28 March 2021 | BRIDGE TO INDIA
Maharashtra has become the latest state to offer ‘green tariff’ option to grid power consumers. This route allows consumers to notionally procure renewable power through DISCOMs without incurring any capital expenditure or entering into complicated renewable power purchase agreements directly with power producers. As per the state regulator MERC’s notification, all consumers, irrespective of size or connection type, may opt for ‘green tariff’ at a premium of INR 0.66/ kWh over normal applicable tariffs for 100% of their power needs for minimum period of one year.
- Simplicity of ‘green tariffs’ is a major positive as consumers face tough choices in traditional renewable power procurement;
- It is crucial to ensure that ‘green tariffs’ lead to a direct increase in consumption of renewable power;
- The model could gain critical mass if regulators and DISCOMs show more creativity with tariff design and contract structures in response to market needs;
Maharashtra is the third state after Karnataka and Andhra Pradesh to offer ‘green tariffs.’ It has followed broadly the same model by charging a flat premium for green power over existing retail tariffs. The premium has been worked out by MERC based on expected incremental cost of renewable power over conventional power up to FY 2025 across all state DISCOMs. Unlike the other two states, however, it has rightly offered the new option to all consumers including residential and SME consumers, who may be more willing to pay a tariff premium.
Increasing consumer choice by offering ‘green tariffs’ is eminently desirable. More consumers want renewable power because of growing environmental awareness. But direct procurement routes such as rooftop solar (lack of physical space), open access (unwillingness to enter into binding long-term PPAs, policy uncertainty) and green power trading (small volumes, high degree of sophistication required for trading) can be difficult. REC trading has been suspended since July 2020. ‘Green tariffs’ are more accessible with the added potential advantage of allowing DISCOMs to retain consumers rather than losing them to other routes.
The model would need to evolve as there are some serious loopholes. The biggest one is that the proposed structure does not lead to any actual increase in renewable power capacity or consumption. Karnataka and Andhra Pradesh pass on ‘green attributes’ or associated RECs to ‘green tariff’ consumers but both of them have contracted renewable power in excess of their RPO requirement. As Maharashtra is lagging behind on RPO, the state regulator has decided that ‘green attributes’ would be retained by DISCOMs to “reduce extra cost burden for them.”
In Andhra Pradesh and Karnataka, where the ‘green tariff’ option is only available to larger C&I consumers, uptake has been disappointing. We understand that in both states, only one consumer has signed up so far. Consumers are reluctant to pay a premium over already high grid tariffs. State governments and DISCOMs therefore need to examine new pricing models to increase adoption. Consumers should also have choice to vary quantum of green power purchased by them. For example, if a consumer wants to cap ‘green tariff’ purchase to meet its RPO targets, it should be allowed to do so.
The ‘green tariff’ model has gained strong traction in international markets including Australia, China, Europe and USA. In the US, the model accounted for nearly 40% of all corporate renewable procurement in 2020. It has grown consistently since introduction in 2013 accounting for 4% share of total renewable power capacity. The market has evolved hugely in response to consumer needs, utility perspective and local market conditions with multiple implementation models including sleeved PPAs, renewable power subscriber programmes and hybrid structures as well as flexible contract tenures.
We expect the ‘green tariff’ model to gain more prominence in India. Tariff design and consumer flexibility would be critical for future growth. Uptake in residential and SME consumers may be a positive surprise.