ISTS waiver distorting the market

28 June 2021 |

The Ministry of Power has extended completion deadline for inter-state transmission system (ISTS) charges waiver for solar and wind power projects by two years. The waiver would now be available to projects commissioned by 30 June 2025. The waiver has also been extended: i) in part to pumped hydro and battery storage projects commissioned by 30 June 2025 provided that minimum 70% of their power requirement is met from solar or wind plants; and ii) to power traded on green exchange until June 2023.

  • The ISTS waiver has been instrumental in allowing hinterland states with scarce land availability and/ or low natural resource to tap into more renewable power;
  • The waiver has led to heavy concentration of projects in Rajasthan and Gujarat exacerbating land, transmission and environmental bottlenecks;
  • Restriction of this benefit to storage projects to allow wider regional spread of capacity and incentivise storage market would have been ideal;

The extension would be applicable only for ISTS charges and not losses (ranging between 3-4%), which would need to be borne by DISCOMs from July 2023 onwards. Applicable waiver for pumped hydro and storage projects would be 75% in the first 5 years, 50% in years 6-8, 25% in years 9-11 before being phased out from year 12 onwards.

The ISTS waiver, mooted to reduce cost of renewable power for states with scarce land and/ or low wind or solar resource, has become a cornerstone of sector growth since 2018. This is the third extension for ISTS charge waiver, provided initially to projects commissioned by December 2019. As the following chart shows, ISTS projects have gained a critical share of tender activity. Between 2018-2020, 71% of total allocated capacity (62,967 MW) was awarded under the ISTS framework. To date, 31,086 MW of solar, 12,270 MW of wind and 5,435 MW of hybrid projects (total 48,791 MW) have been awarded under ISTS framework.

Figure: Growing share of ISTS-based solar and wind projects, MW

Source: BRIDGE TO INDIA research

Hinterland states including Haryana, Punjab, Delhi, Uttar Pradesh, Bihar, Jharkhand and Chhattisgarh have been the main beneficiaries. It is beyond doubt that the ISTS waiver has been instrumental in allowing these states to grow consumption of renewable power.

Figure: Project location and offtaker mix for ISTS projects, MW

Source: BRIDGE TO INDIA research
Note: Offtake data is available for only 21,609 MW capacity.

But as this chart also shows, the ISTS waiver has led to heavy concentration of project capacity in Rajasthan (solar) and Gujarat (wind) – inevitably exacerbating land acquisition, power transmission and environmental bottlenecks, and delaying project commissioning progress. As an example, out of 5,600 MW solar ISTS capacity awarded in 2018, only 1,350 MW has been commissioned to date.

Making ISTS waiver available to storage technologies and green exchanges is a self-evident move. Green exchange offers a promising avenue to DISCOMs looking to fulfil RPO requirements while the REC mechanism remains defunct. But at present, only competitively bid projects selling power to DISCOMs are eligible for ISTS waiver. Extending waiver to all power traded on the green exchange would discriminate against bilateral open access contracts and is an oversight in our view.

We believe that the ISTS waiver extension is not desirable. It would worsen execution challenges in Rajasthan and Gujarat. Moreover, as solar and wind are already the cheapest sources of power, such incentives are unnecessary. It would have been better if the extension were granted only to storage projects to allow better regional spread of capacity and reduce their effective cost, which has been a major barrier in adoption of this technology so far.

Interestingly, the order also states that waiver for pumped hydro, battery storage and green exchange would be reviewed periodically depending on “future development in the power market.” Multiple amendments and incremental extensions are reflective of ad hoc state of policy making partly in reaction to various challenges facing the sector. Lack of long-term policy consistency and visibility has become one of the biggest stumbling blocks in India’s renewable sector.

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