Woes of Wheeling and Banking for Renewables: The problem of plenty can be solved by moving to market based models

India has made great strides in the Renewable energy capacity addition targets with 100GW Solar and 60 GW wind, large part of this progress can be attributed to the spate of reforms starting with the fiscal incentives (which however got tapered off later) like capital subsidy (i.e., subsidy provided in the capital cost of a project), accelerated depreciation benefits (i.e., benefits in the form of higher depreciation in initial years leading to tax savings) finally culminating in the Renewable energy obligations (RPO) stipulated in the Electricity Act of 2003 that mandated certain percentage of generation or consumption to be from renewable energy sources.

But as one looks back, the current environment still has several contending issues to be sorted out as pointed out by Dr. Sushanta Chatterjee, CERC, in his 2016 paper, in the sections on India.

Currently, capacity based wheeling charges are used, which is a disadvantage to RE projects, which typically have considerably lower capacity rates than non-RE projects. Secondly a large number of state-chartered distribution utilities are not credit-worthy, which leads to insufficient and stagnant demand within the REC market (size and customers) and hence, low prices. With the increase in penetration of RE, the balancing costs increase and also the balancing capacity requirement increases.

The problem of plenty includes the policy insufficiency of inter-state wheeling and banking regulations for RE, as RE resource rich states like Rajasthan and Gujarat would not have RPO obligations to be fulfilled whereas others who are rich on non-renewable resources could hold the opposite side of the pole with lots of challenges.

The issue of stakeholder management and consultation by the state regulators is still a subject that leaves a lot to be desired; electricity being a state subject and each state having its own challenges did not make the matter easier.

This is further aggravated as per Chatterjee due to the following issues:

- Poor enforcement of RPOs by SERCs

- Poor financial health (i.e., low or non-existing credit capacity) of state-level distribution companies

- Distribution companies’ preference for meeting RPOs through procurement of RE under long term PPAs

But all this actually dwarfs the actual woes at hand created by the asymmetric payoffs that generators of RE power would enjoy giving power through PPAs to large industrial houses versus selling to State Discoms as follows, while Discoms would be left in the lurch:

Renewable energy developers would like to enter into PPAs with corporate houses for long tenured contracts at fixed costs which is a win-win for both entities in locking a value in an otherwise highly volatile power purchase price environment. Benefits in the form of concessional wheeling or transmission charges, banking facilities, or concession/exemption in levy of CSSs (cross-subsidy surcharge) play a major role in promoting such transactions.

From the perspective of the Distribution Licensee this is just the opposite of what it would like to see.

Distribution licensees are concerned with losing high-tariff customers, which would leave largely subsidized customers to serve. Fear of losing a large consumer base has been a major deterrent to granting open access; open access charges and CSSs are not sufficient to address the economic loss to the distribution licensee.

The woes of wind energy banking is explained by Chatterjee, "Wind energy generation is available at its maximum during the monsoon, when distribution licensees’ overall demand is lessened due to low agricultural load as well as lower air-conditioning loads. During this time, distribution licensees have to scale down to lower-cost thermal generation in order to absorb the wind energy, part of which will be treated as banked energy. But during the nonwindy season when the system demand is higher and consequently cost of power is also high, use of banked energy by the captive and third-party users results in more costly power purchase by the distribution licensee to service such banked energy. Quite often, in the event of their inability to buy expensive power during such a period, the distribution licensees resort to load shedding."

For solar, this problem is similar, solar energy is generated the maximum between 11 am to 3 p.m. when the demand of electricity is the lowest, while solar stops to generate when the demand starts to peak at 6 p.m onwards. The distribution licensee is stranded with this additional energy unless it is able to pass it on and some states are perennially short of demand in this period and must therefore have other states where they could pass over this energy under a wheeling and banking agreement.

More direct PPAs with industrial customers & developers create the additional problem with distribution licensees as they face revenue loss due to migration of industrial and commercial consumers as they subsidize consumers paying lower tariffs.

Chatterjee makes an important point that in the larger scheme of things in order to promote RE, "if procurers’ obligation to pay transmission charges and loss is waived or reduced (as in states like Karnataka, Andhra Pradesh, Telangana, and Madhya Pradesh), any shortfall in the annual revenue requirement needs be socialized on distribution licensees and other open access users. Any impact on distribution licensees would have impacts on retail consumers’ tariffs."

But finally the solution as stipulated by Chatterjee is no less onerous," India may explore regional balancing of variable RE generation as it continues to move toward un-bundling of energy (including) supplies from its delivery (i.e., carriage vs. content) virtual net metering and/or synthetic PPAs between RE developers and credit-worthy buyers of RE attributes (i.e., RPOs) with increasing role of wholesale market for energy and RPOs".

Development of markets where the RE developer is allowed to put the generated power on the exchange and can be traded as Green power is the direction in which India is already moving.

Moving electricity to the market model should include Green power as a separate product and this is where perhaps the final solution lies.