Renewable Purchase Obligations (RPOs)

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Context

• An examination of publicly available data, primarily sourced from platforms like indiaredata.org and other online resources, sheds light on the performance of different states concerning their RPO targets.
• The analysis reveals a concerning trend: a significant shortfall is evident in nearly 25 out of 30 states in meeting their annual solar RPO targets.

Understanding Renewable Purchase Obligations:

Definition and Purpose:

• Renewable Purchase Obligations (RPOs) serve as regulatory mechanisms mandating power procurers in each state, including distribution companies (DISCOMs), captive power producers, and open-access consumers, to annually procure a minimum quantity of renewable energy.
• These obligations are pivotal in driving the transition towards sustainable energy sources, aiming to reduce carbon emissions and mitigate climate change.
•  Additionally, they aim to stimulate the growth of renewable energy markets, fostering innovation and investment in clean energy technologies.

Mechanism and Compliance:

• Non-compliance with RPO targets can have repercussions for power procurers. To address shortfalls, states can utilize the Tradable Renewable Energy Certificate (REC) mechanism.
• RECs represent the environmental attributes of renewable energy generation and can be traded in the market.
• By allowing entities to purchase RECs as an alternative to directly procuring RE-based power, this mechanism provides flexibility and encourages compliance with RPO obligations.

Regulatory Framework:

• State Electricity Regulatory Commissions (SERCs) play a crucial role in setting and regulating RPO targets within their respective jurisdictions.
• These targets are determined based on various factors, including the renewable energy resource potential of the state, the shape of current and projected load-demand, and the potential impact on retail power tariffs.
• SERCs periodically review and adjust RPO targets to align with evolving energy policies and goals.

Evolution of RPO Trajectory:

• Over the years, RPO targets have experienced significant growth, reflecting the increasing emphasis on renewable energy adoption.
• From a modest 2.75% in 2016, RPO targets escalated to nearly 23% by 2023, signifying a substantial commitment to renewable energy integration.
• The recent revision by the Union Ministry of Power, targeting 39% by 2028, underscores the government's ambition to accelerate the transition to renewable energy sources.
• The revised targets, effective from April 1, 2024, indicate a proactive approach towards achieving a more sustainable energy mix.

Performance of states in fulfilling their renewable purchase obligation (RPO) targets

• The performance of states in fulfilling their renewable purchase obligation (RPO) targets, as mandated by State Electricity Regulatory Commissions (SERC), is influenced by several factors.
• These factors include the abundance of renewable energy (RE) resources within the state, the effective implementation of tariff-based annual bidding trajectories, and the institutional efficiency of state power procurers.

Declining Solar Power Tariffs:

• The remarkable decline in solar power tariffs over the past decade, particularly since 2015, has made solar energy increasingly cost-competitive with conventional thermal power sources.
• With tariffs plummeting to around 2.5/kWh from nearly Rs 6/kWh, solar energy has emerged as a viable alternative for power procurement.
• The availability of competitive solar tariffs should ideally incentivize greater adoption of solar energy, thereby influencing clean energy investment decisions in states.
• However, the correlation between declining tariffs and actual adoption rates requires further examination to understand the factors influencing state-level decisions and investments in renewable energy infrastructure.

Impact of Legacy PPAs on Solar Power Procurement:

• The prevalence of legacy Power Purchase Agreements (PPAs) for thermal power among most DISCOMs imposes constraints on their capacity to procure solar-based power.
• This limitation significantly affects their ability to meet solar RPO targets, consequently impacting overall RPO compliance.

State Categorization based on RPO Compliance:

States with Consistent RPO Compliance (100% or >90%):

• Karnataka, Andhra Pradesh, Gujarat, Punjab, and Uttar Pradesh have maintained a commendable track record of consistently meeting their solar RPO targets, achieving approximately 90% compliance.

States with More than 80% Compliance:

• Himachal Pradesh, Maharashtra, Goa, Tamil Nadu, and Madhya Pradesh demonstrate a substantial level of compliance, with RPO rates exceeding 80%.

