Is solar power development sustainable?

RE20173I got an opportunity to speak at the Times Renewable Energy Expo, a Renewable Energy (RE) conference in Pune this past week. I was privileged to be part of the panel featuring Dr Chetan Singh Solanki, Prof. IIT Bombay who has pioneered the adoption of solar power in rural communities. The theme of the panel was ‘Pace of RE scale-up in India’.

I represented India Energy Storage Alliance (IESA) and spoke about integration of energy storage with RE. The intent was to emphasise the need for energy storage in providing flexibility to the grid under increasing penetration of renewable energy. Being intermittent and seasonal, wind and solar energy do have its drawbacks. In spite of being a clean source of energy, the intermittent nature stresses the traditional fossil fuel plants and forces them to operate below optimal efficiency thereby increasing the operating cost and associated emissions. The message was well received by the audience comprising of project developers, researchers, policy makers and RE enthusiasts. But, the burning topic throughout the conference was ‘Are the record low solar tariffs realistic?’

The drop in solar prices

The recent bids in Bhadla that resulted in record low tariffs of ₹ 2.62/kWh and ₹ 2.44/kWh in a span of 2 days was a major discussion point. The drop from ₹ 3.15/kWh to ₹ 2.44/kWh (23%) in a month was never expected. (Read more about why there are no more outliers in solar)

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Module costs

The drop in solar prices is attributed to the decline in module prices which is true but it hides the bigger picture. In a recent publication by Bloomberg, an Altman Z score analysis(see below) of the module manufacturers reveals a gloomy picture. Only one company lies above the mark with three others in ‘just safe’ zone while the rest have all indications to go burst. Incidentally Solar World just announced the beginning of its end. (Also, interestingly Bloomberg lists most of these companies under Tier 1 suppliers).

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Is the development sustainable?

Wind recently witnessed an intense debut reverse bidding and if the indications are right, it could well follow the solar route albeit at a lower rate. So the big question then turns out to be, ‘Is RE development sustainable?’ ‘Can companies and the stakeholders sustain this in the long run?’ I have due respect to all the experts in the big corporations who are winning projects at this price, I wouldn’t challenge their acumen. At a personal level, I just have a few points to say why I believe this development is not sustainable in the overall gambit of things.

  • There is intense corporate competition, with no long term visibility and the urge to develop large portfolios in a short time is driving the bids.
  • How can module manufacturers who are financially weak be trusted to produce quality product that performs for 25 years?
  • Supply is just one side, on the other side low tariffs is also driving down installation costs. There is an even bigger pool of ‘installation experts’ who offer manpower services at any price asked for (What about the logic that says your pay increases as you build expertise?).
  • And, the last one, preserve natural resources. I personally feel this is a huge problem, we don’t want to destroy land (and water) resources on projects whose performance is going to decline rapidly every year.

Renewable Energy development that is sustainable is the need of the hour!

Many Sparks but Little Light…

CoverEarlier this year, I happened to pick a book, ‘Many Sparks but Little Light: The Rhetoric and Practice of Electricity Sector Reforms in India’ published by Prayas (Energy Group). The book clearly stated the objective was to examine the electricity sector reforms in India so far and make recommendations in the hope that future acts in the sector have an impact. The sections in the book are split between generation, distribution, renewable energy, hydro, coal, natural gas and alike. There is a recurring theme to the book and I have picked out a few pointers in them.

Privatisation and unbundling

txThe need for generation privatisation and unbundling is well acknowledged but the results reveal a net negative effect of the process in the sector. Reading this part of the story makes one wonder if all the previous reforms were successful we would have never needed a UDAY (Ujwal DISCOM Assurance Yojana).

Generation privatisation was expected to increase the capacity addition and bring down the tariffs but it never happened. The book captures the series of litigation that have come about in this period. In sharp contrast, net thermal power capacity addition has been low while renewable energy adoption particularly wind has seen a rapid rise post the privatisation of generation. The capacity addition by the private sector in renewable energy has been heartening although authors’ argue that competitive bidding instead of a preferential tariff should have been the norm. I agree to this argument considering the recent development in the wind energy sector post the 1GW reverse bidding tender.

Tariff Setting

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The tariff setting has been on the back-foot right from the beginning. The authors argue that instead of having a competitive tariff bid for thermal power early on during privatisation, they were offered preferential tariffs on a cost plus basis which has been a failure. In contrast we now have aggressive competitive bidding for renewable energy projects which are bringing the net tariff down but the benefits are not passed down to the consumer because the tariff structure is tilted towards fixed cost recovery rather than being flexible in line with the marginal costs.

