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According to the Electricity Act, 2003, the national administrative regulations "National Tariff Policy, 2016" which specifies the provisions of this Act, and the so-called "Renewable Purchase Obligations" (RPOs) as per sec. 6.4 of the Tariff Policy 2016, all state energy regulatory commissions are bound to ensure that a certain percentage of their grid-connected electricity is procured from renewable energy sources. The state "Central Electricity Regulatory Commission" ("CERC") has implemented a state guaranteed feed-in tariff for grid-connected energy generation from photovoltaic and solar thermal sources. Feed-in tariffs are determined according to sec. 8 of the National Tariff Policy, 2016 and sec. 62 et seq. of the Electricity Act, 2003. The funding function has been transferred to the regulatory authorities of the federal states, i.e. the State Electricity Regulatory Commissions (SERCs). In the past, feed-in tariffs were paid exclusively based on the regulations of the Tariff Policy; now, they are mostly determined and paid exclusively as part of regular tenders. The relevant feed-in tariff is determined by the Ministry of New and Renewable Energy (MNRE) prior to the beginning of a tender. The remuneration at the rate of the determined feed-in tariff is exclusively paid within the framework of a Power Purchase Agreement (PPA), which also exclusively regulates the power supply. In some cases, an annual increase in the rate of the feed-in tariff is agreed. However, the guidelines for feed-in tariffs continue to apply to small-scale plants. However, the guidelines for feed-in tariffs continue to apply to small systems and the State Electricity Regulatory Commissions ("SERCs") determine the appropriate feed-in tariff.
In most cases, feed-in tariffs for solar and wind power are paid exclusively as part of PPAs which are usually awarded in a bidding procedure according to the tender guidelines "Guidelines for Tariff Based Competitive Bidding Process". In this procedure, bids may not be placed any more after a benchmark tariff is set and the bidder offering the lowest bid in a reverse auction is awarded the contract. These tender guidelines include several provisions which are intended to increase the attractiveness of solar and wind power by measures such as compensations paid to plant owners in case of energy losses, a mechanism ensuring tariff payment security and termination compensations. According to sec. 2 and 3 of the Guidelines, defined by the SERC for Tariff Based Competitive Bidding Process, feed-in tariffs continue to apply to solar power plants and wind turbines with a capacity of less than 5 MW and 25 MW respectively.
Feed-in tariffs vary from state to state. This has led to significant differences between the individual federal states.
New incentives encourage commercial and industrial users to build new renewable energy plants and receive feed-in tariffs under PPAs. For example, commercial users have been exempted from import and excise duties. In addition, some federal states grant financial support for energy audits1. But also in future, feed-in tariffs will be paid only under valid PPAs. So far, the Indian government has not announced that it considers separating these two models again and, thus, making feed-in tariffs more attractive, in particular for private households.
1 e.g. Tamil Nadu gemäß dem Promotion of Energy Audit & Conversation of Energy (“PEACE”) Scheme http://www.indcom.tn.gov.in/peace.html
The self-consumption model is generally used only in the commercial sector. Offers and opportunities addressed to private households do exist but they are hardly used in practice. However, the Indian government's "Power for all" policy aims to make electricity available 24 hours a day, 7 days a week for all households, businesses and industries by the end of the financial year 2019. In particular in India’s rural areas, this policy can be implemented by way of off-grid solutions in photovoltaic power plants. In order to support the development of renewable energies in rural areas, the German Kreditanstalt für Wiederaufbau (KfW) has signed a EUR 200 million worth of state loan agreement with Rural Electrification Corporation (REC). REC will pass the funds on to investors in the form of low-interest loans for the development of renewable energies in rural areas. The target is to generate a total of 200 MW of clean energy.
In general, the self-consumption model has not been popular in India so far. This is partly due to the lack of information and lack of environmental awareness among the Indian population. Solar Energy Corporation of India („SECI“) establishes contact with producers of PV systems for self-consumption purposes but does not provide any financial funds for self-consumption. Financial support is offered only to project developers for larger projects.Thus, financing is possible only by means of loans from house banks. In principle, interest rates on loans are comparably high in India (8-10%). The lack of storage capacities is still a problem in India. This fact often discourages both end consumers and investors.
