Interview with Gireesh B. Pradhan: “The power market design needs a relook to revive growth in demand”

“The power market design needs a relook to revive growth in demand”

The country’s apex regulator, the Central Electricity Regulatory Commission (CERC) has been proactively working on a number of reforms to facilitate growth in the power sector. One of the landmark orders issued last year was to create a framework for a forecasting and scheduling mechanism for wind and solar. Gireesh B. Pradhan, chairperson, CERC, spoke to Power Line on wide-ranging issues including upcoming regulations, improving renewable purchase obligation (RPO) compliance, strengthening open access, and the need for direct subsidies and tariff rationalisation. Excerpts…

What is your assessment of the current state of the power sector? What have been the sector’s biggest achievements in the past one year?

Let me answer this question in two parts. On the current state of the sector, the power sector has witnessed significant developments and taken big strides to meet the growing demand. Policy and regulatory initiatives have resulted in a number of positive outcomes for the sector. These include a phenomenal addition of generation capacity, touching the 330 GW mark, a substantial growth in renewable energy generation (58.3 GW), and a robust short-term power market structure (approximately 10 per cent of generation). There has been significant investment by private players (144.66 GW of capacity constituting 43.8 per cent of the total generation capacity). Substantial growth has been witnessed in terms of size and transformation capacity in the transmission segment. The grid is more secure and reliable now. Further, the multiplicity of players has created growth avenues and expanded the horizon of the market. We now have more than 600 generators, over 30 transmission licensees, over 70 distribution utilities, two power exchanges and 40 trading licensees. The volume of electricity transacted through traders has increased from 21.92 billion units (BUs) in 2008-09 to 35.43 BUs in 2015-16. The weighted average price of electricity transacted through traders declined from Rs 7.29 per kWh in 2008-09 to Rs 4.11 per kWh in 2015-16. The volume of electricity transacted through the power exchanges increased from 2.77 BUs in 2008-09 to 35.01 BUs in 2015-16. The weighted average price of electricity transacted through the power exchanges declined from Rs 7.49 per kWh to Rs 2.72 per kWh during the same period.

Regarding the biggest achievements during the last one year, renewable energy has achieved parity with thermal power in terms of price per unit. During the past one year, special efforts were made to integrate renewable energy generation, which started yielding results. Ancillary services have been rolled out. A regulatory framework has been created for scheduling and a deviation settlement mechanism introduced for variable solar and wind generation. This has significantly facilitated the integration of renewable energy generation while ensuring secure and reliable grid operations. Going forward, we are working on new interventions like energy storage technologies and electric vehicles. Also, energy efficiency and demand-side management measures have taken off. Initiatives like LED distribution have been successful. The Perform Achieve Trade Scheme has been implemented.

What are the biggest bottlenecks in sector growth?

The distribution segment remains the weakest link in the power sector. The financial health of the distribution companies has been a major concern. Further, low demand has a cascading effect on other segments of the sector – generation, transmission and the short-term power market. This has also led to generation assets getting stranded. The distribution segment is also suffering from high levels of aggregate technical and commercial losses. In order to improve the situation, discoms need to carry out proper demand estimation. There is also an urgent need to establish procedures for energy accounting to accurately identify energy losses. Tariff rationalisation needs to be carried out to help the distribution segment improve its financial health.

What are some of the key orders passed by the CERC in the past one year and what has been the impact of these on the power sector?

In the recent past, the CERC has issued many landmark orders on a wide range of issues, which has had a significant impact on the development of the sector. While taking into consideration the aspects of uncertainty and variability of renewable energy, an order for a framework for “Forecasting and Scheduling Mechanism for Wind and Solar Technologies” has been brought out. This framework requires forecasting by the system operator as well as the wind/solar generator, with the objective of minimising deviations from the schedule.

By an order, additional legroom has been provided through a relaxation in deviation limits. Further, to provide flexibility to respond to the needs of variations in demand and renewable energy generation, the technical minimum in the case of thermal generating units has been reduced to 55 per cent, with a corresponding compensation mechanism for the deterioration in heat rate, auxiliary energy consumption and oil support.

In order to maintain the required instantaneous and continuous balance between aggregate generation and load, the CERC has identified a need for the creation of secondary and tertiary reserves and has operationalised ancillary services. The commission has also extended the market session, thereby enabling the power exchanges to carry on round-the-clock intra-day/contingency market operations for same day as well as next day delivery of power.

With regard to handling load-generation imbalances, the commission has identified the solution as creating reserves and operationalising ancillary services while, however, observing that a relaxation in the deviation limit is not a long-term solution. In this context, the commission has also laid out a roadmap for operationalising reserves, which should be followed by the states. The CERC has determined that each region should maintain secondary reserves corresponding to the largest unit size in the region, and tertiary reserves should be maintained in a decentralised fashion by each state control area for at least 50 per cent of the largest generating unit available in the state control area. These measures have played a key role in ensuring safe, secure and reliable operation of the grid.

What is your outlook for the renewable energy market over the next few years? What will be the CERC’s main focus for this segment?

