Methods of Procuring Solar Power

There are 3 ways in which an intensive energy consumer can procure solar power

  • 3rd Party Sale using Open Access
  • Group Captive
  • BOO(T) – Build Own Operate (Transfer)

3rd Party Sale using Open Access

Open Access is the freedom given to consumers with connected load greater than 1 MW to choose their own supplier of power i.e., they are not restricted to buying power from the utility and can instead buy power from any 3rdparty supplier of power. Therefore, the consumer can contract with a solar IPP to buy power generated from their solar PV plant. A consumer with connected load less than 1 MW may apply for open access; the utility is not obliged to grant open access in such cases, but may do so at its discretion.

Advantages

  • The consumer doesn’t have to invest in the power plant. The consumer only pays for the electricity supplied by the IPP
  • The consumer doesn’t need to maintain the power plant, or be concerned with warranties, quality of components, etc.
  • The consumer is no longer restricted by available rooftop space. The IPP’s solar plant may be much larger than what could have been installed on the consumer’s rooftop
  • Inter-state open access is not allowed. Power has to be procured only from power producers within the state
  • Open access charges in many states are very high
  • Cross subsidy charges are imposed on 3rd party sale
  • There are many delays in getting permissions
  • Congestion and transmission constraints may limit the amount of power that can be procured

 Due to these reasons, 3rd party sale of electricity is witnessed only in a few states, primarily Andhra Pradesh, Karnataka, Maharashtra, and Tamil Nadu.

Group Captive

The Electricity Act 2003 (EA 2003) allowed freedom for the captive power generators and captive consumers  with respect to setting up of captive power plant has been made with a view to not only securing reliable, quality and cost effective power but also to facilitate creation of employment opportunities through speedy and efficient growth of industry.

  • Captive generating plant was defined as one in which captive consumers (a) hold a minimum of 26% of the ownership (b) consume not less than 51% of the aggregate generation computed on an annual basis.
  • If the generating plant was set up by a registered cooperative society the consumers collectively have to consume not less than 51% of the aggregate generation implying that in case of any other form of entity, this obligation is to be in proportion to the ownership rights.

Section 9 of the Electricity act 2003:-Group captive power plant, unlike an individual captive power plant, is a unique structure where a developer sets up a power plant for collective use of many industrial consumers who should have 26 per cent equity in the plant and must consume 51 per cent of the power produced.

Sec 38,39 and 40 of the Act made it mandatory for the Central Transmission Utility (CTU) and the State Transmission Utility (STU) to provide non discriminatory Open Access to the captive generator for the use of transmission system for his/their own use without any surcharge.

Advantages

  • The consumer can gain economies of scale by investing jointly with other consumers in a very large plant
  • The consumers need to hold only 26% of the equity in the project. If the project is funded with 70% debt and only 30% equity, then the consumers need to jointly hold only 26% of 30% i.e., they invest only 7.8% in the cost of the project
    1. Usually, a power plant developer builds the plant under a SPV company and offers 26% equity to the consumer(s). An agreement to buy back the shares on the termination of the procurement contract is also entered into
  • Cross-subsidy charges are not levied as the supplied power is treated as captive consumption
  • As part owners of the plant, consumers are eligible for Renewable Energy Certificates (RECs) and can further monetise Group captive arrangements through sale of RECs
  • Procuring power through group captive arrangements requires open access. Therefore group captive suffers from similar problems to 3rd party sale, such as high open access charges and obtaining permissions, though it does not attract cross-subsidy charges
  • Some organisations may not wish to hold equity in the SPV

Group Captive Generation attributed to

  • Cheaper price – This is the most important factor and the reason as to why the modern day industrialists should shift to captive generation. Industrial tariffs tend to be higher than residential and it effects the profit maximization condition. In this way, industries will get cheaper rate. A general survey estimates the market rate to be around Rs. 3 per unit while production cost to be around Rs. 3.50 per unit.
  • Cross subsidy – The consumers of captive power scheme are exempted from paying cross subsidy surcharges (CSS)

BOO(T) – Build Own Operate (Transfer)

In the BOO(T) model, the rooftop system provider installs the plant on the consumer’s rooftop but only sells the power from the plant to the consumer. In this arrangement, the system provider would bear the capital expenditure for the solar unit provided the customer fulfils certain criteria and enters into a power purchase agreement (anywhere between 5-15 years) with the developer. If both parties agree, the ownership of the plant may be transferred to the consumer after a period of time.

Advantages

  • As the system is installed on the consumer’s rooftop, it does not use grid infrastructure to deliver power and is therefore not affected by grid outages or grid congestion
  • Open access is not required and open access charges do not apply as the plant is independent of the grid
  • The amount of power that can be procured is limited by the extent of roof space available for installing the plant
  • The rooftop system provider may require the consumer to have a good credit rating and/or provide payment security
  • The system provider is the owner of the plant and enjoys all incentives provided by the government, such as accelerated depreciation or RECs

Drawbacks

  • The amount of power that can be procured is limited by the extent of roof space available for installing the plant
  • The rooftop system provider may require the consumer to have a good credit rating and/or provide payment security
  • The system provider is the owner of the plant and enjoys all incentives provided by the government, such as accelerated depreciation or RECs

Summary of procurement options by consumer category

The following table gives a quick summary of available options for different categories of consumers

Open Access Available Options
Customer’s connected load Customer has dedicated feeder? BOO System at the Premises Procure RE Power from 3rd Party/Group Captive
During power cut time During non power cut time During power cut time During non power cut time
> 1 MW Yes Yes
Yes No
No Yes
No No
< 1 MW Yes No
No No

 

As can be seen, power failures dramatically limit the options available to consumers without dedicated feeders if they require solar power to be supplied even during a power failure.

 

Illustration of charges applicable to each option

This table gives a comparison of the different charges that should be taken into account when calculating the landed cost of the procured power.

Charges 3rd Group Captive BOO(T)
Party Sale
Price of Power (at generation point) 3.5 3.5 3.5
Electricity Duty 0 0 Nil
Electricity Tax 0 0 Nil
Line Loss 0.1 0.1 Nil
Transmission Charge 0.09 0.09 Nil
Wheeling Charge 0.37 0.37 Nil
Cross Subsidy Surcharge 0.45 0 Nil
Banking Charges 0.094 0.094 0.094
Generation Tax 0.1 0.1 0
Metering Charge 0.25 0.25 0
Substation Maintenance Cost 0.5 0.5 0.5
Effective Cost 5.454 5.004 4.094

 

Note: The table is only meant to demonstrate how charges apply under different procurement mechanisms The numbers in the table are illustrative only, , and may not be representative of actual charges which vary with jurisdiction, voltage levels, sources of generation, etc. Price of power will also vary based on the method or procurement (they are shown as identical in the table to lay emphasis on the charges.

The table shows the complexity in calculating the effective/landed cost of power under the different options. We recommend a careful evaluation of the charges applicable to you in your jurisdiction before deciding on a method of power procurement