RE Projects With No PPAs, Made For Power Exchanges- CFD could Make It Possible

In an announcement that could potentially change the landscape of renewable energy projects, the way they are procured and the flexibility, freedom enjoyed by developers and generators in the industry, new renewable energy projects can now be sold on power exchanges exclusively. Traders and project developers will interact directly for contracting supplies from these projects. That means projects could be set up for the sole purpose of selling all their output on exchanges.

The Need for CFD Model 

The renewable energy projects traded on IEX will be implemented through the CFD (Contract for Difference) (CfD).

CfD ensures 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.

The mechanism alleviates the issues of forced curtailment of renewable energy generation due to reasons such as low local demand, risk of unbalancing the grid etc.), payment delays and avoid issues with reference to rigid long-term Power Purchase Agreements (PPA).

The difference between the market clearing price and the strike price will be taken care of by the government. The difference will be adjusted through the distribution cess.

In case the price is more than strike price, the excess is paid by the generators to pool. If it is less, the generators will get money from pool, thus the generator is protected. It is held that this will result in better prices than strike prices expected on an average basis.

Up until now, fixed price prices are discovered for projects through the bidding process, usually through the tendering process by SECI. The signing of PPAs is another mechanism for buying and selling of renewable power.

SN Goel, CMD, IEX, says that in the last few years, SECI was left with 17000 MW worth of power, for which there were no takers. The distribution companies were not willing to sign any more PPAs. They lacked interest as the cost of generation also witnessed a slide to as low as Rs 2 per unit, when the cost of integration is very high. Trading via IEX and the CFD mechanism will help address these challenges.

Through this model and trading on IEX, there is no compulsion to sign PPAs either and a price is assured on the marketplace. Additionally, a price that is viable for all stakeholders is settled.  The marketplace also stands to benefit as it promises more liquidity.

Why RE Trading on IEX is a Good Idea for India

Having implemented the CFD model and trading of projects on the IEX, the UK has installed 3000 MW of renewable energy in the last five years. India’s renewable energy sector is set to introduce the idea of trading projects based on the CFD model on IEX on a pilot basis.

So far,trading renewable energy on platforms like the IEX has enabled developers to explore market opportunities outside of PPAs.

Globally, several developed countries like UK, USA, Germany have reported success in taking power trading a step ahead by implementing CFD based trading, which has given fresh momentum to renewable energy projects, pumping more energy into the grid, augmenting installed capacity without regulatory roadblocks that are known to often put projects on the backburner, cause conflict between governmental nodal agencies and the developers involved. Direct trading without the involvement of intermediaries will ease such conflicts revolving around PPAs and price-related disputes.

Competitive Prices, Higher Installed Capacities

Raman Bhatia, Managing Director at Servotech says, “Many developed countries have successfully proven that implementation of CFD assures price commitment to efficiently run businesses. In order to avail the benefits of this payment framework in the Indian energy sector, direct contracts between traders and RE project developers will establish a new benchmark to meet the electricity demand capacity with optimum transparency. These contracts help parties involved to agree upon specific points and quickly modify key points to suit their business interests and gains. The customized terms & conditions are the best parts of such an electricity-generating contract. The parties involved do not need approval from any regulatory body or follow the time-taking procedure to include any new change to the agreement to conform to the continuously changing needs.”

Aditya Malpani, Sr Director, Open Access & Regional Business Head, West Region, Amp Energy India, says that the new route for renewable energy projects will enable developers to compete with the marginal cost of thermal power, which is approximately INR 3 per unit.”

However, he notes that economics around the price point need to be built. He reinforced the view that the trading of renewable energy projects will enable developers to install large amounts of capacities in limited amount of time and be able to operate like a third party. Further, he adds that following this initiative, one will no longer need to take equity from the customer. 

The average ticket size of PPA for energy sold on IEX will be 50 MW, say sources at IEX.

For C&I firms, this will be another pathway to inch towards their renewable energy goals.

Developers’ Pockets

The new announcement is an inviting one that paves the way for new electricity producers to join the RE sector, assuring them of returns. Establishes Raman Bhatia, “New entrants will bring fresh ideas and tech-enabled solutions to generate more electricity with limited investment. The new direct contract between traders and RE project developers is expected to change the business standards of the power sector to a wide extent. Producers and procurers both are free of all kinds of limitations. New RE projects also assure price commitment as per CFD. Setting-up new power plants will also create huge job opportunities and draw more investment to help the economy grow.”

Currently, the floor price on renewable energy projects bagged through the nodal and implementing agencies has been rather low, hovering at around Rs 2.50. In fact, there is no fixed floor price, which isn’t very reassuring for a developer. Solar prices on IEX on the other hand, even though on a downward trend in the past few months, are still significantly higher at almost Rs 3.70 unit in May, for instance. A CFD takes the uncertainty out of downside risks for developers.

Curbing Peak Prices

Adding to Malpani’s viewpoint, Raman Bhatia maintains that direct contracts between traders and RE project developers will act as a suspension to absorb the impacts of high electricity prices during peak times and efficiently deliver the benefits of continuous power supply to people at affordable rates. Eventually, the power sector will find more flexibility to easily maintain the required price balance and serve more consumers.

Ajay Kumar Singhal, CEO, REMCL concludes, “The green economy would rebound with this and prices are likely to be stabilized with few ripples adjusted to seasonal variations.” He further says, “The country has large potential and small to medium scale renewable power developers would also be benefited besides large scale RPDs. The manufacturing solar panel industry would also be set to increase production to meet the increased need within country too.”

Goel sums up why introducing renewable energy projects on the IEX is a welcome initiative, “Renewable energy (RE) resources will be mandated to participate in the market and additional RE capacity developed on the Contract for Difference mechanism. This will facilitate faster addition of RE capacities and spur investment in the sector, thus helping attain India’s 2030 RE targets. The proposal to introduce financial products for electricity to hedge against price volatility in spot markets, will lead to capacity addition, increase private investment and ultimately result in lower prices for consumers.” Further, he points out, “The Group has recognised the inefficiency and inflexibility of long-term PPAs. A stronger role of power exchanges will deepen the market and enable efficiency in electricity procurement. Improving the efficacy of Day Ahead market will lead to a market-based dispatch of electricity, which will result in effective cost optimisation.”

He concludes why this move will ultimately strengthen resource planning, “Higher renewable energy integration will necessitate detailed resource adequacy planning by the utilities to ensure optimum resource mix and introduce capacity contracting through Power Exchanges. Similarly, a market-based mechanism for secondary reserves will contribute towards reducing reserve requirements and lowering electricity prices.”

With inputs from Manish Kumar, Saur News Bureau.