Trouble for renewable energy producers as peak power demand turns dodgy

Data shows that demand doesn't peak in the day, when solar and wind production is optimum, but at night after the Sun has set

At midday when the Sun is overhead in India, people should be demanding a lot of electricity to run their air conditioners, fridges and fans. However, data from India’s premier power exchange, the Indian Energy Exchange (IEX) shows the peak for power demand comes when the Sun sets.

This bit of complexity could upset the applecart of renewable energy (RE) generation projects which India is adding to, massively. To ensure it does not happen, the markets are working on alternatives to keep the price discovery attractive. One of those will signal when too much capacity has got added in the short term. 

By the end of December 2020 the cumulative RE capacity (excluding large hydro power) installed in the country has reached 91.15 Gw. It is a heady number. The share of fossil fuel-based power generation in the electricity mix has reduced to 73.3 per cent by end January 2021, from 80.4 per cent in FY16.

On June 23, a typical hot summer day in India, IEX data shows the market was offering 14,017 MwH from the power producers against a demand of 11,322 MwH, at 3:00 p.m. The demand was 20 per cent less than supply. The price of power is bound to dip with such surplus. The market clearing price for the hour is Rs 2,922.36 per MwH. Prices, however, began to move north as evening set in. By 8:00 p.m. the same day, the purchase bids exceeded the sell bids by close to 5,000 MWh at Rs 5,843.72. Renewables, especially solar, generate in the day and switch off in the evening, so as more of them get added to the market, the price discovery for them could become harsher like the midday Sun. 

This is the conundrum. RE developers have so far sought safety from these low prices by entering into long-term power purchase agreements (PPA) mediated by the Solar Energy Corporation of India. The developers sign the agreement with the Corporation, which then enters into a power sales agreement with the ultimate buyers, the electricity distribution companies (discoms). There are about 25,000 Mw of RE developers searching for discoms to sign agreements with. Paradoxically almost the same amount of thermal projects also do not have power purchase agreements. 

So the RE producers are being prodded to sell their generation in the markets like IEX and its rival PXIL. To make the power markets even handed, the government is also asking for PPAs signed by discoms with thermal power producers to be grandfathered. 

It is a correct move. The Centre argues that RE producers shouldn't enter long-term agreements with the cash-crippled electricity distribution companies even if mediated by Solar Energy Corporation. States like Andhra Pradesh have given the solar power producers a bloody nose. The state contracted long-term agreements, but when prices fell, accused them of profiteering.

While the Centre has railed against what Andhra Pradesh has done, it has advised the RE companies to sell instead on the exchanges. Discoms are sniffing at every opportunity to force RE to lower tariffs. 

As Rahul Tongia, senior fellow, CSEP says, it is as if each RE project is in competition with future renewables. The discoms need to do this because 80 per cent of their power supply is through long term power purchase agreements. To make financial space to pay for them, RE is the fall guy. In such an environment, it seemingly makes sense for RE producers to sell electricity through exchanges.

How electricity is traded: 

Electricity is traded in exchanges in packages of time, ranging from one hour ahead to 11 day ahead. The different types of market allows for finer price discovery. The most popular globally is the real time market. Every half an hour there is an auction and the power is delivered with an hour’s notice. The trade balances out the differences between day ahead commitments and the actual real time demand for and production of electricity.

The volume of trade for all products on both the exchanges have risen. At IEX, the real time electricity trade reached its highest ever monthly volume of 1.73 billion units (BU) in June this year, at an average monthly price of Rs 3.02. Year on year this was a 235 per cent growth and sequentially too it was an impressive 20 per cent higher.

But ominously for the RE companies, here too prices have dropped even though very few of them are in the market. As more supply from RE, especially solar power producers hit the market shores, this could mean trouble. For solar, the average price was Rs 3.64 per unit in FY20 which slipped to Rs 3.28 in FY21. As more producers tap the market, these prices could head more South. 

In the green term ahead market, the long end of the market where buyers and sellers set contracts for up to 11 days ahead, it is the wind producers who accounted for 62 per cent of the traded volume. This is easy to figure since wind power is often agnostic of the time of the day and is more prone to seasonal variations. June to September is a busy production season for them in India. 

“I see no reason why it may not happen,” said Somit Dasgupta, senior visiting fellow, Icrier, and former member, CEA. He explains costs for RE projects have begun to rise as interest rates have hardened. “The best of times for RE on low capex costs seem to be over. We have seen very few projects come on stream in FY21, as without long term power sales agreement there is trouble for them”. He has a point. The government had originally expected to reach the target of 96.95 GW by the end of June this year, yet the ministry has itself added another seven and half months to the deadline. Not all of the delay is due to Covid. 

“People have been sort of taught to think that today's price is the same as the price that was given when the risks were different and the market was different. That's a competition of yesteryear. (But) you’ll have to honor it. Otherwise…you will end up breaking the whole market if this kind of thought process goes on”., said Seethapathy Chander, Advisor, World Energy Council India and a board member of NTPC at a CSEP seminar on India’s Energy Outlook. 

Optimistic signs for RE:

Some of this asymmetry could ease out once the power exchanges start the green day ahead market, which could happen in August, says Rohit Bajaj, Head, and Senior Vice President-Business Development, IEX.  This market could mimic the conditions of the real time market for the RE producers, right now dominated by the thermal power producers on the buy side. He says the launch of the green day ahead market will lead to a better price discovery for RE going ahead from the green term ahead market. But yet its very success could bring in challenges as more RE capacity gets added. 

One of the possibilities is for the markets to signal there are signs of excess capacity being added in the short run. Regulators, like the Central Electricity Authority could take a long term view and space out the addition of new capacity—sort of telling producers to go slow. In a way, it is something like the erstwhile coal linkage but flipped over. In coal linkage, downstream industries had to queue up to get a committed supply of coal. In this case, the queue will be of RE producers as the regulators track the rate of addition of electricity demand in the economy.

Germany, for instance, does it as part of its Renewable Energy Act (EEG). The Act sets an annual deployment target to make sure that capacity addition is compatible with the overall renewables target. This allows for the “adjustment of the power grid to incorporate the growing output from fluctuating renewables”, reports Clean Energy Wire, a news outlet that  tracks the energy transition happening in Germany and beyond. 

While India too has an RE target—it plans to bring 450 GW of RE by 2030, it does not break it down into annual targets. The plan, under the works between IEX, the ministry of new and renewable energy and the ministry of power seeks to create such a time frame. 

“The large number of RE projects whose PPA is being opened up means there is not enough space for clarity as yet”, says Dasgupta. Yet RE developers will sorely need the exchange to not only sell their electricity but offer guidance ahead. Which means, going ahead if the Sun has to shine on RE in India and the energy exchange account for more than the 11 per cent of the total market, both the attraction of signing long term power sales or power purchase agreement has to finish and a regulator to decide how fat the market should become each year, has to happen soon.