Green Electricity Tariffs: Pricing and Other Challenges

Executive Summary 

The Ministry of Power has notified a formula for “green tariffs” for large (greater than 100 kW) electricity consumers to encourage green power uptake from distribution companies. Our analysis finds that this push to create demand for green power (based on Renewable Energy, or RE) has several limitations, including: 

1. Financials: Losses to the distribution companies compared to today’s tariffs (i.e., regulated retail prices).
2. Operations: Lack of clarity on the ability of the distribution company to supply the required incremental green power; this includes challenges in matching the demand by time of day through RE and the likelihood that this is likely to be a reallocation of already procured RE.

To study green tariffs, we analysed current cost and retail pricing structures across twenty-three distribution companies in 11 states, which cover almost two-thirds of units sold across India. Costs include both fixed and variable costs of generation, transmission, and distribution of electricity. We also quantified pricing distortions that include cross-subsidies, where commercial and industrial (C&I) consumers typically overpay compared to the average cost of supply. 

The primary difference between the current electricity retail pricing norms and the proposed green tariff lies in the cost components. Current norms start with the average power procurement cost (APPC) and then add utility distribution costs and cross-subsidies. The proposed green tariff is solely based on renewable energy procurement costs, with caps on costs for both distribution costs and cross-subsidies. 

The calculated average cost of supply for the 11 major states was determined to be Rs 7.47/kWh, but the green tariff works out to only Rs 6.50/kWh—15% lower and thus loss-making. 

If such green tariffs are approved by the respective state electricity regulatory commissions, this could lead to a large-scale migration of high-paying utility consumers, leading to fewer avenues for cost recovery, which would affect distribution company revenues or raise prices for other consumers. 

While the Ministry’s green open access order and green tariff notification are well-intentioned, in their present form, they ignore critical issues that affect the distribution companies today, and may also distort the RE industry because: 

1. The proposed formula does not reflect the cost of supply.
2. Offering and making available 24×7 green energy—one of the conditions in the green order—is possible only by charging a premium.
3. The load profiles of C&I consumers are heterogeneous and may or may not coincide with the corresponding RE generation profile, so a uniform green tariff across the consumers is not efficient.
4. If the renewable energy procured is not new and incremental, this could lead to a zero-sum game, with a skew—there appears to be a disparity in access to affordable renewable energy sources. Premium, i.e., C&I consumers have greater access to cheaper renewable options, potentially resulting in a situation where less affluent and poorer consumers are left with more expensive conventional energy sources.

If the motivation for the green tariff is to increase renewable energy purchases, then its design and features should benefit both distribution companies and consumers. The following could aid distribution companies and improve the scaling of renewable energy: 

1. Distribution companies must calculate the true costs of supplying green power and set the tariff at levels that recover their costs.
2. Distribution companies should increase procurement of green power, but such power should be available to all consumers, not just a subset of consumers.
3. There must be consistent norms for defining green power, especially those that reflect time-ofday differentials. For example, banking of renewable energy should not qualify as green power if some of the delivered power is procured by non-renewable energy means. 6 Green Electricity Tariffs Pricing and Other Challenges
4. Consumers should be incentivised to increase usage during periods of cheaper green supply (typically mid-day, with solar, and focused on renewable energy without storage). One option is time-of-day pricing.
5. Increasing renewable energy beyond a threshold will require storage and system overhauls, e.g. improved flexible supply and ancillary services, the cost of which must be factored in.

Achieving the ambitious target of 500 GW of nonfossil capacity by 2030 necessitates a substantial annual increase of close to 46 GW in non-carbon dioxide-emitting technologies. Variable renewable energy is anticipated to be the primary contributor to this growth. While behind-the-meter renewable energy procurement, such as rooftop solar, is gaining traction, distribution companies remain, and will continue to be, the key source of renewable energy procurement. To ensure the long-term viability of this endeavour, the financial health of distribution companies is paramount. 

Media

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