As rightly pointed in the chapters, the failed reforms have created a surplus capacity in books, resulting in stranded assets, low utilisation of power plants thereby reducing the net effect of the resources. The irony of having 300GW plus of installed capacity when the peak demand is around half of it and still facing grid reliability issues is the net result of these reforms.

On the retail side of tariffs, it is quite evident that there is major cross subsidising in the sector with the fixed cost recovery being very poor across DISCOMs. Unless the fixed costs and energy costs are completely recovered independently as envisaged in the National Tariff Policy (2016) it will be impossible to reap the benefits of low carbon transition where the energy costs are next to zero.  It looks to be seen how close the DISCOMs adhere to the tariff increase commitments made as part of the commitment to UDAY.

Open Access

The authors’ have a valid reason in being critical about open access, they portray the financial impact of exodus of the cross subsidising industrial and commercial consumers to open access across DISCOMs (Distribution Companies).  However, I feel it goes straight against their argument on competition or lack of in it in the sector particularly in generation post privatisation. It is good to have open access as it pushes the DISCOMs to be innovative and offer better incentives to consumers, an example to cite would be the recent proposal from BESCOM (Bangalore Electricity Supply Company) to reduce energy charges and increase the fixed charges to HT clients. Although the regulator didn’t accept the proposal it has set the other DISCOMs and the regulator thinking radically.

In the end, the lack of reforms or successful reforms in transforming the state of the DISCOM sums up the state of sector. UDAY, which seems to be a revolutionary step isn’t first one; the Financial Restructuring Plan (FRP-2012) offered similar services although UDAY aims to make the DISCOMs more accountable with state participation. It is quite easy to assume the proposed reforms by the current Central govt. are radical steps; the authors set things straight by pointing out a slew of failed previous reforms introduced by previous governments. Overall, the book is an interesting read for anyone looking for a comprehensive summary of the electricity sector post 1990s which vindicates the credibility of the research group behind the book.

More details about the book can be found here.

The inefficient electricity tariff structure

The tariff orders for the Financial Year (FY-18) from Karnataka Electricity Regulatory Commission (KERC) were released in the second week of April, an uncharacteristic delay for the commission. What prompted the delay was an impromptu revised Annual Revenue Requirement (ARR) from the Bangalore Electricity Supply Company (BESCOM) two days before the scheduled public hearing. Subsequently a second hearing was held to look into the revised submission and hence the delay.

A need for revision

It is quite surprising for BESCOM to have a ‘Eureka’ moment and propose a new tariff structure for High Tension (HT) industrial and commercial consumers in order to keep them from migrating to open access. BESCOM proposed to increase the fixed cost component and reduce the energy charges, which seems to be a criterion for these consumers to migrate to open access independent of BESCOM supply.IndHT2a

Between FY 14 and FY 16, the number of industrial clients under BESCOM area increased by over 15%. However, the net sales made to this category has fallen by nearly 10%. On the contrary the energy quantum procured through open access mostly on the day ahead short term market has more than doubled which explains BESCOM’s concern.

Why is this migration a concern?

The root cause of the problem lies in the cross subsidising effect brought in by the two part tariffs. In an efficient system the fixed costs incurred in setting up infrastructure to deliver power is recovered in this component and energy charge reflects the true cost of supplying a single unit of energy. The National Tariff Policy of 2016 envisages this too. In reality, this system is inefficient due to an inherent need to cross subsidise consumer classes. Residential tariff has to be lower compared to industrial and hence when the industrial clients migrate, the revenues disappear too.

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BESCOM incurs 33% of its expenditure in fixed costs and however recovers only 11% through the fixed cost component in electricity tariffs. Hence it seemed very sensible for BESCOM to propose an increase in fixed costs and reduce the energy component.

The proposal dint go through the commission this year because of its ad-hoc submission and high resistance from industrial consumers who have made long term bilateral commitments assuming a high energy charge. A decline in energy charge and increase in fixed component would make their deals unfavourable. Although, the proposal seems radical it is not the real solution but it could make the situation better from worse and hence is likely to be given a try the next time around by when BESCOM is expected to make a solid case.

BESCOM data from relevant ARR filings.