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 Climate Change

Published on: Feb. 14, 2020, 4:08 p.m.
A low cost, low carbon electricity market for India by design

By Udetanshu. The author is Principal at Climate Policy Initiative

India’s renewable deployment has accelerated in recent years thanks to the government’s target of 175 GW of installed capacity by 2022 and dramatic cost declines that have made variable renewable sources competitive with existing coal generation.

However, increasing generation from wind and solar is not just about reducing carbon emissions. Clean power generation represents an opportunity to transform the country’s fragmented electricity sector and facilitate new investment in clean energy, flexibility resources and supporting infrastructure. In fact, only a clean energy system can deliver efficient, reliable and affordable electricity for India’s growing population of 1.3 billion. The country is already the world’s third-largest consumer of electricity after China and the US, and electricity demand is expected to roughly double by 2030.

While there are no shortages of efforts to bring clean, reliable and affordable energy to the growing number of consumers in India who will have higher expectations of chilled food, air-conditioned homes and appliances that will work when they need them, the integration of renewables, the inefficiencies and challenges in the system require coordinated efforts.

Climate Policy Initiative Energy Finance, a leading research and advisory group focused on energy markets, finance and policy, has taken a significant first step on this collaborative journey. In 2017, we published Flexibility: the path to low-carbon, low-cost electricity grids, which was commissioned by the Energy Transitions Commission. We found that within a few years a system powered by the sun and wind would be cheaper than a fossil-based system.

This work took a high-level view of the role of flexibility in developing energy transition strategies for power systems. In India, we are taking this work further to analyse India’s specific needs and opportunities to build a national strategy. As with our global project, our analysis of the flexibility challenge in India suggests that a flexible, high renewables system may also be cheaper than meeting demand growth by burning more coal.

Alongside our partners at Energy Transitions Commission India (ETC India) and a consortium comprising The Energy and Resources Institute (TERI) in Delhi and the US National Renewable Energy Laboratory (NREL) we have developed analytical insights and recommendations in support of India’s ambitious renewable energy goals. In February, we published a report with these findings, Developing a roadmap to a flexible, low-carbon Indian electricity system.

Our approach:

In that report, we explored how India’s ambitious renewable targets may be met through an integrated approach to flexibility which combines demand management, energy storage technologies and adaptation of dispatchable fleet.

We found that under a high renewables scenario, India could integrate 390 gw of wind and solar generation by 2030, an increase of more than 40 per cent above the current renewable energy trajectory, at a cost that is lower than that of the current trajectory.

In that work, we looked at four types of flexibility needs:

• Reserve capacity in case a power plant or transmission line suddenly fails, or if demand unexpectedly surges

• Ramping capacity that is fast enough to meet expected sharp increases in demand, such as when the sun sets and consumers turn on their lights or air-conditioners at once

• Daily balancing of supply and demand, for example, solar energy may produce more energy than is needed in the middle of the day, but demand may peak in the evenings when it’s not available

• Seasonal balancing of supply and demand to meet annual cycles, for instance, when hot summers or seasonal industries drive up electricity demand, or during rainy seasons that correspond with high wind generation

Power plant flexibility:

Thermal and hydroelectric power plants, along with load shedding, provide most of the flexibility needed by India’s electricity system today. Existing power plants could provide more flexibility across all types of flexibility needs than they do today. India’s electricity system will need to optimise the integration of power plant flexibility options with demand and storage options.

However, there are limits to how much flexibility they can provide and there are associated costs. Within limits, power plants are dispatchable. For example, a 200 MW plant with a 55 per cent minimum operating level could offer 90 MW of ramping or, in many cases, daily balancing. But thermal power plants are less efficient when they operate below their maximum rated capacity and there are additional costs such as upgrade costs to plants that are not operating as flexibly as they could. Nevertheless, demand flexibility and storage can allow thermal capacity to operate more efficiently.

Mixed resources reduce costs:

Overall, we have found that a balanced portfolio of demand, storage and power plant flexibility performs best on most metrics and is least risky.

But most importantly, with all of the flexibility options in place, total costs of the high re system are below what we could expect from the baseline scenario. That is, adding flexibility to the system lowers costs of a high re ambition to below the costs that would be expected if neither re nor flexibility is pursued with greater urgency.

Electricity market transition and design:

So far, the Climate Policy Initiative’s work with ETC India has highlighted the importance of electricity markets and the need for new market designs to improve flexibility. Successful market reform would address inefficiencies of the current market design, create value for the Indian economy and reduce short term and the long-term cost of moving to a low cost, low carbon, reliable electricity system.

India is a large but fragmented electricity market with more than 600 power stations, more than 30 transmission licensees, around 70 distribution licensees and two power exchanges. Furthermore, there is significant uneconomic dispatch under long-term bilateral contracts, where prices do not reflect the actual cost of production.

Such inefficiency in the dispatch of power plants leads to more severe constraints that drive curtailment of renewable energy, raising costs and carbon emissions. Resolving these issues could unlock significant savings that could be used to lower electricity prices or invest in the next generation of clean power and flexibility.

Moreover, investment, financing and policy support need to be aligned to ensure that India’s power system not only operates efficiently but deploys capital efficiently as well. Novel electricity system resources like energy storage and demand flexibility require new models for electricity market participation, new business models including aggregators of demand-side resources, and investment to support the growth of an immature domestic value chain. Infrastructure like transmission and distribution will be needed to support effective market integration, requiring long-term certainty to facilitate investment. And finally, improved data availability and access will help market participants evaluate opportunities, assess risks, and overall reduce the barriers to doing business in the sector.

Over the next two years, CPI Energy Finance plans to work closely with key stakeholders in India’s electricity sector – including the Central Energy Regulatory Commission, the Power System Operation Corporation, state regulators, dispatch centres, distribution companies, and other stakeholders – to identify and evaluate a subset of the challenges facing the Indian electricity system.

This work will support CERC’s current efforts to explore the market reform options, as well as efforts underway across India to manage the myriad challenges faced by the sector. cpi Energy Finance will be looking to engage with three states to develop case studies that both identify and address the tools and options to address electricity market challenges, alongside analysis at the national level.

Our goal is to use this process of engagement with stakeholders supported by robust quantitative research to develop a roadmap for electricity market reform that support’s India’s transition to a lower-cost, lower-carbon grid.

*This article has been co-authored with Brendan Pierpont, principal at Climate Policy Initiative Energy Finance


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