Regulatory Menu for Integration of Renewables

Background Electricity is one of the essential energy carriers in the transition to decarbonisation. Various world economies are undergoing energy transitions driven by ambitions to achieve energy access, strengthen energy security and environmental conditions depending on internal priorities and challenges (Gielen et al., 2019). The COP 26 Glasgow summit, in which countries pledged to limit global temperature change to under 1.5oC according to the Paris Agreement to achieve climate targets, further strengthened these resolves. The decentralisation and penetration of renewables brings unique challenges in the planning and reliable operation of power systems which influence the outcome of electricity markets. The complex energy transition requires technical, economic and regulatory knowledge to design the evolving electricity trade market. Therefore, countries should collaborate to share their experiences and expertise in market design (Bichpuriya and Soman, 2010). In the European Union (EU), electricity from renewable energy sources (RES) is a significant part of various energy and climate policy strategies. The European Commission (EC) has taken the necessary steps to increase the renewable energy share in production and uptake. The figure below shows that the trend in different energy sources over the years is a decrease in fossil fuel energy sources and a rise in renewable energy sources (OWD, 2022).

Before it was reformed, the EU electricity sector was a monopoly in which vertically integrated companies were responsible for the generation, transmission and distribution of electricity. These companies decided the electricity price and controlled the grid. Reforms which began three decades ago aimed to create an integrated internal European electricity market to reduce electricity costs and increase security of supply. The EU’s internal electricity market has gradually integrated national markets in regional markets and then merged them into the EU market. As it transitions towards full decarbonisation, the European power market and system faces profound changes. With the deployment of decentralised renewable generation and demand response, consumers will play an important role in reducing the sector’s carbon footprint (Rossetto, 2017).

India’s power system is also one of the largest globally. It has made significant achievements in its electrification target and provided over 252 million residential consumers with access to electricity as of 2020 (IEA, 2021a). The Ministry of New and Renewable Energy (MNRE) has floated ample initiatives in accordance with national commitments and climate targets such as achieving net zero emission targets by 2070, as was announced at the COP-26 summit in Glasgow. Associated measures which were pledged during COP-26 include the installation of non-fossil fuel electricity capacity of 500 GW by 2030, sourcing 50 per cent of India’s energy requirement from renewables by 2030, reducing emissions by one billion tonnes by 2030 and achieving a carbon intensity reduction of 45 per cent compared to 2005 levels by 2030 (WRI, 2021).The trend in electricity generation power sources in India is shown in the figure below (OWD, 2022). Much electricity generation in India has been dominated by coal although hydro, wind and solar energies have slowly picked up.

The energy market in India is evolving and there are several policy initiatives to enhance the share of renewable energy (RE) and capacity in the power grid. India has taken several steps in enabling regulation and policy to allow the renewable transition of the power sector. The key steps have involved introducing competition, encouraging regional trade and a more significant push for distributed energy resources. India has gradually introduced competition with regulatory oversight in different parts of the energy sector value chain, subsequently leading to the development of competitive wholesale markets for electricity. This report is based on discussions in the fifth EU-India Regulatory Workshop Series in the framework of the ‘India-EU Clean Energy and Climate Partnership’ organised by the EU Delegation to India in collaboration with the Florence School of Regulation (FSR). The Partnership is supported by the Ministry of Power (MoP), the Central Electricity Regulatory Commission (CERC) and the Power System Operation Corporation (POSOCO).

Electricity Trade through Power Exchange
For decades electricity was provided by vertically integrated local or national monopolies, from generation to final supply and from transmission to distribution. These traditional arrangements helped achieve economies of scale, expand grids and ensure universal access to energy, but in recent years the system has been restructured and replaced with competitive wholesale markets, although not everywhere (Glachant et al., 2021). Like any commodity electricity needs to be bought and sold, and power trading may include buyers and sellers such as generation companies, distribution companies, consumers and traders etc. At both ends of power trading the electricity grid needs to be balanced i.e. demand needs to be met by timely supply. Power trading can not only be categorised by time horizons, i.e. long term, medium term or short term, but also according to how agreements are reached, e.g., through over-thecounter (OTC) trading, power purchase agreements (PPAs) or power exchanges. The specific nature of electricity affects electricity market design (Meeus, 2020). Different countries and
regions have adopted different market designs, typically due to political factors and diverse initial conditions in the industry. Furthermore, uptake of intermittent renewables means market players will need to adapt to riskier environments and certain elements in current market designs will need to be adapted (Glachant et al., 2021).

Electricity Trading in India
Liberalisation of the Indian electricity sector started roughly two decades ago. The Electricity Act 2003 reformed the power sector by enabling regulators to develop the power market by increasing competition while protecting consumer interests. In 2007, the Central Electricity Regulatory Commission (CERC) created a common platform for electricity trading through power exchanges. Currently, India has two active power exchanges, namely the Indian Energy Exchange (IEX) and Power Exchange of India Ltd. (PXIL), with a third one, Hindustan Power Exchange Ltd (HPXL), in the pipeline. Regulated under the CERC Regulations 2021, these power exchanges are the trading centres for suppliers and consumers. Suppliers submit their prices and quantity bids to sell energy or services, and potential consumers submit offers to purchase them (Bichpuriya and Soman, 2010).