Renewable energy  generation has witnessed significant growth, with the present capacity reaching 58.3 GW, from an insignificant capacity of less than 5,000 MW in 2002-03. India has a huge untapped renewable energy  potential. Renewable energy has achieved parity in terms of the cost per unit vis-à-vis thermal power. However, the demand for renewable power has not been adequate. The creation of substantial renewable generation capacity brings along certain long-and short-term challenges that seek the attention of policymakers as well as regulators. Considering the ambitious targets we have set for ourselves, we need to see how well we are positioned in terms of policy guidelines, regulatory frameworks and a conducive market ecosystem to mainstream and integrate the intermittent renewable energy sources. At present, India has a renewable energy capacity of around 58.3 GW. Considering a total renewable energy capacity of 175 GW, a goal determined by the government, grid management is expected to become even more difficult. Therefore, the need for flexibility in thermal generation assumes importance as more and more of renewable generation is integrated. Generation from renewable energy sources, especially solar and wind, is inherently variable in nature and as such, needs to be balanced adequately. Given that the variable cost of renewable energy generation is zero, it is treated as must-run. Coupled with this, we have the issues of variability and uncertainty to be addressed. Therefore, India needs to plan ahead, more so in the context of the ambitious renewable energy target of 175 GW. These challenges warrant a specific energy “storage” solution to cater to peak demand as well as to address the variability of intermittent generation.

RPO is an important part of the renewable energy market design. The act mandates the state electricity regulatory commissions (SERCs) to specify RPOs. Therefore, the responsibility of RPO enforcement on the obligated entities rests with the respective SERCs. Most of the SERCs have specified minimum RPO targets for obligated entities in their states. However, compliance remains an issue. Some SERCs have also allowed carry forward of RPO compliance targets. The SERCs need to ensure strict compliance of RPO targets by distribution utilities. They may need to consider the creation of a separate fund or provisioning as part of the annual revenue requirement of the discom to meet the expenditure towards RPO compliance. We have been raising this issue in the Forum of Regulators (FoR) at regular intervals. In the last meeting of the FoR, it was decided to evolve a web-based tool for RPO monitoring and compliance. We are working on it.

Now, in order to improve the scenario on the ground level, the states have to adopt the framework for effective integration of renewable energy generation. A high-level technical committee under the chairmanship of the CERC member, technical, has been constituted to identify and examine issues and suggest suitable methods for the states to effectively adopt regulations for renewable energy integration at the state level.

What are the steps needed to strengthen the open access framework?

The Electricity Act, 2003 has provided for open access, which implies non-discriminatory sale/purchase of electric power/energy between two parties utilising the transmission or distribution system or associated facilities thereof. In the process of implementing open access, some state utilities reportedly experienced misuse of the provisions of captive generation to avoid payment of the cross-subsidy surcharges and other charges by some open access consumers. At the same time, open access consumers often complain about various tariff and non-tariff barriers, which inter alia include high cross-subsidy surcharges, denial of open access citing non-availability of a transmission corridor and administrative reasons. The relevant rules defining captive generation need to be amended to remove any ambiguity. The retail tariff structures often do not provide for adequate demand charges to meet the fixed charges payable to the generators. Further, issues related to possible standby charges and current cross-subsidy surcharges need careful examination in order to ensure a level playing field for all stakeholders. Additionally, urgent measures to address the manpower requirements of the state load despatch centres (SLDCs) and ring-fencing of SLDCs also need to be taken.

Are you satisfied with the progress on the tariff rationalisation front? What are your views on introducing targeted subsidies for the power sector?

The act mandates the state regulators to determine tariffs that are cost reflective. The policy provides for tariffs to progressively reflect the cost of supply of electricity and the regulators to notify a roadmap such that tariffs are brought within ±20 per cent of the average cost of supply. Therefore, regulators are to determine tariffs and the respective governments are free to announce a subsidy for any specific target category of consumers. Some states like Bihar have adopted a healthy practice of rationalising the number of consumer categories as well as determining cost-reflective tariffs for the categories. This enables the state government to identity the target consumer category and determine the quantum of subsidy. Some states have also adopted the practice of notifying two separate tariff schedules, one without considering subsidies and the other factoring in the subsidy given by the government. The best practices adopted by various state regulators are often brought to the FoR for discussion and experiences are shared amongst state regulators.

In the distribution segment, subsidies are provided by the state government to the utilities. As the distribution utilities are saddled with deeper financial problems, the subsidies do not result in sending the price signals to consumers. Having seen the success of direct benefit transfer (DBT) to the consumers of cooking gas, I strongly advocate the adoption of DBT for providing subsidies to the target categories of electricity consumers.

What are the short- and medium-term priorities for the CERC?

The short-term priorities before the commission include a review of the status of grid reliability and effectiveness of the deviation settlement mechanism. A review of the performance of the short-term electricity market, tariff regulations for renewable power, the renewable energy certificate framework and ancillary services operations are some of the other priorities for the commission in the near future. As regards long-term priorities, the commission would like to work on connectivity, long-term access and medium-term open access, the design for further development of electricity markets, and frameworks for the integration of renewable energy into the grid.

What is your outlook for the power sector for the next few years?

We have several issues to deal with in the power sector. What we need is commitment and determination to address them effectively. As regards the present problem of the financial ill-health of discoms, UDAY has the potential to make a difference, and it needs to be implemented in right earnest. The scheme does not just provide financial support, but is also linked to a mutually agreed and doable performance trajectory. Currently, we are experiencing a phase of low demand for power, resulting in stranded generation capacities. The market design needs a relook to revive growth in demand. The transmission segment is experiencing problems, chiefly owing to right-of-way issues. Appropriate policy prescriptions need to be put in place to mitigate these problems. The commission considers emerging generation capacities through renewable sources as critical to achieving energy security for the nation. Therefore, firming up a robust regulatory framework for seamless integration of renewable energy is a critical area to focus on.