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The tyranny of energy uncertainty

According to reports, two states, pioneers in renewable energy, Tamil Nadu and Rajasthan, were in the news recently for contrasting reasons, and neither was about tariffs. One set a new national record for renewable energy capacity dispatched, and the other reported that the industry was in distress due to widespread back-down wherein discoms have been unplugging from the grid, delaying payments and shying away from power purchase agreements.

The nature of the headlines inspired by renewable energy is changing. Its rapid growth disrupted power markets elsewhere, in terms of higher costs (Germany), low returns (Texas) and load-shedding (South Australia). There are clear signs now that we must reset policy from encouraging investments to introducing serious reforms necessary to sustain growth.

This is because the disruption caused by renewables affects everyone, including renewables. It is not about lower tariffs or new technology (power markets have long known negative prices, and use sophisticated equipment), but the increased uncertainty arising from power generation based on the natural elements. Just imagine trying to get to work exactly on time, every day, using a train service that doesn’t follow a fixed schedule and sometimes may not run at all.

Utilities manage uncertainty and plug shortfall by signing long-term contracts with conventional power plants whose full costs they have guaranteed to pay. This “insurance” cover becomes inadequate as uncertainty grows when more renewable capacity is added. In such events, utilities can only reduce uncertainty by shutting them down temporarily.

This matters because renewable power projects are paid only when power is purchased, and none when disconnected. The must-run criteria, which gives them priority for supply, is no good when faced with a technical constraint. So, private sector returns are affected by how public sector utilities operate, making it costlier to raise new capital.

Compensating them is not a real solution, and even in developed markets, curtailment payments range from partial and conditional (Spain, California) to none at all (Texas, New England). Instead, we must turn to market reforms, automation, and new ways of organizing to manage this risk.

Managing uncertainty individually is expensive. The current regulations do just that—asking each operator to furnish a production schedule is neither cheap nor an improvement (the risk of divining weather conditions is merely passed on to others). Many developed power markets use a collaborative model. For example, Denmark sources about 40% of its power from wind farms by relying on Norwegian hydro to balance the variability. We must create regional structures so that utilities are not limited by state borders in maximizing the use of national renewable energy resources.

This is an opportune time for creating a national company to provide balancing (or, real-time “insurance”) services. As it happens, power plants with the required quick-response capability viz., gas and hydro power, are underused and facing insolvency. They can be readily acquired for an affordable price, giving them a new life to serve as a provider of reliability services. For the industry, reduced uncertainty simply means cheaper capital, leading to lower tariffs.

Pumped-storage hydropower enables this, and more. In fact, it is the cheapest energy storage technology that can, say, store a day’s solar power to feed evening peak demand when the lights come on. We need a clear programme of investment in pumped storage; India has a modest 6 GW of pumped storage while China has over 30 GW under development.

The current approach is not environmentally friendly. Utilities keep coal-fired power plants on stand-by to meet inter-day variation, burning more coal and oil. This is cheaper because once a generator’s capacity is contracted, only the fuel costs are due.

The real reason, though, is poor automation of distributed power plants—a hangover from our subsidy-based past when basic equipment that qualified for tax deduction was used. The fall in renewable tariffs allows us now to deploy some of that surplus on automation.

Transmission is the other weak link needing investment. Natural solar and wind resources have low energy density i.e., are less concentrated per square metre than coal-fired power plants, and so a wider network is necessary to capture the same output. In addition, utilities must also invest in a wide range of areas to maintain proper voltage (reactive power facilities), grid stability, visibility (instrumentation), and cyber security.

An increased uncertainty in an underinvested grid can easily cause congestion and higher costs (as power flows change from their original design), and any given hot spot can trigger a region-wide blackout. Energy security is a national issue, and cannot be ignored or left to the states.

Tamil Nadu and Rajasthan have made creditable efforts to reduce uncertainty and thus promote renewable energy. They worked with others to improve accuracy of forecasts, studied feasibility for energy storage and risks to grid stability, invested in transmission and set up new coordinating centres to manage renewable energy flows.

If the headlines have persisted despite these efforts (and, both states have had good and bad news), it means that we have a pressing need for real reforms, which must involve the capacity to manage more uncertainty, and a move towards a single, pan-India renewable energy market.

Kameswara Rao is leader—energy, utilities and mining at PwC, India.

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