Daybreak - India's electricity distribution companies are getting disintermediated

Episode Date: March 13, 2023

With summer around the corner this year, the Indian government is scrambling to make sure the country does not face power outages.But as this demand for power rises, the country is also working on increasing its green energy capacity. In fact, India is turning out to be one of the fastest to increase its renewable energy capacity. The transition to green energy is not just about how electricity is produced, it is also about how it is consumed. India emerged as the biggest market for corporate power-purchase agreements  (PPAs) in Asia-Pacific for the second year in a row.This trend has the state-run discoms or power distribution companies seriously worried. 

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. With summer around the corner this year, the Indian government is scrambling to make sure that the country does not face power outages. Summers are usually when the demand for power shoots up. But India is seeing a surge in power demand in general. In 2022, the country's power demand grew by about 8% compared to the previous year. Now, this 8% rise in demand is nearly

double the speed compared to the rest of the Asia-Pacific region. The government of India, meanwhile, has said that it will ensure that coal stocks are made available at coal-based power plants for the rest of summer. But as this demand for power rises, the country is also working on increasing its green energy capacity. In fact, India is turning out to be one of the fastest to increase its renewable energy capacity. And not just that, the country also has among the lowest costs of setting up renewable energy. And India's price of green hydrogen is considered one of the most competitive in the world. So the government of India has been invited to major green energy players from around the world to invest here.

But this transition to green energy is not just about how electricity is produced. It is also about how it is consumed. The starting point for any net zero obsessed company is to make sure that the power it consumes is green. But when they buy green energy from a state-run distribution company or discom in India, there is barely any traceability. By discomp, I mean the West Bengal State Electricity Distribution Company or Maharashtra State Electricity Distribution Company, Tata Power Delhi Distribution Limited and the likes.

For these Nensiru companies, this lack of traceability is a tricky situation. Plus, the whole deal with buying from state-run utilities turns out to be quite expensive for them. And that is because it is their business that allows these state-run discoms to give us power at subsidized rates. So it is not surprising that last year, India emerged as the biggest market for corporate power purchase agreements or PPAs in Asia Pacific for the second year in a row. A corporate PPA is essentially a long-term contract under which a business agrees to

purchase electricity directly from a producer. According to industry experts, this demand for corporate PPAs in India is only expected to skyrocket in the next few years. Corporate PPAs basically allow companies to purchase clean energy at a cost that is 10 to 50% lower if they were to buy it from a discount. Well, this is all well and good. This trend has the discoms seriously worried. In today's episode, I will tell you how these corporate PPAs might harm the ability of discoms to subsidize power for other customers like you and me. Welcome to Daybreak, a business podcast from The Ken.

I'm your host, Nickda Sharma, and I don't chase the new cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Monday, the 13th of March. In India, electricity is a part of the concurrent list under the Constitution, which basically means that both the center and the state can make their own laws on the subject. In June 2022, the Indian government introduced the green energy open access rules.

Open access is when commercial and industrial consumers are allowed to choose from a number of power companies in the open market rather than being forced to buy power from a local utility monopoly. The new open access rules reduced the load limit for contracting renewable energy from one megawatt to 100 kilowatts. And what did this do? It made it easier for smaller companies to buy green energy. But though the central government has introduced green energy open access rules, state governments still need to make policies to implement them.

Only a few states, including Karnataka and Madhya Pradesh, have introduced draft policies so far. Nevertheless, companies of all sizes are now looking to sign deals to buy green energy directly from power producers. At least three renewable energy experts that the Ken spoke to said that they expect the share of renewable power through PPAs to reach 20% in the next decade. Even the size of these contracts is increasing. In December last year, the Renewable Energy Company Renew Power signed an off-take agreement with the tech giant Microsoft for 150 megawatts of solar capacity. In the same month, Amazon signed PPAs for 300 megawatts.

of wind and solar power, including a deal with vibrant energy. Karthikea Sharma, the co-founder of the clean energy firm, Sunshore Energy, told again that large-scale contracts with the likes of Amazon and Microsoft, which is often to supply energy to their data centers, will be a crucial driver. He told us that globally, the top four companies, Microsoft, Amazon, Meta and Google account for 70% of corporate PPAs. And apart from these tech giants, more than, and more Indian companies are also laying down ambitious sustainability goals.

This is also because they are under pressure from investors due to renewable purchase obligations or RPO's. RPO is a mechanism by which the state electricity regulatory commissions oblige entities to purchase a certain percentage of power from renewable energy sources. Even steels, automobiles and other export-oriented industries are under pressure to stick by stricter laws in other countries. For example, the imposition of a carbon tax in Europe. In India, too, the market's regulator

Sebi has tightened compliance regulations and reporting standards. All of this is of course great progress if you look at the larger picture. But for discoms in India, this is kind of bad news. How? Stay tuned to find out. Power distribution companies or

discoms basically act as aggregators. They buy energy from generators and supply it to agricultural, industrial, commercial and residential users. But these state-run utilities in India are already under huge amounts of debt. For them, if these companies that had originally been buying energy from them shift to corporate PPAs, it is going to be a massive setback. It will lead to revenue loss and also affect their ability to subsidize power for other customers. So discoms are fighting hard to keep their high-paying customers. They are increasing the

cost of procuring green power directly from the open market by levying all kinds of surcharges. They are also coming up with ways to supply green power themselves, but obviously at a premium. And they have to do this because it is also a way for them to plug their losses. So discoms are pushing back. It is a game of survival. But because of this, green energy open access policies don't always lead to desired outcomes. For example, in 2017 in Karnataka, the state government introduced benefits for open access solar contracts and removed a lot of charges imposed by discoms on such deals. The year after that, the state saw the installation of two gigawatts capacity and a huge jump in the number of corporate PPAs. Other states like

Andhrapradesh, Tamil Nad, Maharashtra, Rajasthan and Haryana also followed Karnatica, but the discoms in these states staged a fightback. They moved to court, they blocked deals and they levied surcharges again. So by 2019, most of these states either withdrew their open access benefits or did not extend them beyond the march of that year. For now, discoms still cater to large grid-scale projects with over one gigawatt capacity. On the other hand, the biggest corporate PPAs hover around 350 megawatts. But if this pushback by DiscOMs continues,

it might lead to hampering India's rise as a leader in renewable energy. So DiscOMs have to figure out a way to supply green power directly to corporations. In the next 10 years or so, the proportion of corporate PPAs in contracted renewable energy supply is likely to rise to double digits. For discoms, time is running out. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras.

Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited. by my colleague Rajiv Sien.