Solar losing out as Indian DISCOMs flout purchasing rules, reports Mercom Capital

One of the most pressing concerns for the Indian government as it grasps the steering wheel of its solar juggernaut is to ensure that the country’s distributed electricity companies (DISCOMs) abide by rules that stipulate they must purchase solar electricity before other sources.

However, according to the latest India Solar Quarterly Market Update by analysts Mercom Capital, some DISCOMs are flouting these rules and instead opting for the cheapest power options available on the exchanges.

Falling demand for power across some segments of the industry, particularly India’s commercial and industrial sector, has – according to the Central Electricity Authority (CEA) – led to record low prices on the power exchanges. And with DISCOMs across the country often in less-than-optimum financial health, they are increasingly purchasing the cheapest available power on the exchanges.

In certain states, such as Rajasthan and Tamil Nadu, this is leading to a curtailment of solar power, says Mercom Capital CEO Raj Prabhu. The Tamil Nadu state government has agreed a PPA for solar power at INR 7 ($0.1045)/kWh, which is currently uncompetitive with the cheapest fossil fuel power available on the exchanges and thus is often overlooked by cost-conscious DISCOMs.

Additionally, DISCOMs shorn of a major source of revenue due to suppressed usage across the C&I sector are resorting instead to power cuts because they cannot afford to even purchase the cheapest power available. Hence, despite low power deficits and even power surpluses being recorded across many parts of India, some urban and lots of rural areas are still prone to electricity and power cuts.

The Indian government, in its push to reach 100 GW of solar PV capacity by 2022, introduced a "must run" law stipulating that any solar power produced in the country must be snapped up first by DISCOMs. And while the specter of curtailment is not yet widespread, Mercom reports that developers and state agencies are concerned that the problem may escalate, damaging investor confidence at a critical juncture in India’s solar evolution.

"Total new renewable energy capacity addition has increased to 30% as of calendar year July 2016, with intermittent renewable energy capacity additions including wind and solar accounting for almost 28% (solar accounted for 16%), a huge positive largely due to government’s push for renewables," said Prabhu.

A lack or integration of these intermittent sources on to the grid is an issue for India, but more pressing – Prabhu stressed – is falling power demand and the poor financial health of the country’s DISCOMs.

Mercom says that state increases in power tariffs on residential and agricultural consumers are required to reflect present costs. Otherwise, Prabhu warns, DISCOMs will struggle to return to rude financial health. Currently, despite some states ostensibly boasting surplus power, DISCOMs are unwilling to supply electricity around the clock for fear of financial losses on the low tariffs from residential and agricultural customers.