By Sushmita R. Ajwani, Director, Power and Renewables, ICF International
The commercial and industrial (C&I) segment consumes around 665 billion units of electricity annually, which is more than 50 per cent of the total consumption in India. Owing to the steady economic growth of the country, power consumption in this segment has grown by 5 per cent in the past 10 years. However, the perennial challenge faced by the C&I segment is the rising price of power, which has significantly impacted profitability. The genesis of this challenge lies in the fundamentals of the tariff structuring methodology of discoms, where cost distribution is not uniform across consumers. Historically, to reduce the cost burden of the agrarian community, electricity used in the sector has been overly subsidised. To eliminate the cost arising due to the subsidised tariff, industries and commercial establishments were made to pay the premium. In the past 10 years, the demand charges of most industrialised states have increased, such as in Maharashtra and Gujarat by 8 per cent and 3 per cent respectively.
To control the impact of this incessant increase in grid tariff, many power-intensive industries have turned to safe havens in captive thermal power plants (TPPs), reducing their cost from Rs 9 per kWh to Rs 3-3.30 per kWh. However, not all industries could take this route, as their power requirement was inadequate to support the cost associated with setting up captive units. Further, in today’s scenario, captive TPPs are not seen as an environmentally sustainable option. The realm of procurement of power from sources other than the grid opened up in 2003 as “open access”. Initially it was welcomed and discoms extended various incentives to encourage consumers to switch to alternative modes. Many consumers switched to short-term power markets and third-party power procurement with a lock-in period of three to five years. Tamil Nadu and Karnataka experienced the maximum exodus of C&I consumers to open access routes.
Gradually, as the volume of open access increased, discoms started experiencing revenue drain, which was a key deterrent to open access power. Power procured through open access declined and in many states these transactions became unviable and nearly stopped, as in Rajasthan, Gujarat and Madhya Pradesh. Since 2018, the open access market has experienced new life alongside renewable energy projects. With the government aiming to increase renewable energy capacity in the country, state governments facilitated growth by introducing heavy incentives through open access policies such as waiver on open access charges, electricity duty and cross-subsidy surcharge (CSS). Karnataka, with the most C&I-friendly renewable policy, has become one of the largest markets for renewable open access and more than 20 per cent of the C&I demand in the state is met by renewable energy projects.
However, with the continuous deterioration in the financial health of discoms, these incentives were also reduced and renewable energy open access has been left to thrive based on the cost benefits it brings in as against the grid tariff. During the same time, renewable energy technologies witnessed a decline in the cost curve and regulatory deterrents could not stop the market from growing. The key challenges that the green open access market faced were as follows.
Misinterpretation of captive rules and levy of cross-subsidy surcharge
- In 2021, Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited (MPPKVVCL) imposed CSS and additional surcharge (AS) on UltraTech Cement stating that upfront no power plant can be declared as a captive generating unit. Hence, CSS would be payable by UltraTech’s Maihar unit during the financial year, which would be refunded/adjusted upon its qualification as a captive user on an annual basis.
- In another order of the Madhya Pradesh Electricity Regulatory Commission (MPERC) issued in May 2021, the commission dealt with a similar case of levy of AS on an onsite captive consumer. MPPKVVCL relied on a 2007 order of the MPERC, wherein the regulatory commission held that captive users are liable to pay AS, subject to MPPKVVCL demonstrating stranded fixed costs as a result of their universal supply obligation.
- In August 2022, MPPKVVCL levied AS on Porwal Auto Components. The case is pending adjudication before the Appellate Tribunal for Electricity.
However, the Supreme Court order dated June 3, 2021 clearly disallowed levy of any surcharge on captive consumers to follow the true spirit of the Captive Rules, 2005. This order came as a key judgement for the entire open access market and has eliminated multiple interpretations of captive rules.
Increasing open access charges
In the landed tariff of power, open access charges range from 10 per cent to 20 per cent for captive consumers, to more than 20 per cent for third-party consumers. For instance, in Gujarat, open access charges are 14 per cent in the case of captive consumers and 28 per cent in the case of a third-party consumer. It has been observed that the major contributors to open access charges, transmission and wheeling charges have witnessed a significant growth rate in the past five to seven years.
For instance, in Maharashtra, transmission charges have increased by 14 per cent since 2017 and wheeling charges at a 36 per cent compound annual growth rate (CAGR). In Uttar Pradesh, transmission charges have increased at 7 per cent CAGR since 2017 and wheeling charges at 21 per cent CAGR. In Tamil Nadu, transmission charges have increased at 9 per cent CAGR since 2017 and wheeling charges at 29 per cent CAGR. Similarly, Karnataka has observed an increase of 5 per cent and 17 per cent since 2017 for transmission and wheeling charges respectively.
Addition of new open access charges
There are various new charges other than the open access charges that have been introduced by many states on open access consumers. For example, in Gujarat, the hybrid policy of 2018 applied multiple wheeling charges of Re 0.05 per kWh on hybrid projects. In Madhya Pradesh, the Harit Urja Tax has been introduced in a new renewable energy policy at the rate of Re 0.10 per kWh.
Long gestation period for getting open access approval
In Uttar Pradesh, long-term open access (LTOA) approval is subject to an commercial operation date (COD), availability-based tariff (ABT) meter installation and security deposit with discoms. Most projects have a capacity greater than 100 MW. The major concern lies with the power supply achieving partial COD. Developers are filing a petition seeking LTOA approval on partial COD, which takes around five to six months. In Maharashtra, LTOA approval is granted only in the case of one special purpose vehicle (SPV) per consumer. However, the Green Open Access Rules, 2022 introduces a clause for appointing a load despatch centre/ central transmission utility/state transmission utility as a nodal agency, which shall reduce the influence of discoms in the open access approval process and shorten approval timelines.
