Green Markets: Playing a Pivotal Role in Renewable Energy Integration

The Indian power sector is undergoing a paradigm shift with rapidly increasing renewable capacity addition in the system. Renewable electricity generation has seen over 15 per cent compounded annual growth rate over the last few fiscal years (2016-17 to 2021-22) vis-à-vis a total growth of around 3.5 per cent. The country now boasts of a massive installed renewable energy capacity of 165 GW (comprising 118 GW renewable electricity and about 47 GW hydro), as of September 2022. This is expected to increase substantially as the country strides towards achieving its target of meeting 50 per cent of its energy requirements from non-fossil fuel sources by 2030.

This expedited growth has been possible due to a favourable policy environment, aided by technological innovations, resulting in falling cost curves and renewables achieving grid parity. The capacity addition in renewables is primarily driven by long-term PPAs of Discoms, either through the competitive route or the earlier feed-in tariff mechanism. However, as the penetration of renewables in the grid increases, new technological and market-based solutions are essential for renewable energy integration and absorption. While hybrid plants (with or without different storage technologies) and distributed solutions are already progressing on the technological front, the recent advent of market-based solutions is providing immense value to renewable energy buyers and sellers, facilitating competitive, transparent and flexible power procurement, with certainty of schedule and time-bound payments.

Rise of Green Markets in India

The exchange-led electricity and renewable energy market provides a diverse spectrum of market-based products and contracts. They include the real-time market (RTM), the green term-ahead market (GTAM), and the green day-ahead market (GDAM). Discoms now have access to real-time exchange-discovered prices to make optimal buy-sell decisions. Also, renewable energy surplus renewable energy generators without PPAs/with expired PPAs, generators who commissioned prior to their scheduled dates, etc., can now monetise their surplus energy immediately and help their counterparts in meeting their renewable purchase obligations (RPOs).

With exchange market providing transparency and flexibility in procurement, a pan-Indian green market is facilitating obligated entities such as Discoms, open-access consumers and captive power plants in fulfilling their RPOs at competitive prices.

These green markets can be further augmented with various enablers, including:

• Waiver of ISTS charges, which has already been announced by the Ministry of Power, to be implemented along with the proposed Sharing of Inter-State Transmission Charges and Losses (First Amendment) Regulations, 2022
• Providing dynamic interchangeability between Renewable Energy Certificate (REC) eligibility and green power, thus facilitating flexibility, growing trust in the segment, and an increase in market liquidity
• Fungibility among the various categories of RECs, which is already under progress with the recent promulgations from the Ministry of Power
• Permitting RE generators to buy from RTM in order to manage the variations in green energy production
• Uniform implementation of Forecasting and Scheduling (F&S) regulations across all states
• Stringent monitoring of RPO compliance

Need for New Market Models

Further, newer market models are emerging with an objective to extensively facilitate integration of renewables. Contract for Difference (CfD), for example, is one innovative mechanism that alleviates the issues of forced curtailment of renewable energy generation (due to low local demand, risk of unbalancing the grid etc.), payment delays and avoid issues w.r.t rigid long-term Power Purchase Agreements (PPA). CfDs ensure that a guaranteed price (called ‘strike price’) emerges through an auction and is the basis on which the PPA is executed by the generator. If the discovered market price exceeds this price, the difference is paid to the market pool by the generator, and vice versa for when the discovered price is lower than the strike price. Thus, CfDs introduce some modicum of flexibility in PPAs and endow payment security to generators and Discoms alike, in addition to providing a market for the trade of surplus RE generation to areas that are deficit in green power. As nearly 86% of India’s power generation comes from long-term PPAs, it is crucial to customise CfD models to align it with the existing market and facilitate smooth integration of renewable energy.

Similarly, Virtual Power Purchase Agreement (VPPA) is a form of bilateral contract that allows financial transaction between generator of renewable power project and consumer, while the physical electricity supply to consumer is handled by Discoms. As it ensures certainty of cash flows for the RE generators as they sell though power exchange, this mechanism can help deepen the market and encourage RE capacity addition in India.

Increased renewable penetration and stringent targets to achieve climate goals, will necessitate having a certain capacity in place to ensure grid security and provide round-the-clock power to all. As more intermittent renewable generation comes on stream, having a Capacity Market will act as a back-up for generators and demand-side responders to help balance the network during times of stress. Capacity Markets are based on creating a generation resource adequacy requirement, which is the ability of the system to meet any level of power demand, including peak demand, at all times. Electricity capacity markets work in tandem with electricity energy markets to ensure that investors build adequate generation capacity, in line with consumer preferences for reliability. With increased variability and uncertainty due to penetration of renewables, the significance of Resource Adequacy becomes even more relevant.

Creation of Capacity Market will help ensure the creation of capacities by keeping long-term demand profile at the country level. Once capacities are created at the national level, energy markets through the Exchange will help allocate resources on merit basis for each time block of 15-minutes. Implementing reserve requirements on a multi-year forward basis offers improved reliability and also encourages participation of new generators to meet the forward resource needs of the distribution companies. The new generation capacity addition through Capacity Markets auctions will improve liquidity in the market and encourage new technology to integrate into the grid. Further, with increasing energy demand and ambitious renewable energy targets, it has become imperative to deepen the electricity market and encourage new capacity addition through Capacity Markets auctions. This will enhance grid stability and ensure reliable, round-the-clock uninterrupted and competitive power supply to the consumers.

The way forward

Introduction of exchange-based green markets, along with RTM and their encouraging performance in terms of liquidity, competitive price discovery and premium commanded by green market segments, will encourage more merchant renewable capacity into the system.

Further, markets function as a stepping-stone for new green power procurement models being envisaged – such as virtual PPAs and Contract for Difference (CfD) – and have the potential to fast-forward advances in renewable energy forecasting algorithms, which will help address the key concern of buyers and grid operators viz. intermittency of green generation.

In the long term, significant renewable purchase compliance targets, coupled with voluntary green targets committed to by a whole host of industrial and commercial customers, will continue to act as a driver for green merchant capacity addition. The aforementioned market enablers and support from the lending community will go a long way in meeting India’s ambitious renewable targets.