In an effort to strengthen India’s energy transition, the Ministry of Power (MoP) is working on a green tariff policy that will allow discoms to supply renewable power to consumers at a specific tariff. This green tariff will be linked to the average power procurement cost of renewable sources. The move is expected to help discoms go beyond their existing renewable energy commitments and renewable purchase obligations (RPOs), besides supporting renewable energy generators. Industry experts share their views on the impact of the expected green tariff policy and highlight some of the issues with its implementation…
What is your view on the MoP’s plans to introduce a green energy tariff? What will be its likely impact on the sector?
In June 2021, the MoP announced that the central government is working on a green tariff policy. The salient features of the policy would be as follows:
- It will help discoms supply electricity generated from clean energy projects at a lower rate as compared to power from conventional fossil fuel sources.
- Large corporates that are looking to procure only green power can contract such power from a clean energy developer, as is done in the commercial and industrial (C&I) segment.
- Once the policy is finalised, discoms can exclusively buy green electricity and supply it at a green tariff.
- The green tariff will be the weighted average tariff of green energy that a discom procures.
- The tariff will be slightly lower than that from conventional fuel sources and new regulations will also ensure that open access applications are approved within a fortnight.
In principle, this is a very good policy, promoting green energy use. The finer details are awaited from the MoP. Looking at the broad contours of the proposed policy, its implementation strategy will be the key to its success. Currently, discoms procure a mix of power from conventional and renewable sources at a varying cost and blended tariff is offered to consumers. In this backdrop, clarity is awaited on the mechanism to offer electricity procured from clean energy sources to be supplied at a lower rate as compared to conventional fuel. Also, it is proposed that if the industry wants only green power from a renewable developer, open access applications would be approved within a fortnight. One issue that needs to be clarified is, how would the industry requirement for steady power be fulfilled as renewable generation is erratic in nature.
Impact on the sector
- A few large corporates may migrate from the C&I segment to direct supply from discoms as it may be more predictable due to the pooling of various renewable sources as compared to C&I. However, the green tariff of discoms could be relatively higher, as compared to the C&I tariff, as consumers will have to pay for the operational inefficiencies of the discoms.
- Power producers that are essentially focused on the C&I segment may have to now shift their focus to discoms as their corporate customers could potentially move to discoms. This may call for a reorientation of their business model.
- If a discom supplies renewable power at a relatively lower tariff to consumers, it may impact its financial position, unless met by increased subsidy from the state government. Receipt of subsidy in a timely manner from the state government has been a challenge at times.
“One issue that needs to be clarified is, how would the industry requirement for steady power be fulfilled as renewable generation is erratic in nature.” —-Sachin Gupta
As part of its energy transition efforts, India is working towards electrification of the economy by developing action plans for the greening of electricity. The government is in the process of formulating a set of rules and guidelines to enable the green tariff mechanism. Once the mechanism is in place, discoms can exclusively buy green electricity and supply it at a green tariff, which will be the weighted average tariff of green energy that the consumer will pay. Ultimately, green tariffs create a path forward for renewable energy within a utility business model that customers already rely on to purchase their electricity.
While this initiative will add to the maturity and support the long-term vision of net zero emissions for the sector, the immediate stress would be on long-term power purchase agreements (PPAs). While, independently, green tariffs and current trends look very cost effective, the cost of cannibalisation is one factor that the sector must think of. Therefore, the transition to the green grid should be phased properly in order to mitigate the immediate impact of green tariffs.
Impact on the sector
- The green tariff will be slightly lower than the tariff from conventional fuel sources. Large C&I customers will play an important role in driving growth.
- As implemented in other countries, utilities offer green tariffs at a competitive, long-term fixed price that reflects the direct cost of generating and delivering renewable energy. This allows customers to mitigate the risk of future fossil fuel price fluctuations in their electricity bill.
- Consumers can subscribe the portion of their consumption not already subscribed to other programmes.
- The green tariff could save millions of tonnes of carbon dioxide emissions.
- It will ensure that open access will attract large green electricity consumers to set up their own captive green energy plants.
“India is working towards the electrification of the economy by developing action plans for the greening of electricity.” —-Somesh Kumar
The C&I segment contributes to around 40-45 per cent of the electricity demand in India and is setting clean energy procurement targets to achieve its sustainability goals. Several corporates in India have voluntarily set up targets to move to 100 per cent renewable energy by joining initiatives such as the RE100 initiative (global initiative to bring together the world’s most influential businesses committed to 100 per cent renewable electricity) and the climate development group, or by setting explicit sustainability targets. These include large corporates such as TCS, Infosys, Tata Motors, ITC, Reliance Industries and ICICI Bank. Further, several international players with establishments in India, such as large IT players such as Microsoft, Amazon, Cisco and Facebook, have also set explicit targets to source power from renewable power sources. The World Wide Fund-India, in association with the Confederation for Indian Industry, launched the Renewable Energy Demand Enhancement initiative for corporate buyers. This initiative aims to increase businesses’ commitment to renewable energy while also addressing the challenges that hinder the same.
Such large C&I customers would have to opt for procurement from third-party generators through open access or set up their captive units to meet the green energy targets. Under these circumstances and amid the growing focus among large C&I customers to procure clean energy, the Government of India is proposing to formulate a mechanism, wherein discoms would be able to supply clean energy at a specific tariff, linked with the average power procurement cost of renewable sources.
