up its own renewables unit for instance
Among the options of fight, flight and adapt, E.ON seems to have chosen the last one. Its clean energy share of electricity generation was 12.9 per cent in the first nine months of 2014, while that of RWE, Germany's second largest utility, was 4.8 per cent.
Utilities in India are set to face a similar flood of renewables with the government targeting 15 per cent of generation from clean energy in the next five years against six per cent currently. Most of this increase would be from solar plants - the aim is for aggregate solar capacity of 100,000 megawatts by 2022 - and an increase in annual wind installations to 8,000 megawatts per year against an average annual addition of about 2,300 megawatts in the past five years.
In 2015, India is projected to add 2.8GW of wind and 2.5GW of solar installations according to Bloomberg New Energy Finance.
The Bangalore Electricity Supply Company (BESCOM) provides a good case study in India. The distribution and retail supply licence holder serves about 10 million customers and had revenues of Rs 11,700 crore (approximately $2 billion) in the year ended March 2014. Many of its largest customers such as Infosys, Wipro, Coca-Cola and SAP are choosing to buy power from alternative suppliers or generating their own clean power. This reduction of power purchase by its highest paying consumers has tariff implications for all categories of consumers.
In the year ended March 2014, BESCOM's actual sales were short of the estimate approved by the regulator, leading to lost revenue of about Rs 850 crore. It has also reduced the sales estimated for the year ending March 2016. In its annual revenue requirement for 2015-16 therefore, BESCOM has sought a tariff hike of 80 paisa per unit for all consumer categories.
As more renewables are added to the grid, they will pose a threat to the traditional cross-subsidy model where large customers cross-subside the agricultural and residential users. There is also a question mark on funding for maintaining and expanding the grid if the customers who are able to afford a solar plant on the roof and some storage capacity are able to yank themselves off the grid completely.
The world's most progressive companies are moving towards 100 per cent renewable power. They are measuring, and reducing, their emissions. They are using energy more efficiently in their production processes and in their buildings. Apple proudly states that all its data centres run on renewable energy only. Amazon is moving in the same direction.
For commercial and industrial enterprises in India bracketed in the highest tariff slabs, a switch to renewables would lower bills in many cases. That would make the case for renewables even more compelling given that at least some of these companies would be willing to pay more for renewable energy to be climate-friendly.
Infosys is one of the companies committed to becoming carbon neutral by 2018 by meeting 100 per cent of its electricity requirement through renewable sources by that year, and also by reducing electricity consumption by 50 per cent on a 2008 baseline. At what level would the tariffs settle if the likes of Infosys snap their ties altogether with BESCOM?
The author is editor, Global Policy for Bloomberg New Energy Finance
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