States with Less than 60% Compliance:

• Bihar, Chattisgarh, Jharkhand, and Telangana exhibit RPO compliance rates below 60%, indicating a notable shortfall in meeting their renewable energy procurement obligations.

States with Less than 40% Compliance:

• Haryana, Rajasthan, Uttarakhand, Meghalaya, Jammu & Kashmir, Delhi, West Bengal, and Odisha lag significantly behind in RPO compliance, with rates falling below 40%.

Regional Performance Trends:

Eastern States:

• Eastern states have consistently performed below 40% since 2014, with challenges such as unavailable data (West Bengal and Odisha) and limited integration despite renewable energy potential (Jharkhand, Chattisgarh, and Odisha).

Northern States:

• Despite possessing the highest installed solar capacity, northern states like Rajasthan have struggled to meet RPO targets since 2014.
• The lack of public disclosure of performance data beyond 2019 raises concerns. Additionally, reliance on costly thermal PPAs in some northern states like Delhi and Haryana impedes the transition to cheaper solar power procurement.

Implications of Recent Shortfall:

Restriction on Private Capital Investments:

• States failing to meet their RPO targets create an environment of uncertainty and reluctance among private investors.
• Investors tend to favor states with a track record of meeting or exceeding their targets, as these states offer more predictable returns and regulatory stability.

Discouragement of RE-based Power Procurement:

• The persistent failure to meet RPO targets discourages states from transitioning towards renewable energy sources for power procurement.
• Even in states with low RE generation potential, the lack of progress in meeting RPO targets hampers the adoption of RE-based power procurement strategies.

Risk of Thermal Power Lock-in:

• Failure to meet RPO targets may result in a prolonged reliance on thermal power sources beyond the targeted phase-out year.
• This scenario not only delays progress towards renewable energy adoption but also exacerbates environmental concerns associated with continued reliance on fossil fuels.

Challenges Faced by Eastern States:

Inadequate Preparedness for Energy Transition:

• Eastern states appear ill-equipped for the energy transition, lacking market-enabling mechanisms to decarbonize their electricity sectors compared to their counterparts in other regions.
• This deficiency reflects a broader gap in infrastructure and policy frameworks required to facilitate the integration of renewable energy sources into the power mix effectively.

Governance Capacity and Data Transparency:

• The absence of comprehensive data on RPO targets suggests a governance capacity deficit within the respective State Electricity Regulatory Commissions (SERCs).
• States like Telangana, Bihar, Chattisgarh, Odisha, West Bengal, and Tamil Nadu have been inconsistent in publishing their RPO data, exacerbating transparency issues and hindering effective monitoring of compliance efforts.

Historical Oversight and Regulatory Weaknesses:

Past Criticisms and Reports:

• The Standing Committee on Energy of the 17th Lok Sabha in 2021 and a Comptroller and Auditor General (CAG) report in 2015 have previously highlighted dismal performances by state DISCOMs in meeting RPO targets.
• The reports also underscored regulatory failures, including non-enforcement of penalties for non-compliance and the allowance of carry-forward deficits from previous years by SERCs, indicating systemic weaknesses in oversight and enforcement mechanisms.

Factors Contributing to Current Deficits:

Generation Deficit in Solar Power:

• The deficits in RPO targets are partly attributed to inadequate generation of solar power, as highlighted in the Niti-Aayog paper titled "Resource Adequacy Planning to Meet RPO targets by States, All India Roadmap 2024."
• The consistent shortfall in meeting RPO targets and the reluctance of utilities to purchase Renewable Energy Certificates (RECs) for compensation underscore the challenges in achieving renewable energy goals.

Unrealistic Targets or Insufficient Capacity Addition:

• The discrepancy between set targets and actual performance raises questions about the realism of initial RPO targets, especially for states with limited solar potential.
• Insufficient capacity addition by states and a lack of effective mechanisms to stimulate demand for solar power within the state may have contributed to the shortfall in meeting targets.

Need for Strategic Capacity Planning:

Capacity Planning as an Afterthought:

• The Central Electricity Authority's report, "20th Electric Power Survey of India," highlights the generation deficit and underscores the need for proactive capacity planning to address gaps in renewable energy deployment.
• Capacity planning has often been an afterthought in many states, leading to suboptimal RPO compliance and hindering progress towards sustainable energy transition goals.

