Who makes “Hay” while the Sun Shines ?

Is it time to open the Champagne bottles with the record low bid price of Rs 2.44 / KWhr or is it time to sit up and do an in-depth introspection on whether any of the primary stake-holders viz Discoms, End Consumers, Coal Power Generators, Solar Power Developers & Financial Institutions & the solar equipment manufacturers are reaping the benefits of the low solar prices.

Let’s look at the impact of the low-cost solar power on each of the entities…

Discoms: So far as the discoms are concerned the low-cost solar power is essentially displacing the coal-based power whose variable cost i.e. cost of coal is more than the cost of solar power. Thus the discoms are rearranging the portfolio of power purchase. They still have to pay the Fixed cost of the coal plants. Considering average specific coal consumption of 0.8 Kg/KWhr ( for Indian Coal ), the solar power cost of Rs 2.44 / KWhr will be cheaper compared to all coal-based power plants where the landed coal cost is > Rs 3050 / Tonne. This would be applicable for most power plants located > 1500 Kms from the coal source or older plants whose specific coal consumption is higher.  It is necessary to also bear in mind that the average cost of power from the power exchange is also about Rs 2.50 / Kwhr. Thus discoms would essentially be decarbonizing their power.   So far as their average rate of power purchase is concerned there is not likely to be any change.

Retail Consumer: Low cost of power whether it is from power exchange or from solar is causing larger consumers to start buying their power from open access sources which in turn causes a reduction in discom’s revenue which coupled with a  reduced consumer base causes an increase in retail tariff.  Thus even though solar power may be available at Rs 2.44 / KWhr, the bulk of the end consumer does not benefit from it.

Coal Power Generators : As brought out in numerous articles, the coal-based power plants are seeing a continued decline in their Plant Load Factor and due to lower efficiencies of operating at lower loads which has not been considered by the regulator while fixing their tariff, the result is that they are also not making much return on their investment.

Solar Power Developer: The intense competition for getting projects is forcing the developers to take significantly higher risks. The bid prices are being worked out based on a number of assumptions mainly factoring in future price reduction of solar PV modules, inverters, module mounting structures and cables. The foreign developers are perhaps also factoring in lower cost of finance. Most of the aggressive developers are possibly driven more by future valuation rather than the traditional IRR model pursued by conventional power developers. This is seen from the fact that none of the established power project developers have been successful in these solar bids.  It is therefore safe to say that with the current trend of solar tariffs, the IRR is likely to be in the sub 10% levels which from the point of view of conventional wisdom tantamounts to making no money.

Financial Institutions: Financial Institutions which have funded the coal power projects are already under severe stress with large number of power projects being stranded for various reasons. The new solar projects with lower tariffs are increasing the risk for more number of earlier projects becoming stranded.

Solar Equipment Manufacturers: Facing stiff competition from the Chinese suppliers, and pressure from the aggressive developers,  the local module & inverter manufacturers are under severe pressure and hence are likely to be selling with a less than 10% margin. To protect the domestic interests,  GOI is planning to bring in a policy of “Buy Indian” which may bring some temporary relief. Nonetheless, the severe competition will result in their margins being squeezed.

It can thus be seen from the above that none of the key stakeholders are getting benefitted from the Solar revolution except perhaps the farmers who have been able to sell their marginal lands at a good price. Also, there is a generation of additional employment for solar project construction.

It is clear that practically nobody is making “Hay” while the sun shines.

Is there a way to make the solar revolution to benefit the power sector & the consumers?

The simple answer is “Yes”. There is a way but that would require a paradigm shift in the thinking of all the stakeholders.

Before I go into the modalities of how this can be done, let us take a look at what exactly is ailing the power sector. There are basically 3 key issues which are presently hurting the power sector. First factor is an apparent surplus power situation with the demand not keeping pace with the supply and the second factor is the highly subsidized or free power being given to agriculture and the subsidy from the government / from other consumers not adequate to cover the subsidized agricultural power. The third factor is the shift of retail consumers to open access.

“Solar” power provides a very good option for mitigating all the three problems.

The solution is to set up the solar power project in a decentralized manner rather than setting it up in large solar parks. The 500 MW solar projects should be set up in 500-100 villages in capacities of 1MW – 5 MW instead of  in a large solar park and 10% – 15% of the power should be made available as “Royalty” power free of cost to the village where the solar plant is being set up, somewhat similar to the concept of 12% free power in case of Hydro projects.

Rationale for Centralised Coal plant  

The traditional approach of large centralized power plants have evolved because of a) it is more economical to transmit and distribute power rather than transporting the high ash Indian coal over long distances b) the economy of scale factor of coal-based power plants wherein one large 2000 MW thermal plant is more economical than setting up 20 no of 100 MW power plants c) time involved in getting the permits, clearances & financing for a large power plant is same as that of a small power plant.

While the above rationale is valid for coal-based power plants, however, the same does not hold true for Solar power plants. All the three factors which favored the centralized power generation concept for coal is not valid for the solar power plants which needs to adopt an entirely different approach.

Coal is a concentrated energy source while Solar & Wind are distributed energy sources

Unlike Coal; wind & solar both are not concentrated energy sources but are widely distributed across the country.  For an energy source which has already been distributed by the mother nature, there is no rationale for concentrating it and redistributing.

Economy of Scale factor :

Economy of scale factor is also not valid for both solar and wind since both are modular. The solar module capacity generally used is a 250 Watt panel. A 1 MW solar plant uses 4000 panels and 100 MW will use 400,000 panels.