Electricity demand is increasing every day due to the continuing economic and population growth. For India to be able to successfully implement its “Power for all“ policy, the implementation of the self-consumption model is inevitable. Climate conditions in India favour in particular solar power: solar radiation is 4-7 kWh/day with approx. 300 sunny days per year. Therefore, off-grid solutions can ensure a continuous power supply in rural areas. Already now, the government is providing allowances of up to 30% for the construction costs of small power plants (in particular so-called solar cooking/concentrated solar thermal (CST) systems) in the area of solar and hydropower. It can be expected that the Indian government will continue to financially support the self-consumption model.
PPAs are awarded in a standardised procedure by “Solar Energy Corporation of India“ (SECI), the authority responsible for power marketing. In most cases, the procedure is a competitive bidding process. The legal basis for all PPAs is the Electricity Act, 2003. PPAs are standardised contracts in respect of which SECI allows little or no room for adjustment. PPAs are awarded exclusively by the federal states; therefore, PPA contents vary depending on the federal state and energy sector. In most cases, PPAs are meticulously pre-formulated so as to leave no room for ambiguities.
At the beginning of 2019, the federal states of Gujarat and Telanaga considered renegotiating the existing PPAs because they had been concluded on unfavourable conditions. Due to increasing competition and rising foreign direct investments (FDI) in renewable energy, players in the solar energy segment have to offer ever-lower prices, which has led to a situation that solar tariffs reached a record low of INR 2.44 per kWh in 2017. Total FDI inflows in the renewable energy sector amounted to a total of USD 4.8 trillion over the last 5 years. In addition, the National Solar Energy Federation of India ("NSEFI") has requested the Indian government to set a uniform limit of less than INR 3 per kwh for feed-in tariffs in bidding procedures organised by the state power utility National Thermal Power Corporation India ("NTPC") and SECI. According to the NSEFI, this harmonisation should help implement the concept of “One Nation, One Grid, One Renewable, One Price“.
The Indian government considers revising the Electricity Act, 2003. The aim is to regulate the direct transfer of subsidies, the obligation to ensure power supply “24 hours a day, 7 days a week”, the legal consequences of breach of duties under a PPA as well as establishing and development of smart meters and prepaid electricity meters.
The “wind bidding scheme 2003” for wind energy projects has been recently amended in order to accelerate and simplify the implementation of projects. For example, the amendment has extended the admissible period for land acquisition up to a total of 18 months. This will help developers of wind energy projects in federal states where land acquisition is usually more time-intensive. In addition, the amendment has established further structures to reduce investment risks connected with land acquisition. The amendment also includes incentives that will ensure early commissioning of wind turbines.
Moreover, in all areas of renewable energy there is an increase in large-scale projects which are accessible which are accessible exclusively under PPAs or in a competitive bidding process. In the new budget of the newly elected Indian government the Minister of Finance Nirmala Sitharaman has made it clear that the government will launch a programme that aims to attract global enterprises to India through transparent tender procedures and thus encourage them to implement large-scale renewable energy projects. This is intended to promote economic growth and the "Make in India" programme. The Indian government plans to grant such enterprises exemptions from income tax for their plants and to create further indirect tax benefits.
The lease model is particularly suitable for solar projects and has been used so far only in this area. Available lease options include the “RESCO (Renewable Energy Service Company) model” under which a third party enterprise finances, installs, operates and maintains the solar project. The roof owner may then consume the solar power produced and, in return, pays a tariff established in advance in the lease contract. Under the pure “Rent-a-Roof“ model, however, only the roof-top is rented to a third party enterprise in return for payment of a fixed monthly rent.
In addition, the National Wind-Solar Hybrid Policy, 2018 has been enacted, which regulates the lease of specific solar modules in India. The main goal of the policy is to establish a framework for a large grid-connected wind solar PV hybrid system and, as a result, ensure optimum and efficient use of the transmission infrastructure and achieve better network stability.