The Future of Renewable Support Mechanisms
Tackling climate change and the corresponding action to decarbonise our energy systems is one of the biggest challenges of our times. The COP 26 conference at Glasgow further boosted the resolve of countries around the world to set and achieve new targets. An IPCC 2018 report observed that to cap global warming at 1.5o C above pre-industrial levels, global greenhouse gas (GHG) levels need to be curbed by around 45% by 2030 and reach net zero by 2050. Setting planned trajectories for GHG reductions by accelerating the phase-out of coal and subsequent utilisation of renewable energy (RE) sources with a natural gas transition could be one of the most cost-effective way to achieve climate neutrality (Piebalgs et al., 2020). Moreover, other RE vectors can be used like green hydrogen, electric vehicles and storage etc., thus improving the scope of cross-sectoral approaches. India and the EU have their own sets of targets and approaches to reach these goals. At the end of 2021, global RE generation capacity, including hydro, reached 3061 GW. As of 2022, the EU has a cumulative 647 GW of RE and intends to achieve a 55% emission cut by its member states and a 40% share of renewables in its energy mix by 2030 (IRENA, 2022). India, on the other hand, aims to reduce its emission levels by 45% from 2005 levels and to meet 50% of its energy demand with RE and increase its non-fossil-fuel-based energy capacity to 500GW by 2030 (WRI, 2021). With targets to achieve net zero by 2050 in the EU and 2070 in India, the current RE capacities indicate the scale of the challenge ahead for both the EU and India to accomplish these ambitious targets. Support mechanisms are vital for countries to promote energy production from renewable sources to achieve these goals.

Different RES sources come with different technologies, output characteristics and market maturities. Therefore, they have different outcomes, and the support needed in terms of cost structure also varies accordingly. The RE support scheme can also be dependent on the policy objective and market failures, technology readiness and market requirements. The support can be in direct forms such as investment grants, tariffs incentives and tenders. For e.g. generation-based direct voluntary schemes such as green tariffs are based on the willingness of customers to pay premium prices for electricity from RES, whereas capacity-based direct voluntary schemes such as shareholder programmes are based on the willingness of certain companies and/or investors to have limited or no return on their capital invested in RES-based generation. Shareholder programmes are initiatives in which stakes in a RES plant are offered to the public (e.g. to the customers of an energy utility). In a donation, the RES developer asks
the public for cost-free funding (Golnoush et al., 2022). Indirect forms of support are environmental taxes such as carbon pricing, taxation of electricity produced from non-RES resources and removal of subsidies on fossil fuels (Nouicer et al., 2020).

Renewable Support Mechanisms in India
Implementation of RE support schemes is done at two levels in India. The Ministry of New and Renewable Energy (MNRE) serves as the Government of India’s central nodal agency promoting renewable energy for both grid-connected and off-grid services. And the State Nodal Agencies (SNAs) implement MNREs schemes at the state level, driven by factors such as RE resource potential, availability, supporting infrastructure and the will of the states to invest in RE (Aggarwal and Dutt, 2018; Bhushan et al., 2019). The growth of RE in India is dispersed and is based on the RE penetration, which is highly variable across the states in India. The national average share of solar and wind in India is 8.2%, and the corresponding averages are higher in the ten renewable-rich states, i.e. Tamil Nadu, Karnataka, Gujarat, Rajasthan, Andhra Pradesh, Maharashtra, Madhya Pradesh, Telangana, Punjab, and Kerala (IEA, 2021b). As of 2022, the country’s total installed solar power capacity is 56.95 GW. The installed wind capacity stands at 40.70 GW, biomass at 10.205 GW, small hydro projects at 4.88 GW and large hydro at 46.51 GW. In addition, India also has 223.14 MW capacity of grid-interactive waste to power projects and 253.61 MW capacity of off-grid waste-to-energy projects (MNRE, 2022). India has set itself ambitious plans for RE with a short term target of 175 GW (100 GW solar 60 GW wind, 10 GW biomass and 5 GW small hydro) by 2022 and a long-term target of 450 GW RE capacity by 2030. For offshore wind, MNRE announced a medium-term target of 5GW by 2022 and a long-term target of
30GW by 2030. Given that the current RE capacity is around 110 GW (excluding large hydro), much work needs to be done to meet the targets. Figure 10 shows the cumulative installed RE capacity of the different states in India.

