The hidden costs of renewable power

How compulsory purchases of renewable energy have made it expensive for discoms that primarily rely on thermal power

India’s renewable power programme, with tariff bids for solar power hitting new lows every few months, is coming up at the cost of thermal power. The idea is to do exactly that and replace the dirty carbon-fuelled coal power generation with green options. But the manner in which this is being achieved is unwittingly raising costs for renewable power purchases.

Solar tariff at ~2.14 a kilowatt hour (kw/hr or unit) was the lowest ever after basic customs duty was imposed on solar equipment from July 1, 2021. It was achieved at a recent Madhya Pradesh government auction; and wind tariffs were in the range of ~2.69-2.7 in the recently concluded bidding by Solar Energy Corporation of India.

Any policy-maker, however, will always reiterate the importance of coalgenerated power in providing the base load for a country as big as India. Base load implies the bare minimum needed to keep the power grids functional and supply reliable, which is a challenge for renewable power. There are, of course, examples of some very small countries that run their power systems entirely on renewable power. Anguilla, in the Caribbean, runs entirely on solar power. Fiji meets its power requirement from renewables that include hydel power.

In India, the base load necessity for coal was reflected in the recent crisis that gripped the power sector in August-end, with power stations reporting bare minimum coal stocks. The country’s largest power generator, NTPC, in fact, was frantically telling states to buy its more expensive natural gas-based electricity, while the Union government instructed power producers to immediately go in for coal imports. All this because the state utilities did not stock up enough coal to meet the rising power demand before the monsoon came in the way of transportation and blocked further supply.

This experience during the waning monsoon season puts a question mark on whether the country’s increasing reliance on renewable energy can improve the power supply situation for India. For those with rooftop solar captive generation, monsoon is not exactly the season for high generation and the same goes for utility-scale renewables that enjoy a “must-run” status.

Must-run status means that power distribution companies (discoms) are obligated by regulation to pay for green power even if they do not need or use it. But this, in turn, means that a discom has to ask the thermal plant to back down. “This translates to paying for renewable power and also paying the fixed cost for thermal power; so there is an enhanced cost for buying renewable power,” said a senior power official in one of the states that is at the forefront of adding renewable power capacity. This reality behind the purchase of renewable power makes the overall cost of buying green power higher than the tariff at which it was agreed to be bought.

The states obviously feel that they should not pay a higher price when they have agreements with thermal units tied up for 25 years. Therefore, each time the discovered tariff for solar is lower than earlier, some discoms do not honour green power purchase agreements (PPAS). Rewa Ultra Mega Solar Ltd, a joint venture of Madhya Pradesh and the Union government, for instance, got a tariff of ~2.35 for 105 Mw unit and ~2.33 for another 220 Mw unit from NTPC Renewable Energy offering for its Shajapur Solar Park on July 19. The state, therefore, decided not to proceed with a power sales agreement (PSA) it signed with NTPC just two-and-a-half months ago on April 30 for buying power at ~2.7.

States also do not want to give up thermal PPAS signed even when they are trying to meet the country’s target of 175 Gw of renewable installed capacity. The reason being the cost it would entail because of contractual obligations. Madhya Pradesh, for instance, on September 2 bought 23.17 million units (23,171 Mw/hr) from Reliance group’s Sasan Ultra Mega Power Plant at ~1.63. On the same day, it bought 10.66 million units (10,664 Mw/hr) from Kota Supercritical Thermal Power station of the Rajasthan government for ~2.03. These are just two of the coal-based plants among many that fed electricity to the state consumers when the coal stocks were precariously low. According to a Union government portal, all must-run green power units together sold just about 21.8 million units (21807 Mw/hr) to the state.

This dichotomy was laid bare during the recent crisis when the states were trying to keep power generation going even while coal stocks were depleting. On August 30, almost 30 per cent of the generation capacity or 84,947 Mw monitored by the Central Electricity Authority was unavailable, of which 50,818 Mw was under “forced” maintenance or outage.

The dependence on thermal power, therefore, is huge but the capacity utilisation of these generation units is a little more than half, implying the sub-optimal utilisation of capital expenditure that has gone into it. The challenge at this stage of renewable power induction, therefore, is to see whether the low tariffs are truly reflective of the cost that state discoms additionally pay for thermal power they are not using. A universal look at generation capacity addition and power purchase mechanisms is needed rather than just a source-based approach to power sector planning.

The challenge at this stage of renewable power induction is to see whether the low tariffs are truly reflective of the cost that state discoms additionally pay for thermal power they are not using