Options for Indian corporates to go green

Context

The demand for renewable energy (RE; primarily solar and wind) among corporates in India is on an upswing, with many pledging to consume electricity solely from renewable sources. For instance, Tata Motors, Infosys, Mahindra & Mahindra, Amazon India, and AB InBev India have committed to 100 per cent electricity consumption through RE (Tata Motors and Mahindra & Mahindra, 2019).

The reason for this interest is twofold. First, several companies have signed up to achieve 100 per cent electricity consumption through RE sources. Second, electricity contributes significantly to operating costs for industries. With rapidly declining RE tariffs, companies are looking to improve their competitiveness by procuring cheaper solar/wind energy. In this CEF Explains, we identify the market mechanisms through which corporates in India can buy and claim RE consumption.

Green tariffs

Green tariffs are specialised retail tariffs that electricity distribution companies (discoms) charge for the sale of RE to their consumers. Businesses can sign up for these tariffs and claim RE consumption, while discoms procure electricity on their behalf from RE project developers. This mechanism has been widely adopted in countries such as the US, where 3.7 GW of RE capacity has been added to the grid because of corporates subscribing to green tariff programmes (Renewable Energy Business Alliance and World Resources Institute, 2020). However, in India, only a couple of discoms have implemented this approach. For instance, in Andhra Pradesh, industrial consumers have the option of choosing a special green tariff of INR 12.50 per kWh instead of the regular tariff of INR 11.30 per kWh. Meanwhile, in Karnataka, consumers have to pay a premium of INR 0.50 per kWh on top of any tariff to claim RE consumption. Uptake has been poor in both states due to the premium charged on top of already high industrial/commercial tariffs.

Open access

Open access (OA) allows corporates (commercial and industrial electricity consumers), typically with a load of 1 MW or above, to directly enter into a contract with an RE project developer or set up their own power generation project (captive) and use the state grid to transport electricity. In addition to the RE generation tariff, corporates are required to pay a variety of charges, such as transmission and distribution charges, cross-subsidy surcharges, additional surcharges, and load despatch centre charges. These charges are complex to navigate, and result in landed tariffs that may be either competitive or even non-competitive with discom tariffs. CEEW Centre for Energy Finance’s open access tool helps demystify these charges and answer the fundamental question for corporates: which state has the lowest open access landed tariffs in comparison to discom tariffs?

Renewable energy certificates

Renewable energy certificates (REC) are instruments that allow corporates to buy the environmental aspect of green power without having to buy green power itself. A REC is essentially a premium that a corporate pays, over and above the electricity tariff a discom charges, to convert ‘brown’ power to ‘green’ power. The instrument is typically used to fulfil the renewable purchase obligations (RPO) of discoms, but it may also be used by corporates to meet their RE commitments.

Green term ahead market

On 21 August 2020, Indian Energy Exchange (IEX), one of the two power exchanges in the country, launched short-term trading of RE. A green term ahead market (GTAM) allows a discom or corporate electricity consumer to procure solar or non-solar RE from merchant RE developers or discoms with surplus RE generation. GTAM has the following types of contracts:

Intra-day contracts
Day-ahead contingency contracts
Daily contracts
Weekly contracts

In addition to the price discovered through trading on GTAM, a corporate consumer is typically required to pay additional charges, such as transmission charges, wheeling charges, cross-subsidy surcharges, and additional surcharges to transport electricity to the point of consumption. The main difference between GTAM and OA is that the former allows for short-term flexibility in purchasing RE, whereas the latter binds buyers into contracts or commitments that run into many years.

Relevance and impact

Corporates around the world as well as in India are increasingly facing pressure from investors to demonstrate their green credentials and are committing to RE consumption.
OA is the most widely used mechanism for corporate green energy procurement.
The bouquet of options for corporates to procure RE has been temporarily reduced to three due to a suspension in REC trading since July 2020 due to arbitration on Central Electricirtt Regulatory Commission’s order to remove the trading floor price.
Increasing awareness about green power trading through GTAM is expected to augment merchant RE capacity additions in India, thereby ensuring sufficient liquidity in the market segment.