Efficient Procurement of Ancillary Services
Electricity can be considered a commodity, just like copper, oil and grain. However, electricity markets differ substantially from other commodity markets due to physical characteristics such as time, location and flexibility. An increasing share of renewable energy in the energy mix can aggravate grid integration challenges. Therefore, ancillary services are required to balance and safely dispatch the system (Rancilio et al., 2022). Balancing relates to a situation closer to real time i.e. after the markets have closed (gate closure), in which grid operators (transmission grid operators and distribution grid operators) need to ensure that supply meets demand in a reliable way. Efficient balancing markets ensure security of supply at the least cost and can deliver environmental benefits by reducing the need for back-up generation. An important aspect of balancing is the approach to procuring ancillary services (ENTSO-E, 2022).

Electricity Trade Beyond Borders
Currently, RE technologies and services are transforming the electricity sector, creating a need for adaptable interconnected transmission lines between countries (Rossetto, 2017). The EU and India are diversifying their energy mixes by including more RE than traditional fossil fuel as energy sources. Cross-border trade through interconnected transmission lines between countries has the potential to harness distant RE resources. As a result, the various problems associated with RESs, such as their intermittent nature and variability in load and generation, etc., can be overcome (Bahar and Sauvage, 2013). Cross-border trade also helps make electricity more accessible and affordable, together with better reliability and supply. Moreover, cross-border trade will encourage competition by creating a large interconnected liquid market in the electricity sector (Meeus and Reif, 2020). This will allow gencos to compete across borders and lower supply costs for final consumers. Other spill-over benefits of inter-connected cross-border trade include promoting peace between trading countries and regional economic growth through local industry and job creation (Fischhendler et al., 2016). Cross-border trade in electricity requires cooperation between various governmental and administrative bodies in a minimum of two neighbouring countries interconnected by transmission lines and cross-border interconnectors. This cooperation between neighbouring countries can be realised through intergovernmental meetings at the various ministerial, diplomatic and official levels. Additionally, the involvement of private industrial players such as private gencos, grid operators and DISCOMs will further boost cross-border trade. Apart from the physical dimension of electricity, the electricity marketplace, such as power exchanges, also fosters cross-border trade (Puka and Szulecki, 2014). Furthermore, the Global Commission on the Geopolitics (GCG) of Energy Transformation has pointed out that regional cooperation on RE and electricity will be as important as international trade in gas and oil in developing the energy system in the future. The GCG has stated that “electricity trading tends
to be more reciprocal” whereas “oil and gas flow in one direction, from an exporter to an importer” (IRENA, 2019b).

2016 These were replaced with the ‘Guidelines for Import/Export (Cross Border) of Electricity’ in December 2018. Additionally, the Central Electricity Regulatory Commission (CERC) issued CBTE (Cross Border Trade of Electricity) Regulations in March 2019. Moreover, India is planning to develop the following interconnections with its neighbouring countries. They are in different stages of implementation (PIB, 2020):
• Operation of Muzaffarpur (India)-Dhalkebar (Nepal) 400kV DC line (operated at 220kV)
• Baharampur (India)-Bheramara (Bangladesh) 2nd 400kV DC line
• Alipurduar (India)-Jigmeling (Bhutan) 400kV DC (Quad) line
• Gorakhpur (India)-New Butwal (Nepal) 400kV DC (Quad) line
• Sitamarhi (India)-Dhalkebar (Nepal)-Arun-3 HEP (Nepal) 400kV DC (Quad) line.

Furthermore, India has already arranged regional power system integration with Bangladesh, Bhutan and Nepal through high voltage synchronous (alternating current) and high voltage asynchronous (direct current) connections. Last, India has deployed the latest technologies, including a Static Synchronous Compensator (STATCOM), Voltage Source Converter-based High Voltage Direct Current (HVDC) system, etc., in the Indian grid to facilitate cross-border trade with its neighbouring countries (PIB, 2020).

Cross-border trade in electricity has multiple benefits, including increased reliability, accessibility, affordability, liquidity and competition in the electricity sector. The rise in intermittent and variable RE as a source of electricity requires an increase in cross-border trade for better optimisation across borders. Furthermore, cross-border electricity trade is impossible without regional cooperation and the participation of government and other important stakeholders in neighbouring countries. Constitution of new institutions such as ACER and ENTSO-E is required to facilitate the harmonisation of rules and regulations on cross-border trade. Additionally, power exchanges are required to provide platforms and
products for cross-border trade. Last, infrastructure like interconnectors and a transnational transmission network is a must for carrying out cross-border trade. The EU has already made leaps and bounds toward cross-border trade through market coupling and creating a common internal electricity market and market coupling. India also has taken steps toward cross-border trade in electricity through bilateral agreements with Bangladesh, Bhutan, Myanmar and Nepal. However, cross-border trade in electricity
encompassing several countries in the SAR has yet to progress for various reason. These reasons include inadequate inter-regional institutions, marketing platforms and transnational network planning, and non-uniform sectoral reforms. Therefore, cross-border trade in the SAR requires cooperation at the government-to-government level along with other incremental measures such as the constitution of a new institution for governance, market platforms and additional investments in transnational infrastructure to increase cross-border trade in the SAR.

Source:EUI EU

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