Green Tariff Policy

Boon or bane for discoms?

In June 2021, the power minister an­nounced that the government is mu­lling the introduction of a “Green Tariff Policy” in the electricity sector. From the limited information provided through the press release, it appeared that such a policy will help electricity distribution companies (discoms) to supply electricity generated from clean en­ergy projects at a cheaper rate as co­mpared to power generated from conventional fuel sources.

The government provided more, though ambiguous, information when the Minis­try of Power invited comments on the Draft Electricity (Promoting Renewable En­ergy through Green Energy Open Acc­ess) Rules, 2021 (draft rules) in August 2021. The draft rules appear to facilitate greater consumption of renewable energy through all categories of discoms’ consumers and captive users. This is being done through modification of the renewable purchase obligation (RPO) as it currently exists under the applicable regulatory framework. At present, the RPO re­quires that certain obligated entities (distribution licensees, open access consumers and captive power consumers) procure a minimum percentage of their consumption from renewable energy sources, including a separate solar purchase obligation, as applicable. Through the draft rules, any entity (having a consumption requirement of 100 kW or more except for captive consumption), whe­th­er obligated entity or otherwise, can seek the supply of green power from its area distribution licensee.

The draft rules, if implemented, will definitely help the government in achieving its target of 450 GW of installed renewable energy capacity by 2030, as it will spur the demand for renewable energy. In most states, the tariff of renewable power, solar and wind, with 50 per cent of cross-subsidy surcharge may be cheaper than the retail tariff. Therefore, while this appears to be a good policy for the rene­wable energy sector, its implications on discoms must be evaluated.

The key aspects of the draft rules are (i) provision of open access to all consumers intending to procure green energy; (ii) provision of banking for green energy open access consumers; (iii) minimum term of such green procurement from discom to be one year; and (iv) exemption from minimum 50 per cent of cross-subsidy surcharge for 12 years from the co­mmercial operation date. These aspe­cts have to be discussed thoroughly so as to ensure that they do not impose an additional strain on discoms. For example, the draft rules provide that the term of green procurement from discoms will be for a minimum of one year. A one-year term implies that the discom will have to tie up power in the short term. This po­wer may be procured at a tariff higher than what is discovered in the case of long-term procurement. This will affect the procurement planning of discoms and their aggregate revenue requirement. Further, it is not clear who will bear the burden of exemption of a minimum 50 per cent of the cross-subsidy surcharge.

An important aspect, which needs discussion, is the determination of green tariff by the state electricity regulatory commissions. The draft rules provide that the green tariff will be determined by the regulator, which may comprise an average pooled power purchase cost of the renewable energy, cross-subsidy charges (if any) and service charges, covering all prudent costs of the distribution licensee for providing green energy. This provision makes it vague in as much as it is not clear whether there will be two tariffs – green tariff and conventional tariff – for retail sale. Further, it appears that cross-subsidies, under the Electricity Act, 2003 can be imposed only in cases of open access. Therefore, if a consumer opts for green tariff, there is no legal requirement for such a consumer to pay the cross-subsidy surcharge. This may lead to an additional burden on the discoms.

For accelerated and efficient development of the renewable energy sector, it is critical that the green tariff policy is well evaluated such that it not only pushes the increase of renewable energy capacity but also promotes the development of discoms.

Naman Mittal
Shashwat Kumar

By Shashwat Kumar, Partner, and Naman Mittal, Associate, Shardul Amarchand Mangaldas & Co.

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