The post is a short summary of one part of my master’s thesis on ‘The Evolution of Electricity Retail Markets in a Low Carbon World’. Apart from looking at the electricity retail market regulation and pricing under different scenarios I have also tried to look at it from a utility standpoint. For this analysis the chosen utility was Banagalore Electricity Supply Company (BESCOM) considering its recent regulations and my prior experience in dealing with the policy regulations in Karnataka.
The recent announcement of the solar rooftop tariff revision in the state of Karnataka has not gone very well with the general public even as they were expecting the tariffs to be reduced eventually. Tariff revision seemed to be an obvious move considering the ever decreasing cost of the solar power system and the recent solar bid results dint quite justify the previous tariff of INR 9.56 which is more than double the lowest tariff in the country with knowledge of the fact that the scale and projects are totally different. (More about it.)
The slide deck below provides a brief insight into the case study part of my thesis.
Electricity markets are undergoing a second round of transformation after the first one in which the vertically integrated utilities were unbundled and regulated. In this phase utilities are grappling with high penetration of renewable energy in the grid mix and also a need to adopt and offer smart technologies to consumers to remain relevant. There are cases where utilities like in Karnataka (Read more) and around the world have gone forward with Renewable Energy (RE) expansion and then deciding to pull the plug.
The story from a consumer view point
Consumers in Bengaluru have one of the lowest electricity tariffs in comparison to most of the metros. Bengaluru does in fact have a high penetration of solar water heaters but the consumers patronage to a similar system in solar PV had failed to take off even when the Feed in Tariff was set at INR ₹ 9.56/kWh. From a general perception having already installed solar water heaters consumers don’t want to invest on a new experiment until the previous investment has paid off. The other issue is also the lack of roof space. Consumers with a solar water heater installation would find it hard to squeeze in a 1-2kWp on the roof. But industry peers who have experience with domestic systems attribute the lack of interest to the financial non viability of a 1-2kWp system on an energy savings perspective and on the contrary consumers don’t really trust the utility to pay them a high Feed in Tariff (FiT).
BESCOM as a utility ranks higher among other national utilities in financial performance. Over the past few years, it has been pleading with the regulator Karnataka Electricity Regulatory (KERC) to increase the domestic tariffs significantly in order to bridge the gap between the fixed costs incurred and recovered considering a significant portion of BESCOM’s fixed costs is recovered through energy sale to industrial consumers. The industrial consumers are making a slow transition to third party renewable energy purchase through open access regulation which makes BESCOM case even more interesting. BESCOM’s Annual Revenue Requirement filing for 2016 has been very comprehensive. In order to press its case, BESCOM has produced consumer level fixed costs incurred and recovered. It had also proposed a new telescopic tariff for domestic consumers which the regulator discarded. In this background it is forced to pay domestic consumers most of whom will generate more than their consumption a higher FiT. The scenario of electricity market feedback is likely to return here.(More about it. )
The regulator driven by national and state level targets and seeing a lack of progress in domestic rooftop penetration in the state is forced to look at alternatives. However, as seen from the analysis a few objectives and principles produce unintended consequences. The flaw here is the premises of its analysis. For e.g. ,it considers the central regulator’s benchmark tariff of 75000/kWp as system cost in estimating the FiT. None of the industry players with credibility offer a 1kWp system at that price considering the technical specifications set by BESCOM in setting up a system are stringent and capital intensive. Hence, there is poor adoption of a 1kWp system. The tariff is set as a standard for 1-10kWp and so the consumers who could afford a 3kWp system generate double their average consumption and will tend to benefit in the long run.
Overall, the system under its current policies could produce unintended consequences. If the ultimate goal is to fix a two part tariff common across all consumers then ensuring parity is critical. Utilities like BESCOM have to be profitable and also ensure the tariffs don’t increase at the current rate of 5% average a year.