New rules announced by the power ministry on selling surplus electricity from rooftop solar installations could hold back  expansion of the sector that has seen slow growth

Rooftop solar is yet to find many takers in India (Photo by Sameer Halai/flickr)

Rooftop solar is yet to find many takers in India (Photo by Sameer Halai/flickr)

Last week, Prime Minister Narendra Modi doubled down on India’s target of installing 40GW of rooftop solar by 2022.

“Already, 4 GW solar capacity is installed through rooftop solar projects… 2.5 GW will be added soon. 40 GW solar power is aimed in the next one-and-a-half years through rooftop solar projects,” he said during a webinar address on the implementation of budget provisions in the power sector.

The target implies a 10-fold expansion in rooftop solar over just 20 months. Modi’s optimism notwithstanding, just last month, a parliamentary standing committee shot down the target as “unrealistic” given the tepid uptake of rooftop solar in the country.

The 40 GW rooftop solar target is part of India’s aim of installing 100 GW by 2022. But as things stand today, only utilities are expected to achieve their 60 GW target, not rooftop solar.

While successive misses of yearly targets have cast major doubt about the viability of this target, the Ministry of Power’s new rules for electricity consumers has sparked fresh concerns regarding its implications on rooftop solar installations.

Contentious provision

The new rules, published in the Gazette of India on December 31, 2020, for the first time, specify limits for net metering for energy generated through rooftop solar installations being fed into the national grid. According to the rules, net metering is mandated for projects up to a capacity of 10 kW, beyond which gross metering shall be applicable.

This contentious threshold to check the big players from milking their surpluses of rooftop solar power generation has ignited a debate around the prudence of such a move and its implications on the progress regarding solar installations.

Let’s first understand what net metering and gross metering mean and how they affect consumer decisions on rooftop solar. Net metering allows grid-connected solar rooftop plant owners to supply and receive power from DISCOMs through the same meter and pay fixed tariffs only for extra units consumed. Depending on the state and DISCOM operator, this tariff increases progressively along with the quantum of consumption.

Gross metering, on the other hand, treats energy being fed into the grid and that being demanded from it as parts of separate balance sheets with compensations and payments made in accordance with different rates for both set by the state.

According to a recent analysis published jointly by IEEFA and JMK research, the introduction of the 10 kW threshold could hinder the growth of rooftop solar in the country as it mostly affects corporate and industrial consumers, who are responsible for the bulk of installed capacity thus far.

The analysis, which looked at net and gross metering tariffs across states leading in solar rooftop capacity, found that gross-metered consumers are compensated for the export of solar power to the grid at rates of INR2-4/kWh. However, current rooftop power purchase agreements (PPAs) signed by large developers have tariffs in the range of INR3.5-4/kWh.

“Until a few years ago, DISCOMs were power-deficit so there was a strong push to promote rooftop solar in order to increase the efficiency in power supply. The net metering mechanism was an attractive prospect for consumers who could sell back surplus generation to the grid at retail tariffs,” says Vibhuti Garg, energy economist at the Institute for Energy Economics and Financial Analysis (IEEFA) and a co-author of the paper.

Under a gross-metering regime, lower rates of compensation relative to PPA-determined rates would essentially mean that large consumers would not be able to avail the commercial benefits of generating energy for their own consumption.

This effectively translates to longer payback periods and riskier investments for large consumers and rooftop solar developers. This difference between the two rates is what will make rooftop solar unattractive to corporate and industrial consumers, who will fall under the gross metering regime under the new rules.

Not all rosy 

Net metering, which effectively provides equal rates of compensation as it charges for consumption, on the surface seems like a fair alternative. But the concept, although not new, has failed to deliver any serious growth in rooftop solar adopters. Neither has it been able to generate enthusiasm amongst DISCOMs.

Experts see the variable nature of renewable energy capacity in India as one of the reasons, because India still lacks storage capacity.

Consider this: Consumers buy when they fall short of power, and sell when their rooftops solar generate surplus. That would typically mean that they would buy during evening when the demand is at its peak and power is expensive, and sell during the day when there’s hardly any demand and power is essentially cheaper. This imbalance is disadvantageous for the DISCOMs, who end up in losses.