Competition in the area of solar power has recently increased, with tariffs reaching a record low of INR 2.44 per kWh in 2017. Large companies with higher returns are in a better position than smaller operators. Service fees are levied on third-party business models in which solar power plants are leased, which makes lease less competitive during the project term. There must be no link between the rent paid by a consumer to a lessor and the actual feed-in tariff for the energy produced in order to ensure a stable rent.
In general, the RESCO initiative is still in its infancy. This is in particular caused by the fact that large enterprises have shown no interest in the RESCO model so far.
In order to support renewable energies and in particular to promote and popularise also other types of energy than solar power, the Indian government has recently published the "Draft Offshore Wind Energy Lease Rules, 2019", a draft policy for leasing offshore wind energy areas that will be established in the Exclusive Economic Zone (EEZ) India. The intention is to award these areas exclusively as part of international tenders. Comments and suggestions regarding the draft policy can still be submitted. This shows that the Indian government is aware of the potential of leasing options.
Lease agreements, in particular PPAs with third party operators, are becoming an interesting option for renewable energy investors, in particular in federal states with a strong industrial base, where commercial and industrial consumers pay high end consumer tariffs for electricity.
Popular models in India are the "net metering" and the "rent a roof" model. Net metering means that excess amounts of electricity produced for self-consumption are fed into the grid and the electricity bill is reduced in return for each kWh of electricity fed into the grid. The legal and administrative bases depend on the respective federal state.Rent a roof, on the other hand, is a project intended to promote the development of solar roofs and was launched in the federal state of Gujarat in 2010. Enterprises rent roof areas and pay the owners a certain amount per kWh, which is agreed between the parties in the given contract. This creates incentives for building owners to use the roofs of buildings and make them available to third party enterprises. In return, enterprises are paid feed-in tariffs by the respective federal state government under a PPA.
The product range for private households is very limited and the products available on the market are mainly addressed to commercial and industrial customers who purchase larger installations.
So far, there have been no sufficient sources of information and financial incentives for private customers in the area of net metering. Moreover, the administrative registration procedure for net metering is known to be lengthy and tedious.
So far, only industrial and commercial end consumers have benefited from solar roofs under the "rent a roof" model because the costs are significantly higher for private users due to the lack of surface area/size of the installation. In principle, electricity offtakers from the industry and commerce pay higher prices for the cost of electricity. Although this constitutes an indirect subsidy on the prices for private households, these are mainly commercial users – not private users – who have an interest in solar power. Besides, it is difficult to obtain a standardised "roof rental contract" in the second step.
Currently, in most of the sectors diesel generators and oil furnaces are still in use. High electricity tariffs still constitute a significant cost factor for enterprises. But this also entails opportunities especially for German industrial companies, for which energy efficiency is an important area. Government initiatives have addressed the issue, are dealing with it extensively and also German expertise is highly sought-after in this area.
In India, a truly vast number of funding instruments is available for the expansion of renewable energy. In order to create incentives for individuals as well as for small and medium-sized enterprises, the Reserve Bank of India (RBI) has provided loans for renewable energy investments so as to facilitate taking out of low value loans. Moreover, private consumers can obtain such a loan either independently or as part of a housing loan granted by banks. But for both options, the fundamental problem of very high interest rates on bank loans continues to exist. The expansion of the PV rooftop segment is an essential part of the strategy aimed at achieving the solar power goals in India. In light of this, the government will be keen to further and more successfully incentivise the area of PV power plants and also to create direct marketing opportunities so as to offer more chances for the private sector. The Ministry of Powers of India has proposed a new set of rules for electricity consumers called the Electricity (Rights of Consumers) Rules, 2020, which also provides for residual reductions for the "Net-Metering" model. This includes that the "Net-Metering" model should only be valid up to 5kw and beyond this limit a "Gross-Metering" should be applicable. This could have the consequence that the "Net-Metering" model becomes unattractive. However, the proposed law has not yet been passed and is currently open for comments and suggestions.
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Martin Wörlein
Partner, Head of India practice
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Rahul Oza
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