Similarly, each wind plant is a 1-2 MW capacity.

Sub-optimal utilization of transmission corridors

For evacuating power from the large solar parks, it is envisaged to construct green corridors. The transmission lines from solar parks would be grossly underutilized since solar power itself is not available for more than 10 hrs and if we also consider the fact that the peak solar power is available only for about 4 hrs, the utilization rate of the transmission line would be a mere 30%. There is no rationale for investing lot of money in transmission lines which are going to be utilized only for 30%.

Grid Stability

Solar and wind are characterized by their intermittent nature. The grid disturbance on account of this intermittency is more in case of large solar parks than if they are distributed over a wide area, since the clouds have a tendency to keep moving and due to what is called as portfolio effect the disturbance gets evened out since when one plant drops load another would have picked up load.

Losses in stepping up Voltages to 400 KV in case of solar parks

The generation voltage of solar power from the inverter is only 300 V – 415 V which is then stepped up to 33 KV and then to 132 KV/220 KV and finally to 400 KV in case of a Solar Park. Also, this power is later stepped down to 400 V at the consumer end. Thus there is significant transformation loss occurring with the Solar Park concept. On the contrary with distributed solar power projects, the power may have to be stepped up to only 11 KV / 33 KV and it gets consumed at that level itself and there would be much less losses.

Difficulty of acquiring land for centralized solar plants:

One of the major disadvantage of solar energy is that it is a weak energy source and requires large area for aggregating the energy. The solar plants need about 5 acres for setting up 1 MW which means that if a 1000 MW plant is to be set up in one place, it will require 5000 acre of land to be acquired which is quite a difficult task even in a sparsely populated state like Rajasthan. On the contrary acquiring 5 acres of land for 1 MW plant is much simpler.

Failure of centralized power generation concept to provide 24X7 power to villages

India’s population is widely distributed across the country. 70% of the population live in 600,000 villages.  Rural electrification had been given a priority and through various programs like DDUGJY etc large number of villages have been electrified and today the wires have reached large no of villages. While the wires have reached the villages, however, electricity does not reach the people. Since the rural communities are provided with subsidized power and are not considered to be remunerative, the discoms are compelled to regulate the power supply to the villages depending on the ability of the discoms.

Need for Royalty type benefit sharing mechanism for villages.

It is unfortunate that villages that give up their land for the large wind and solar power plants do not derive any direct benefit from the power plants.

The royalty mechanism is the single most formalized benefit-sharing policy in the hydropower sector and is applied in all Hydro Electric Power Projects.  The underlying principle behind the payment of royalties is that the respective Governments, have the ultimate ownership rights over water resources and give prescriptive rights to water users, in this case, the hydropower projects. Based on this principle, the government collects royalties for the use of water resources from the hydropower projects.

Solar resource is no different from the water resource.  Extending the principle of ownership of water resource by the government in the context of villages, the villagers should get rights over the solar resource and they would be entitled to benefit sharing from the solar power projects.

The villages that give up the land are also giving up the rights to the solar energy resource. The solar power policy of number of State Government has provided allocation of Government land at concessional rates to the solar power developers with a view to promoting solar power development, however, it is not providing any compensation to the villages that are giving up their right over the solar resource on those land. It therefore stands to reason that a benefit sharing mechanism similar to that of Hydro be evolved for compensating the villagers for use of the solar / wind resource.

Proposal for setting up Village level 1MW – 2 MW Solar projects

1.      Considering various issues outlined above, various Governments should promote setting-up of 1 MW – 2 MW capacity of Solar projects thru the IPP route / CPP route.  In case of IPP route, the SPDs can be offered a tariff for 25 years on the basis of the prevailing APPC rate and in case of CPP, he is allowed to adjust his power consumption against generation.

2.      The SPD shall provide 10% – 15% as royalty payment to the village where the Solar plant is planned by the SPD.

3.      The village facilitates the land required for the solar plant.

4.      Royalty power payment agreed by the developer can be divided equally between all the consumers in the village. Thus in case the 1 MW plant generates 1.6 Million KWhr/ yr, the royalty payment agreed upon is 10% then the villagers are entitled to 1.6 Lakh KWhr per year. Out of this the electricity consumed by the common facilities shall be deducted and the balance shall be divided equally between all consumers and credited to them.

5.      Each consumer shall be metered and each consumer shall be billed after adjusting the  credit due to them from the royalty payment.

6.      Those who consume less than their quota shall be paid for the surplus at the applicable tariff rate. Similarly those who consume more than their quota shall be billed at the applicable tariff rate for the surplus.

7.     This is shown in the sketch below where 10% royalty is assumed. In this case the SPD gets paid for 0.9y at the APPC rate & the individual consumers are given credit for 0.1y/n where n is the number of consumers in the village. In this example common facilities have not been considered.

Benefits of this scheme :

The major benefit of this scheme is that a) the village is assured of getting 24X 7 power b) The distribution infrastructure gets to be utilized fully. c) Once the villages are assured of 24 X 7 power supply, more economic activity will develop. d) Agricultural consumers will no longer become a burden on the discom e) land acquisition for the SPD will become easier f) village can get lease rent for the land from the SPD. g) each agricultural consumer will be metered and since he will benefit from the metering, they will welcome it. h) The villages will start exporting power rather than importing power. I) this will create additional employment- direct and indirect  J) this will also bring about discipline and help in reducing wasteful expenditure of electricity i) benefits the CPP / open access consumers since they can reduce their power cost by investing in solar projects without hurting the discoms j) this will facilitate digitizing rural India.