India’s renewable energy capacity has grown by leaps and bounds over the years. As of March 2022, it accounts for 27.5 per cent of the overall installed electricity generation capacity in the country, as compared to 17.5 per cent five years ago. Over 15 GW of capacity has been added during the last financial year (2021-22). At the COP26 summit, India reiterated its commitment to mitigate climate change and decarbonise its economy. The country has set a target of augmenting non-fossil fuel electric capacity to 500 GW and meeting 50 per cent of its energy requirements through renewables by 2030. As a result, more renewable energy capacity addition is on the way. Further, supportive market dynamics as well as favourable cost economics have led to a huge inflow of investments from both domestic and foreign investors for the adoption of renewable energy sources.
Over the years, captive and rental power have emerged as viable options for commercial and industrial (C&I) consumers to meet their energy demand and hedge against the risks of high grid power tariffs. While coal has traditionally been the fuel of choice for most industries setting up captive power plants, renewables are emerging as competitive options owing to their rapidly declining capital costs and their ability to meet renewable purchase obligations (RPO). Greater access to debt financing, emergence of the opex business model and a robust regulatory framework have further facilitated the adoption of captive renewable energy in the C&I segment. With the larger goals of decarbonisation and “net zero” in mind, C&I consumers are increasingly entering into corporate power purchase agreements (PPAs), which are contracts between a corporate buyer and a renewable power generator for purchase of electricity for a pre-agreed price and duration.
Key trends and drivers
Renewable energy uptake by C&I consumers is largely driven by the falling generation cost of renewable power, mainly solar, and increasing grid power tariffs. The grid power tariff for C&I consumers in many states is nearly Rs 10 per unit, while the levellised cost of power through rooftop solar (with a battery storage facility) is around Rs 6-Rs 7 per unit, offering a clear cost advantage. In contrast, the cost of power generated by diesel gensets hovers at over Rs 20 per unit, owing to the high cost of fuel. Given that energy costs account for 30-40 per cent of the total operational expenditure of C&I consumers, significant savings can be realised via renewable energy procurement under third-party corporate PPAs, for both captive and group captive power.
Further, corporate establishments are sourcing solar power as part of their green strategies to attract customers as well as investors. Nowadays, investment banks and asset managers across the world consider environment, social and governance criteria before lending to businesses. Banks and private equity players are shying away from financing climate-unfriendly businesses. Moreover, Indian companies are announcing net zero targets and the trend is only expected to gain momentum in the wake of the COP26 announcements. Major Indian companies such as Reliance Industries Limited (RIL), Tata Consultancy Services, HDFC Bank, Wipro, Infosys, Mahindra & Mahindra, JSW Energy, ITC, Adani, Dalmia Cement and the Indian Railways (IR) have announced net zero targets. IR aims to reach net zero by 2030, RIL’s goal is to become net carbon zero by 2035, and the Mahindra Group and Wipro have set 2040 as the target year. In addition, 64 Indian companies have committed to reducing greenhouse gas emissions, according to the Science Based Targets initiative, a global alliance that helps businesses establish their own climate targets.
Technology options and business models
As per the Central Electricity Authority, the share of renewable energy sources in the installed capacity of captive power plants in industries with demands of 1 MW and above has been estimated at around 5.9 per cent during 2020-21. At present, rooftop solar is the most preferred technology for C&I consumers. Renewable developers are exploring combined solar and wind hybrid projects due to supportive government policies and waivers on open access charges for such projects. Hybrid projects offer benefits such as reduced risk due to the lower generation variability of the combined technologies, and better utilisation of the transmission infrastructure. Notably, Andhra Pradesh, Gujarat and Rajasthan have introduced policies for hybrid projects. Till date, 14,705 MW of solar wind hybrid plus RTC capacity has been tendered, of which 9,405 MW has been awarded.
As for wind power, there is no certainty that it will remain competitive if grid charges are applied. The biomass segment is still struggling due to logistics issues, but the use of biomass with solar power in captive energy generation has emerged as an area of interest. However, producing biomass in such large quantities is a challenge. The solution lies in the co-location of solar panels and biomass plantations. Another key trend has been a shift from traditional open access and third-party power procurement to the group captive model. This is mainly due to the withdrawal of open access waivers for new third-party PPAs across multiple states, unlike group captive projects, which continue to enjoy a waiver of cross-subsidy surcharge. This trend is likely to continue with more consumers and IPPs opting for group captive models to minimise risks and improve their financials.
