How to ramp up solar capacity to 100 Gw

Installed solar capacity in India has increased four-fold in the last three years. Yet overall solar capacity now is just eight per cent of the 100 Gw targeted for 2022. Clearly, we need to add 15 Gw in each of the next six years — or five times the three Gw added last year, which was the highest ever.

This is a huge task, more so because this would require commensurate and sustainable visibility of buyers for the electricity so generated, and smooth integration of solar power into the national and local grids.

Nature’s bounty in terms of copious solar radiation or “insolation”, rapidly reducing equipment cost and therefore tariffs, and consistent encouragement from the government have spawned a material bump-up in installed capacity.

However, given the staggering goal, some areas need urgent attention. The first of these is to understand properly the idiosyncrasies of solar power and the resulting impact on grids and project viability.

Compared with conventional energy, solar power is irregular because generation is not possible 24 hours a day; management of grids therefore becomes crucial. This quirk gets magnified geometrically when you scale up to 100 Gw by 2022, or a third of the peak demand of 289 Gw projected for that year (as per the 18th EPS-CEA), assuming full, simultaneous availability.

Irregular supply destabilises grids, impacts off-take and spawns curtailment risk or “back-down”, which is the unplugging of a power source from the grid. The government says all renewable projects must run continuously, yet curtailments are a reality and as high as 15-35 per cent in the relatively more mature wind power sector in Tamil Nadu and Rajasthan.

Our calculations show that a 10 per cent curtailment can lead to a five per cent decline in the internal rate of return (IRR) of wind power projects, enough to render many unviable. The problem is that backing down has now started in solar, too. So, the ministry of new and renewable energy has asked states to enforce “must run”, ordering that any backing down can be only of thermal projects, ensuring that some coal is saved.

The second issue is the credit profile and wherewithal of discoms. In the wind sector, payments are delayed by six to 24 months, mainly due to revenue underrecovery by discoms. Madhya Pradesh, Tamil Nadu, Rajasthan and Maharashtra have been laggards here. For developers, a year’s delay in payment can shave off three to four per cent from the IRR, which alters the project feasibility arithmetic.

At least in one state, solar projects are also facing payment delays because the central government’s off-take agency, which is supposed to pay, is yet to get its monies from the state discom. Another reason for payment delays is the significant gap between average revenue (without subsidy) and average cost of supply, which varies from ~1.49/kWh to ~2.31/kWh.

Further, large solar projects are being bid in the range of ~4.34 to ~5 per kWh, well above the national average procurement cost of ~3.40 per kWh (Central Electricity Regulatory Commission calculation), which increases the burden on discoms.

The third issue is the Renewable Purchase Obligation (RPO) which has financial implications for discoms. A back-ofthe-envelope calculation of RPO obligations, including additional solar power for two key potential renewable energy states, shows an impact of 15-20 per cent on the annual revenue requirement, which, in turn, will have to be offset through a 65-87 paise tariff hike over three years.

All this means that structural mitigation of grid integration risks and sustained improvement in the finances of discoms are imperative if solar power is to thrive.

There are six ways to ensure this happens.

First, solar power needs greater grid acceptability and stability, and this can be ensured by strengthening the transmission infrastructure. Work is already underway on the Green Energy Corridor, which aims to promote inter-state trade of renewable power by synchronising renewable and conventional generation. This is expected to make India’s transmission ecosystem more dynamic, with the ability to handle variations in generation and improve the incorporation of solar power into the grid.

Second, metering and forecasting needs to improve. Though “availability based meters” need to be installed to account for energy injection and deviation in generation, not all states have done so, because of which a “deviation settlement mechanism” has not been implemented.

Third, the Forum of Regulators has already come up with model regulations on forecasting, scheduling and deviation settlement for wind and solar power projects. States need to take the cue and roll out their own regulations.

Fourth, there is a need to enhance grid stability structurally, or for the long term. This can be done by setting up ancillary industries that can sync with solar generation timings, and promoting alternative sources such as hydro power, which does not fluctuate as much as wind or solar, and can quickly respond to demand situations. It’s good to note that the government is already working on a hydro policy.

Fifth, commercially, curtailment in solar can be curbed by shifting to a fixed take-orpay, or deemed generation contract where discoms will have to pay in spite of backdowns.

Finally, raising tariffs to reflect cost of supply is critical in improving the financial health of discoms. With the Ujwal Discom Assurance Yojana (UDAY) taking off, this is the best time to raise tariffs and make utilities revenue-neutral, instead of artificially pruning costs during regulatory tariff assessment exercises.