CERC Deviation Settlement Mechanism To Hurt Renewable Players, Says NSEFI

In a letter to Indu Shekhar Chaturvedi, Secretary, the Ministry of New and Renewable Energy, the National Solar Energy Federation of India (NSEFI), a key developer body of renewable players has flagged major industry concerns on the Deviation Settlement Mechanism for renewable energy as notified by the Central Electricity Regulatory Commission (CERC). The new rules dated March 14 were made public through a notification published on March 22. Notification means that any changes at this stage will need a formal advisory from the Ministry of Power to the regulator.

In its letter, the NSEFI has pointed out that the final notification seems to have ignored representations made during meetings with CERC, MNRE & MoP, CERC has released final regulations which are significantly tighter than the current DSM regulation and will have a ‘disastrous’ impact on Renewable Energy project revenues.

Highlighting the key recommendations made and the final version CERC has gone with, NSEFI said that developers had requested for the following changes:

1. Direct that the deviation settlement band may be narrowed from the current 15% to 12%
2. Penalty for breaching this band may be applied equally for over and under injection
3. Developers may be allowed to ‘virtually’ pool forecasting & scheduling to aid in more accurate predictions (being followed in AP & Karnataka already)
4. The penalty may be linked to the PPA price instead of Ancillary market which is not yet mature. That the linkage to Ancillary market could be initiated in subsequent regulations.

However, what the final CERC notification for forecasting and scheduling of wind and solar generation and resultant deviation settlement has gone with a version that is very different, namely–

1. They have narrowed the band of deviation to 10%
2. There is NO payment to developers for over injection beyond 10%
3. No provision for pooling power is prescribed.
4. The penalty for under-injection is linked to ancillary services market. What is worse according to the NSEFI is that CERC has opined that for the next year or more , this penalty should be the HIGHEST of the power price in Day Ahead Market or Real Time Market or Ancillary Service Charge of all regions. Due to the low volume of trade in some of these markets in some exchanges, prices fluctuate and are sometime greater than Rs 20 per unit (though they have recently been capped at Rs 12 by CERC) . This would mean that any under-injection beyond 10% in these time blocks will mean a penalty of Rs 2 per unit on the developer. Given the extant tariffs of between Rs 2 and Rs 2.50, this would be between 100%-80% penalty for developers.

The NSEFI’s main premise, Wind & Solar are both intermittent sources and it is difficult to predict with any accuracy, specially at individual project level, what the resource will be in each 15 min interval as required by DSM was already an onerous burden. That is why the draft regulations, which had provided for ZERO payments in case of deviations had drawn a concerted effort from the industry to correct the bias against renewable players. The industry body has come out with its estimates on the likely impact of the new regulations on projects, if allowed to be implemented without changes.

• Impact of 4-5% on annual revenue of operational solar projects and 7-8% for wind projects, which is significantly higher than the current impact of ~0.3 – 0.5% for solar and ~2% for wind. This is conservative as it doesn’t account for high prices in exchanges which would significantly increase penalties for under-injection as noted above.
• While the operational projects will have a severe revenue impact, the concern the industry has is that there being no proper/accurate way of forecasting Wind & Solar, the ability of Developers to fully assimilate the risks of this DSM change even for new projects are difficult.

The body has pushed for allowing aggregation of projects at regional level to reduce variability, since all developers use the same globally accepted forecasting methods. It also makes a case for linking penalties where applicable to the PPA rate of projects, rather than prices in power exchanges/ancillary market, as these markets are not yet operational (ancillary markets) while exchanges prices can be very volatile. Approvals for multiple exchanges also creates potential for more confusion on reference power costs, according to NSEFI.

With the body claiming the vast chunk of Indian developers, NSEFI’s concerns will probably get a hearing from the MNRE and Power Minister, especially at a time when the overall power situation remains finely balanced, as it is.