The fact that the biggest gains from a net-metering regime are cornered by large consumers, and corporate and industrial entities adds a further layer of complexity to the debate. DISCOMs supply power to industry at higher costs compared to residential and agricultural users.

There is further differentiation within user categories in rates according to the sanctioned load, with higher consumption typically attracting higher rates. Under a net-metering regime, large consumers are able to milk the benefits of surplus generation, while also limiting their demand from the DISCOM to peak evening hours.

In essence, this becomes very expensive solar power for DISCOMs, explains Tongia. “If they (DISCOMs) were interested in increasing green power, they could have simply procured wholesale grid-scale solar at ~INR2/kWh (or INR2.25 including transmission and distribution losses), instead of effectively paying, say, INR8-10 per kWh via offsets through net metering (based on the retail tariffs for selected sets of consumers),” writes Rahul Tongia, senior fellow at Centre for Social and Economic Progress (CSEP).

The opinion among experts though is split on the real financial impact of net-metering on DISCOMs. According to Neeraj Kuldeep, programme lead working on rooftop solar energy at the Council on Energy, Environment and Water (CEEW), the impact of net-metering right now is marginal compared to potential gains in distributed energy generations.

“Rooftop solar currently occupies less than 2% India’s total generation capacity and relative to DISCOM revenue, the cost of procuring rooftop solar is fractional. Further, other benefits to DISCOMs such as reductions in transmission and distribution losses, reductions in peak demands and contributions to Renewable Purchase Obligations (RPO) have not been quantified or included in assessments,” he says.

“The losses to DISCOMs from rooftop solar are relatively marginal. Given the small size of the rooftop solar market, introducing a 10 kW limit for net metering at this time would hinder the growth of the market before it hits maturity,” adds Garg.

Where do the states fall

The new rules, however, are subject to implementation by state governments. Experts believe that many states will be tempted to do so in an effort to address concerns around the financial health of DISCOMs.

West Bengal, last month, issued amendments that allow net-metering for sanctioned loads of up to 5 kW and gross-metering for contract demands above 5 kW. Karnataka, too, has proposed a gross-metering regime for projects over 10 kW capacity at a INR 2.84/kWh tariff.

States are also seeking to introduce other kinds of limitations on compensations to be paid out by DISCOMs. Punjab State Power Corporation Limited (PSPCL), last month, submitted a petition seeking amendments on the state’s net-metering regulations from 2015. The proposal specifies a nominal procurement rate for surplus rooftop power of INR 2.25 (~USD 0.031)/kWh from domestic or government consumers and INR 1.75 (~USD0.023)/kWh from other consumers. Surplus power to be procured by the DISCOM, however, is not to be more than 10% of the total annual generation.

Way out

A viable resolution to the debate, according to the IEEFA-JMK Research analysis, is a ‘net feed-in’ mechanism, which is effectively a combination of the net-metering and gross-metering regimes. Under such a mechanism, rooftop solar power used for self-consumption would be calculated at retail tariffs, while surplus energy fed into the grid would be compensated at rates determined by states.

This, the authors of the analysis believe, will create a “win-win” situation for consumers and DISCOMs, while also pushing growth of rooftop solar in the country. “The feed-in mechanism offers a middle path that generates benefits for all stakeholders,” explains Garg.

Irrespective of differences regarding implications on India’s rooftop solar capacity additions, experts across the board agree that the need of the hour is to fix prices so that they reflect the true costs of generation in both retail and rooftop PV.

“We are still in the dark when it comes to the true costs and benefits that come from expanding rooftop solar. These factors are important in fixing prices and tariffs, and determining a clear policy direction. This assessment is necessary for any dynamic pricing mechanism which would be needed to determine the true value of energy being generated. The market ought to reach this stage before regulations and limitations are issued,” says Kuldeep.

“Even if gross metering is applied, states should have time-of-day pricing where day-time and off-peak hour tariffs are relatively low, while peak hour tariffs are higher,” says Garg.

This was first published in CarbonCopy.

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