States not allowing captive projects
Discoms in Rajasthan are reluctant to issue group captive approvals in the state. In May 2019, a petition was filed by Tesco Energy Private Limited, which has a 37 per cent share in an SPV with other shareholders such as Secure Meters Limited (26 per cent share) and Youngistan Renewable Energy Solutions Private Limited (37 per cent share). The Rajasthan Electricity Regulatory Commission (RERC) released an order providing a clarification on the captive status: “One of the shareholders, M/s Secure Meters, wants to consume 100 per cent of the power generated having an ownership of 26 per cent of the company.” In the commission’s view, the petitioner’s generating plant does not fall under the definition of “captive generating plant” as per Section 2(8) of the Electricity Act, 2003, and Rule 3 of the Electricity Rules, 2005. Hence, it cannot be treated as a captive power plant. In view of the foregoing discussions, no relief could be granted to the petitioner.
Banking regulation turning stringent
In Uttar Pradesh, the CRE Regulation of 2019 allows banking up to 100 per cent of the energy generated in the state, on the basis of which discoms are refraining from signing wheeling and banking agreements at 100 per cent banking of open access power. Recently, Amplus filed a petition regarding restricting the facility of banking up to 25 per cent of the energy generated to 10 consumers of a 50 MW group captive solar project. The final hearing is pending. In Rajasthan, banking of energy is subject to a maximum ceiling of 25 per cent of the energy injected during a 15-minute time block, allowed only for captive consumers. In Madhya Pradesh, the new banking regulation restricts banking for discoms’ registered captive renewable energy projects.
However, the Green Open Access Regulation, 2022 provides a clause for a monthly banking settlement period, with minimum banking allowed as 30 per cent of the energy consumption. The monthly banking provision will help consumers in states where banking facility is restricted.
Despite all these challenges the market remains unstoppable. In 2009, 300 MW of open access power purchase agreements (PPAs) were signed, which will increase to 1.9 GW in 2022 – approximately 15 per cent growth in the past one decade. As per various reports, the total open access quantum till the third quarter of 2023 is 20 GW. This impressive growth is the twin play of the choice of the right procurement model and continuous innovation in renewable energy power products on offer, which has supported the objective of power cost optimisation for the consumer. The procurement model, which was agreed upon and adopted across the consumer class, was one-to-one captive structure based on the Captive Rules, 2005. The captive procurement model, which requires 26 per cent equity contribution from the consumer, insulates the buyer from changes in key open access charges such as CSS and AS. In the past five years, the entire regime of open access has moved to this captive structure for power procurement. To derail this procurement model, some of the discoms started levying AS, which was later squashed by the Supreme Court order dated June 3, 2021, which clearly reiterated the fundamentals of captive rules and disallowed levy of any surcharge (CSS and ASS) on any captive consumers. With this order, the market gained refreshed momentum.
Separately, the continuous innovation in renewable energy generation to improve the cumulative utilisation factor (CUF) has also encouraged consumers to continue with renewable energy open access. Initially, renewable energy open access consumers were procuring only from ground-mounted and rooftop solar projects, which allowed them to replace only 40 per cent of the power. With maturity in technology, fall in prices and supportive regulations, developers could develop new product lines such as intra-state hybrid renewable energy, which has increased the replaceability to close to 60 per cent.
In the past one year, these intra-state hybrid projects could graduate to interstate renewable energy projects with the Ministry of Power’s announcement of transmission charge waiver for ISTS renewable energy projects. This made consumers actively explore the viability of procuring power from these projects and in fact many large industries dependent on captive TPPs have signed PPAs under this route – for instance, the Vedanta-Serentica 580 MW ISTS renewable hybrid project, 300 MW JSW and ReNew’s renewable energy hybrid project, etc. Other than ISTS projects, consumers, especially multinational firms, are also actively exploring options to purchase green attributes to convert their entire consumption to green power. Renewable energy procurement of these companies is pinned to the principle of “additionality” and hence, buying a simple renewable energy certificate (REC) or i-REC certificate is not a solution. Recently, the Central Electricity Regulatory Commission’s (CERC) order on “REC new mechanism” has permitted REC bilateral agreement between the developer and the consumer, which paved the way for many renewable energy merchant plants and bilateral renewable power agreements. The most recent example is Microsoft signing a 100 MW REC bilateral agreement with ReNew Power and for another 100 MW with Amplus Power.
Another new procurement model which is under active discussion is the virtual power purchase agreement (VPPA). Globally, the VPPA is the procurement model most accepted by corporations to meet their renewable energy targets. In India, till October 2021, the concept was marred by regulatory uncertainty but the Supreme Court’s order dated October 7, 2021 on the jurisdiction of the CERC and the Securities and Exchange Board of India in power transactions has helped clear the air around this concept. In fact, with further deliberation in the market, the VPPA has been viewed as a simple bilateral agreement between two parties, which cannot be transferred and traded further, and hence does not require any stringent monitoring from any regulatory agencies.
The open access market has evolved in many ways and has been accepted across the C&I market as the most viable power sourcing solution. In spite of its high acceptability, open access in the power sector will continue to face challenges from discoms till such time that it is not seen as a threat to their revenue model. The concept of “content and carriage” may bring the required parity, but it will come with major regulatory and institutional changes. These changes can only be gradually ideated and adopted and the government, with its Green Open Access Rules, has paved the way for it.