Dr. Pramod Deo is the longest serving electricity regulator in India. As an energy economist, he has been able to contribute significantly to MERC’s orders on utility tariffs, power from renewable energy sources, captive power, etc. In the Department of Energy, Government of Maharashtra, his major contribution was preparing the State Electricity Reform Bill, 2000. He is the founding director of state and national level energy institutions, namely the Maharashtra Energy Development Agency (MEDA) and the Energy Management Centre, set up to promote renewable energy and energy efficiency, respectively.
Inwind Chronicle interviewed Dr Deo for his views on wind power development in the country.
IWC: The year 2007 has seen a decrease in installations in India (1,580 MW) as against over 1,800 MW in 2006. The installations this year are also much lower than the annualised target of 2,100 MW set in the XI Plan (The Plan has targeted 10,500 MW from wind energy and 14,000 MW from all renewables over the five-year period i.e, 2007-08 to 2011-2012).What according to you are the major reasons for this setback?
Dr Deo: The Mandatory Renewable Purchase Specifications and preferential feed-in tariffs determined by the State Electricity Regulatory Commissions pursuant to enactment of the Electricity Act, 2003, resulted in spurt in renewable energy capacity additions during 2005, 2006 and the early part of 2007. The Maharashtra Electricity Regulatory Commission (MERC) has been at the forefront in terms of developing progressive RPS framework and by determining an attractive tariff framework for various renewable energy technologies in the State. However, it is realised that tariff and mandatory procurement regulations can support renewable capacity addition only to a limited extent as these two mechanisms have inherently conflicting objectives. While the preferential feed-in tariff mechanism does not envisage any target for procurement, the mandatory procurement scheme envisages market-based pricing. In India, we have a peculiar situation wherein both of these instruments are mandated within the Act. Over a period, implementation of both mechanisms causes the inherent conflicting objectives of these mechanisms to work against the development of the sector. For e.g. in Maharashtra, MERC has specified penal charges for non-compliance of RPS. Some of the renewable energy developers used these charges as ceiling while bidding for renewable energy tenders of the utility. The rates quoted were much above the preferential feed-in tariff determined by the Commission. As a result, utilities are not in a position to purchase renewable energy. Similar issues are arising in other States in the country impacting renewable energy development.
Further, with the implementation of RPS regulations, market model for wind energy has changed from captive generation/third party sale to sale to distribution licensees which have to comply with RPS requirements. These distribution licensees are not interested merely in renewable capacity addition but also want assurance in the form of “assured level of generation” as RPS targets specified by the Regulators are in energy terms. Unless the wind industry recognises this change and responds by way of generation guarantees the distribution licensees would not be keen to sign a contract for purchase of wind power. It has to be realised that Regulators cannot enforce RPS Regulations on the distribution licensees unless these are allowed to seek contractual commitments from renewable energy generators.
Another issue which is apparently hurting the wind sector is increase in the cost of raw materials such as steel and cement. This increase in costs is impacting financial viability of wind developers. In some cases, wind developers have argued for revision in feed-in tariffs to take into consideration cost increases. However, in the absence of cost benchmarks, it would be difficult for Regulators to undertake revision. Further, the Tariff Policy suggests that competitive bidding may be undertaken for procurement of renewable energy. Given these issues, it is necessary to develop new competitive mechanisms for further development of renewable energy in the country.
I IWC: What are the steps that you think should be taken at the national level to reverse this trend? In particular, should the government promote a generation-based incentive scheme as opposed to the present capital cost-based incentive scheme?
And what should the Central Electricity Regulatory Commission (CERC) be doing to promote renewables?
Dr Deo: As mentioned earlier, it has become necessary to develop new competitive mechanisms for further development of renewable energy in the country. Traditionally, renewable energy, being the State-specific phenomenon, promotional policies have been State-centric. This has resulted in some States exploiting renewable energy to a great extent. However, some of the States have not been able to develop renewable energy owing to techno-commercial issues peculiar to that State. Thus, States such as Tamil Nadu, Karnataka, Uttar Pradesh, Punjab, Gujarat, NE States, etc continue to have huge untapped renewable potential. One of the hurdles in development has been the inability to sell renewable energy outside the State. Therefore, at the national level, a framework enabling inter-State sales of renewable energy should be developed. The CERC can play an important role in development of such a framework.
Further, it is necessary to promote generation over capacity addition. To this end, generation-based incentives would play a crucial role. It is necessary that suitable generation-based incentives are developed and prevailing capital cost-based incentives are withdrawn.
IIWC: In some states like Gujarat and Karnataka the minimum purchase of renewable energy as prescribed by the State Regulator has been reached while in other states there is a shortfall, sometimes very large. How can this divide be overcome?
Dr Deo: Renewable sources are un-evenly spread across the country. While States in northern and eastern region have significant small and mini hydro potential, southern and western states have significant wind potential. As a result, some of the States have been able to procure as much as 10 per cent of their energy from renewable sources while few others have not been able to procure even 1 per cent of their energy requirement from renewable sources. In many cases, though demand for renewable energy is growing, local state specific problems are constraining renewable energy development. Also, in some cases RPS has been applied to open access (OA) and captive consumers which would cause market for renewable sources to grow manifold. These OA and captive consumers are spread across the country and are keen to procure renewable energy from the least cost source. Therefore, it would be necessary to permit sale of renewable energy across State boundaries.
