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Cheap solar power singes state electricity boards' revenues

This case could make the case stronger for captive power producers on the one hand, and for rooftop solar power producers on the other for reasons that are explained a bit later. The court, in its order, reiterated the principle of settled contracts which lends certainty to power purchase agreements (PPAs) and imposes confidence in investors.

March 22, 2019 / 03:53 PM IST
Representative image

Representative image

RN Bhaskar

Last week, the Karnataka High Court quashed an order issued by the Karnataka Electricity Regulatory Commission (KERC) relating to an increase in wheeling charges for open access power consumers in the state. The high court order has provided relief to renewable energy generators trading power through open access in the southern state.

Wheeling is the transportation of electric power over transmission lines of the grid. A solar plant owner wanting to sell power needs only a connection to the network or grid. He then pays the company owning the transmission line based on how much power is being moved and how congested the line is, and these charges are called wheeling charges.

The move could make the case stronger for captive solar power producers on one hand and for rooftop solar power producers on the other, for reasons explained further in this article.

Meanwhile, the court in its order, reiterated the principle of settled contracts which lends certainty to power purchase agreements (PPAs) and imposes confidence in investors.


It all began in May 2018 when the KERC issued an order imposing high wheeling or transmission charges on renewable energy projects across the state. Units that were less than 10 years old (meaning all units as advocacy for solar projects began less than 10 years ago), had to pay additional transmission or wheeling charges fixed by the CERC in cash. This was a five-fold increase in wheeling charges for open access consumers in the state of Karnataka. The order was brought into effect from April 1, 2018, and was scheduled to be in force until March 31, 2020.

However, certain renewable energy project developers operating in Karnataka filed writ petitions in the High Court challenging this order.

What the court observed

  • KERC had promised solar photovoltaic (PV) project developers that they would be exempted from wheeling charges for 10 years after commissioning.

  • KERC was wrong in first guaranteeing exemption and then seeking to remove that guarantee. Such exemptions if withdrawn were not in public interest and could lead to project developers and investors suffering monetary loss leading to issues in serviceability of loans and would affect the economy.

  • KERC's action boils down to discriminatory treatment.

  • KERC can only determine wheeling and banking charges prospectively not retrospectively.

  • Renewable energy project developers do not have to pay increased charges.
    In fact, this is the problem all power suppliers especially renewable power producers face when dealing with state-owned power utilities. States have sought to undermine the sanctity of contracts by imposing arbitrary charges. They have sought to reduce competition in the power generation space by levying charges that make competition extremely risky, hence difficult.

They promote higher cost for power generators and distributors. And they have sought to make renewable power more expensive than it could be.

Almost all states levy standby charges, capacity charges, and BED (Bombay Excise Duty) to ensure that surplus power sold by a private captive producer would not be allowed to undermine the profitability of more expensive conventional or grid-sourced power.

At the central level, the government has slapped a 25 percent safeguard duty on solar panel imports – ostensibly to protect domestic producers of solar panel. It has thus promised promotion of solar power on one hand, and slapped it with higher imposts on the other.

Finally, despite pious sounds being made about the need to promote rooftop solar, there are no indications that this is being done. On the contrary, it is almost certain that the government will slip on its targets for solar power generation in general and for rooftop power in particular.

The two main reasons

But why do governments in India try to sabotage plans relating to solar power and private distribution of power?

One reason is that solar power prices have crashed to levels not foreseen earlier (see chart on India's solar power tariffs below). This makes solar power – inclusive of the battery – cheaper than conventional power. This is true for business establishments that pay around Rs 8 to Rs 12 rupees a kWh (unit).


Obviously, when they can get power (inclusive of battery costs) at around Rs 6 a unit, why not save money? And these prices are likely to slide further as batteries are likely to become cheaper and popular. As mentioned earlier, battery demand is likely to soar 15 times over the next few years and prices expected to fall. As state grids end up selling less expensive power to companies (who can generate solar power in abundance from their factory roofs), states will have less money to offer subsidised power to farmers and other vote banks. Hence the heartburn, and the desire to hike tariff through the imposition of other levies.

Nonetheless, there is a another reason to hike tariffs. Most governments know that power is stolen from state grids. Yet this theft is concealed, by "misclassifying" the stolen power as agricultural consumption. To justify this, states like Maharashtra actually show a higher population of pump sets per acre of arable land – far in excess of actual numbers. Much of the power theft is linked to powerful people most often than not, politicians.  They run factories and other businesses on this stolen power.

That in turn makes honest companies unviable on one hand, and bankrupts state power grids on the other. Few states like the idea of enterprises using power independent of the control that grids used to exercise on them until now. Hence the disincentives. Clearly, the government of India wants to do everything to restrict the growing popularity of solar power worldwide (see chart below on the surging solar demand).


The centre as spoiler

The situation can become so terrible that the central government does not listen to reason. Thus, in spite of promoting power to the remotest household, and paying lip service to solar power, it needed the chief minister of Tripura to personally plead with the union power ministry to allow his state to instal solar power facilities for the remotest households.

His argument was simple. Grid connectivity would cost him at least Rs 2 lakh per household in the remotest region. There were over 50,000 such households in the state. Solar power connectivity would cost just Rs 50,000 each.

Moreover, the longer the grid wires, the more expensive would reaching the power become. There is also risk of both power and wires being stolen. The chief minister finally had his way, but only after he gave a written assurance to the centre that the state would pay for the solar power installations.

The central government forgot that rooftop solar is an employment generator, and can create over 80 million jobs within a few years.

Forgotten were the rooftop solar targets, the economics and the employment generation.

The Karnataka Court's order is a harbinger of things to come. With solar costs plummeting, and the state grids nearing bankruptcy, expect changes in the power sector that few have imagined before. The tide's coming, but it seems unlikely that the bunds will withstand the force of the waves.

Note: The author is Consulting Editor at Moneycontrol.
RN Bhaskar
first published: Mar 22, 2019 03:53 pm
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