To Reduce Risk, Enhance Transparency and Increase Affordability of Solar Power

According to one of the key objectives of Electricity Act, 2013 “Promotion of competition in the electricity in India” emphasizes on the reduction of electricity cost through the competitive procurement mechanism. The power purchase cost of electricity is the major cost ingredient for distribution likenesses, thus the overall cost of electricity enhances on consumer side. Hence, when India is taking tremendous lead in deploying renewable sources of energy, such as solar for meeting its current energy demands, the appropriate regulations/guidelines would be certainly instrumental in reducing cost of electricity from solar energy. The National Tariff Policy, 2016, has also stressed on purchasing power from the renewable energy sources. It stated that procurements of renewable power of specified capacities shall be done through competitive bidding process. Keeping this in mind and making solar more affordable to consumers, the Ministry of New and Renewable Energy (MNRE), Government of India, issued the new guidelines on August 3, 2017, for tariff-based competitive bidding process for procurement of power from grid connected solar PV power projects. These guidelines have been issued under the provisions of Section 63 of the Electricity Act, 2003, for longterm procurement of electricity by the ‘procurers’ [the distribution licensees, or the authorized representative(s), or an intermediary procurer] from gridconnected solar PV power projects (‘projects’), having size of 5 MW and above, through competitive bidding.

OBJECTIVE

The new guidelines aim to provide more freedom to investors, flexibility, and transparency in solar PV generated electricity. The specific objectives of these guidelines are as follows:

Protection of consumer’s interests

Chief objective of the guidelines would be to promote competitive procurement of electricity from solar PV power plants through distribution licensees. The competition in purchasing/selling of solar-based power will reduce the power purchase cost, hence the reduction in overall cost of procurement.

Bring transparency in procurement mechanism

The guidelines also focus on bringing more transparency and fairness in procurement process. In case of longterm power procurement within state or inter-state, the guidelines would provide a framework for an intermediary procurer for a trading.

Standardization and uniformity

To protect the interests of the investors by bringing more confidence and business, these guidelines aim to provide more stability and uniformity in process. To ease the procurement process, minimizing the risk associated with the solar PV projects among stakeholders thereby encouraging investments, increased bankability of the solar projects, and profitability for the investors.

KEY REFORMS INITIATIVES

Various reforms initiatives such as power purchase agreement (PPA), repowering, bidding process, etc., have been directed in the announced guidelines. The detailed discussions on these key reforms are described here.

PPA reforms

The PPA period has been kept high because then in case of higher PPA it tends to give lower tariff. The PPA for the solar PV projects should not be less than 25 years from the scheduled date of commissioning. In any case, unilateral termination is not allowed and also there shall be no change in the PPA proposed.

In case of supplying less energy corresponding to the minimum capacity utilization factor (CUF)  by the solar power generator will be subjected to pay penalty for the shortfall in energy supply below the signed CUF level. The amount of the penalty will be according to PPA, which has ensured the interests of procurers. On the other side, in case of availability of power that is more than the maximum CUF mentioned in PPA, the generators have rights to sell it to another entity, provided first right of refusal will vest with the Procurer(s).

Generation compensation

In a few conditions where the plants are ready to commission but some constraints, such as lack of power evacuation infrastructure, grid unavailability or eventuality of back-down have arisen due to off-take constraints, these should be minimized by providing some generation compensations. The new reforms on the generation compensation include off-take risk reduction process for the current running projects. Generation compensation provided for following offtake constraints are given in Table 1.

Repowering

The new norms say that solar power generators will be free to re-power from time to time according to their suitability during the specified PPA duration. But there will be change for the procurer for buying electricity; it should be within the range of CUF, mentioned in the PPA. Any excess generation power generators are free to sell the power to anyone after the consent of current procurers.

Bid structure and process

Bid structure will be designed in the form of packages with minimum size of each package being 50 MW. Apart from this, smaller packages will be applicable only for the North-Eastern and special category states. Bidders have to bid for entire package. Bids have been allowed in both power (MW) and energy (kWh) terms. There are two ways of selecting bidding parameters for the procurers: tariff as bidding parameter and viability gap funding (VGF) as bidding parameters.

• Tariff as bidding parameters: In case of this, the bidding parameters will be the tariff quoted by the bidders. The procurers shall opt for—fixed tariff for 25 years (in Rs/kWh) and escalating tariff with pre-defined annual escalations (in Rs/kWh).
• Viability gap funding (VGF) as bidding parameters: It involves a mechanism wherein a predetermined tariff is offered to the solar power generator along with a financial assistance, to enable the solar power generator to supply power at this tarif
• To make bidding process more effective and transparent, e-bidding has been stressed on.

PAYMENT SECURITY MECHANISM

The procurers have to ensure the regular payments to their respective power providers. There is formulation of proper payments security mechanism to avoid the risk of generators in case of delayed/ non-payments. The instruments like Letter of Credit (LC), payment security fund, and state guarantee will ensure generators interest. There are different clauses for the procurers based on their procurement process, that is, whether it is purchased directly from generators of through any intermediate procurers. Table 2 provides information about the payment security mechanism.

RATIONALIZATION OF PENALTIES

According to the commission schedule the project (less than 250 MW) should be commissioned within 13 months. In case failing to do so there is adequate penalty on solar power generators according to the PPA. There is always uncertainty between generators and procurers to take these penalties. Clarity on penalties certainly saves the risk involved with the investments. So penalties have been rationalized to reduce the overall cost to the generators while ensuring the scheme guidelines.

TERMINATION COMPENSATION

In case of termination of PPA and making projects more bankable, termination compensation has been introduced. These compensations will be securing the generators’ and lenders’ investments. Quantum and modality for termination compensation in case of both generator default and procurer default has been clearly defined.

SUMMARY

To summarize, new guidelines for tariffbased competitive bidding process for procurement of solar power will help enhance transparency and fairness in the procurement process, while protecting consumer interests through affordable power. These guidelines will also provide standardization and uniformity in processes and a risk-sharing framework between various stakeholders involved in the solar PV power procurement. This will help in reducing off-taker risk and thereby encourage investments, enhance bankability of the Projects and improve profitability for the investors.

Article Courtesy :Mr Sarvesh Devraj, Research Associate, Renewable Energy Technology Applications, Renewable Energy Technologies Division, TERI, New Delhi.