One mechanism which has been internationally proven is of Renewable Energy Certificates (RECs). Under this mechanism, RE Certificates are issued to the generator for a specified quantum of RE generation which can be sold in the open market, where the distribution licensees and the open access consumers can procure the certificates under a price discovery mechanism. The electricity shall be physically purchased by the local utility, and necessary credit will be given, when the RE Certificate is purchased by any person. Implementation of the REC mechanism at the national level should be deliberated at the earliest.
IWC: Coming to the State level do you think that the State Governments and the utilities should take a more proactive role in promoting renewables in general and wind in particular?
Dr Deo: Various stakeholders such as State Governments, State utilities, nodal agencies, developers, lenders and equipment manufacturers play an important role in development of renewable energy. The role of regulator, though important, is limited to specification of the RPS target and determination of feed-in tariffs. It is the responsibility of the transmission company to provide suitable interconnection infrastructure and that of the distribution company to enter into a power purchase agreement. It has been observed that while regulators have been generally proactive about RE developments, transmission and distribution companies need to change their mindsets. These utilities need to incorporate renewable energy in their perspective planning.
With regard to the wind sector, the Transmission System Plan developed by State Transmission Utilities (STUs) should take into consideration the planned growth in wind energy. The State Governments can assist RE development by making available necessary funds to utilities. The Government of Maharashtra introduced a cess of 4 paise per unit on electricity consumption by industrial and commercial consumers in the State, the proceeds of which will be used for development of renewable energy sources in the State. Other States can consider adopting similar measures to develop a renewable energy fund dedicated for addressing barriers to growth of RE sources in their respective State.
IWC: In Maharashtra, the regulatory regime has favoured sale of power from wind projects to grid rather than the captive/open access route. In Tamil Nadu, it has been the reverse with the bulk of the installations coming on the captive route. What lessons can be drawn from the experience so far?
Dr Deo: The regulatory regime in Maharashtra has favoured sale to grid as well as captive/open access route for harnessing of renewable energy. In fact, Maharashtra is one of the first States to make applicable mandatory percentage for RE procurement to captive and open access consumers to the extent of power sourced by such users from their captive/OA sources. This move would significantly expand the market for renewable energy sources.
However, Maharashtra has not seen capacity addition under the Captive/ OA route. The main reason for the same has been the necessity to follow open access regulations for procurement of RE. It may be noted that the existing open access regulations have been designed primarily for conventional high PLF generation. As a result, currently RE generation is subjected to heavy OA charges. It is necessary to develop a cost effective mechanism to ensure that OA and captive consumers also purchase RE.
IWC: What steps do you think the industry should take to ensure a higher level of penetration of renewable energy technologies in the grid?
Dr Deo: With higher penetration of renewable energy in general and wind energy in particular, grid operational requirements need to be addressed. It is well known that wind energy generation cannot be scheduled on a 15-minute day-ahead basis, however, the same needs to be despatched at all times, as and when available, in order to maximise generation and optimally utilise the WEG assets already installed. However, with high level grid penetration of WEGs, grid operators would need to have access to information about forecasted wind generation within some range. The wind energy industry needs to develop scientific tools and techniques for forecasting of wind generation at least 2-3 hours before “gate closure” if not on a day-ahead basis. This would facilitate grid operations to a great extent. This has been the practice in the global electricity markets where significant wind energy penetration has been achieved. Over the period, this would also facilitate the wind industry to provide assurance of wind generation over a long term. This would go a long way in ensuring a higher level of penetration of wind energy into the grid, as it will enhance credibility of wind energy from utility/off-taker perspective.
IWC: In the light of the current negotiations for the post Kyoto arrangements what would be the impact of India’s continued slow development of its renewable potential?
Dr Deo: Independent of post-Kyoto development, we need to take a look at our approach and development strategies in a comprehensive manner for holistic development of renewable energy in the country. The Electricity Act, 2003, covers only renewable electricity and does not address other forms of renewable energy, such as bio-fuels in transportation, bio-gas in cooking and industrial applications, solar, thermal, etc. Moreover, in India, different ministries are responsible for different forms of energy, which is creating hurdles in holistic development of RE technologies in India. While it may be difficult to avoid multiple ministries, overarching framework to direct these ministries needs to be put in place.
One such framework could be a separate and comprehensive RE Law which will create a uniform framework for development of RE sources through different ministries, institutional structure to identify new technologies and develop mechanism for commercialisation of the same, framework for the sale of grid- connected RE in the inter-State market. An attempt was made to develop such legislation by a Committee under my Chairmanship. It is necessary that all interested stakeholders promote the concept of Renewable Energy Law to make it a reality.
At the time of the interview Dr Deo was Chairman MERC. Subsequently, he has taken over as Chairman CERC.