Banking restrictions on renewable energy projects in India

India’s renewable energy (RE) installations have shown tremendous growth over the last few years to reach 104 gigawatts (GW) as of 30 November 2021. This growth has been steered by the drastic reduction in technology costs over the last few years along with a strong policy and regulatory environment. Various state governments have helped by giving waivers and incentives to promote the increased deployment of renewable energy. One such provision provided to RE generators is “banking of power,” allowing utilities to store the surplus energy generated and withdraw it later when needed. The concept was first introduced in Tamil Nadu in 1986 and is similar to a bank customer’s savings account.

In banking of power, a generating plant supplies power to the grid, without planning to sell it. Instead, the plant holds the option to draw back the power from the grid within a certain time period and against the charges specified under relevant regulations.

Generally, banking in India is provisioned at the point of consumption by the distribution companies (discoms). Banking is only permissible for intrastate transactions. Several State Electricity Regulatory Commissions (SERCs) levy a banking charge that varies across states.

Key benefits of banking provisions for renewable energy generators include:

• It is an effective mechanism to utilize excess RE generation.

• As solar and wind power are intermittent in nature, it is not possible to forecast the generation and supply of energy with 100% accuracy. Banking can help manage intermittency and ensure a reliable power supply.

• In some cases, banking can also provide financial benefits. Imposing banking charges can allow discoms to generate additional revenue from banked energy.

• The banking provision indirectly helps utilities in peak load shifting.

• It pushes the Commercial & Industrial (C&I) segment to increase its share of RE procurement, thereby helping to meet sustainability and RE100 targets.

Despite all the benefits, it has been observed over the last two years that state governments have been issuing or have been considering restrictive and stringent banking notifications for renewable projects. Discoms are restricting the banking provision because they fear losing high-paying C&I consumers. After adopting restrictive net metering regulations and withdrawing waivers for open access renewable projects, discoms are now restricting banking facilities to keep C&I consumers from shifting to alternative RE power procurement models.

Some reasons that different discoms or state governments have used to justify the new restrictions are:

1. The fast-paced evolution of solar technology has led to increased efficiency, which in turn led to smaller capital expenditures (CAPEX) required to set up a solar power project over the last five years. This ultimately reduced the per-unit cost of electricity generation by solar projects. Discoms have argued that to settle excess energy banked by developers, they have to buy excess power at tariffs that are linked to average power purchase costs (APPC). As per latest Central Electricity Regulatory Commission (CERC) order for FY2021/22, the national APPC is Rs3.85 per kilowatt-hour (kWh), which is higher than the per-unit cost of generation from solar projects, which is in the range of Rs2-2.8/kWh. Many discoms have been claiming the difference caused them to lose money.

2. The Ministry of New and Renewable Energy (MNRE) has set up statewide targets to achieve 175GW of RE installed capacity by 2022. States that have achieved 85% to 90% of their targets plan to withdraw the banking facility for the open access RE projects. Their primary reason for introducing a banking facility is to promote renewable energy. Since targets set by MNRE are almost achieved, they can withdraw the facilities. Because of these banking provisions, regulators have said that this leads to additional cost burden on discoms, which will lead to higher per unit electricity costs for consumers.

3. Discoms also stated that consumers in some states are taking advantage of the banking provision by drawing on banked energy during peak demand periods while injecting power during off-peak periods. The cost of power procurement during peak period is higher. Discoms are facing losses due to the difference in power procurement costs.

Though discoms have raised valid points, the national RE target of 450GW by 2030 is still far away. Restrictive banking provisions at this early stage of the RE growth trajectory in India will create a huge setback for renewable project developers.

As part of this briefing note, the current status of banking provisions has been analysed across leading RE-rich states in India, along with the implications of these restrictive provisions upon the renewable sector.