Harsh Penalties for Deviation Settlement is Playing Havoc with Solar, Wind Projects

Severe financial penalties on developers making solar, and wind projects unviable in many states in India


India is one of the leading markets for renewable energy generation in the world. It was the third largest solar photovoltaic (PV) market in the first quarter of 2019 behind China and the United States. Renewables currently make up 9% of the total electricity generation in the country. With India’s plan to install 175 GW of renewable energy by 2022, grid integration of intermittent renewable energy sources is expected to be a challenge.

Due to the intermittent nature of wind and solar energy, forecasting and scheduling are essential for stable and efficient grid management. Over the past couple of years, central and several state electricity regulatory commissions have issued forecasting guidelines for the industry. These guidelines provide a methodology in case there is a deviation in the generation, and developers are required to pay penalties due to these deviations. This process is called deviation settlement mechanism (DSM) through which developers compensate electricity grid infrastructure providers for errors in forecasting and scheduling of power generated by their projects.

In the case of deviations from the schedule, the Central Electricity Regulatory Commission (CERC) has established a fee for errors based on 15-minute time blocks and charges for deviation payable or receivable to/from regional DSM pools by the renewable generators.

When the error is less than or equal to 15%, charges for deviation are computed at a pre-defined rate for the deviation in energy terms for an absolute error of up to 15%. When an error is more than 15%, there are additional charges for deviation along with the fixed rate. The methodology for computation of the fixed rate has been specified by the Central Regulator in the regulations. Below is an example of DSM charges in Rajasthan.

Deviation Charges in Case of Under or Over-Injection for Sale of Power Within the State

After contacting the developers and qualified coordinating agencies (QCAs) (organizations that provide intermediary services), here are our takeaways on how DSM policies across the country are becoming an increasing burden on wind and solar energy developers:

  • According to sources, typically DSM charges can cost developers anywhere between 0.3% to 0.5% of generation revenue depending on the accuracy of forecasting and scheduling capabilities. However, some developers have raised concerns as these charges are costing them 5%-10% or more as some states have fixed penalties between ₹0.5-₹1.5 (~$0.007-0.02)/kWh in the case of deviation.
  • CERC’s DSM policy has been interpreted differently by many states. Therefore the charges also vary significantly across the country. These policies are also based on pre-2016 regulations when there was far less competition in solar and wind tariffs
  • States should allow the aggregation of pooling substations for renewable energy projects to reduce DSM charges, a few developers opined
  • QCAs are expected to play a crucial role in the power generation ecosystem, as they are responsible for forecasting and scheduling. In some cases, QCAs are taking the risk of deviation penalties for fixed per MW costs charged to the developers

An executive working for a large renewable energy developer with more than 1 GW portfolio, stated, “Deviation settlement charges for wind and solar are not at all justifiable. The CERC has day-ahead regulations, and there are several penalties that solar and wind projects have to bear due to this. On average, solar projects lose 10-12 paise (~$0.001) as a penalty to the CERC. So, if you have bid for a tariff of ₹2.65 ($0.038)/kWh, you will ultimately get ₹2.55-2.57 (~$0.037)/kWh. For wind projects, the average penalty is more like 20-25 paise (~$0.0036). How can you expect lower bids in such a situation?”

Another source from a prominent wind and solar energy developer mentioned how these charges were variable from state to state, “The charges for deviation settlements are not uniform as different states have different charges for deviation settlement, and we have raised concerns everywhere in the industry. These charges are too high and have caused a revenue loss for generators; we need to see some relaxations on these charges because otherwise, the projects will become unviable.”

Numerous developers and a QCA also echoed the view about the aggregation of pooling substations (PSS) whereby the developers, by aggregating multiple wind and solar projects could reduce the deviation charges. However, most states do not allow aggregation.

Amit Gupta, head of forecasting and scheduling services at Statkraft, a company that focuses on providing forecasting and scheduling services, said, “Deviation charges are reasonable in states such as Karnataka and Andhra Pradesh where PSS aggregation is allowed, but in Rajasthan where the regulator does not allow aggregation, the quantum of charges for deviation is almost 20 times more.”

“We hope that as the industry matures, charges will settle in a much narrower range. Going forward, we foresee market-based balancing to be introduced as in more developed markets. Meanwhile, it is possible for QCAs to take risks on DSM penalties and guarantee fixed costs to producers for the projection of long-term DSM costs and could also help them in new project planning. Currently, this product has been already offered by few QCAs, including Statkraft in India.”

Due to the relatively recent large-scale grid integration of renewable energy projects, regulators seem to lack the understanding of how to reasonably penalize developers for deviation.

On how to solve this issue, Gupta further stated, “The DSM regulations need to be reconsidered to allow aggregation at the state level. DSM charges should be kept at a low level in the beginning and gradually increase as the market and technology mature. Introducing real-time balancing market will also support in bringing more efficiency to the system. Virtual Power Plants (VPP) for renewable energy may also be technically helpful to resolve higher deviation charges and may help operators to manage the grid more efficiently. In the European market, we have seen the imbalanced cost, and the requirement of the spinning reserve has come down with more renewable energy into the system.”

According to sources, regulators formulated DSM guidelines using a small data set of pilot projects, to which developers did not raise appropriate objections. So, state electricity regulatory commissions need to understand what renewable energy developers are up against now, especially in this highly competitive tariff environment. Further, states do not have good enough reasons not to allow aggregation. It is expected that the states will change the policy to allow aggregation of multiple projects.

“Forecasting and deviation charges is another important area where the regulators need to update the policy to match the current realities on the ground. In some states, solar projects get charged for deviation while energy generated from the same projects are curtailed. It does not make any sense that solar power has to be curtailed when agencies already have the forecasting and deviation data,” said Raj Prabhu, CEO of Mercom Capital Group.

“These are some of the important practical issues developers face every day which regulators don’t seem to factor in when they are coming up with tariff caps. At the end of the day this is another element increasing developer risk, which makes it harder to bid lower,” Prabhu added.

So far, Gujarat, Maharashtra, Uttar Pradesh, Punjab, Telangana, Haryana, Andhra Pradesh, Gujarat, Tamil Nadu, and Meghalaya have issued regulations for the forecasting, scheduling, and deviation settlement for solar and wind generation.

Recently, Mercom reported on the Rajasthan high court upholding the deviation settlement mechanism order passed by the Rajasthan Electricity Regulatory Commission (RERC).

In May 2019, the CERC finalized the fifth amendment to its deviation settlement mechanism regulations. These regulations were to come into force with effect from June 03, 2019.