CERC, the central power sector regulator, has issued an order capping base penalty rate under Deviation Settlement Mechanism (DSM) at INR 12/ kWh for both power producers and consumers. Earlier, the base rate was set at maximum of weighted average price discovered on power exchanges and weighted average ancillary service charge. The change came in response to reports of around 20% increase in frequency excursions beyond the prescribed band (49.90-50.05 Hz) since new DSM regulations came into effect on 5 December 2022, which led to ancillary service charge shooting up to INR 40/ kWh.
Under the new DSM regulations, deviation bands for renewable power projects have been tightened from 15% to 10% while penalty rates have been increased. Under-injection beyond 10% attracts penalty at 10% of the base rate while over-injection between 5-10%/ beyond 10% attracts penalty equivalent to 10% and 100% of PPA tariff respectively. The asymmetric nature of penalties means that the power producers are overestimating generation resulting in higher frequency band violations and greater demand for ancillary services.
States with high renewable power penetration have been pushing CERC for more stringent deviation penalties for renewable projects to help maintain grid stability. Karnataka is a good example – the state reported 58% renewable penetration in FY 2022 with monthly penetration reaching a high of 76% in July 2021. Daily wind power generation in the state varied between 800 MW to 2,700 MW in FY 2022 necessitating more frequent and bigger changes in conventional power consumption resulting in higher penalties.
Power producers have reported a sharp jump in penalties under the new regime. Wind and solar power producers in the southern region reported 12x and 6x week-on-week increase respectively in penalties for the week of 5-12 December 2022. Weekly penalties for the seven ISTS wind power producers in southern region increased from INR 3.5 million to INR 42 million in the week of 5-12 December 2022, while the quantum went up from INR 13 million to INR 77 million for the 29 ISTS solar power producers in the southern region in the same period. The trend is similar for projects in the western region as seen in the following figure. We understand that projects in the northern region managed to buck the trend mainly due to favourable weather conditions.
Figure: Aggregate weekly deviation penalties for ISTS projects, INR million
Source: Regional Power Committees, BRIDGE TO INDIA research
Aggregate deviation penalties for solar and wind power producers are estimated to grow from 0.3% and 0.5% of revenues to 1.2% and 2.5% of revenues respectively. Power producers have raised their concerns at various levels including a legal challenge in the Delhi High Court. The court has refrained grid operators from encashment of bank guarantees or grid disconnection until 25 April 2023. Meanwhile, MNRE has set up a committee to address grievances of renewable power producers.
The new DSM regulation exposes growing conflict between renewable power producers and consumers. Tamil Nadu, Karnataka, Madhya Pradesh and Haryana have already adopted CERC regulation for intra-state projects, while Gujarat has gone for an even tighter permissible deviation band of 7-8% for solar and 8-12% for wind power projects. Other renewable-rich states are bound to follow. The Draft Indian Electricity Grid Code 2022, currently under consideration by CERC, proposes limiting revision flexibility in generation schedules, which would make things worse for power producers.
In the absence of any likelihood of recourse under ‘change in law’ provisions in the PPA, the project developers can only hope for a favourable decision from the courts and hone their forecasting ability to minimise revenue loss.
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