Solar Power Bundling Scheme And Its Impact On The Health Of The Discoms
By Apurva Mittal
The Ministry of New and Renewable Energy (MNRE) has landed with various strategies and mechanisms to reduce the solar price for utilities in India. In order to facilitate grid-connected solar power generation, the concept of bundled solar power was introduced in the first phase of Jawaharlal Nehru National Solar Mission (JNNSM), 2010.
Bundling can be defined as a strategy that joins products or services together in order to sell them as a single combined unit. Similarly, under the mechanism of bundled power, comparatively expensive solar power is bundled with power from the unallocated quota of the Government of India (Ministry of Power), which is generated at National Thermal Power Corporation (NTPC) coal-based stations, making it relatively cheaper before it is offered to the Distribution Companies (discoms). The price of this bundled power is set by the Central Electricity Regulatory Commission (CERC). The main idea behind introducing the concept of bundling was to reduce the price of solar so that impact on the discom is reduced. Reduced cost of bundled power made solar power relatively cheaper for the discoms on one side and on the other side the developers too were pleased, as they would receive a higher solar tariff.
During the completion of JNNSM Phase I, the government was successfully able to reduce the cost of bundled power to approximately INR 5/kWh, hence creating a win-win situation for all the stakeholders.
NTPC Vidyut Vyapar Nigam Limited (NVVN), the trading arm of NTPC, plays a pivotal role in this whole process. NVVN signs PPAs to purchase solar power from developers and then sells it at a reduced price after bundling it with an unallocated quota of coal-based power.
During Phase I, the ratio of coal-based to solar power was kept at 4:1 (i.e., with every four units of unallocated coal-based power, one unit of solar power was bundled).
The state of Rajasthan (in the FY 2011–12) had received maximum allocation (100 MW) during JNNSM Phase I, which equals 74% of the total allocation. NVVN bought unallocated power from NTPC at INR 2.91/kWh (Y) and bundled every four units of this power with one unit of solar power, purchased directly from the developers at a weighted average of INR 12.11/kWh (X). This mechanism resulted in a substantial decrease in the price of the bundled power, INR 4.43/KWh (Z).
With India’s coal production growing at a snail’s pace, one of the major problems with the concept of bundling was the scarcity of unallocated coal. Political disputes surrounding irregular coal block allocation led to further non-availability of coal.
All these factors facilitated the introduction of the Viability Gap Funding (VGF) scheme. VGF is a financial tool wherein a state determines the tariff and assures that the gap will be funded by its resources. Under this mechanism, the electricity generated is bought at a pre-determined tariff of INR 5.45/kWh over 25 years, instilling a level of assurance in the financing community to fund these projects. Now that Solar Energy Corporation of India (SECI) has succeeded as the off-taker of power from NVVN, a developer, to bid for the projects, will first have to identify the buyers of their generated electricity. Additionally, the banks in India will have to do their due-diligence on each kind of buyers.
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During Phase I, stakeholders were trading with a financially strong and big name like NTPC, due to which the traders had developed a level of comfort and were assured that their money was safe. This level of trust and bankability unfortunately could not be associated with SECI (now RECI) as it was not a self-sustaining and self-generating organization during that phase. During NVVN’s operative period, as the sole trading arm for bundled power, a lower cost of solar project models minimized risks perceived by financiers. Risks such as marketability of solar power and potential defaults by distribution companies were also reduced. These were some of the main reasons for NVVN makin a comeback in JNNSM Phase II, Batch II.
Both bundling and VGF have their pros and cons. It cannot be ascertained which one is better than the other. But one can surely assess the effect of these PPAs on the health of the discoms.
With the discoms’ mounting debts, their respective states are increasing the electricity tariffs each year. By increasing the tariffs, on one side, the losses for the previous years have lessened for the discoms, but on the other side, they are getting buried in more and more debt every year. At the end of the day, this is impacting the end consumer.
Of all the states, Rajasthan is bearing major losses and has borne the brunt of it for three years in a row. From the above-mentioned graph, we can observe a gradual rise in the APPC as well as bundled power price, over the time frame. One of the major reasons for the increase in the price of the bundled power is the unavailability and increase in the price of the unallocated coal, which is the major component of the bundled power. It can be seen that the gap between the APPC and NVVN bundled power has gone up as high as INR 2.01/kWh in the year 2013–14. Bearing such a huge amount of debt, if the discoms had a choice, they could have opted for other sources under APPC. Since the discoms are obliged to buy bundled power through NVVN, they end up bearing the APPC, bundled-power cost as well as the gap between the former two.
The average pooled power purchase cost (APPC) takes into consideration weighted average pooled price at which the distribution licensee has purchased the electricity, including the cost of self generation in the previous year from all the long-term energy suppliers, but excludes those based on renewable energy sources and short-term purchases. The discoms’ annual reports take the unallocated solar power purchase for bundling into consideration while calculating the APPC but exclude the solar component of the same. This doesn’t really give us a clear picture of APPC, and subsequently, financial health of the discoms.
If we compare the power purchase cost borne by the discoms from various energy sources, one can observe that the price of the bundled solar power is relatively lower than many of its counterparts. If one delves further, the cost of purchasing solar energy (both thermal and PV), is remarkably high. So, to stabilize this gap, bundling is utilized to lower the price of purchase of a high-priced energy source such as solar power with low-priced unallocated coal power. At such a low cost (in this scenario), a discom will be released from the burden of buying an energy source at a high price and will gradually decrease its debt and address its Renewable Purchase Obligation (RPO) by penetrating solar into the market.
From this it can be concluded, that bundling is not significantly impacting the financial health of the discoms. In fact, with technological advancements and government intervention in the solar sector, which would further help reduce the solar tariffs, we can soon be looking at a relatively equal bundling ratio.
References:
- CRISIL. Report on health of power sector 2011
- IDFC. Presentation on implementation: Issues on bundling scheme
- RERC. Annual report 2013–14
- CEEW & NRDC ‘Reenergizing India’s Solar Energy Market through Financing’
- CERC. Annual report 2013–14
About the Author: Apurva Mittal is a research associate with GERMI. Her focused area of interest is Marketing Research. She is an IT engineer and has keen interest in Marketing.
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