In a landmark move, the Central Electricity Regulatory Commission (CERC) has approved renewable energy trading on the Indian Energy Exchange through green term-ahead market contracts. This is a significant development given the country’s efforts to accelerate its transition to clean energy. In fact, over the past few years, the government’s push for green energy has been quite evident. This is driven by the Paris Climate Agreement, signed by India in 2016, and an increasing preference by distribution utilities, industries, and other large consumers to adopt renewables at the most competitive price.
Global trends driving energy shift
Over the past few years, climate change has emerged as one of the key challenges confronting economies across the globe. It has been encouraging to see joint efforts at all levels – from intergovernmental to intercommunity – to move to greener and sustainable alternative energy sources.
As a result, the world over, there has been a major shift in the energy landscape. European countries are already known to enjoy a high share of renewable energy in their energy mix, for instance, Sweden (54.6 per cent), Finland (41.2 per cent) and Denmark (36.1 per cent). Countries such as the US and China have been leading energy transformation globally. With the lowering of the cost of battery energy storage systems (BESSs), hybridised power models are gaining preference for addressing renewable energy intermittency. According to the IEA World Energy Investment 2020, investments in battery storage have already exceeded Rs 29.4 billion ($4 billion). Storage solutions are becoming increasingly attractive today due to the sharp fall projected in battery costs. According to the BNEF, battery prices, which were above Rs 80,882 per kWh in 2010, fell 87 per cent to Rs 11,472 per kWh in 2019. By 2023, average prices are expected to be close to Rs 7,353 per kWh. The levellised cost of stand-alone BESSs for managing peak demand would amount to Rs 7-Rs 8 unit for the consumer, which is expected to go down to Rs 4-Rs 5 in the next three years.
The emergence of virtual power plants, peer-to-peer energy markets along with intelligent controlled systems, internet-enabled applications and smart technologies have been the catalysts of this change. These have led to greater cost optimisation for ecosystem players in terms of increased efficiency and greater flexibility. Most importantly, these factors have accorded freedom of choice to end-consumers. Moreover, a supportive policy has led to the reduction in renewable energy costs for consumers, thus encouraging greater adoption. Since 2010, the cost of energy has dropped by 82 per cent for photovoltaic solar, by 47 per cent for concentrated solar energy, by 39 per cent for onshore wind and by 29 per cent for offshore wind. The current levellised cost of energy for large-scale solar is above Rs 2.50 per kWh, compared to about Rs 12 in 2010. On the back of these developments, we are expecting renewable energy’s share to increase to 86 per cent by 2050 from about 28 per cent currently, across the world. One of the leading examples of falling costs of renewables is the Abu Dhabi Power Corporation, which has announced the lowest solar power tariff in the world at AED 4.97 fils per kWh (Rs 1.10 per kWh) on a levellised electricity cost basis.
India’s green imperative
As a signatory of the Paris Agreement, India is committed to increasing its renewable energy capacity more than five times from 35 GW till March 2014 to 175 GW by the year 2022. The share of renewable energy in the total installed capacity has grown from 11.8 per cent in March 2015 to 23.4 per cent in March 2020. As of March 2020, India had an installed renewable energy capacity of about 87 GW of the total installed power generation capacity of 370 GW. Solar and wind energy continue to be the two key contributors, comprising about 77 GW (89 per cent) of the total installed renewable energy capacity. The country has seen significant growth in installed renewable energy capacity over the past five years, registering a compound annual growth rate (CAGR) of 17.33 per cent during financial year 2016-20. Now it stands fifth globally in terms of installed renewable energy capacity. The total solar power capacity has increased by more than 11 times in the past five years. This growth has been possible due to the political will and growing regulatory support.
We are on track to achieve the targets set under the Paris Agreement. Committed to further accelerating the energy shift, India aims to increase the share of renewables to 450 GW by the year 2030.
The government has been moving in the right direction to address various structural, operational and financial challenges in the power sector. We have been seeing a transition to a regime that is market-oriented, unleashing greater competition, efficiency and transparency with support from simple and minimal regulations. In fact, the deepening of the market framework will gradually give distribution utilities and generation companies greater flexibility and reduce their reliance on long-term PPAs. This will be key in fulfilling our national renewable energy aspirations. Meanwhile, we are yet to see access to technology used in developed countries. The adoption of new-age concepts such as virtual power plants along with other supportive technologies can enable the growth of hybrid models to support round-the-clock power from renewables.
Last, but not least, we must focus on strengthening our transmission and distribution network to allow better integration of renewable energy.
Green energy markets
To meet the country’s ambitious renewable energy target of 450 GW by 2030, set under the Paris Climate Agreement, the government must embrace a market-based approach. Globally, we have seen that countries with higher renewable energy share in their energy mix have deeper market penetration. Wherever there has been high renewable energy penetration, it has happened through a market-based approach. For example, in Germany, where 50 per cent of the electricity generation is through renewables, it is all routed through power exchanges. The German power market has successfully transformed from a system founded upon centralised coal and nuclear power plants into a twenty-first-century electricity grid based predominantly on renewable energy.
The green energy markets can be a major catalyst in energy shift by allowing buyers and sellers to procure green power on an immediate/short-term basis as per their energy requirement, rather than being tied up in long-term power supply agreements.
With an increase in renewable energy penetration, a framework is required wherein various sources of energy can be integrated to meet power demand seamlessly. This type of integration can be best done on exchanges, like it is done in other developed countries.
Going forward, the introduction of new green market segments such as the day-ahead market, long duration green contracts and contracts for difference (CfD) will play a crucial role in furthering sustainability goals and ensuring that all the renewable energy generated within the country is despatched efficiently through a pan-India exchange-based energy market.
Market-based models such as the CfD mechanism for renewables can help in trading and scheduling of power at the exchange at market prices with guaranteed revenue to the generator. The price guaranteed, known as the strike price, for the renewable energy generator, is determined through auction and the generator executes a PPA at that strike price. In case the discovered market price is more than the strike price, the generator pays this difference to the market pool and if the market-discovered price is less than the strike price, the pool pays the difference to the generator. In case of a shortfall in the pool, this shortfall would need to be contributed by the government by way of cess.
Currently, in India, all the renewable energy capacity is tied up in long-term PPAs, hence customisation of the CfD model is required to bring it in accordance with the market-based model. The establishment of an efficient, transparent, competitive and liquid market has proved crucial for the accelerated development of renewable energy in advanced economies such as the UK, the US and Germany.
With the emergence of a green market, renewable power generators will have an additional avenue to sell their power, which until now has largely been sold under long- and medium-term contracts. The green market will encourage green generators to adopt part market and part PPA models. For example, we can have a system wherein a part of the renewable capacity – say, a 75 per cent share – is under PPAs, while the rest is routed through the markets.
The recent regulatory amendments to the CERC Inter-State Transmission Charges and Losses are a remarkable step towards accelerating the adoption of renewables in India. Going ahead, the government policy should move towards a 100 per cent market-based model where we route everything through the exchange, which will be the ultimate sustainable model.
The energy markets will ensure that consumers have greater choice and will enable optimum demand-supply equilibrium at the most competitive prices. The recently launched real time electricity market coupled with a green market will enable distribution utilities to integrate renewable energy efficiently.
Markets are undoubtedly fundamental to shaping India’s energy future. The markets can efficiently drive India’s transition towards “energy-as-a-service” in the true sense of the term. The Covid-19 pandemic has paved the way for “green” economic recovery and the growing focus on and share of renewable energy across the world underlines the relevance of power markets more than ever.