From RPOs to PDOs: Time to think of Power Decarbonisation Obligations for discoms

Against this backdrop, this article explores options for India’s march towards decarbonisation of the power sector.

By V Subramanian & Srinivas Krishnaswamy

The Paris agreement aims to keep the increase in global average temperature to well below 2oC above pre- industrial levels, and further limit the increase to 1.5oC, to reduce risks and impact of climate change (Article 2 of Paris Agreement). Further, with the new IEA-prescribed scenario to phase out fossil fuels to achieve the 1.5oC target suggesting that the power sector achieves net zero by 2040 globally, pressure on countries to develop long term deep decarbonisation plans, with the ultimate goal of net zero emissions by the earliest possible year, would grow.

An issue that appears top-priority is power-sector decarbonisation “in all the countries.” To put this in context, the total greenhouse gas (GHG) emissions from India’s electricity generation stood at 958 Mt Co2e, constituting 51% of the total GHG emissions from the energy sector and approximately 40% of India’s total GHG emissions for 2015.

Against this backdrop, this article explores options for India’s march towards decarbonisation of the power sector.

Decarbonising the power sector would essentially entail maximising renewable power in the overall sourcing and use. Targets of 175 GW and 450GW have been announced. Given the structure of the Constitution, it is necessary to take the states into confidence and work out an acceptable solution.

An early renewables-promotion initiative power was the Renewable Power Obligations. (RPOs). This was not so much from the point of view of reducing emissions than to make additional power available to the grid and discoms. In order to incentivise renewable energy, the Indian Electricity Act 2003, gave legal teeth to RPOs that mandate all electricity distribution licensees must purchase or produce a minimum specified quantity of their electricity requirements from renewable energy sources. It further empowered state electricity regulators to determine the quantum of such RPO based on the renewable potential of the states. The rationale was to give a level playing field for renewable energy that was more expensive in the first decade of the 21st Century. At that point of time, the cost of renewable power was higher than that of coal-based power that was in the region of Rs 3.72 per kWh. Also note, such RPOs were prescribed for states as a whole, not for each discom.

It was also seen that all the states were not equally endowed with renewable resources, as a result of which a market-driven mechanism of Renewable Energy Certificates (RECs) was also introduced. In brief, the concept was one of a few discoms absorbing the energy from renewable sources at the Average Power Purchase Cost (APPC) and granting certificates to the energy producers who could sell them to other discoms and other obligated entities to fulfil their RPO commitments. Though there were provisions for penalties for non-compliance with RPOs, they were hardly imposed by the regulators. The law existed more in breach than in observance. The system of RPOs and RECs is continuing for historic and academic reasons alone.

However, the new cost dynamics, the creation of a national grid and technological developments have changed the scenario and increased the number of options available significantly. Cost of renewable power is lower, transmission of power from one region to another is seamless and with better technological tools, power scheduling has become well planned and executed.

Though critics of renewable power may state that the CUFs are much lower than that of coal-based thermal power, cost of renewable power is far below that of conventional coal thermal power. As of 2021, the lowest bid price for solar is Rs 1.99 per kWh, while the average price of wind is Rs 2.65 per kWh, hydro is in the region of Rs 2.72 per kWh—in sharp contrast to the situation a decade earlier. Further, compared to installed capacity of mere 10 GW of RE in the decade of 2000s, the current installed capacity of renewable power (January 31, 2021)—including solar, wind, small hydro and bio-power—is well over 94GW. Given this backdrop, it is time to revisit the incentive and penalty structure in the power sector.

Given the decline in the prices of renewable energy, coupled with increased capacities, a number of discoms have dramatically increased their share of purchase of electricity from such sources. The share of renewable energy in a few discoms is as high as 33%. This has been further facilitated by the completion of the National Grid that enables seamless transmission of power one region to another.

Further, a number of states have also exceeded their RPOs. Notable amongst them are Andhra Pradesh, Karnataka, Rajasthan, Maharashtra and Gujarat. The accompanying graphic gives a snapshot of select states’ RE purchase.

However, this trend is still not a pan-India trend, though a number of states have definitely increased their RE share. One of the reasons for this not happening is that many of the discoms are still saddled with long-term power purchase agreements with coal power generating companies.

In addition to such compulsions of PPAs, the discoms continue to incur “fixed costs” even when they do not draw power. In quite a few cases, the fixed costs paid by discoms to coal-based gencos may actually be more than the current prices of solar or wind power per kWh.

This then leads us to question the continued the relevance of RPOs and RECs and the option of evolving a more logical and robust system that can expedite decarbonisation of India’s power sector by 2050 or a reasonable time period if not 2050. We propose a new system that could incentivise both the renewable energy gencos to meet and perhaps even exceed the set targets by 2030 and ensure optimum “capacity utilisation factor”, apart from incentivising discoms to increase the share of renewable power in their portfolio.

Our proposal is to have a progressive and a time-bound cap on the purchase of coal-based power, reducing this on an annual basis. Naturally, this has to be done discom-wise, by looking at the historical break up of procurement of power from various sources and targets or trajectories for future procurement of power.

This data is not hard to come by since all the discoms disclose their source of power supply and cost. This new system could be called Power Decarbonisation Standards. The system would set a progressive threshold for decrease in purchase of coal-based power and a corresponding increase in purchase and absorption of renewable power by discoms.

Taking into account the present extent of purchase of both renewable and coal-based power, it should not be difficult for the regulators to set a trajectory of annual reduction of coal-based. The Power Decarbonisation Standards, if adopted, would also ensure that a comprehensive plan is put in place to limit the setting up of new coal plants, while also retiring vintage coal-fired power plants—more polluting than the recent ones—over a period of 20-odd years.

These can also be designated as Carbon Credit Certificates (CCCs) to be granted to the discoms by the regulators for annual reduction in purchase of coal power after a cut-off date. These CCCs could also become market-based financial instruments that can be traded domestically to start with, and, later on, internationally when the markets mature.

Further, in order to incentivise decarbonisation of the power sector, the scheme could also include captive power plants operating on coal to shift to renewable power.

To conclude, the concept of Power Decarbonisation Obligations could work only with a finely-tuned coordination and implementation mechanism that involves policy, regulations and enforcement, with state governments on board.

If the solution lies in reducing coal-based power in the system, it is high time the government looked at innovative options rather than tinkering with the existing structure alone.

Subramanian is former secretary, ministry of new and renewable energy and Krishnaswamy is CEO, Vasudha Foundation