Regulatory policy

Policy change underway: green power purchases likely to be mandatory

The Union Government is considering changes to the Electricity Act and National Tariff Policy to require electricity distribution companies (discoms) and other wholesale buyers to meet their Renewable Power Purchase Obligations (RPOs) ), a measure that will boost investments in the solar, wind and hydropower sectors.

This decision comes at a time when companies engaged in the renewable energy segment have drawn up massive expansion plans and are seeking to raise funds from different sources, including domestic banks and financial institutions, foreign banks, markets of capital and multilateral institutions.

The plan is also in sync with New Delhi’s new commitment to meet half of its energy needs from renewable sources by 2030.

RPOs were introduced in 2010 under section 86(1) (e) of the Act. Through this section, the Center urges large electricity buyers, including discoms, to meet a certain percentage of electricity needs from renewable sources.

But enforcement of this standard has been lax, as most state governments have not shown a strong will to enforce it. While RPO rates between states vary roughly between 9 and 17 percent, some states, including Uttar Pradesh, have even waived the penalty for non-compliance.

“Now that India has updated its 2030 commitments under the Paris Agreement, there is more urgency to reduce its dependence on coal. is currently revising the tariff policy to make them mandatory,” said a Delhi-based power finance executive.

Some of India’s biggest conglomerates are increasing their renewable capacity in the hydro and wind segments, bankers have said. Solar energy has been one of the main sectors for banks in recent years in terms of loan demand, but investment demand for the hydroelectric and wind segments is starting to firm up, they added.

“There is a clear will from the government in favor of renewable sources. We are seeing strong demand for hydropower projects in states where it is viable, including Himachal Pradesh, Uttarakhand, Jammu and Kashmir and northeastern states,” said a senior executive from a large public sector bank.

Historically, the exposure of the banking sector to alternative energy sources has been limited. According to a March 2022 paper by researchers at the Reserve Bank of India (RBI), as of March 2020, only around 8% of bank credit deployed in the power industry was for unconventional power generation. The ratio ranged from 17% in Punjab to a meager 0.1% in Odisha. The share of unconventional energy in credit to the utility sector was higher for private banks at 14.8%, compared to just 5.2% for public sector banks (PSBs).

In recent times, however, thermal power has fallen out of favor with banks and lending to the coal power segment mainly takes the form of refinancing transactions. Bankers are also wary of coal-based projects from an asset quality perspective after the dismal experience of the last cycle of bad loans. A number of thermal power plants financed in the late 2000s went bad in the absence of power purchase agreements.

The State Bank of India (SBI) is now closely pricing its exposure to thermal power projects. “The life cycle of coal projects could be between 20 and 30 years. We therefore need to consider whether such projects could become a threat to India’s global sustainability commitments and, in turn, create asset quality issues for us,” said a senior executive from the bank.

The government had, in 2020, launched the Renewable Energy Certificates (REC) scheme as a market-based instrument to facilitate meeting RPO targets. Under this program, conventional energy buyers such as discoms and corporations that do not meet their RPO targets can purchase CERs on exchanges from registered renewable energy producers. However, higher prices on exchanges and regulatory uncertainties have made project developers reluctant to enroll under the program. In addition, buyers began to enter into individual contracts with developers at lower prices compared to exchange rates. Thus, just 4526 MW or 4% of the installed renewable energy capacity is registered under the program in December 2021.

At the United Nations Climate Change Conference (COP26) held in Glasgow in November last year, Prime Minister Narendra Modi announced that India would reduce total projected carbon emissions by one billion tonnes until 2030. By 2030, the country will reduce the carbon intensity of its economy by less than 45%, he said.

With contributions from Vikas Srivastava in Mumbai