Implications of Non-Compliance and Their Consequences:

Linkage to Solar Resource Potential:

• The ability to meet RPO obligations appears closely tied to the solar resource potential of states, as evidenced by the exemplary performance of Karnataka, Gujarat, and Andhra Pradesh.
• Factors like flexible power procurement policies and ambitious deployment targets incentivize developers to invest in solar projects in these leading states, resulting in a concentration of solar generation in western and southern India.

Risk of Asymmetric Growth and Grid Instability:

• The asymmetric growth of solar generation in certain regions may pose risks to grid operations due to the concentration of variable renewable energy (RE) sources.
• This trend could lead to over-reliance on solar energy at the expense of other RE technologies, potentially narrowing investment opportunities and limiting the diversification of the energy mix.

Negative Signals in Energy Markets:

• The lack of enforcement of obligated targets by State Electricity Regulatory Commissions (SERCs) sends negative signals in energy markets, undermining investor confidence.
• Extensions of shortfalls in targets to subsequent years, non-enforcement of penalties for deficits, and limited participation in Renewable Energy Certificate (REC) markets indicate governance shortcomings by SERCs.

Diminished Investor Attractiveness:

• States with inadequate governance and enforcement mechanisms may appear unattractive to developers, despite their high RE potential.
• The heightened capital risk in such states, coupled with missed opportunities, reduces investment pipelines for RE resources, hindering progress towards renewable energy targets.

Thermal Power Lock-In:

• States with low RE generation and existing thermal power infrastructure continue to procure power from conventional sources, leading to a lock-in of thermal power beyond the target years.
• This perpetuates reliance on fossil fuels and impedes decarbonization efforts, particularly in eastern states where the availability of cheaper thermal power could deter the transition to cleaner energy sources.

Alignment with New RPO Targets:

Syncing Solar Installations with RPO Trajectories:

• With the introduction of new RPO targets from 2024, it becomes imperative for the pace of solar installations to align with the corresponding RPO trajectories.
• States must ensure that the deployment of solar energy infrastructure matches the requirements set by the revised RPO targets to avoid compliance deficits.

Utilization of REC Mechanism for Deficits:

• Any shortfalls in meeting RPO targets must be addressed through the Renewable Energy Certificate (REC) mechanism.
• This mechanism provides a means for DISCOMs to procure RECs as a substitute for direct procurement of renewable energy, thereby facilitating compliance with RPO obligations.

Consequences of Non-Compliance:

Penalties and Non-Revenue Costs:

• Failure to meet RPO targets would subject DISCOMs to penalties, increasing their non-revenue costs and impacting their financial viability.
• The imposition of penalties adds financial strain to DISCOMs, affecting their ability to exit existing thermal Power Purchase Agreements (PPAs) and transition to lower-cost renewable energy sources.

Extension of Thermal Power Arrangements:

• In scenarios where RPO targets are not met, DISCOMs may be compelled to extend thermal power arrangements to balance the inadequacies from solar generation.
• This reliance on thermal power prolongs the transition away from fossil fuels, undermining decarbonization goals and perpetuating environmental risks associated with conventional power generation.

Conclusion:

• Ensuring compliance with the new RPO targets is critical for advancing India's renewable energy goals and achieving a sustainable energy future.
• States must prioritize the timely deployment of solar energy infrastructure and leverage mechanisms like RECs to bridge any compliance gaps.
• By aligning solar installations with RPO trajectories and avoiding penalties, DISCOMs can facilitate a smooth transition towards cleaner and more cost-effective renewable energy sources, thereby accelerating progress towards decarbonization objectives.

PRACTICE QUESTION Q. Explain the importance of Renewable Purchase Obligations (RPOs) in India's energy sector. Highlight the challenges hindering states' adherence to RPO targets and discuss the ramifications of non-compliance. Provide succinct policy recommendations to bolster RPO compliance and facilitate the transition to renewable energy.

SOURCE: DOWN TO EARTH