Policy and regulatory update
The Central Electricity Regulatory Commission recently notified the terms and conditions for renewable energy certificates for the Renewable Energy Generation Regulations, 2022. Under these regulations, captive generating stations based on renewable energy sources will be eligible for issuance of certificates, provided that the certificates issued for self-consumption are not eligible for sale. The certificates will be issued on the basis of the electricity generated and injected into the grid, or deemed to be injected, in case of self-consumption by eligible captive generating stations based on renewable energy sources. The certificates issued to captive generating stations based on renewable energy sources to the extent of self-consumption will stand redeemed on compliance with RPOs.
Further, the Ministry of Power circulated the Draft Electricity (Promoting Renewable Energy through Green Energy Open Access) Rules, 2021 on August 16, 2021. The draft rules mention that there will be uniform RPOs for all obligated entities (discoms, open access consumers and captive power consumers) starting from the date of notification of the rules. Further, there will be no limit on supply of power for captive consumers taking power under green energy open access. These positive developments at the central level are likely to increase the uptake of renewable energy in captive generating stations. Moreover, there is also a greater focus on green hydrogen, which is produced from renewable energy.
The Ministry of New and Renewable Energy has circulated a draft cabinet note to mandate a green hydrogen consumption obligation for fertiliser and petroleum refining industries for the period of 2023-24 to 2029-30. The move is likely to push these industries towards greater renewable energy uptake in operations. Also, the green day-ahead market and green term-ahead market have been introduced at the power exchanges. This is expected to provide competitive price signals, besides offering an opportunity to market participants to trade in green energy, in the most transparent, flexible, competitive and efficient manner. The market-based competitive prices will provide another option to renewable generators to sell power, as well as allow obligated entities (distribution licensees, open access consumers and captive power consumers) to meet their RPO targets by directly buying green power from the power exchanges.
Meanwhile, at the state level, withdrawal of open access charge waivers by various governments has negatively impacted market sentiment. For instance, Gujarat and Maharashtra withdrew waivers from open access consumers in 2020. In addition, in January 2020, Maharashtra proposed grid support charges (GSC), a new levy for electricity consumers that have a sanctioned loads above 10 kW for rooftop solar. The state discom sought a steep GSC of Rs 8.66 per unit, while the total handling cost of electricity is roughly about Re 0.70 per unit. Although the proposal did not get a go-ahead from the state regulator, such moves create much ambiguity amongst developers and consumers alike. Further, many states are now attempting to levy an additional surcharge not only on open access, but also on captive. This is significant as the additional surcharge currently ranges from Rs 1 to 1.5 per unit across various states. While the Electricity Act gives categorical exemption of cross-subsidy surcharge for captive generation, it does not do so for any additional surcharge. The states are leveraging this ambiguity to bring captive generation under the ambit of additional surcharge, in a bid to attain a reliable revenue stream for financially distressed discoms.
A report by the World Business Council for Sustainable Development notes that state electricity regulatory commissions are restricting banking of renewable power in many renewable resource-rich states by moving from annual to monthly banking periods. Solar resource-rich states such as Gujarat and Maharashtra, which often have surplus generation, have already moved to monthly banking for third-party sale of renewable power. This is bound to affect the viability of renewable electricity projects. In addition, Rajasthan, Andhra Pradesh and Madhya Pradesh have completely withdrawn the banking provision for renewable projects, while Karnataka is planning to restrict it to a 15-minute period. Further, states such as Maharashtra, Gujarat, Madhya Pradesh, Karnataka and Haryana have third-party open access charges that are higher than discom tariffs, making third-party sale unviable in these states. However, states such as Gujarat, Rajasthan, Andhra Pradesh, Odisha, Uttar Pradesh, Chhattisgarh, Karnataka and Tamil Nadu have third-party sale charges lower than the grid tariff, but still higher than that for group captive models. This deters large corporate buyers from opting for the third-party sale model and prompts them to move towards group captive models.
The way forward
Recently, the power and renewable energy minister announced that the government is considering a proposal to mandate all power projects, including captive, to set up renewable projects at their existing locations under their current contracts with distribution companies, and sell bundled electricity. As a result, the renewable energy uptake trend among captive power projects is expected to grow. Further, as corporates announce net zero targets in order to mitigate climate change concerns, renewable energy adoption will see an uptick. However, if India is to achieve the target of meeting 50 per cent of its energy requirements through renewable energy by 2030, states need to come forward and streamline policy and regulatory frameworks to encourage greater renewable energy procurement by C&I consumers. Currently, the fragile financial health of discoms pushes states to impose high open access charges, given that C&I consumers are the highest revenue accruing category of consumers for discoms. However, despite challenges, C&I consumers and corporates are likely to shift more and more towards renewables, driven mainly by carbon neutrality ambitions and favourable project economics. N