A case for strengthening the framework on banking of renewable energy

The Union Cabinet has approved India’s updated nationally determined contribution (NDC) to climate action, which sets a target to achieve 50 percent cumulative installed capacity from non-fossil fuel-based energy resources by 2030. Much of this capacity target is likely to be fulfilled through renewable energy (RE) sources like solar and wind energy.

RE sources are inherently intermittent and variable in nature. Therefore, RE generation is not in sync with the demand cycles. A technological solution to intermittency is physical storage of energy, and thus, storage technologies are critical to a transition to RE heavy energy systems. Until physical storage options are cost-competitive and scalable, banking of energy is a short-term alternative to promote RE generation.

In the past few years, several states have placed different kinds of restrictions on banking of RE, jeopardizing the interim solution to its intermittency. In June 2022, the Centre notified the Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022 [RE OA Rules] to ensure a consistent approach to energy banking for RE open access consumers. While the RE OA Rules recognise the importance of banking, it fails to provide a coherent framework.

Overview of energy banking in India

Energy banking is an exchange of electricity for electricity. It is an arrangement where surplus power generated in a particular period is fed into the grid. This surplus energy known as banked energy is then supplied back during periods of low RE generation. 

Banking has been an essential complement to open access (OA) purchase of RE. The discoms provide this service upon payment of ‘banking charges’ by the consumers that is in kind (a share of banked energy) or in cash (Rs/KWh). The banking arrangement varies across states as it is regulated by the State Electricity Regulatory Commissions (SERCs). It is a promising alternative to storage for achieving higher penetration of RE, and has been useful to commercial and industrial (C&I) consumers choosing RE through OA. 

However, there has been a trend of increasing restrictions on banking. States have either withdrawn their banking facility completely or imposed various conditions that limit duration and quantum of banking.

With higher penetration of RE, which now accounts for a significant share of electricity generation in a few states, discoms have been seeking discontinuation of pro-RE policy measures, including the banking facility. Banking has been a challenge for discoms[1], particularly because of the costs[2] incurred to supply back during periods of high demand. Subsequently, varied restrictions have been brought in at the state level. RE developers have challenged these restrictions before SERCs and the cases are at various stages of pendency before Appellate Tribunal for Electricity (APTEL) and the Supreme Court of India. 

So far, APTEL has resisted these attempts to dilute banking provisions. In January 2021, APTEL[3] considered Tamil Nadu ERC’s decision to completely withdraw the banking facility to be “extremely radical”. It held that preferential treatment of RE is a stated policy of the Government of India towards its commitments to climate action under the Paris Agreement, and SERCs must consider the same while taking decisions. 

In March 2019, reviewing a petition against Karnataka ERC’s order to reduce banking period to six months, APTEL[4] held that banking is not just a commercial transaction; it is physical support for RE generation. In Karnataka, the months of May to September are periods of peak wind generation and if banking is not allowed on an annual basis, the surplus energy generated will not be available for consumption (in accounting terms) in the peak demand season (January to March). While reduced banking period (one-six months) fails to factor seasonal variability in wind power generation, solar energy with variation over the course of a day is not affected. 

Why discoms are resistant to energy banking

Discoms’ resistance to banking can be explained by the cost factor. There can be a significant difference between the variable cost of power at the time of injection and drawl of the banked energy. Wind generation is highest in the monsoon season, when agricultural and cooling demands are lower. Discoms back down low-cost thermal generation to absorb surplus wind energy, part of which is banked. However, the banked energy is generally claimed during peak summer months, when the discoms need to run expensive plants or procure expensive power from the spot market to supply back the banked energy. The discoms contend that this unit-to-unit adjustment has impacted their finances.

The discoms also allege that RE developers are taking advantage of the banking facility by installing and seeking permission for higher capacity than their stated drawl requirement.

This was demonstrated in recent cases[5] before APTEL where banking was used as a reason to impose restrictions on OA beyond contracted demand.

The root of the problem lies in the fact that the cost of banking facilities has not been ascertained or fully understood. So far, discoms have not been able to make a case for financial hardship faced by them since they have failed to provide adequate data[6] and analysis[7] on why these restrictions on banking are necessary. APTEL has criticised SERCs for failing to analyse the impact of banking which has led to the current state of ad hoc regulations. Since APTEL cannot independently establish if discoms are suffering financial losses due to banking or not, it has suggested[8] that CEA conduct these studies and advise the central government to formulate a uniform policy. 

The jury is still out on the cost of banking. These could be prohibitive, or could be cheaper compared to other solutions. A study (Jain & Jain, 2020) claims that banking service provided by discoms to an open-access customer buying solar energy from an independent power producer can increase the cost of solar electricity by 20-30%, which is still cheaper than storage.

