India’s Proposed National Green Tariff Policy: Resistance Ahead?

As global discussions on climate change and the pressing need to reduce dependency on fossil fuels take centre stage, India too is taking steps to embrace and promote green energy. The Indian Government recently announced plans to formulate a “green tariff policy” with a view to incentivise consumption of renewable energy over non-renewable energy. Under this policy, power distribution companies (DISCOMS) will supply power generated from renewable sources to consumers at a tariff that is lower than that of conventional energy.

 

The principal idea behind the proposal of green tariff policy is that this will encourage more consumers to opt for cleaner green energy, thereby pushing DISCOMS to contract more renewable power, even beyond their renewable purchase obligations (RPOs), as there will be sufficient demand in the market for clean energy.

 

This is a welcome move. However, while it is agreed that Governments across the globe should take steps to incentivise consumers opting for clean energy, the announcement of India’s green tariff policy has raised some concern regarding certain gaps that will need to be addressed.

 

Let us discuss some of these gaps that will require urgent attention as we move towards implementing this new policy.


Rising construction costs for solar projects


This proposal of introducing a green tariff policy floated because around that time, the tariffs, which were being determined through competitive bidding processes, had gone down as low as INR 1.99 per unit and INR 2.43 per unit for solar and wind projects respectively. However, recently Ministry of Finance through its Notification dated 30-9-2021 [Ref. No. 8/2021 – Central Tax (Rate)] has revised the Central Goods and Services Tax (CGST) rates on “solar power-based devices” from 2.5% to 6% thereby revising the GST rates on “solar power-based devices” from 5% to 12% [CGST plus State Goods and Services Tax (SGST)]. With this revision in the GST rates, the cost of construction for the solar projects will substantially increase which will be reflected accordingly in the determined tariff rates. Thus, the tariff rates for solar projects will not remain this low for upcoming projects.

 


Deviation in renewable power generation


The biggest obstacle for the proper implementation of green tariff policy would be that renewable power is infirm in nature i.e. it is dependent upon variable natural factors, such as wind speed and solar irradiation, thereby causing the actual generation to vary from the scheduled generation which eventually create grid insecurity issues. So, if the DISCOMS start increasing their contracted renewable capacities in light of its growing demand among the consumers, then they would also be needing sufficient conventional power to absorb the deviations happening in green energy generation in order to maintain grid stability. The same can further be corroborated by Central Electricity Authority’s (CEA) Report on Optimal Generation Capacity Mix for 2029-2030 which states that India’s projected peak demand value in October 2029 will be approximately 340 GW, and a thermal installed capacity of approximately 267 GW will be required to meet such demand.

 


Issues pertaining to “banking” of power


One way to tackle the issue of deviation of actual renewable power generation from the scheduled generation by the renewable power developers is through banking the surplus power with the DISCOM concerned. However, the banking regime/regulations are not consistent across the States in India. All the State Electricity Regulatory Commissions have formulated their respective banking regulations for renewable power generators on the basis of numerous factors including load requirement in the State concerned, commercial status of the consumers and the respective State targets for green power integration to the grid. There are some States which do not encourage the provision of facility of banking to renewable power developers citing commercial reasons (adverse impact on the viability of the State DISCOMS, etc.) and impose restrictions on the facility of banking including imposing time of day (TOD) restriction for withdrawal of banked power, levy of heavy banking charges and allowing facility of banking only on seasonal basis.

 


On-site battery storage – A solution?


Considering the issues pertaining to the facility of banking, one of the prospective ways of implementing the green tariff policy would be to align this with the requirement of on-site battery storage facility for renewable power plants. Government has been planning to create a robust regulatory framework for developing energy storage systems in India. Ministry of New and Renewable Energy (MNRE) had also constituted an expert committee to draft policy to establish a National Energy Storage Mission. Also, a policy framework is being prepared to introduce on-site battery storage systems for wind and solar projects. Recently, in December 2020, Solar Energy Corporation of India (SECI) had issued a tender for a 20 MW solar project along with an on-site 50 MWh battery energy storage system to be set up at Phyang, Leh, Union Territory of Ladakh. In past two years, SECI had issued other tenders as well for setting up of solar projects along with on-site battery storage systems. Apart from this, SECI has also issued a tender for 2000 MWh of standalone energy storage systems.

 

A robust battery storage mechanism can play a pivotal role in ensuring grid security vis-à-vis increasing green power integration to the grid. However, battery storage facilities/systems have not been introduced in India yet on a commercial level and are still at a very nascent stage. Therefore, the associated costs for creating such an infrastructure would be much higher which will eventually be reflected in the corresponding tariff rates as well. So, even if the green tariff policy is introduced after ensuring that there is on-site storage facility for renewable power projects, the tariff determined/adopted will still be significantly high and cannot be less than that of thermal power tariff rates.


Green tariff policy: The road ahead


One may say that this is the classic case of “putting the cart before the horse”. If incentivising the consumers would create an unwarranted demand to shift to green energy, then there is a clear challenge with respect to the grid coming under extreme pressure. The Government must be mindful of this, as they cannot introduce the policy without taking into consideration the aforementioned issues. Incentivising and boosting demand disproportionately, without creating the necessary infrastructure to support the increased demand could lead to a major challenge. One could say that going forward with the green tariff policy without addressing the above issues will be somewhat of a hasty move.

 

In order for it to be efficacious, it is imperative that sufficient cost-effective infrastructure for on-site battery storage is created first at the national and State level. Only a robust battery storage infrastructure could minimise the deviation related risks in renewable power generation, which will thereby propel green energy’s market share.

 

For now, all eyes are on the Government as they deliberate on what would be the best possible way to take into account all stakeholders’ interests, including the pressures that could adversely impact DISCOMS in the future.

 


† Shivanshu Thaplyal, Partner in the Energy, Infrastructure & Resources team at Khaitan & Co. Shivanshu regularly advises on corporate/commercial matters and policy and regulatory issues.

†† Rishabh Sharma, Associate in the Energy, Infrastructure & Resources team at Khaitan & Co.

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