The Modi government 2.0 recently announced its goal to make India a five trillion-dollar economy by 2024. Foreign institutional investments would play a crucial role in meeting this target. The share of India’s rapidly growing renewable energy sector in total FDI inflows to the power sector has increased from 25 per cent to 35 per cent in the last five years. It is further expected to attract larger sums of long-term and cheaper institutional capital. India has already become the largest ‘real’ renewable energy market in the world with its clean energy transition rooted in market principles. However, to attract further institutional investments in Indian renewables, the government need to significantly de-risk the sector. Issues such as high cost of capital (60% of renewable tariff), delay in payments, land constraints, and increased uncertainty due to unpredictable domestic and trade duties remain key obstacles.
Another structural but less-talked about fault line lies at the intersection of the pace of renewable energy capacity addition and the ability of the grid to transmit renewable electricity from these far-flung areas to demand sources in a timely manner. This inability of the grid results in ‘curtailment’.
Curtailment risk is a post-connectivity risk, where the grid operator issues an instruction to limit the scheduled energy output of a specific power generator, due to either commercial or technical considerations. Regulations prohibit commercial curtailment of any kind. But potential violators of these regulations such as grid operators have an absolute control over any such information that could prove their culpability. Therefore, older renewable projects that were bid out at higher tariffs, as compared to recent RE bids or thermal power tariffs, face higher commercial curtailment risk.
On the other hand, technical curtailment, occurring due to imbalances causing instability to the grid, remains a larger concern for developers of newer projects. The most cited reason for the technical curtailment by grid operators is the variable nature of renewables. However, the same grid operators rarely cite other pertinent reasons such as inability of electricity distribution companies to forecast their load accurately, and inability of transmission companies (TRANSCOs) to foresee power grid outages. This risk will rise as the share of renewables grows in the Indian energy mix. Analysis by the Council on Energy, Environment and Water (CEEW) suggests that had developers anticipated curtailment rates of 10% and 20% in the Bhadla bid (INR 2.44/kWh), tariffs would have stood at INR 2.71/ kWh and INR 3.05/ kWh respectively. Left unattended, where anticipated curtailment would increase tariffs, unanticipated higher curtailment rates would only burden Indian banks (lenders) with more NPAs.
The Indian policymakers are attempting to control the conflagration of curtailment risk through several technical, regulatory, and contractual measures. Some of the interventions being discussed include increasing balancing area from states to regions, providing more flexibility to renewable-rich states, introducing regulations pertaining to forecasting and scheduling, piloting utility-scale batteries, and creating an ancillary market for balancing services from hydro and gas-based plants. However, such structural reforms and technology upgrades are often expensive, politically infeasible (requires tremendous and rare states and Centre coordination), and have long gestation periods. Instead, we propose a three-pronged approach comprising structural and contractual restructuring, and an innovative financial mechanism to bridge the gap.
First, greater accountability and transparency must be introduced to build trust within the grid operation system. Separating the grid operation function from the grid planning function could set clear accountability between the TRANSCOs and the grid operators. Further, grid operators should apportion electricity imbalances to different sources of variability. In the absence of such transparency, developers suffer the unfair loss of revenue during unanticipated curtailment, affecting the viability of renewable energy projects. It also makes the regulators’ job to intervene in case of malfeasance, difficult.
Secondly, significant potential exists for restructuring the current form of RE power purchase agreements (PPAs). Robust PPAs should allocate greater risk to grid operators as they are best placed to predict, control, and manage curtailment. A grid operator guaranteeing, through the PPA, that grid management issues would not impact the operation of the project, beyond a pre-determined number of hours per year, would alleviate the risk for developers significantly. Determining the number of hours could depend on factors such as quality of transmission infrastructure, existing and future proportion of RE connected to the grid, etc. Any loss in revenue due to curtailment experienced beyond this agreed quantum, must be compensated in full. While restructuring PPAs would not completely remedy the risk, it would make the loss in revenue more predictable and the PPAs bankable.
Finally, risk mitigation products could effectively address a developer’s curtailment concerns in the short to medium-term, even as more reforms are being undertaken. CEEW has designed a use case for a guarantee product called the Grid Integration Guarantee (GIG). Using a combination of actuarial methods and big data techniques, millions of terabytes of data generated in power systems operations was analysed to calculate premiums. Developers/investors could pay these premium to insure their RE assets against curtailment. For wind developers in Gujarat, insurance premiums ranged from 2% in the Palanpur circle to 22% in the Junagadh circle. Such premiums could also help policymakers to periodically quantify the cost of grid integration, using a market-based approach.
India’s energy transition hinges on the deep de-risking of renewable energy assets that would match the risk-return requirements of institutional investors. Lowering the cost of capital would further bring down RE tariffs and thus electricity tariffs for Indian consumers. A rulebook to guide the energy transition does not exist. Making one will be a true display of India’s commitment to a just and ambitious energy transition.