How centre is short-circuiting power sector reform

The waiver of inter-state transmission system (ISTS) charges contradicts the draft Electricity (Amendment) Bill’s aim of reducing cross-subsidy in the power sector.

How centre is short-circuiting power sector reform
Cost of recycling would be over and above this. If we are to add these figures to the cost of generation from renewables, there is no parity with coal as on date.

By Somit Dasgupta

Recently, the power minister announced that inter-state transmission system (ISTS) charge may be waived for renewable generation projects (solar and wind) for at least another six months with effect from December 2022. This concession, introduced in 2016, is available to solar and wind projects set up through competitive bidding route that have power purchase agreements (PPAs) with entities for compliance with renewable purchase obligations (RPOs).

Of course, as the name suggests, the solar or wind generator has to be connected to an inter-state line (as opposed to an intra-state line), and all such projects get this benefit for a period of 25 years from their date of commissioning, with the cut-off date extended, as of now, to December 2022. The intention behind giving the additional six months’ time, was possibly to offset the effect of the current pandemic. The question is: Is such a waiver really an incentive to the renewable sector or to the consumers at large? We first have to see how ISTS charges are determined and apportioned amongst states.

ISTS charges are determined under the Point of Connection (POC) principle. The calculations are a bit complex, but, in layman’s terms, it can be said that payment will be based on the extent of usage of the transmission lines. Whosoever uses more, pays more and vice-versa. The total transmission charge that is payable is determined by the CERC, and for FY21, it is about `40,300 crore. This total charge has to be apportioned amongst the users on the basis of usage. For determining the extent of usage by each entity, load flow studies are conducted by the National Load Despatch Centre, and the total transmission cost is apportioned state-wise.

Now, here lies the rub. If we are to give exemption to solar and wind projects connected on ISTS lines, then we exclude that capacity from the PPAs held by the discoms of the state. Consider a state which has PPAs of 500 MW, out of which 50 MW is from solar and wind projects connected on the ISTS lines. To determine the state’s share in the transmission cost, it would be assumed that it has total PPAs of only 450 MW against the actual figure of 500 MW. Considering that the full transmission cost, as determined by the CERC, is being paid to the transmission service provider, obviously, someone else is paying for the cost. What is actually happening is that a part of the transmission cost is getting socialised across all the states resulting in some form of cross-subsidy.

Through this mechanism, are we really offering any subsidy to the renewable generator? The renewable generator will only receive its generation cost from the purchaser which was arrived at the time of bidding and nothing more. The transmission cost is paid by the purchaser, the discom. It is just that the states which have a relatively higher ratio of solar and wind projects connected to the ISTS will be able to deflect some of their transmission charge to other states. This entire calculation shows that there are no efficiency gains through this process, and we are merely distorting prices apart from making things non-transparent—optics, while for the nation as a whole, it is a zero-sum game. Instead of this cross-subsidy, in case the government really wants to subsidise the sector, it can pay direct subsidy so that there are no price distortions. It may be mentioned that in the case of solar, only about 5,500 MW, or ~15% of the current installed capacity, is connected to the ISTS.

For wind, it is about 2,250 MW, or ~6% of the total wind capacity. The draft Electricity (Amendment) Bill 2020 talks of progressively reducing cross-subsidy in retail tariff and tariff reflecting the cost of supply. Cross-subsidising transmission charge in this fashion belies this principle since transmission cost is also a part of the cost of supply.
If we really feel renewable tariff is now comparable with that of coal-based projects, where is the question of any waiver of transmission charge? Many analysts believe the generation cost of solar and wind projects are not really on at par vis-à-vis coal since certain costs of renewables are ignored while these should be added to their cost of generation—viz balancing cost and the cost of recycling solar waste at the end of their life. In a case study conducted by CEA in 2017, it was estimated that the balancing cost for Tamil Nadu was Rs 1.57 per unit spread over renewable generation and the corresponding figure for Gujarat was Rs 1.45 per unit.

Cost of recycling would be over and above this. If we are to add these figures to the cost of generation from renewables, there is no parity with coal as on date. For giving a fillip to renewables, there are other issues which merit attention, for example, there is serious lack of harmony between the policies being announced by the government of India and what is being done by some of the states. How else do we explain the reopening of PPAs as is being done by some states! The introduction of ceiling tariffs for both solar and wind-based projects is also illogical since radiation levels and wind potential vary across the country.

The ceiling tariff for wind-based projects, however, has since been withdrawn. Imposing custom duties for a short period of three years is also myopic since no investment decisions are made for such short duration. A minimum of 7-10 years should have been considered so that domestic manufacturers are reasonably assured of recovering their investments. Withholding payments of renewable generators by discoms is yet another sure way of killing the industry. Let us address these issues first rather than indulge in creating a mirage by providing a waiver of ISTS charges for solar and wind projects.

The author is Former member (Economic & Commercial), Central Electricity Authority. Views are personal

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