Will Solar suffer with India turning power surplus

We have flagged the risk from the increasing power oversupply in some states, to solar power in the last few months. Indian states which have historically being facing huge power deficit have suddenly turned into power surplus states. With huge expansion plans of power capacity this situation could become more acute, if industrial growth fails to take off; leading to increased supply of power which does not have a home.

The problem has become so bad that India’s ministry for renewable energy has written to the Central electricity regulator to ask power utilities not to curtail the procurement of solar power. Power procurement is sometimes cut off by utilities, when there is a situation of oversupply which could lead to grid instability risks. However, the distribution utilities are using this law to cut off solar power for up to 2 hours at a time. This does not make sense, as solar power is still a fraction of the overall power capacity in the country at around 8 GW out of 270 GW.

Also read Wind producers face large losses due to curtailment by Utilities with India turning Power Surplus.

Curtailing Solar Power is not a good move

Distribution utilities by law should curtail thermal, gas and nuclear power before cutting off solar power, as solar energy in India has a “must run” status. The reason for solar power’s high priority status is that solar power does not require fuel like other energy sources using fossil fuels. This implies that solar power will keep generating power, even if the distribution utility does not buy power from the solar panel farms. It is a case similar for wind power farms which do not require any fuels.

Most of the large solar farms have been built in the country at very low margins, due to the intense competition seen in reverse auctions conducted by the state and central governments. This means that any actualization of a small risk could lead to huge losses for the investors and lenders of the solar project. Most of the solar developers would not have factored in grid curtailment by utilities for up to 2 hours a day in their models. This problem is being seen in Rajasthan and Tamil Nadu which have the most heavily indebted utilities making huge losses.

The other problem faced by solar developers is that they get zero compensation for being forcefully cut off from selling power to the grid. Thermal plant owners generally get compensated for the fixed costs, but in case of solar power there is no compensation at all. Given that 95% of the solar power is fixed costs, this is a problem for the solar developers.

The India government is planning to install 10 GW of solar power this year and with the existing 8 GW capacity already facing problems, it will be a difficult problem to incentivize developers to build out this capacity. If this risk persists, then solar developers will build in these risks into their models, leading to higher costs for consumers. The states which are curtailing solar power may find that there are no bidders for auctions, which sell power to the utilities in these states. They have to be careful as solar power will become the most important power source in India going forward.

Though Kapoor’s letter does not name any discoms, industry sources said those in Rajasthan and Tamil Nadu were the main culprits. Sunil Bansal, General Secretary, Rajasthan Solar Association (RSA), said the problem had been plaguing the state for some time. “In fact, it has been increasing. On average, there are back downs of one hour a day during peak hours,” he said. “That amounts to 1200 MW of capacity remaining unused.”

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