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Tamil Nadu solar policy: An analysis

According to reports, the cornerstone of the solar policy announced by the Government of Tamil Nadu on October 20, is its creating a demand for solar power by imposing obligations on an industry that is already suffering from crippling power cuts and a recent hike in tariffs.

More tariff hikes are ahead, as the state’s electricity generation and distribution utility, TANGEDCO, needs to clear out losses of around Rs 50,000 crore.

And now, the industry (as well as colleges and residential schools and buildings with built up area of 20,000 sq m or more) will have to buy 3 per cent of their electricity consumption from solar power till December 2013 and 6 per cent from January 2014. Therefore, a demand is created by, as one industrialist put it, “arm-twisting the industry.” What of generation?

The TN solar policy has different thing to offer to utility scale power projects and the rooftop ones.

If you are a utility scale (i.e., large) project developer, you could sell your power to either TANGEDCO and be paid a ‘solar’ tariff or to consumers directly.

Today, it is common knowledge that the financial situation of TANGEDCO is terrible. It has not paid its dues to various generators, especially the wind power producers, for well over a year. Given this situation, it is hard to believe that any banker will come forward to fund a solar project in the state that has a power purchase agreement with TANGEDCO.

The developer then will have to sell it directly to consumers. Here is where the Tamil Nadu policy pales in comparison with the recently-announced policy of Andhra Pradesh. AP exempts a developer from paying wheeling and transmission charges and cross subsidy charges and electricity duty. Tamil Nadu does not. The least the state could have done is to have followed the AP example.

In April, the state’s regulatory commission allowed the utility to hike the long-term open access transmission charges from Rs 2,781 per MW per day to Rs 6,483 per MW per day. The short-term open access charges were raised from Rs 28.96 a unit to Rs 270.11 — nearly ten times. And then, there are ‘cross subsidy charges’.

Therefore, it wouldn’t make sense for solar developers to sell power directly to consumers on the ‘open access’. That leaves the developer with the only other choice: group captive. Form a special purpose vehicle with your customers as your shareholders and sell power to them. Conditions apply, though. This is what is most likely to happen in Tamil Nadu.

Now, here is where the TN policy distinguishes itself positively from AP’s. The AP policy relies heavily on ‘renewable certificate mechanism’. TN’s does too, but in Tamil Nadu, you can sell power at any tariff to a captive customer and yet get market trade-able renewable energy certificates.

By relying less on RECs, TN has de-risked the projects. Consumers, for sure, will have to pay more, but presumably they will be happy to do so, because they at least get power to run their plants.

Tamil Nadu could have exempted developers from wheeling and transmission charges, cross subsidy charges and electricity duty, as AP did. But the AP model conflicts with the spirit of the REC mechanism, which is, to be eligible for RECs the generator shall not have availed himself of any other benefit. This is a legal question mark that hangs on the AP policy, and TN has gotten rid of it.

Coming to rooftop projects, the TN policy promises quite attractive generation-based incentives — Rs 2 in the first two years, Re 1 in the next two and 50 paise in the following two — for households. Here again the big issue is payment security. Given TANGEDCO’s track record in payments, banks will be hesitant to fund the projects.

Otherwise, the government promises to set an example by putting up solar rooftops on all government-owned buildings.

The policy document also contains statements about encouraging solar module and cell manufacture. The discussion is academic. Given the global glut situation and the low prices, and with the prospect of prices going down further, the point whether anyone will be willing to invest in manufacturing in India is moot.

There are two things that the government of Tamil Nadu can do in order to make sure that the policy works.

The first is to earmark some funds from its budget to support solar. Rajasthan has done this. This will ringfence solar expenses from the rest of TANGEDCO’s problems and give tremendous confidence to lenders. If necessary, the government could raise tariffs by, say, two paise, to defray the costs.

The second is to make land available. Land is a big head for solar projects, ask any developer. If the Tamil Nadu Government can make available land for solar parks, the state is sure to win projects.

Finally, to lead the rooftop revolution in India, given the net metering facility would exist, the government can bring in a system whereby the GBI payments due to the customers are deducted from the customers’ monthly bills. This will obviate the need for them to be running after TANGEDCO for their dues.

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