C&I Segment: Group Captive Mode to Drive Installations in FY24-FY25-CareEdge Ratings

HERC approved the new green energy open access rules.

A new report from CARE Ratings predicts sunny times for solar power through Group captive mode in India’s C&I segment. Commercial & Industrial (C&I) consumers in India have the option to purchase power either through a third-party power plant or through a captive/group captive power plant besides procuring power from the designated utility in their region.

Even as availment through the third-party open access route does not warrant any capital investments from the procurer, it necessitates the procurer to pay all the open access charges applicable in the state. On the other hand, in the captive/group captive route, C&I consumer owns at least 26% stake in the plant, while exempt from paying two major types of open access charges i.e. cross subsidy surcharge (CSS) and additional surcharge (AS) which approximately account to Rs. 2.5-3.0 per unit in the key RE states.

From FY17, when the open access RE market was a fledgling market most capacity installations happened in Karnataka, thanks to a favourable state policy. As per this policy, solar plants commissioned prior to 31st March 2018, would be exempt from paying open access charges for a period of 10 years. Resultantly, Karnataka witnessed open access RE installations of over 2 GW in FY18, kickstarting the growth of this segment. However, discoms withdrew open access benefits during FY18 to FY21, fearing a large scale migration of large customers to open access, even as discoms were locked into long term procurement contracts for thermal power in many cases.

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That followed by the lull during Covid meant the open access market slumped. However, now the open access market has grown overthe last two years with installations of 2.6 GW and 3.2 GW in FY22 and FY23, respectively. Gujarat has done the heavy lifting this time, playing catch up with a conducive wind-solar policy, even as other states also joined in.

Now, According to CareEdge Ratings, even as annual open access installations in India have remained below 3.5 GW thus far, with cumulative installations at approximately 13.6 GWp, the market is set to grow consistently over 4 GW each year. Installations are projected to remain within the range of 4 to 5 GW for the next two years i.e. till FY25 thereby necessitating debt financing of at least Rs.30,000 crore. Growth today is driven by lower costs, better policies, corporate push driven by ESG ratings, and of course large developers looking to move into the corporate PPA market for better margins as well.

Green Energy Open Access Rules to be a Key Enabler for C&I Sector

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Perhaps the biggest driver now is the Green Energy Open Access rules. Initiatives under these rules include

(i) reducing the eligible load to 100 kW from 1 MW for consumers to procure power through the open access route,

(ii) defining the modalities of open access charges that can be applied by state distribution companies (discoms), and

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(iii) stipulating a minimum banking period of 30 days for consumers among others.

Discoms are also obligated to supply green energy at an additional cost upon consumer request. Individual states have the jurisdictional powers to determine open access charges for their customers through their electricity commissions. So far, a few states such as Karnataka, Madhya Pradesh and Haryana have come up with a final order for the adoption of green energy open access rules and CareEdge Ratings has analysed the same. While few suggestions primarily pertain to reducing the minimum load requirement, the applicability of a minimum banking period of 30 days has also been accommodated. On the other hand, suggestion related to the adjustment of energy banked in the off-peak period against drawl in the peak period has been disallowed in the states of Madhya Pradesh and Haryana. In the other key states, which are yet to adopt the green energy open access rules, Tamil Nadu and Andhra Pradesh continue to refrain from offering banking to the C&I customers which poses a hurdle for the segment’s
development. While Gujarat has a conducive banking policy for wind and hybrid plants with nil banking charges, it has very high banking charges for the solar units @ Rs. 1.15 per unit which discourages the installation of solar plants through open access routes.

Trends in Open Access In India

In its analysis that assumed the cost of solar-wind hybrid power at Rs 4 /unit, CareEdge ratings found that captive Open Access (OA) has emerged as the most attractive option. Owing to the exemption of CSS and AS, the group-captive model offers the highest margin of safety i.e., the discount a RE C&I project offers on the grid tariff ranges between 20-40% under the group captive mode with the viability being the best in Gujarat, Karnataka and Uttar Pradesh.