A fundamental flaw

New RPO targets are well-intentioned, but do we have commensurate generation?

A fundamental flaw
The RPO targets were fixed by the respective state electricity regulatory commission (SERCs). (Representative image)

By Somit Dasgupta

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Recently, the government announced a trajectory for renewables purchase obligations (RPOs) for the period 2022-23 to 2029-30. The guidelines are complex. What may be mentioned for the purpose of this piece is that, for 2029-30, the total RPO target is about 43%. Out of this, a major chunk, of 33%, will account for solar generation, old hydro and wind generation, biomass, etc. The remaining 10% will take care of new wind and hydro based generation. Now, what exactly is an RPO? This is a mechanism whereby large and bulk consumers (hereon, designated entities) are mandated to buy a given proportion of their power from an identified renewable source. Since the cost of generation could be high from such sources, the designated entities, in normal circumstances will not buy from that source and will depend upon conventional sources that are cheaper. By mandating RPOs, there is an assured market and it promotes building up of more generation capacity, which will ultimately lead to lowering of cost of generation on account of economies of scale.

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The concept of RPOs was introduced in India in pursuance of the Electricity Act 2003 (Act) and it was limited to solar power only. The RPO targets were fixed by the respective state electricity regulatory commission (SERCs). Subsequently, in 2016, the concept of RPO was extended to non-solar generation to include wind, biomass, etc. Subsequently, the government, in 2018, laid down a trajectory of RPOs for solar and non-solar sources for the period 2016-17 to 2021-22. For the final year, 2021-22, the RPO figure was 10.5% each for solar and non-solar. These figures are on a pan India basis. Obviously, all states are not renewable-resource-rich and, consequently, may not be able to meet the target. In such a case, the designated entities can buy renewable energy certificates (RECs) to the extent they are in deficit.

Now, has this concept of RPOs served the objective? The answer is ‘no’. The reason is that the SERCs, after laying down the RPO targets, never really enforced them. It is common knowledge that barring a handful of states, all lag behind their targets by a huge margin. The report of the Standing Committee for the ministry of new and renewable energy (2020-21) says that, for the year 2019-20, about 19 states met less than 50% of their RPO obligations and only four states achieved more than 100%, namely, Karnataka, Andhra Pradesh, Rajasthan and Tamil Nadu. There is, however, a larger question regarding the RPO targets laid down. The estimated total power purchase (in the absence of actual figures) in 2021-22 would be around 1,350 billion units (BUs), out of which about 150 BUs came from hydro sources. Considering the fact that that the RPO target is 10.5% and after adjusting for purchase from hydro sources, about 126 BUs would be required from solar sources. The problem is that with the present, grid-connected solar capacity of 46 GW, only about 77 BUs can be generated assuming an average capacity utilisation factor of 19% for solar plants. So, if all the designated entities actually try to meet their RPO targets, the figure of 10.5% cannot be reached due to insufficient solar generation.

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It would be interesting to see if a similar situation occurs in 2029-30. According to governments estimates, the likely demand that would emanate from the distribution companies (discoms) in 2029-30 would be around 2,400 BUs. The RPO target for solar, old hydro and wind based generation being 33%, it would mean that solar generation to the extent of 580 BUs would be required after accounting for old hydro and wind generation, which would be around 210 BUs in 2029-30. All these estimates are broadly indicative and are being used to drive the point home. To generate 580 BUs of solar energy, one would need a generation capacity of 300 GW. While arriving at this figure, it has been assumed that the capacity utilisation factor would go up to 22% from 19% today because of technological improvement. To reach 300 GW capacity by 2029-30, we have to add solar capacity at an average of about 30 GW per year for the next eight years. What we have added is only about 6 GW per year in the last eight years! Incidentally, adding to capacity is going to be tougher now onwards with imposition of basic customs duty, restrictions regarding vendors qualified to supply equipment, increase in GST, etc.

Things are going to get more complicated since the government intends to provide statutory guarantees to RPOs to ensure that the targets are met. In the proposed amendment to the Electricity Act (Bill already tabled in the Lok Sabha), the designated entities are going to be levied a penalty if they fail to achieve their RPO targets. The penalty is going to be between 25 paise and 35 paise for the first year of default to the extent RPO targets are not met. From the second year onwards, the penalty would be raised to anywhere between 35 paise and 50 paise. This would mean that for each percentage point of RPO target not met, pan India, the defaulting entities would cumulatively have to pay `150 crore, assuming the penalty is 25 paise per unit. Given the current financial health of the discoms, it is inconceivable that they will be able to pay penalties of such an order.

Two points emerge from this discussion. First, the RPO targets are too optimistic and are unlikely to be met, more so because of lack of generating capacity by 2029-30 rather than lack of will on part of the designated entities. Second, by not meeting the RPO targets, huge penalties would be levied on the designated entities, which they anyway can’t afford to pay. The net result is that we shall see more frequent discom bailouts. Instead of imposing penalties, a better approach would be to hold the regulatory commissions accountable and proceed against them if RPO targets are not met.

However, one can move against the regulatory commissions only if it is proved that sufficient capacity was available. At the end of the day, it almost seems like a chicken-and-egg story! What comes first, RPOs or generating capacity?

The writer is senior visiting fellow, Icrier, and former member (economic and commercial), CEA Views are personal

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