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Good news for green energy

According to reports, the renewable energy sector has good reasons to rejoice over the approval of financial restructuring of electricity distribution companies by the Cabinet Committee for Economic Affairs, and not just because the utilities will soon have money to pay their dues to wind-power companies.

It is widely expected that States will raise electricity tariffs to avail themselves of the grants offered by the Central Government. This means that solar power will come closer to grid parity, or indeed reach grid parity. ICRA estimates that over the next four years, the annualised tariff hike would be around 11 per cent. It says that some “outlier” States may even need to raise their tariffs between 15 per cent and 17 per cent. This is sweet news for solar-power producers.

Further, the major complaint in the renewable energy industry is the evident lack of enforcement of renewable energy obligations (RPO). The obligated entities are mandated to buy a prescribed quantum of electricity from (specified) renewable energy sources, or if they are unable to do so, buy renewable energy certificates (REC) from the market.

Since the REC mechanism came into force (effectively) in April 2011, no State-owned electricity distribution company, all obligated entities, have fully fulfilled its RPO requirements. The various State electricity regulatory commissions, which are the bodies responsible for enforcement of the obligations, have been lenient because the financially unhealthy discoms will not be able to pay more for green power.

This absence of enforcement has been a major source of apprehension for renewable-energy producers. In fact, the solar industry has found it difficult, if not impossible, to secure bank funding if the projects depend upon RECs for income. (The other option is to sell power at the preferential-higher-feed in tariff.)

Enforcement of RPO will be a big boost to the industry, as it will fuel demand for either green power or RECs.

But now that there is a good possibility of State discoms improving their finances, the regulators can be expected to be strict in enforcing RPO obligations.

The restructure of discoms’ loans will help the green-power sector in yet another way. As the State Governments take over the bonds issued by discoms to lenders, the lenders will have additional room to finance energy companies. Now, there is a fear of banks hitting their exposure limits to the power sector.

The scope for lending, combined with REC-registered projects being accepted by banks, will lead to easier fund flow to the sector.

Finally, the new Chief Economic Adviser, Raghuram Rajan, has given a new lease of life to a 2010 decision of the Government to decontrol diesel prices. Usually, the Government takes tough decisions by first having its people talk about them, so as to prepare the general public for the decision. A decontrol of diesel prices and the inevitable rise in the prices of the fuel will only make energy consumers look to alternative sources, such as wind and solar.

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