In 2015, India surprised the international community with its announcement of a renewable energy (RE) capacity addition target of 175 GW by 2022. At the then total installed capacity of 275 GW, this meant a huge commitment with an underlying hope that electricity demand in the country shall remain robust, basis policies such as the “Make in India” boost to manufacturing and “Power to All” via ambitious rural electrification.
Three years down the line there have been some hits and some misses. As per a recent press release by the Ministry of New and Renewable Energy (MNRE) the installed RE capacity has reached 70 GW of which, rooftop solar contributes only 1.6 GW. Analysts project that at the current pace it is almost impossible to even come close, let alone meet, the original rooftop solar capacity addition target of 40 GW by 2022. Several reasons have been identified for this slow progress which include – high initial capital expenditure coupled with lack of financing options, absence of information regarding subsidies and procedure, lack of adequate roof space as well as possibilities of alternate usage, scepticism regarding poor quality of materials used and, above all, the apathy of distribution utilities.
The Threat of Death Spiral
Most distribution utilities rely on a two-part tariff structure for billing residential consumers and a three-part structure for billing commercial and industrial (C&I) consumers. In addition to the consumers aggregate consumption (kWh) and contribution to system demand (kW), the third building block in case of C&I consumers is a time of consumption (kWh/h) with discounts for off-peak period usage and charges for peak period usage. Additionally other charges, such as fuel adjustment charge, regulatory asset charge, government taxes etc. are also levied on per unit basis. The net effect of such rate design is that approximately 80% of the utility’s revenue recovery is volumetric in nature.
Volumetric rates, coupled with policies for the promotion of distributed energy resources (DER), including rooftop solar net-metering, have been argued to lead to a revenue death spiral situation. The utility strains its revenue recovery for every unit of self-generation by its consumer, and more so in case of high-end residential and C&I consumers, who not only pay for their consumption but also cross-subsidize the low-end residential and agriculture consumers. The resultant increase in tariff makes the grid more expensive for remaining consumers, thus giving them further economic motivation to look for alternate solutions. Utilities have reacted in ways possible, unlike a popular belief that they behave like dinosaurs unwary of the threat of death spiral.
Distribution utilities have often retorted to unclear and often confusing processes causing administrative delays as a way to limit their revenue loss. Delays are mostly attributed to the challenges faced by utility staff in handling new administrative pressures emanating from processing of rooftop net-metering applications, including inspection and testing, safety and security standard verifications, procurement and installation of net-meters and overall changes required to metering and billing processes and software.
Options under consideration
Realizing the revenue loss for distribution utilities and therefore their reluctance for rooftop solar development, MNRE has issued a concept note explaining a new model titled Sustainable Rooftop Implementation for Solar Transfiguration of India (SRISTI). Under this model, the distribution utilities will be the sole implementers of the rooftop solar programme and shall be provided adequate financial incentives for capacity deployment over and above the base installed capacity. Incentives are to be calculated as a percentage of the benchmark project cost for incremental installed capacity. These performance linked incentives are supposed to cover the costs incurred by distribution utilities in related administrative works, but that does not address the issue of lost revenue (and under-recovery of cross-subsidy). Therefore the success of this model remains doubtful.
Alternatively, some utilities have proposed a steep increase in fixed charges, especially for the C&I consumers, while proposing a reduction in energy charge. In most of the cases, regulators have approved an increase in fixed charges, often on grounds that the same shall discourage bulk consumers from procuring power through self-generation or open access thus protecting utility revenues. However, redesigning rate structures to recover network costs through fixed charges may lead to efficiency and equity considerations.
Alternatives to watch out for
Regulators are struggling to find ways to tap opportunities brought forward by technological advancements and at the same time protect utility interests. Performance-based regulations (PBR) which have been tried out in the past for network monopoly industries are increasingly being tested for application to the changing landscape of the electric industry.
In this context, experiences from the New York State’s Reforming the Energy Vision (REV) is particularly useful. REV seeks to transform the utility business from an input-driven model to an output-based model, where the utility competes with its customers and other service providers. It introduces the concept of a distribution service provider, who facilitates the means to achieve optimal performance of the electric grid. All stakeholders get a fair chance to propose solutions and the most efficient solution then gets implemented.
As the system becomes more and more decentralized newer solutions and methods can be explored. A key to creating win-win for all stakeholders is recognizing the value of grid and compensating the utilities for providing the same. After all, we don’t want the dinosaurs to become extinct. We only want them to coexist and contribute to the ecosystem.
News Source: Economic Times