India has made significant progress in adding solar capacity in the past decade. Much of it has come through utility scale, ground mounted and grid interactive solar projects. Rooftop solar and captive generation projects constitute a smaller fraction of overall solar capacity. Falling costs have made solar projects more attractive to consumers. However, it has caused new conflicts between the interests of users and those of distribution companies (discoms). This has resulted in regulatory constraints fuelled by the reluctance of discoms to support net-metering and captive projects.
Several state governments have initiated net metering policies to promote rooftop solar (RTS) projects. These policies are intended to incentivize consumers to establish RTS projects, by allowing them to pay tariffs only on the net electricity drawn by them from discoms, after adjusting for the electricity exported to the grid through RTS installations. Where the electricity exported exceeds the power consumed, some states allow for banking of that energy for a certain period, while others allow for the purchase of that excess electricity at a predetermined price. Effectively, consumers offset the generation against the maximum tariff that they are paying. For industrial and commercial consumers, this brings significant savings as they are often purchasing electricity from discoms at the highest rate.
These policies, however, differ widely from state to state, based on the size of the installation, the type of connections for which the set-off may be claimed, the meter to be installed and the developer model. The timelines and procedures for approval also vary significantly between states. Most states actively discourage large rooftop solar projects, often with an upper cap on the size of the installation (typically 1 MW). Certain states impose size restrictions based on the contracted demand of the consumer, which ensures underutilization of the available space. Size limits make most large commercial and industrial rooftops ineligible for the benefits of net metering policies. Some states like Uttar Pradesh have prohibited net metering benefits for commercial and industrial consumers, and for public buildings, while states like Maharashtra are moving away from net metering to gross metering for commercial and industrial consumers. Gross metering is financially unviable for industrial and commercial consumers, and it is unlikely that many will install RTS projects. Rules governing the banking of excess electricity fed into the grid under net metering also vary widely, with some states limiting banking to one month, making such installations less attractive.
In order to avoid uncertainty around net metering policies, a number of industrial and commercial consumers are choosing to install behind-the-meter (BTM) projects. BTM projects connect with the internal electrical system of the consumer on the low-tension side, as opposed to grid interactive projects that feed into the grid by connecting on the high tension side. Effectively, these projects reduce the offtake of the consumer from the grid, as the power needs are first met through the supply from the BTM installation. By not connecting to the grid, it may be argued that such projects do not need registration under the net metering policies. However, it is only a matter of time before discoms and regulators move against such projects. Captive generation projects too suffer from similar regulatory prescriptions. The requirement of annual certification of captive generation projects exposes already installed projects to regulatory uncertainty and bureaucratic high-handedness, particularly when regulations change.
Opposition of the discoms to net metering and captive generation stems from the faulty architecture of electricity subsidies. While discoms have been corporatized across the country, they still operate as government arms bearing the subsidy burden of the states. The subsidies for low end retail consumers and farmers are funded by the discoms through premium pricing of high-end retail and commercial and industrial users. The electricity regulators and the state governments too have acquiesced to the discoms by protecting their premium customers through regulatory restrictions. These regulatory restrictions have prevented nationwide open access, and the development of an efficient electricity market.
It is time for administrations, particularly the central government to ensure that the subsidy burden on discoms is shifted from their balance sheets to that of the governments. That alone should usher in a new wave of electricity reforms. RTS installations and captive generation projects will continue to suffer until governments and regulators accept that the need of the discoms to support their subsidy burden through cross-subsidization is inconsistent with the broader public interest of promoting clean energy.
Mani Gupta is a senior partner and Abhishek Tripathi is the managing partner of Sarthak Advocates & Solicitors.