The older regime benefited just a handful. The new rules should spur a conversation on equitable and sustainable pricing frameworks
By Rahul Tongia
Solar power isn’t just good for the environment, many consumers find it good for their pocket as well. It is the cheapest new-build for electricity in India. Forty percent of India’s ambitious 100 GW solar power target for 2022 is meant to come from “rooftop” photovoltaic (PV) generation, or solar cells installed by end-users (they can install it anywhere on their premises). But the actual penetration, thus far, is only of a very low percent. Most solar power generated has come from large grid-scale solar farms, often through large-scale bidding. Rooftop solar was picking up steam till the recent Electricity (Rights of Consumers) Rules gave a clarification on how to price rooftop solar power; this, industry experts fear, could stifle, if not kill, rooftop PV. The new norms will lower the payments to rooftop PV owners, but given solar prices have fallen, a decrease in prices may be necessary and fair.
The updates are an important evolution in the hitherto hodge-podge consumer PV rules that different states follow, and it is time for regulators and policy-makers to find a new framework for pricing rooftop solar that isn’t just based on explicit or implicit support mechanisms, but works for all stakeholders—not just the PV-owner but also the discom.
The crux of the issue is pricing. Grid-scale power is easy to price—there is often a bid that discovers the price and the discoms sign agreements to buy such power. What about rooftop solar? There are two difficulties with setting prices for rooftop solar. First, not all consumers are the same. Current retail electricity tariffs differentiate between residential, agricultural, commercial and industrial users. The latter two segments, on average, overpay to cross-subsidise irrigation pumpsets and households. Even within a category, we have progressive slabs or tiers of pricing, with larger (ostensibly richer) consumers paying more than the category average. Second, where does the rooftop solar power go?
If the household consumes their own solar power, this reduces the amount of power that they need to buy from the discom; for such users, incremental tariff based on their slab that they avoid makes ‘rooftop PV’ generation worth it. But, the real challenge comes when we consider any surplus PV power that they don’t consume—say, when the house is empty. Unless they have a battery to store this power, which is expensive, the logical solution is to feed in such electricity to the electricity grid. But, what should they be paid for such power?
A “simple” solution is to treat import and export of power at the same rate, equivalent to the meter spinning backwards when they generate surplus solar, called net metering, which was the prior norm. But this means that the electricity being fed in to the grid is worth the retail electricity price for the end-user. This creates several problems. First, this means that the larger (and richer consumers) benefit more. Second, this becomes very expensive solar power for the discom. If they were interested in increasing green power, they could have simply procured wholesale grid-scale solar at ~`2/kWh (or `2.25 including transmission and distribution losses), instead of effectively paying, say, `8-10 per kWh via offsets through net metering (based on the retail tariffs for selected sets of consumers).
A few states allow what is termed “banking”—where the consumer can give surplus solar power mid-day, and then offset their units of electricity consumed at another point in time, sometimes for a nominal charge. So, if a consumer gives solar power mid-day, but asks for compensatory power in the evening, which is when the grid is facing peak demand, these are not the same for the utility. In fact, the utility may even be paying a hefty premium for procuring power in the evening. Rates for banking solar power are low, likely to encourage solar power, but, unfortunately, if the consumer is treating the grid like a battery, they aren’t paying for that privilege.
The new Consumer Rules limit net metering to 10 kW of feed-in, which is still much larger than most residential consumers’ connections to the grid. Any larger solar connection should now be priced through gross metering, instead of net metering, meaning there would be a separate price for such solar power. Some states have set PV gross metering prices at the utility’s average power procurement cost, which is still higher than the new benchmark grid-scale solar price (close to `2/kWh), but invariably lower than the highest consumer retail price slab.
This shift in rules certainly hurts those who were making out like bandits under the older regime. This is before considering the 30% capital subsidy households could avail—which effectively meant we are subsidising the rich, who have the roofs and the high tariffs. But the older solar pricing system was creating distortions that ultimately hurt other consumers—the ones without rooftop solar. This wasn’t just because of the existing electricity prices equilibrium relying on overpaying consumers but also because the current electricity consumer prices don’t reflect the true fixed costs of infrastructure for last mile delivery.
As selected consumers increase their use of rooftop solar, they reduce their units or kilowatt hours of electricity purchased, but the infrastructure still needs to be built for the peak demand, which is often in the evening. With less purchases, the aggregate cost (Rs /kWh) goes up. But, the more average prices go up, the more people want to lower their usage of the grid (through rooftop solar, open access, or other means), further raising costs. This has been termed the Utility Death Spiral. But it is critical to emphasise that it is not the utility that necessarily bears the brunt—in India, they are regulated entities with fixed rates of return—but other consumers (often poorer ones) for whom prices would go up.
How do we fix this? What is ultimately needed is for prices—both retail and PV—to reflect true costs. Unfortunately, this is easier said than done. We don’t yet have ‘time of day’ pricing for consumers, except in niche cases for bulk consumers. Even before dynamic pricing, state electricity regulatory commissions (SERCs) need to determine a fair value for incoming solar. If the government wants to encourage solar power, any support it wants to offer should be explicit and outside the tariff mechanisms. Such a price would evolve over time, but state regulators should give multiple years of clarity in pricing, without which the uncertainty would deter deployers.
We also need to overcome utility resistance, covert and overt, which has often been through onerous paperwork or under the guise of “grid security”. Similar resistance happened before, with Open Access, where bulk consumers over 1 MW in size could leave the discom for third-party suppliers, but utilities feared losing their “paying customers”. In fact, through concerted policies and technology innovations, we need to increase the quantum of feed-in solar that the last mile infrastructure can absorb.
In the short run, we have enormous headroom for rooftop PV, which is helpful for the grid because it brings the generation near the consumer and also spreads it out. There is also scope for growing the ecosystem of solutions providers who offer not just quality deployments but even finance for buyers. In parallel, we will have to fix the long-run bottleneck for scaling—equitable and sustainable pricing frameworks. The Consumer Rules help spur the conversation.
The author is Senior Fellow, Centre for Social and Economic Progress
Views are personal