Power Ministry Proposes Compensation For Grid Curtailment; Positive For Renewables

The government has proposed a compensation mechanism for existing renewable energy projects, which will protect the cash flows to an extent from grid curtailments says India Ratings and Research.

India Ratings believes that, if the proposal is adopted this will also ensure a favourable operational environment for renewable energy projects and will be positive for wind and solar energy developers.

The absence of clarity on two possible reasons for grid curtailment - "low system demand" and "grid security", could however pose new challenges for developers. Further clarity by the authority/utilities to define the terms and spell out when these measures will need to be opted for could allay possible apprehensions of the developers and make the process more transparent.

India Ratings had highlighted earlier the issue of grid curtailment in the report ‘Market Wire: Grid Curtailment Contagion Puts Pressure on Credit Profiles of Renewable Energy Projects’ and ‘Market Wire: Strong Payment Mechanism Partly Contributes to Solar Tariff Free Fall; Solar Projects Funding To Ease’. Historically, Power Purchase Agreements (PPA) signed for renewable energy projects have failed to address the grid issues and lacked a mechanism to compensate for energy loss. India Ratings estimates that the annual debt service coverage ratio (DSCR) slips by 0.12 times for 10 percent of energy curtailment and the 50 percent proposed compensation at PPA tariff, will restrict the fall by half (0.06 times). The developers have bridged any cash flow shortfall in debt service through a combination of or individually tapping debt service reserve or drawing working capital limits or sponsor support in the past.

At the conference of Power, Renewable Energy and Mines Ministers of States and Union Territories held on May 3-4, the same was proposed as the framework for awarding compensation for existing renewable projects in case of grid curtailment. The provision for curtailment is proposed to be applicable only to renewable power plants providing day-ahead forecast and schedule. The compensation is suggested to be part of the PPA provision for future projects. Decisions on curtailment are recommended to be made on considering the balancing cost for accepting renewable energy in the grid, where major balancing cost will be additional cost to run thermal plants below their technical limits. For existing projects, the compensation mechanism may be notified by the respective Electricity Regulatory Commission.

The recent reverse auction of 750 megawatt solar capacity in Rewa solar bid included the provisions for compensation for deemed generation in case of curtailment. The recommended PPA format for future wind and solar projects should also include provisions for curtailment compensation.

In the proposed framework, it is unclear what classifies as a situation will be identified as low system demand incidences. Since the network operators have the option to shut down a thermal plant which is falling below its technical minimum operating level. For example, Tamil Nadu discom reportedly shuts down one or two of the state owned thermal plants during high wind season to enable full evacuation of wind power generation. There is a possibility of utilities taking refuge under the low system demand and curtail high costs renewables to save costs leading to reduced cash flows. India Ratings believes that utilities should project demand for the next six months to one year along with definition of low system demand for example a 15 percent dip from the projection and that could be defined as low system demand. This transparent process could allay the fears of developers when actually the demand plummets.

India Ratings believes that the compensation to renewable projects will incentivise grid operators and distribution utilities to reduce curtailments, will benefit renewable energy developers in scheduling and forecasting and enable integration of increasing renewable energy capacity. In FY17, grid curtailment was prevalent for wind projects in Rajasthan (up to even 45 percent energy curtailed compared to P90 plant load factor) and solar projects in Tamil Nadu.

The falling levelised cost of renewable energy in the current national energy surplus situation fuels the debate of gaps in implementation of “must-run status” of renewable energy compared to merit order dispatch of conventional energy. “Must run status” of renewable projects emanates from India Electricity Grid Code notified by the Central Electricity Regulatory Commission and adopted by the State Electricity Regulatory Commissions.

The share of renewable energy in the Indian power market is set to rise, given the projected renewable capacity addition.

India Ratings and Research, a wholly owned subsidiary of Fitch Group, is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.