5 Reasons Why Lower Renewable Energy Prices Are Unlikely To Lead to Lower Electricity Bills

For the lay reader, it has been a mystery how despite headline news of renewable bids being awarded at figures like Rs 2.50/kW to Rs 3.00, their final power bill seems to be on an inexorable climb upwards. This is despite the fact the RE power itself was priced at a huge premium as recently as 2016, when it started to slide down. The good news is that those PPAs for power at Rs 8 to Rs 16 were signed for relatively small quantities of renewable power, leaving their overall impact on costs controllable.

Retail bills in India reflect power billing at anything between Rs 6 to Rs 15 per unit in fact, depending on your state. Or your category as a power consumer industrial versus commercial versus farming versus residential).  What’s more, there is more bad news ahead. The bill for the end customer, especially residential, short of the kind of subsidies being thrown around in Delhi or some other states are not going to come down in the future as well. While an obvious reason is the many exemptions available to renewable energy generators in terms of ISTS related costs, there are a whole lot of other reasons you need to understand better to make sense of this contradiction.

Let’s dive in-

1. The real cost of renewable energy is not what you see in the headlines. As these are incentivised with various exemptions that thermal power operators or even large Hydro generators have to pay. The most obvious one, ISTS (Inter State Transmission System) provides an exemption for renewable projects till June 30, 2025, before being phased back in with a graded increase, heading upto 100% charges by 2028. These charges, which currently range from Rs 1/kWh to over Rs 2/kWh, if applied, would have delayed renewable uptake thanks to the more expensive power.

2. Energy storage costs: As the share of renewable energy in the grid goes up, stability for the grid will demand large energy storage capacity as well. For now, large storage batteries remain the best solution for the medium term, while pumped hydro storage remains a longer term solution. The cost of these large batteries, usually Lithium ion based, remains high enough to be an incremental cost on the power cost stack, despite a steep fall in the past year. The attractive bids seen recently remain for 2 to 4 hour power back up, and not the kind of long duration storage of 8 hours or more that will be needed in a decade’s time. And remember, even these sub Rs 2.50 bids are built around viability gap funding.

3. No goodbyes for Coal, Nuclear or Large Hydro: Even with large batteries, no large Non-Hydro dominated grid worldwide is capable of counting on renewables exclusively to power it. That means the need to preserve fossil powered coal and gas plants remains, adding to capacity charges and more. India in fact is likely to be using coal plants for baseload needs well past 2060, by current indications. Nuclear power plants, despite their clean energy, remain much more expensive, so increasing their share in the long term as a cost measure is not the answer, although it might be the answer to replace fossil fuels as their pollution impact become unacceptably high. Nuclear costs in fact could remain as high as Rs 15 per unit, which should make many consumers thankful that the share of nuclear is set to remain at under 10% in the long term as well in India.

4. The cost of Grid Upgradation: A grid designed for the old economy powered by fossil fuels is also being upgraded and strengthened to handle the new economy of more demand, higher share of renewables, and the need to manage extreme climate events all at once. That means a very high level of investments to be prepared. Consider how the electrification of transportation in itself is likely to add over 20% to power demand. Or how a warming planer is likely to lead to much kore stress on equipment, as well as spiking demand for cooling. Investments into the sector will be crucial to support RE additions, so there really is no slowing down possible here.

5. With a typical life of a yet unproved 25-30 years for renewables, and even lower at 10-15 years for battery based energy storage, renewable energy planning and additions will need to be a much more active ongoing project, unlike say, thermal or nuclear. That means the low costs we see today may have changed significantly in a decade’s time. In case of thermal and nuclear, decade long capacity addition plans were perfectly acceptable (despite significant cost increases), while for renewables, fine tuning plans every two years is required, and thankfully feasible due to their much shorter setup times. With almost all PPAs still for 25 years, expecting significant impact on overall costs will take a very long time to pass through, if at all renewable prices drop further on the back of higher efficiency and lower storage costs.

Conclusion: The dream of free, unlimited energy is perhaps one of the biggest scientific goals of this century, as options such as nuclear fusion or more efficient, longer lasting solar and wind are being chased all over the world. But thanks to embedded costs today, be it PPAs with existing thermal operators, capacity charges for baseload demand, standby charges and many more additional charges the cost of power seems unlikely to take a pause on incremental jumps before 2040, if at all. Post that period, it is not impossible to expect that a combination of phase out of the most expensive sources, plus a larger share of lower cost renewables and storage could actually start to make an impact on power costs for all. Of course, as we see currently, many people with the foresight and ability to go for renewable energy on their own right now are already benefiting, thanks to the incentives on offer. In the next decade, a new batch of beneficiaries enjoying lower than grid costs would possibly be those who can do the same with off grid power, where costs are expected to be lower than the grid even with storage soon. For everyone else, it will be down to the most obvious solution. Get kore done with less, ie, by using higher efficiency appliances and other lifestyle changes in house design, cooling and cutting out waste.