Restrictions in banking of power threatens renewables growth in India

Without banking power, the business model of solar power becomes unviable.

Introducing restrictive provisions on the banking of power could potentially slow down India’s efforts to achieve its  450 gigawatts (GW) renewables target by 2030, a report found.

In a report, the JMK Research and the Institute for Energy Economics and Financial Analysis flagged that restrictive provisions on the banking of power will also be detrimental to the business model of solar power. 

India’s renewable energy (RE) installations have shown tremendous growth over the years, reaching 104GW as of 30 November 2021. This has been steered by the drastic reduction in technology costs along with a strong policy and regulatory environment. Various state governments have also helped through waivers and incentives, such as the “banking of power” provision for RE generators that allows utilities to store the surplus energy generated and withdraw it later when needed. 

Generally, banking in India is provisioned at the point of consumption by the distribution companies (discoms). Banking is only permissible for intrastate transactions, while several State Electricity Regulatory Commissions levy a banking charge that varies across states.

Banking provisions for RE generators provide effective mechanisms to utilise excess RE generation, and help manage intermittency. It also ensures a reliable power supply as solar and wind power are intermittent, making it impossible to forecast the generation and supply of energy with 100% accuracy. 

Despite these benefits, it has been observed that state governments have been issuing or considering stringent banking notifications for renewable projects. Discoms are restricting the banking provision because they fear losing high-paying C&I consumers. 

Some  discoms have argued that the fast-paced evolution of solar technology has led to increased efficiency, which in turn led to smaller capital expenditures required to set up a solar power project over the last five years. This ultimately reduced the per-unit cost of electricity generation by solar projects. 

Discoms have also raised that to settle excess energy banked by developers, they have to buy excess power at tariffs that are linked to average power purchase costs (APPC). As per latest Central Electricity Regulatory Commission order for FY2021/22, the national APPC is Rs3.85 per kilowatt-hour (kWh). This is higher than the per-unit cost of generation from solar projects, which is in the range of Rs2-2.8/kWh. Many discoms have been claiming the difference caused them to lose money. 

Other discoms argued that some consumers take advantage of the provision by drawing on banked energy during peak demand periods while injecting power during off-peak periods. This is considering the cost of power procurement during peak periods is higher. In this light, discoms face losses due to the difference in power procurement costs. 

Though discoms have raised valid points, the national RE target of 450GW by 2030 is still far away. Such provisions at this early stage of the RE growth trajectory in India will create a huge setback for renewable project developers. 

Banking Restrictions at Central Level 

In August 2021, the Ministry of Power issued draft electricity rules, allowing banking on a monthly basis only for open-access consumers.

Since renewable sources of energy are intermittent in nature, imposing restrictions of 10% cap will not motivate RE developers. Banked energy also indirectly helps discoms with peak load shifting, and imposing restrictions will result in more unstable grid management. States are likely to follow suit and introduce similar restrictions.

Status of Banking Regulations Across Major States 

In the last few months, some RE-rich states have moved from an annual to a monthly banking period, while some have completely withdrawn banking facilities for RE projects. For instance, Gujarat and Maharashtra have moved from an annual banking period to a monthly banking facility. 

In Andhra Pradesh, the banking facility has been completely withdrawn, whilst the Andhra Pradesh government amended its policies to pull back the incentives given to RE developers. 

Karnataka Electricity Regulatory Commission in August 2020 has also proposed to discontinue the banking facility extended to renewable projects; but later allowed a baking facility for solar projects with annual settlement periods and with banking charges of 2% in September.  

Rajasthan has also restricted its banking facility for third-party transactions. Madhya Pradesh does not allow a banking facility for discom-registered captive projects. 

There is no uniformity across states, and all states have different provisions for banking. Most RE-rich industrial states have shifted from annual to monthly banking provisions. For major states, banking charges range from 2% to 12.5% of the banked energy. Banking provisions are also likely to be restricted to time-of-day or daylong across most states. 

Way Forward 

There is a high potential for excess energy generation during peak summer or windy seasons that can be utilised later with a banking facility. However, without a banking facility or with restrictions to monthly banking, excess generation is lost. Without banking power and without any commercial settlement mechanism for excess energy, the whole business model for solar projects selling power via open access will become unviable. 

These restrictive regulations hamper both sides of the RE market—demand and supply. Considering India’s target of 450GW of RE installed capacity by 2030, it is necessary to have a banking facility for RE projects. 

C&I’s RE segment is just 2% to 14% of the total installed capacity across key RE-rich states in India. This is less than 1% of the overall electricity generation portfolio across most of these states, in terms of contribution. 

Introducing restrictive measures at this stage is not good for the RE sector. Statewide targets are necessary for rooftop and open-access RE segments. Until the targets are reached, it is imperative that no restrictions are imposed on RE capacity additions. 

Discoms should also justify the increase in cost efficiency and revenue because of these restrictive banking provisions. Instead, regulators can promote banking by allowing banked energy with Discoms to contribute to their Renewable Purchase Obligation.  

Consistency in central policy and regulatory implementation over the long term has been a critical issue for the Indian solar market. It is also important that a uniform regulatory framework be brought across different states to encourage development in the Indian solar ecosystem. Because of different banking provisions and banking charges, project developers face confusion and uncertainties when dealing with different states. Regulations should not be retrospective, and commissioned projects should not be affected by restrictive regulations and notifications. 

The RE banking period needs to be adequate to expand the pool of RE procurers from discoms. Banking provision need not burden developers with excess banking charges and withdrawal charges. States should adopt uniform provisions and regulations to create clarity for industry stakeholders and renewable project developers. 

More restrictions might lead the project developers to look at alternate options to utilise unbanked excess energy. One of which is the Green Term Ahead Market and Integrated Day Ahead Market trading platforms, where generators can sell excess energy at competitive rates and utilise banked energy through intra-day contracts and day ahead contingency contracts. 

Generators may also deploy Battery Energy Storage Solutions to store excess energy and supply it during the winter season. Alternatively, discoms can explore the option to procure banked energy themselves, instead of the developer/end consumer. 

For availing banking in any state, a Wheeling and Banking Agreement  is signed by project developers with respective state discoms. Instead of returning power back to the end consumer/developer, discoms can simply pay for the quantum of banked energy after each month at their lowest cost of procurement.. However, rather than changing every year, it should be fixed at least for the year in which the agreement was signed, unless further amended by the developer. 

Furthermore, with government plans to spend about Rs24,000 crores to set up domestic solar cells and modules,and domestic PV manufacturers making large expansion investments, imposing restrictions to curb the open-access and rooftop solar markets is not right for sector growth at this point. An entire ecosystem needs to be built to drive future investments and growth in the sector. Government policies will play a critical role to drive this market. 

To conclude, imposing restrictions at this phase of renewable industry growth in India will have a minimal effect on discom finances, but their impact on reaching the nation’s RE target could be huge. The government needs to weigh the pros and cons and then decide the future course of action.