Abstract
COVID-19 has adversely affected the energy demand in India. In this context it becomes important to exclusively analyse the impact on the renewable energy sector. Renewable energy Power Purchase Agreements have been one of the most important tools for promoting the usage of renewable energy, especially among the corporate sector. In this blog we aim to focus the impact of COVID-19 on Renewable energy PPA’s in India and further analyse the role of renewable energy PPA’s in the post-COVID-19 era.
Introduction
Renewable energy plays a crucial role in the fulfilment of the Sustainable development goals. In fact, it has a direct link with Goals 7 [1] (Ensuring access to affordable, clean and sustainable energy) and 13 [2] (Taking action against climate change and its impacts). Any move towards fulfilling these goals will need the impetus from the renewable energy sector. In this context it becomes important for us to discuss about tools which help in commercialising the use of renewable energy and thereby displacing or reducing the usage of conventional fossil fuels.
One important tool, which has been in use for promoting the use of renewable energy are the Power Purchase Agreement’s (PPA). Simply put, a PPA is a long term electricity supply agreement [3] that contains the terms of agreement i.e. quantity of the electricity to be supplied , the price etc.
PPA’s can be categorised either based on their distribution or based on the parties to the agreement. Based on the parties to the agreement PPA’s can be categorised into utility PPA and a corporate PPA. A utility PPA [4] is an agreement with a local transmission distribution company whereas a corporate PPA is an agreement with a business or a corporation. PPA’s based on distribution can be divided into Physical PPA’s and Virtual PPA’s. In a physical PPA [5] the energy is being transmitted from the specified delivery point to the corporation’s energy account or meter Whereas in a virtual PPA [6] the energy flows without a specific destination and the corporation does not physically receive the electricity.
Covid-19’s Impact on Renewable Energy PPAs
The COVID-19 pandemic has had a huge impact on every sphere of the economy. The energy sector has been one of the primary sectors which has been on the receiving end of the pandemic. It has been estimated that there is a 25-30% reduction in peak power demand during the crisis [7]. It is important to acknowledge this fact because the economics of demand and supply is crucial to our discussion on the impact of COVID-19 on the renewable energy PPA’s. We would discuss the impact of COVID-19 on both, the existing PPA’s and future PPA’s.
Impact on Existing PPAs
PPA’s which are currently in force face the problem of being dishonoured. Both parties, producers and consumers, are susceptible to such acts of breach. On the producers’ side, such breach is primarily caused when they fail to meet the obligations of supplying the electricity in quantities determined in the PPA’s. It is important to acknowledge the fact that the plants which produce renewable energy are composed of complex systems and machines which need to be duly operated and maintained. However, due to the pandemic and the travel restrictions that have been imposed, the manpower required [8] to undertake such operational and maintenance tasks may not be available. Even if the required manpower is present, most maintenance tasks will require access to material resources like spare parts[9]. However, due to the supply chain disruptions, the availability of such resources may pose further problems. The interplay of such factors, thereby causes the production of the plant to be below its optimum levels. Additionally, as a result of the social distancing norms and safety requirements to be followed, the cost of production will increase and may even cause a delay in construction of current projects [10]. This may further dampen the economic condition of the producer, and in some cases may force the producer to dishonour the PPA.
On the consumer’s side, PPA’s may be dishonoured as a result of the extreme financial stress caused by the pandemic. As noted above, the demand for energy has decreased substantially and the financial impact of such a decrease is primarily borne by the DISCOMS. It is estimated that the net total impact of the pandemic will be a whooping INR 895 billion (USD 11.8 billion) in FY 2021 [11]. The direct consequence of such financial stress is a delay in payments under the PPA’s or efforts on the part of DISCOMS to escape such liabilities [12]. This once again leads to a lack of revenue for the producers and will put them in serious financial jeopardy [13]. Similarly, corporate PPA’s may be dishonoured if the company is undergoing a financial crisis as a result of the pandemic. Further, owing to the financial strain, DISCOMS may try and push for renegotiation of existing PPA’s. However, various agencies [14] in the past have suggested that such renegotiations will have an adverse long term impact and will reduce investor confidence [15] in the renewable energy sector.
Impact on Future PPAs
Future PPA’s will also be adversely affected by the pandemic. As a consequence of the pandemic most of these future PPA’s will not enter into force, at least for the foreseeable future. The primary reason behind this being is the uncertainty surrounding the demand and prices of energy.
Uncertainty over energy prices will be a stumbling block while negotiating PPA’S. PPA’s are generally long term contracts, where the energy price is fixed keeping in mind the projections of energy price, over the course of agreement. However, due to the current low level of prices [16], producers are not willing to negotiate PPA’s based on such projections and want to have a clear view of when the industry will start up again. Low energy prices can also act as a decintivizing factor for signing PPA’s as most corporations opt for PPA’s to decrease their energy costs.
When viewed from the consumers’ perspective, the lack of demand will be the primary reason for not entering into new PPA’s [17]. As noted above, DISCOMS are already under financial distress owing to the lack of demand and hence it is unlikely that they will add onto their already existing liabilities by signing new PPA’s. Similarly, many corporates also have dwindling energy needs, either because of a lack of demand in the economy [18] or due to substantive change in the way the company undertakes its operations. For ex-The pandemic has forced many companies to adopt the work from home. This will surely have a substantial impact on the energy bill of the company i.e a decrease in the costs for them, as the consumption is less than what it used to be. As a consequence , companies are reluctant to commit to volumes without knowing what their actual demand is and hence are unwilling to sign new PPA’s.
