Wednesday, November 21, 2012

Will Solar Policy help Tamilnadu to solve its Power Crisis?

The cornerstone of the solar policy announced by the Government of Tamil Nadu on October 20 is that it has created a demand for solar power by imposing obligations on an industry that is already suffering from crippling power cuts and a recent hike in tariffs.
More tariff hikes are ahead, as the State’s electricity generation and distribution utility, Tangedco, needs to clear out losses of around Rs 50,000 crore. And now, the industry (as well as colleges, residential schools and buildings with built-up area of 20,000 sq. m or more) will have to buy 3 per cent of their electricity consumption from solar power till December 2013 and 6 per cent from January 2014. Therefore, a demand is created, as one industrialist put it, by “arm-twisting the industry.” What of generation?
The State’s solar policy has various things to offer to utility-scale power projects and the rooftop ones.
If you are a utility-scale (that is, large) project developer, you could sell your power to either Tangedco and be paid a ‘solar’ tariff or to consumers directly. That the financial situation of Tangedco is terrible is common knowledge. It has not paid its dues to various generators, especially wind-power producers, for well over a year. Given this situation, it is hard to believe that any bank will come forward to fund a solar project that has a power-purchase agreement with Tangedco.
Open access
The developer then will have to sell it directly to consumers. Here is where the Tamil Nadu policy pales in comparison with the recently announced policy of Andhra Pradesh. AP exempts a developer from wheeling and transmission charges and cross-subsidy charges and electricity duty. Tamil Nadu does not. The least the State could have done is to have followed the AP example.
In April, the State’s regulatory commission allowed the utility to hike the long-term open-access transmission charges from Rs 2,781 a MW a day to Rs 6,483. The short-term open-access charges were raised from Rs 28.96 a unit to Rs 270.11 — nearly 10 times. And then, there are cross-subsidy charges.
Therefore, it wouldn’t make sense for solar developers to sell power directly to consumers on the ‘open access.’ That leaves the developer with the only other choice: group captive. Form a special purpose vehicle with your customers as your shareholders, and sell power to them. Conditions apply, though. This is what is most likely to happen in Tamil Nadu.
Now, here is where the State’s policy distinguishes itself positively from AP’s. The AP policy relies heavily on the renewable certificate mechanism. The State’s does too, but in Tamil Nadu, you can sell power at any tariff to a captive customer and yet get tradeable renewable energy certificates (RECs). By relying less on RECs, the State has reduced risk in the projects. Consumers, for sure, will have to pay more, but presumably they will be happy to do so, because they at least get power to run their plants.
Tamil Nadu could have exempted developers from wheeling and transmission charges, and cross-subsidy charges and electricity duty, as AP did. But the AP model conflicts with the spirit of the REC mechanism, which is, to be eligible for RECs the generator shall not have availed itself of any other benefit. This is a legal question mark that hangs on the AP policy, and the State has gotten rid of it.
Coming to rooftop projects, the State policy promises quite attractive generation-based incentives (GBI) — Rs 2 in the first two years, Re 1 in the next two and 50 paise in the following two — for households. Here again, the big issue is payment security. Given Tangedco’s track record in payments, banks will be hesitant to fund the projects.
Otherwise, the Government promises to set an example by putting up solar rooftops on all State-owned buildings.
The policy document also contains statements about encouraging solar module and cell manufacture. The discussion is academic. Given the global glut situation and the low prices and with the prospect of prices going down further, whether anyone will be willing to invest in manufacturing in India is a moot point.
Earmark funds
There are two things that the Government of Tamil Nadu can do in order to make sure that the policy works.
The first is to earmark some funds from its Budget to support solar energy. Rajasthan has done this. This will ring-fence solar expenses from the rest of Tangedco’s problems and give tremendous confidence to lenders. If necessary, the Government could raise tariffs by, say, 2 paise, to defray the costs.
The second is to make land available. Land is a big headache for solar projects, ask any developer. If the Tamil Nadu Government can make available land for solar parks, the State is sure to win projects.
Finally, to lead the rooftop revolution in India, given the net metering facility is in place, the Government can bring in a system whereby the GBI payments due to the customers are deducted from the customers’ monthly bills. This will obviate the need for them to run after Tangedco for their dues.
Ref: This Article was published in Hindu Business Line  on 22 Oct 12

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