Regulatory framework on banking is inadequate, unclear and uncertain

The RE OA Rules recognises the importance of banking and makes provisions to assure banking facility to RE open access consumers: 

• “Banking shall be permitted at least on a monthly basis on payment of charges”

• “The permitted quantum of banked energy by the Green Energy Open Access consumers shall be at least thirty percent of the total monthly consumption”

The first provision implies that SERCs can notify a longer banking duration, which would allow consideration of state-specific context. However, in the explanation to the clause, the RE OA Rules clarify that “the credit for banked energy shall not be permitted to be carried forward to subsequent months and the credit of energy banked during the month shall be adjusted during the same month.” This seems to be inconsistent with the first provision. 

If the explanation prevails and banking duration is limited to a month, seasonally productive wind energy will be adversely affected. It is possible that RE generation cost may go up to factor the cost of the surplus energy that cannot be recovered. It can also lead to downsizing of projects to avoid surplus generation, and thus, affect the pace of RE capacity addition. Monetisation of surplus RE in day-ahead and spot market is another avenue for the developers, as seen in the round-the-clock RE contract. But how it unfolds in practice remains to be seen.

The frequent changes to banking provisions and resulting litigation lead to disruption and uncertainty in the regulatory framework. There have been cases where restrictions were imposed retrospectively on existing RE developers, and APTEL overruled[9] such orders since SERCs tried to unilaterally amend existing contracts. These developers have made substantial investments and entered into commercial agreements based on the existing regulatory framework, and shifting sands will lead to such projects becoming unviable[10].

Price discovery is necessary to apportion the costs, responsibilities and liabilities among stakeholders. It is premature to take policy decisions based on insufficient and imperfect data. APTEL had suggested that CEA and SERCs conduct in-depth financial and scientific studies to determine the cost of banking. Karnataka ERC has recently commissioned a study for this purpose. The RE OA Rules requires the Forum of Regulators to prepare a common methodology for calculation of banking charges for SERCs. 

Open access based on renewables would be unviable without a pragmatic banking framework[11]. Developing such a framework requires research that seeks to analyse and address the concerns raised by both RE developers as well as distribution licensees. It is critical to signal regulatory certainty for RE promotion and foster energy transition in the medium-term. As a consequence of the RE OA Rules, it is now up to the states and SERCs to decide how to interpret and incorporate banking provisions in their regulations.

References

1.Tamil Nadu Spinning Mills Association v TNERC & Ors. (Appeal No. 191 of 2018 and batch, 28.01.2021), Paras 5-6,35 [‘TNERC Case’] https://aptel.gov.in/sites/default/files/Jud2021/A.Nos.%20191,%20195,%20265%20of%202018%20&%20406%20of%2019_28.01.21.pdf ; Submissions of MSEDCL before MERC in ‘Petition of Maharashtra State Electricity Distribution Co. Ltd. for amendment of Banking provisions of Distribution Open Access Regulations, 2016’ (Case No. 85 of 2017, 27.03.2018), Para 3 https://www.mahadiscom.in/consumer/wp-content/uploads/2019/03/18-Order-85-of-2017-27032018.pdf

2. Fortune Five Hydel Ltd. v. Karnataka Electricity Regulatory Commission & Ors (Appeal No. 42 of 2018 & batch, 29.03.2019) [‘KERC Case’], Paras 5.3, 11.20 https://aptel.gov.in/judgements/Judg2019/Final%20%20Judgment%20of%20A.42%20of%202018%20&%20batch%20%2022.2.2019_29.03.19.pdf.

3. TNERC Case, Para 71, 75

4. KERC Case, Para 14.16

5. Roha Dyechem Private Limited v MERC & Ors. (Appeal No. 319 of 2018 and batch, 27.04.2021) https://aptel.gov.in/sites/default/files/Jud2021/A.No.%20319%20of%202018_27.04.2021.pdf ; M/s. Greenyana Solar Private Limited v HERC & Ors. (Appeal No. 164 of 2020, 20.09.2021) https://aptel.gov.in/sites/default/files/Jud2021/A164of20_20.09.21.pdf

6. TNERC Case, Paras 85-87

7. KERC Case, Paras 14.16,16.8

8. TNERC Case, Para 93

9. KERC Case

10. TNERC ‘Order on procurement of wind power and related issues’ dated 01.10.2020, Summary of comments received from stakeholders (Page 45 onwards)

11. https://energy.prayaspune.org/our-work/policy-regulatory-engagements/comments-and-suggestions-on-kerc-s-discussion-paper-on-wheeling-charges-and-banking-facility-for-renewable-energy; https://energy.prayaspune.org/our-work/policy-regulatory-engagements/choosing-green-the-status-and-challenges-of-renewable-energy-based-open-access

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(Environmentality is a collection of ideas, perspectives, and commentary by researchers at the Initiative on Climate, Energy and Environment, Centre for Policy Research, New Delhi. Views and opinions expressed in this blog are solely those of the authors. They do not represent institutional views.)

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