Increase in cost of Renewable Energy Promotion

Rising competitiveness of renewable energy can pose a challenge to power distribution companies (discoms) and the thermal power sector

Given the low share of renewables in the energy mix at present, the financial implication may not be much.

It’s no secret that renewable energy promotion involves financial costs. But what is unknown is the quantum of the expense. A government committee study on grid integration of renewable energy pegs the cost at about Re1/unit. The study says it would still be cheaper to add renewable capacities in future even after including this financial cost but it calls for remedial measures such as sharing of balancing responsibility (by more states) of renewable energy, which is intermittent in nature.

An analysis of test cases in renewable-rich states Tamil Nadu and Gujarat by the committee puts the financial cost of managing renewable energy generation at Rs1.57/unit in Tamil Nadu and Rs1.45/unit in Gujarat.

That is due to the costs arising out of the standby balancing generating capacity charge, underutilization of conventional energy assets, opportunity cost of foregoing existing cheap spot rates (available at less than Rs3/unit, whereas renewable contracts averaged at Rs4/unit), impact of the deviation settlement mechanism charges for interstate flow of power and sub-optimal utilization of the transmission system used for evacuation of renewables due to their lower capacity utilization.

A major part of the financial burden is attributed to the opportunity cost of Re0.5/unit of foregoing cheaper sources for must-run renewables priced at an average of Rs4 per unit. With tariffs in the competitive bids now falling to around Rs2.5/unit (compared to new coal capacity tariff of Rs3.5/unit), this Re0.5/unit charge is expected to come down to zero in the future. Even then states are expected to see a financial burden of Re1/unit.

To be sure, given the low share of renewables in the energy mix at present, the financial implication may not be much. But if India has to achieve its capacity addition targets without remedial measures, the cost can become a sizeable amount.

 Renewable Energy Promotion

According to Sabyasachi Majumdar, senior vice-president and group head (corporate ratings) at Icra Ltd, wind and solar projects are required to comply with the scheduling and forecasting norms. So the deviation cost will have to be borne by the project owners.

But the rising competitiveness of renewable energy can pose a challenge to power distribution companies (discoms) and the thermal power sector. “From discom utility’s perspective, rise in renewable energy share may result into a loss of energy demand from high paying industrial and commercial segment who may opt for open access route using renewable energy which is cost competitive,” says Majumdar.

He added: “Further, there would be operational flexibility required for the thermal power plants which would be exposed to grid back down due to renewable energy which has must-run status; and in turn, cost of thermal generation will remain under upward pressure and also with an increased thrust to meet the stringent environmental norms, going forward.”