Power Ministry Proposes Compensation for Grid Curtailment, to Benefit Renewable Energy Sector

“If the proposal is adopted it will protect the cash flows to an extent from grid curtailments and also ensure a favourable operational environment for renewable energy projects. It will also be positive for wind and solar energy developers,”

The government has proposed a compensation mechanism for existing renewable energy projects, which will protect the cash flows to an extent from grid curtailments said India Ratings and Research (Ind-Ra).

“If the proposal is adopted it will protect the cash flows to an extent from grid curtailments and also ensure a favourable operational environment for renewable energy projects. It will also be positive for wind and solar energy developers,” the ratings agency said in a statement here.

The absence of clarity on two possible reasons for grid curtailment – ‘low system demand’ and ‘grid security’- could however pose new challenges for developers. Further clarity by the authority/utilities to define the terms and spell out when these measures will need to be opted for could allay possible apprehensions of the developers and make the process more transparent.

Historically, power purchase agreements (PPAs) signed for renewable energy projects have failed to address the grid issues and lacked a mechanism to compensate for energy loss.

According to Ind-Ra, the annual debt service coverage ratio (DSCR) slips by 0.12 times for 10 per cent of energy curtailment and the 50 per cent proposed compensation at PPA tariff will restrict the fall by half at 0.06 per cent.

The developers have bridged any cash flow shortfall in debt service through a combination of or individually tapping debt service reserve or drawing working capital limits or sponsor support, it said.

“The recent reverse auction of 750MW solar capacity in Rewa solar bid included the provisions for compensation for deemed generation in case of curtailment. The recommended PPA format for future wind and solar projects should also include provisions for curtailment compensation.”

It, however, maintained that the absence of clarity on two possible reasons for grid curtailment – low system demand and grid security – could however pose new challenges for developers.

“Further clarity by the authority/utilities to define the terms and spell out when these measures will need to be opted for could allay possible apprehensions of the developers and make the process more transparent,” the agency said.

Also, in the proposed framework it is unclear which situations will be identified as low system demand incidences, since the network operators have the option to shut down a thermal plant which is falling below its technical minimum operating level, it said.

Citing the recent forced shutdown of some thermal power plants by Tamil Nadu discom during high wind season to enable full evacuation of wind power generation, Ind-Ra said there is a possibility of utilities taking refuge under the low system demand and curtail high costs renewables to save costs leading to reduced cash flows.

“We believe that utilities should project demand for the next six months to one year along with definition of low system demand. This transparent process could allay the fears of developers when actually the demand plummets,” it said.

The compensation will also incentivise grid operators and distribution utilities to reduce curtailments and benefit renewable energy developers in scheduling and forecasting and enable integration of increasing renewable energy capacity.

In FY17, grid curtailment was prevalent for wind projects in Rajasthan (up to even 45 per cent energy curtailed compared to 90 per cent of plant load factor) and solar projects in Tamil Nadu.