A Shift Towards Renewable Energy PPAs
PPAs typically require no capital expenditure [19] and can be located in the same grid region as a company’s operations (a direct PPA) or not (a virtual, or financial, PPA). Not only it helps in financing and building new renewable projects but also boosts local economies and reduces the impacts of pollution. PPAs, where Energy Attribute Certificate (EACs) are maintained, enable companies to make Scope 2 claims [20] (reduced or zero-emission) for public disclosure platforms like Carbon Disclosure Project (CDP) and Global Reporting Initiative (GRI).
India has a surplus generation capacity and stressed assets [21]. Thus, the scope for expansion in the Non-Renewable sector is less and paving the way for the development of the renewable sector in India. It has an ambitious target of achieving a 100GW solar energy target by 2022 [22] and has installed approximately 35GW of solar energy projects, as of January 2020. We have witnessed a growth in the number of first-time corporate clean energy buyers in India and it is now the world’s second-largest market [23] for corporate renewable purchasing power agreements after the U.S. It would be interesting to see how the country’s solar sector tackles the issues amidst pandemic and plots a strategy to achieve its targets.
In April, while revising the guidelines concerning lockdown measures, the Indian government sanctioned the construction of renewable projects [24] in areas not identified as containment zones. Due to issues like cash flow crunch, working capital requirement, recovery of payments from distribution companies, supply chain disruptions and workforce availability, the whole solar industry has been considerably affected due to the COVID19 outbreak. But the government has adopted a positive approach to limit these negative effects on the sector. In early June, the Ministry of New & Renewable Energy (MNRE) extended the various deadlines [25] for its One Sun One World One Grid (OSOWOG) plan on appeal of many consulting firms amid the lockdown. Bloomberg New Energy Finance (BNEF) [26] in its report, in June, acknowledged that India has become one of the world’s largest and most competitive renewable energy markets and it can serve as a model country for others for renewable growth. At the same time NITI Aayog and Rocky Mountain Institute (RMI) [27], published the report titled “Towards a Clean Energy Economy: Post-COVID-19 Opportunities for India’s Energy and Mobility Sectors” [28] that studied the impact of COVID on transition and clean energy. It vindicates for stimulus packages and a drive to continue the momentum towards a clean energy economy.
Companies are taking drastic and radical measures to minimise their expenditures and reducing electricity cost is one of such avenues. Commercial & Industrial companies ideally spend 15 to 30% of their total expenses on electricity costs where electricity is commonly taken from sources such as thermal power through DISCOMs, onsite captive generation, Open Access (OA) etc. But by shifting to renewable power, the companies can reduce their electricity cost by 25 to 40% [29] and at the same time, their sustainability goals can be met. This makes renewable energy PPA’s extremely attractive for corporates and thus pave the way for their growth.
Conclusion
Amidst COVID-19 and global challenges, the PPA market still has an important role to play this year. In the process of infrastructure development, the transition to a sustainable and greener energy system must continue with innovative ways to reduce our ecological footprint and tackle climate change.
To control the negative impact of the pandemic on the sector and on PPA’s, cooperation from all sides is essential. DISCOMS and corporates have to ensure that they don’t delay the payments under the PPA’s. A delay in payments will not only impact the financial position of the producers, but may also have a negative impact on the investor sentiment with regards to the renewable energy sector.
Generators and off-takers would normally make the initial contacts through trade shows and industry conferences that lead to signed deals, but now the parties are shifting to a digital platform. The current situation could act as a trigger for the solar industry, the Indian government and other stakeholders to outline the right roadmap for achieving India’s solar energy targets. Since the last decade, renewable energy has played a fundamental role in adding and building power capacity in India.
About the Authors
V. Shanthan Reddy is a 3rd year law student at the National Academy of Legal Studies and Research (NALSAR), Hyderabad and is an Associate Editor at IJPIEL.
Dikshi Arora is a 2nd year law student at Rajiv Gandhi National University of Law (RGNUL), Punjab and is a Junior Editor at IJPIEL.
Editorial Team
Managing Editor: Naman Anand
Editors-in-Chief: Akanksha Goel and Samarth Luthra
Senior Editor: Varun Pandey
Associate Editor: V. Shanthan Reddy
Junior Editor: Dikshi Arora
Preferred Method of Citation
V. Shanthan Reddy and Dikshi Arora “Renewable Energy PPA’s in India: A Kick at the Can or a Fly in the Ointment?”
<https://ijpiel.com/index.php/2020/10/23/renewable-energy-ppas-in-india-a-kick-at-the-can-or-a-fly-in-the-ointment/>
Endnotes
[1] https://sdgs.un.org/goals/goal7
[2] https://sdgs.un.org/goals/goal13
[3] https://www.next-kraftwerke.com/knowledge/ppa-power-purchase-agreement
[4] https://www.3megawatt.com/guide/ppa
[5] https://leveltenenergy.com/blog/energy-procurement/physical-power-purchase-agreement-or-virtual-ppa
[6] Id.
[9] Id.
[14] https://www.icra.in/Media/OpenMedia?Key=c076c884-67a9-4130-b882-957591eea949
[15] https://www.livemint.com/industry/energy/discoms-altering-ppas-is-bad-move-for-power-sector-says-icra-1562646426486.html
[16] https://www.power-technology.com/comment/covid-19-ppa-short-term/
[17] https://renews.biz/59551/covid-19-crisis-slows-market-for-corporate-ppa/
[18] Supra 16.
[21] https://eal.iitk.ac.in/assets/docs/Navneeraj_Sharma.pdf
[22] https://energy.economictimes.indiatimes.com/news/renewable/mnre-confident-of-meeting-100-gw-solar-power-capacity-target-by-2022/74733761
[23] https://karmaimpact.com/indias-shift-to-renewable-energy-driven-by-lower-costs/
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