In fact, some state regulators such as those in Andhra Pradesh, Karnataka and Maharashtra have notified green energy tariffs, with an option for consumers to obtain 100 per cent of their procurement from clean energy sources by paying an additional tariff. However, supply under the green energy tariff is subject to the availability of surplus renewable power after meeting the discom’s RPO, and the tariffs are at a premium to the regular grid tariffs. In contrast, C&I customers can opt for green power procurement through open access under a long-term PPA with third-party renewable generators and with tariffs being at a discount to grid tariffs.
In this context, the ability of discoms to offer firm supply of green power at cost-competitive tariffs against market rates is important to retain C&I customers amidst the growing demand for clean energy. The details of the proposed green tariff policy and its impact on discoms’ green energy tariff norms remain to be seen.
“The ability of discoms to offer firm supply of green power at cost-competitive tariffs against market rates is important to retain C&I customers.”—Sabyasachi Majumdar
Renewable energy has been a national priority, with India leading the effort on the global stage. Corporates, individuals and several commercial establishments are also pursuing ambitious sustainability goals. The green energy tariff is a mechanism that allows such sustainability focused organisations and individuals to achieve their goals and make a strong commitment. Organisations look at renewable energy not only as a commitment to their investors but also as a commitment to their consumers. Increasingly, consumers are choosing products and services that make a strong sustainability commitment.
Recently, the Maharashtra Electricity Regulatory Commission introduced a green power tariff option for consumers through which one can avail of up to 100 per cent renewable energy supply. Adani Electricity has received an overwhelming response since the launch of the programme on World Environment Day. More than 750 consumers have chosen the green tariff option, which, most interestingly, also include residential consumers.
The green power tariff will help distribution companies go beyond their existing renewable energy commitments and RPOs. In turn, this will also support renewable energy generators.
In Adani Electricity’s case, we are committed to procuring 30 per cent of Mumbai’s energy requirement through renewable sources by 2023 and 60 per cent by 2027. This will make Mumbai one of the world’s first megacities to be largely powered by renewable energy.
However, due to the intermittent nature of renewable energy, grid integration will become increasingly challenging. This is where the role of energy storage systems at competitive tariffs will become integral to a utility’s operation. As renewable energy penetration increases, so shall the share of energy storage systems. Further, we will increasingly witness electricity procurement from multiple sources to match the load curve of the utility.
“The green power tariff will help discoms go beyond their existing renewable energy commitments and RPOs. This will also support renewable energy generators.” — Spokesperson, Adani Electricity Mumbai Limited
Given the importance of climate change, it has become imperative to adopt an increasing quantum of green/renewable energy. Many companies have also declared their net zero goals. As such, green tariffs have emerged as one such way to promote exclusive green power for customers. It is particularly relevant for customers who have a load of <1 MW, as open access option is currently not available for them as per the regulations, and corporates that have sustainability and carbon reduction targets. This is definitely a positive development for the sector. Tata Power-DDL has already filed a petition with the Delhi Electricity Regulatory Commission, seeking green tariffs in line with the above. The proposal covers tie-up of green power towards meeting 100 per cent green power requirements of consumers on a voluntary basis. We hope to see our environment conscious customers avail of this option.
“Green tariffs are a way to promote exclusive green power. —Ganesh Srinivasan”
What are some of the likely issues and challenges associated with the implementation of such a policy?
- Storage solutions for renewable power will be a key driver for the success of this policy. Storage solutions such as pumped storage, battery and other technologies will play a key role in ensuring steady supply, as bundling of power from fossil fuels is not envisaged under this policy.
- If major high tension industrial consumers of discoms move to green power, there is likely to be an increase in the subsidy requirement from the state government, industrial customers being a remunerative segment for discoms.
- One issue to assess will be the fate of discoms’ RPOs. RPOs helped in the evolution of renewable energy. If the RPO policy is sidestepped in some manner as a result of the green tariff, it may have a bearing on discoms’ power procurement strategy.
- As per this policy, it is claimed that the tariff will be slightly lower than that of energy from conventional fuel sources. However, the renewable capacity for which PPAs have been entered into in the past by discoms are at a relatively higher tariff; it is the new renewable capacity that is at competitive rates. This could restrict the ability to offer major differential between green tariffs vis-à-vis conventional power tariffs.
- Such a policy could be successful when renewable power occupies a substantial share in the total energy mix of the country. In India, for the month of June 2021, of the total 115.39 BUs of power consumption, renewable sources contributed around 14 per cent, while the balance came from conventional sources. The increasing share of renewable power in the future will aid the implementation of this policy.
The green tariff may take time to gain popularity, considering that several other avenues of accessing green power are already available. There could also be an accounting challenge as carving out a separate billing component could lead to added complexities for discoms, but this is still doable to some extent, considering electricity is a homogeneous good and whether green or non-green, the electrons are the same.
Discoms also need to improve the reliability, security and quality of supply, along with evolving pricing structures. Also, if consumers adopt green tariffs, the non-green portion of tariffs will also have to be reset, to account for the entire conventional value chain and adequate cost recovery.
The MoP has paved the way for further promotion of green power by allowing discoms to exit from conventional PPAs that have crossed 25 years. This will enable the closure of certain old, non-environment friendly and fuel-guzzler stations. The increasing quantum of local renewable power beyond say 30 per cent of the requirement (particularly high rooftop solar) can cause power quality issues. Larger quantum of grid-scale renewables will also need to be balanced with other options like storage to deal with the intermittent nature of renewable energy. Sourcing hybrid (wind and solar) power will also play an important role in smoothing out the generation variations.
One important decision that individual state electricity regulatory commissions need to take is whether the discom will be supplying green power over and above the RPO or the currently procured green power (for meeting RPO) will be allocated to the customer signing up for green power.