Weekly Update: The Indian government wants to fix the RPO mechanism

Last week, the Ministry for New and Renewable Energy (MNRE) under the new minister held a meeting with the Forum of Regulators (FoR) to discuss ways to revive the Renewable Purchase Obligation (RPO) mechanism (refer). Until parity in terms of landed cost of power (LCOP) between renewables and other energy sources is widely reached, the RPO mechanism can be a key driver for demand for solar power in India.

  • The RPO mechanism currently works indirectly, and has failed to have a more direct impact on the solar demand
  • RGOs (Renewable Generation Obligations) might be easier to implement than RPOs on loss making distribution companies
  • BRIDGE TO INDIA believes that demand creation for solar in India should have more linkages with parity and market forces – rather than focus on obligations

Currently, it works indirectly, by incentivising state and central policies. However, a lack of penal action for non-compliance, the bad financial health of most obligated entities, non-co-operation of state regulators and an out-dated Renewable Energy Certificate (REC) pricing mechanism have prevented it from having a more direct impact on solar demand.

In the meeting, the ministry asked the State Electricity Regulatory Commissions (SERCs) to direct the distribution companies to make financial provisions in their revenues to ensure RPO compliance. Also, SERCs should invoke penalties for non-compliance. Another suggestion is to increase the validity to the RECs that have already been issued in the hope that better compliance over the next six months will help these certificates find an off-take. These proposals and directives are not new. Similar meetings with similar statements have been held before. What can be done to really affect change?

The central government needs to ensure that the directives are followed up on ground. For example, a very large part of the power consumed in the states is bought from central generators. The central government could link access to this power to conditions, such as financial restructuring and RPO compliance.

A newer suggestion that came up in the meeting relates to “Renewable Generation Obligations” (RGOs). This means that generators of conventional power have a related obligation to also produce renewable power.¬†This can then be bundled with conventional power and sold to the distribution companies at tariffs very similar to the existing cost of power procurement (as long as the renewables share is small). This would transfer the responsibility of going renewable to the financially healthy power generators. It might be easier to implement than RPOs on loss making distribution companies.

BRIDGE TO INDIA, believes that an ideal mechanism to create demand for solar in the country should have more linkages with parity and market forces – rather than focus on obligations. This would mean a significant overhaul and expansion of the existing policy framework and in all likelihood mean a larger focus on distributed solar. India needs to do this eventually anyway, for a transition to parity based markets. The government should start thinking in this direction.

Jasmeet Khurana is a consultant at BRIDGE TO INDIA.

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