Renewables Rise: Increasing share in C&I captive capacity

Increasing share in C&I captive capacity

The captive capacity of Indian commercial and industrial (C&I) units is on the rise owing to the increasing affordability of variable renewable energy and the growing adoption of technologies such as IoT and data analytics. These drivers are complemented by the government’s facilitative policies. Over the past decade, the share of captive po­w­er generation mix in the overall power generation mix has increased from 19.5 GW in June 2010 to 77 GW in June 2022. Cap­tive capacity accounts for 19 per cent of the aggregate installed capacity in 2022, up from 12 per cent in 2010.

Growth drivers

The increasing use of renewable energy in C&I units can be attributed to its aff­ordability and commercial viability. Fur­thermore, these installations enable C&I units to gain revenue through the sale of excess electricity to other entities via the trading exchanges.

Over the years, captive and rental power have emerged as viable options for 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, re­newable sources of power are emerging as competitive options owing to their rapidly declining capital costs. More­ov­er, they help entities meet their renewable purchase obligations (RPOs) and net zero targets. Greater access to debt financing, the 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.

There is more demand for renewable en­ergy as C&I consumers aim to meet the larger goals of decarbonisation and net zero emissions. Hence, several C&I entities are increasingly entering into corporate power purchase agreements (PPAs). These are contracts between a corporate buyer and a renewable power generator for the purchase of electricity at a pre-determined price for a specific duration. The international emphasis on environment, social and governance norms is also providing a fillip to several major corporate entities and pushing them to develop captive capacity in their industrial units with some players even consi­dering the replacement of captive thermal power plants that are ageing with re­newable sources of energy.

The renewable energy installations in C&I units are growing on account of increasing tariffs levied upon C&I consu­mers by discoms in a bid to become profitable and reduce debt. Moreover, the rise in the price of fuel such as coal, natural gas and crude oil for several yea­rs, with the exception of 2020-21 (during Covid-19), means that captive power plants incur higher expenditures owing to the higher cost of fuel. The cost of op­erating fossil-fuel based captive power pla­nts is expected to increase further ow­ing to regulatory mandates requiring the installation of emission control systems such as flue gas desulphurisation and de-NOx systems.

Meanwhile, the cost of components related to rooftop solar and renewable energy-based technologies has continued to decline. Grid power tariffs in many states for C&I units are roughly Rs 8-Rs 10 per unit while the levellised cost of power th-rough rooftop solar with four-hour battery storage stands at Rs 6.50-Rs 8 per unit, with the additional advantage of mi­ni­mising sudden outages.

Technology options and business models

At present, renewable energy-based capacity accounts for 6-8 per cent of the total captive capacity of 78 GW in India. Most of the industrial units with captive capacity were set up a long time ago and were based on thermal power. Solar power (especially rooftop solar), wind power and biomass-based energy are the major types of renewable energy-ba­s­ed captive capacity. Solar power is suited for installation in C&I units because it does not have many exorbitant requirements except for irradiation, in comparison to wind-based power or biomass-based power.

Many sugar factories utilise bagasse-ba­s­ed generation. Using by-products as raw material helps increase the inbuilt efficiencies of the manufacturing process.

In recent months, several industrial entities have expressed interest in developing hybrid renewable power as well as round-the-clock captive capacity. Hy­brid renewable power is a combination of solar- and wind-based power on the same site. It helps reduce off-peak issu­es. Renewable energy 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 transmission infrastructure. Notably, Andhra Pradesh, Gujarat and Rajasthan have introduced policies for hybrid projects.

Captive power plants powered by gas turbines have helped achieve high levels of energy efficiency in the fertiliser and alkali industry. Petrochemicals and sponge iron are the other industries where the use of electricity has steadily in­creased. In the medium- to long-term, India plans to substitute gas-based turbines used in these industries with green hydrogen or green ammonia-based fuels.

Policy and regulatory update

The Central Electricity Regulatory Com­mission recently notified the terms and conditions for renewable energy certificates under the Renewable Energy Ge­ne­ration Regulations, 2022. As per these regulations, captive generating stations based on renewable energy sources will be eligible for the 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 the RPOs.

Another key trend has been the 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. In addition, the regulations for group captive power have been revised and liberalised in 2022.

A CPP is a power plant that is being set up by a company for generating its own electricity. CPPs owned by a group or having multiple owners are called group CPPs. Under the group captive scheme, a power plant is developed for collective usage of consumers. At present, under the Indian Electricity Act, 2003, and the Electricity Rules, 2005, a power project is considered “captive” if the consuming entity or entities consume at least 51 per cent of the power generated and owns/own at least 26 per cent of the equity. These pl­an­ts operate off-grid or they can be connected to the electric grid to exchange excess generation. Captive power plants are set up by power-intensive industries where the continuity and quality of energy supply are crucial.

In December 2021, the Supreme Court of India ruled that captive power consumers will not be liable to pay an additional surcharge under Section 42(4) of the Electricity Act, 2003. The court also stated that this decision will be applicable retrospectively and, hence, discoms are now enjoined to refund the bills issued to captive power consumers. This decision will be extremely favour­able for captive power generators as it will ensure the refund of the surcharge.

Issues and challenges

Solar resource-rich states such as Guja­rat and Maharashtra, which often have surplus generation, have already moved to monthly banking for the 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 the charges 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.

Coal-based capacity accounts for 40 GW out of the 78 GW captive capacity in India. However, fluctuations in the price of coal and scarcity of coal pose challenges for coal-based captive C&I units. For instance, in August 2022, around 50 per cent or 20-22 GW of captive coal-based capacity had to be temporarily closed owing to high coal prices and non-availability of coal. Therefore, C&I companies with captive coal capacity plan to diversify into renewable capacity in the medium to long term. Further, C&I units with coal-based captive capacity are required to maintain a huge workforce dedicated to operations and maintenance (O&M) of the thermal power plants (TPPs), raising the O&M cost of operating captive TPPs. Renewables-based captive capacity involves minimal O&M costs, does not require specialised staff for operating it and is, therefore, more favourable than TPPs.