Varun B R

A World Bank study conducted in the 1960’s was of the opinion that an integrated steel mill in South Korea was a premature proposition without economic feasibility. A number of factors stood against setting up the ‘Pohang Iron and Steel Company Limited’ (POSCO). But by 1988, POSCO had become the eleventh largest steel company in the world. This transition was made possible by realizing a dynamic comparative advantage (a). In the context of India’s energy sector and the backdrop of Sustainable Development Goal – 7 (SDG7), we stand at a similar crossroad. Though there is a global mandate to shift towards clean energy, the trajectory we employ with respect to the ancillary services (b) in the electricity market design will be crucial. India stands to be a global leader for SDG7 owing to its abundant potential by virtue of its location and geography (W. Brent. 2018).

What is an Electricity Market?

In an economic sense, electricity is a tradeable commodity. The system that enables the purchase, sale and trade of electricity by way of bids, offers and financial swaps, respectively, forms the electricity market. The market comprises of businesses that are involved in the generation, transmission and delivery of electricity. There are also businesses that are involved in managing these interactions in order to ensure that the electricity demand is met economically on a real time basis. There is no economical way to store large amounts of electric energy and hence the real time management of electricity demand and supply is a key aspect to be looked into. The operations in this industry are evolving due to environmental regulations that have led to expansion in renewable power generation. As nations make this shift towards renewables, the reliability factor to meet electricity demand and stability of electric supply is a challenge. Ancillary services will necessarily have to take on a robust role to make the transition to renewable sources efficiently. The likes of energy storage systems, will play a major role in shaping the subsequent electricity market design.   

The Government of India set a target to install 175 Gigawatt (GW) of renewable energy capacity by 2022, post the Climate conference held in Paris in 2015. From Table 1 on the right, we observe that the renewable capacity stands at around 69 GW, while current capacity is pegged at 83 GW. The direction of energy policy should expectantly head towards investment in technologies that enable incorporation of renewable sources, but this is yet to be reflected in the national electricity policy.   

§3(4) under the Electricity Act, 2003, mandates the Central Electricity Authority (CEA) to prepare a National Electricity Plan (NEP). According to this plan, to meet energy demands through the years 2022 to 2027, priority has been given to development of hydro and nuclear projects. Table 2 briefly outlays the propositions.

The foregoing table indicates that the government is heading towards adoption of non-fossil fuel sources of electricity generation. In tune with SDG7, there is a target to achieve large renewable resource addition. However, the variability and uncertainty associated with renewable power generation is planned to be balanced by power from hydro and gas power plants. To the NEP’s credit, it does mention that peaking capacity can also be met through energy storage devices. But there is no guideline detailing the development of such systems to scale.

Going beyond Hydro Power

While it is important to scale up green sources of energy, we must look beyond hydro power. Detrimental effects such as destruction of aquatic ecosystems, ill-compensated displacement of human settlements, risk of drought in the neighbouring lands and consequences of dam construction, interferes with the natural flora and fauna. Hydro power plants are also geographically restricted and hence come with considerable power transmission costs to relatively inaccessible areas.

In order to provide for peaking capacity, energy storage systems must be developed and harnessed to counter the supply variability that plagues renewable sources. The shift to renewables as the major source of power generation will require innovations in ancillary services to increase the reliability of electric supply.

Electricity Market Design: Way Forward

An estimated eighty-seven percent of power procurement in India is through bilateral Power Purchase Agreements (PPA) between DISCOMs (Electricity distribution companies) and power generation companies which are charted for a duration of twenty-five years. This implies that there is no scope for efficient pricing in the market and power is purchased at higher prices as decided in the PPA. What this translates to, is illustrated in the following diagram:

As of 2019, India’s financially burdened power assets are approximated to be 65 GW. With ambitious renewable capacity addition targets, the above problem is expected to multiply in magnitude.

A National Electricity Market

The Central Electricity Regulatory Commission (CERC), has proposed for the creation of a national market to purchase electricity. Touted to be the next significant reform in the power sector after the Electricity Act of 2003, it stands to maximise resource efficiency and price reduction in power procurement. The benefits of this are two-fold. On one hand this would address the issue of stressed power assets and this will also facilitate incorporation of variable energy to the grid. A national market with real-time dispatch of power from the generator to the DISCOM can enable optimal grid management. Looking forward, this step coupled with effective ancillary service mechanisms, can help counter the power variability arising out of renewable resources.

Policy Requirement: Storage

There are multiple benefits of having an efficient energy storage system such as improvements to renewable power reliability, quality, resilience to fluctuations and better overall energy efficiency. The problem however is that these benefits are not quantifiable. Hence it is imperative that the government directs the development of such favourable policies. In support of ancillary services, a report by the India Smart Grid Forum (ISGF), prescribes the following recommendations:

• Integrating the likes of energy storage systems officially as a part of the national energy policy. This will not only help bring storage systems to the mainstream dialogue, but also incentivise investments in upcoming grid stability systems and services.
• In the interest of reducing stress on the grid during peak demand, and to increase transparency in price, we must shift from a flat-tariff system to time-of-use tariff, such as smart meters.
• Government must focus on incentivising development and finance of energy storage and distributed-energy projects. The policy must also not restrict itself to being technology specific and provide support to new projects in a phased manner, after evaluating the prospects of its contribution to creating strong ancillary services.

Conclusion

It is necessary to acknowledge that there is an element of resistance among the current stakeholders to change the method of grid operation and management. Transition to new technologies is a challenge that will necessarily have to be dealt with by our existing utilities. Development of suitable policies is thus imperative. The way we direct our energy policy today can, and will, potentially lead to long term gains, and the government must capitalise on this opportunity.    

Varun is a Master’s student currently enrolled in the Public Policy programme at NLSIU, Bengaluru. A Mechanical engineer turned policy student, Varun’s primary interest lies in energy policy. Through the duration of the course, he has also developed an interest in studying community networks to effect socio-economic change. He believes his best learnings have come through by way of conversing with people and is actively on the lookout for different perspectives. He can be reached at varunbr@nls.ac.in.

References

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Alberini, Lorenzo. 2019. ‘As energy gets smarter, ‘time of use’ tariffs spread globally’ (blog), (https://www.smart-energy.com/industry-sectors/electric-vehicles/as-energy-gets-smarter-time-of-use-tariffs-spread-globally/) (accessed on 26^th July 2020).

Energy Statistics report 2019, Central Statistics Office, Ministry of Statistics and Programme Implementation.

Energy Storage System: Roadmap for India 2019-2032, India Smart Grid Forum.