The waiver of charges for the interstate transmission system (ISTS) contradicts the proposal for an Electricity (Amendment) Bill's aim of reducing cross-subsidy in the power sector.
Recently, the Minister of Power announced that an interstate transmission system (ISTS) charge may be waived for renewable generation projects (solar and wind) for at least another six months with effect from December 2022. This concession, introduced in 2016, is available to solar and wind projects set up by competitive bidding routes that have power purchase agreements (PPAs) with entities that comply with renewable purchase obligations (RPOs).
Of course, as the name suggests, the solar or wind generator must be connected to an interstate line (as opposed to an intrastate line) and all such projects will receive this benefit for a period of 25 years from the date of commissioning, with the cut-off date being extended to December 2022. The intention behind the additional period of six months was possibly to compensate for the effects of the current pandemic.
The question is: is such an exemption really an incentive for the renewable sector or for consumers in general? First, we need to see how ISTS charges are determined and spread across states.
The ISTS charges shall be determined in accordance with the Point of Connection (POC) principle. Calculations are a bit complex, but it can be said, from the layman's point of view, that payment will be based on the extent to which the transmission lines are used. Whoever uses more, pays more, and vice versa. The total transmission charge payable is determined by the CERC and, for FY21, is approximately '40,300 crore. This total charge must be allocated to users on the basis of use. In order to determine the extent of use by each entity, load flow studies are conducted by the National Load Dispatch Center and the total cost of transmission is allocated on a state-by - state basis.
Now, this is the rub. If we are to grant exemption to solar and wind projects connected to the ISTS lines, we shall exclude that capacity from the PPAs held by the discomfort of the State. Consider a state with PPAs of 500 MW, of which 50 MW are from solar and wind projects connected to the ISTS lines. In order to determine the state's share of the transmission costs, it would be assumed that it had total PPAs of only 450 MW compared to the actual 500 MW. In view of the fact that the full cost of transmission, as determined by the CERC, is paid to the transmission service provider, it is clear that someone else is paying the cost. What is actually happening is that part of the cost of transmission is being socialized across all states, resulting in some form of cross-subsidy.
Are we really offering any subsidies to the renewable generator through this mechanism? The renewable generator will only receive its generation costs from the purchaser who arrived at the time of the bidding and nothing more. The cost of transmission shall be paid by the purchaser, the discom. It is only that states with a relatively higher ratio of solar and wind projects connected to the ISTS will be able to deflect some of their transmission charges to other states. This entire calculation shows that there are no gains in efficiency through this process, and we are merely distorting prices, apart from making things non-transparent — optics, while for the nation as a whole it is a zero-sum game. Instead of this cross-subsidy, if the government really wants to subsidize the sector, it can pay for direct subsidies so that there are no price distortions. It may be noted that in the case of solar, only about 5,500 MW or about 15% of the current installed capacity is connected to the ISTS.
For wind, it is about 2,250 MW, or about 6% of the total wind capacity. The proposal for an Electricity (Amendment) Bill 2020 discusses the gradual reduction of cross-subsidy in retail tariffs and tariffs reflecting supply costs. In this way, cross-subsidy transmission charges deny this principle, since transmission costs are also part of the cost of supply.
If we really feel that renewable tariffs are now comparable to those of coal-based projects, where is the issue of any exemption from transmission charges? Many analysts believe that the cost of generating solar and wind projects is not really equal to the cost of coal, given that some of the costs of renewable energy are ignored, while these should be added to their cost of generation — the balancing cost and the cost of recycling solar waste at the end of their lives. In a case study conducted by CEA in 2017, the balancing cost for Tamil Nadu was estimated to be Rs 1.57 per unit spread over renewable generation and the corresponding figure for Gujarat was Rs 1.45 per unit.
The cost of recycling would be above and beyond that. If we are to add these figures to the cost of generating renewables, there is no parity with coal as of today. For renewables, there are other issues that merit attention, such as the serious lack of harmony between the policies announced by the Government of India and what is being done by some of the states. How else do we explain the re-opening of the PPAs, as some states do! The introduction of ceiling tariffs for both solar and wind-based projects is also illogical as the level of radiation and wind potential varies across the country.
However, the ceiling tariff for wind-based projects has since been withdrawn. The imposition of customs duties for a short period of three years is also myopic, since investment decisions are not taken for such a short period of time. A minimum of 7-10 years should have been considered in such a way that domestic producers are reasonably assured that their investments will be recovered. Withholding discomfort payments from renewable generators is yet another sure way to kill the industry. Let us address these issues first, rather than indulge in mirage by granting an exemption from ISTS charges for solar and wind projects.
