Flexing India’s Energy System Through Market...

Tim Buckley, Director of Energy Finance Studies Vibhuti Garg, Energy Analyst September 2019

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Flexing India’s Energy System Through Market Mechanisms A Recipe for India to Achieve a Least Cost, Low Carbon Electricity Market Twice Today’s Size

Executive Summary Indiahassetexceptionallyambitiousrenewableenergytargetsincluding175gigawatts(GW)by2022andrisingto523GWby2030,whichincludes73GWoflargehydrocapacity.Suchtargetsinvariablyencountervariousnewheadwinds.

Thislastyearhasbroughtsomeenergychallengestothefore,includingcentre-statepolicyinconsistencies,makeinIndiavsleastcostmoduleprocurement,andquestionsoverthegrid’scapacitytoincorporatearapidlyrisingvariablerenewableenergy(VRE)penetrationsoquickly.

India’selectricitysupplyhashistoricallybeenlargelycoaldominated,with201GWcurrentlyoperational,representing56%ofcapacityand74%oftotalgenerationin2018/19(Figure1).

Inthelast2-3years,theshareofsolarandwindgeneration,althoughlow,hasincreasedrapidlyto22%ofcapacityand9%ofgeneration(19%includinghydro).

Inthisnote,IEEFAreferencestheproposedtransformationpathwaysofthreeotherleadingrenewableenergyintegrationmarkets;California,GermanyandAustralia,toconcludethatacombinationoftechnologieswillbeneededtomanagepeakdemandrequirementswhilstmaintaininggridstabilityatleastoverallcost.AsperFigure2,thereareagrowingnumberofcountrieswithover20%VREpenetration,withDenmark,whichisstronglygrid-interconnected,leadingtheworldin2018atover50%.

India’sCentralElectricityAuthority(CEA)hasputaheavyemphasisonbatteryenergystoragesystems(BESS),modellingasmuchas34GW/136GWhby2030.WhileBESSisincreasinglycommerciallyviable,deploymentatthisspeedandscaleisunprecedented,bringingassociatedlearning-by-doingcostsandintegrationrisks.

IEEFAWOULDRECOMMENDALOWERRISK,MULTI-TECHNOLOGYFIRMINGSOLUTION,includinginterstateandinternationalgridconnectivityenhancements,pumpedhydrostorage,gaspeakingplants,fasterrampingcoal-firedpower,utility

Significant renewable energy installs require a

combination of technologies will be needed to manage

peak demand requirements whilst maintaining grid

stability.

Flexing India’s Energy System Through Market Mechanisms

scaleanddistributedbatteries,hybridprojects,demandresponsemanagement(DRM),greaterdiversityofgenerationsources,andevensolarthermalwithstorage.

Atime-of-daypricing(TOD)signal,on-demandpeakingsupplycontracts-for-differentwithcontractuallongevity,orsimilarmechanismsarealsoneededtoincentivisecapitalmarketstoopenupinvestmentsinon-demandpeakingcapacity.

Figure 1: India's Electricity Capacity and Generation (2018/19)

Source: CEA, IEEFA Estimates

Figure 2: Share of Electricity from VRE, Top 10 Countries 2018

Source: REN21 Global Status Report 2019

Capacity IncreaseGW % TWh % Utilisation GW vs FY19

Coal-fired 239.8 32.2% 1211.5 51.7% 57.7% 39.1Gas-fired 24.4 3.3% 53.3 2.3% 25.0% -0.6Diesel-fired 0.0 0.0% 0.0 0.0% 0.0% -0.6Hydro 63.4 8.5% 183.4 7.8% 33.0% 18.0Nuclear 11.9 1.6% 74.1 3.2% 71.2% 5.1Renewables 405.0 54.4% 789.6 33.7% 22.3% 327.2Bhutan/Nepal n.a. n.a. 31.2 n.aTotal 744.5 100.0% 2,343 98.7% 388.2Battery Storage 34.0Captive power 51.4Total 795.9

---- Capacity ---- -- Generation --

Flexing India’s Energy System Through Market Mechanisms

Table of Contents

ExecutiveSummary.................................................................................................................1

India’sPeakingSupply:TechnologyAlternatives.......................................................4

InternationalElectricitySectorCaseStudies................................................................7

APriceSignaltoIncentivisePeakingSupply.............................................................12CapitalRequirements...........................................................................................................13

Conclusion.................................................................................................................................14AboutIEEFA.............................................................................................................................15

AbouttheAuthors.................................................................................................................15

Table of Figures

Figure1:India'sElectricityCapacityandGeneration(2018/19).......................2

Figure2:ShareofElectricityfromVRE,Top10Countries2018.........................2Figure3:India'sElectricityCapacityandGeneration(June2019)..................14

Flexing India’s Energy System Through Market Mechanisms

India’s Peaking Supply: Technology Alternatives Indiahassetambitiousrenewableenergytargetsincluding175gigawatts(GW)by2022risingto523GWby2030,whichincludes73GWoflargehydrocapacity.

India’s2019CentralElectricityAuthority(CEA)paper1assumes34GW/136GWhofbatteryenergystoragesystems(BESS)willbeneededtobalanceandfirmtheever-increasinggridsupplyofVREthatresultsfrommeetingtheambitioustargetof523GWofrenewableenergyby2030.

Thereisahugegapbetweenwhatislikelytobecommerciallyfeasibleoverthecomingdecadeandthesmallscaleoffacilitiesinoperationsofar.Forinstance,India’slargestoperationalBESSistheTataPowerDelhiDistributionLimited(TataPower-DDL)10MWhfacilitycommissionedinFebruary2019.

WhilethepaceofchangeinBESSisstaggering,thelearningbydoing,thesupportivescaleofmanufacturingrequired,andthetechnicalsupportinfrastructureneededissimplynotyetinplacetofacilitate34GWbythe2030target.

BloombergNewEnergyFinance(BNEF)highlightsglobalbatterypriceshavefallen85%since2010.2IEEFAexpectsafurtherhalvingoverthecomingdecade.Theconvergenceofelectrificationtechnologiesinthepower,transportand(potentially)industrialsectorsarecombiningtodriveinnovationandscaleaheadofmostexpectationsglobally.

Batteries,bothdistributedutility-scaleon-gridandsmallscalebehind-the-meter,areexpectedtoproliferateandprogressivelyreplaceexpensive,polluting,noisy,importdieselgenerators.

Whilebatteriesareanewtechnologyintermsofstationarypowerandgridapplications,theevidenceto-dateisoverwhelminglypositive.Thepaceoftechnologicaldevelopmentmeansbatteriesarehighlylikelytoplayakeybalancingroleasvariablerenewableenergy(VRE)penetrationincreases.

Theinternationalexperienceoverthelast2-3yearssuggestsexponentialbatteryuptakeforsometimeyet(referbelow),butnotsufficienttogivehighconfidencethattheCEA’sambitiousnew34GWby2030targetcanbeachievedatsuchspeed.

1India’sCentralElectricityAuthority(CEA),Draftreportonoptimalgenerationcapacitymixfor2029-30.2BloombergNewEnergyFinance,EnergyStorageInvestmentsBoomAsBatteryCostsHalveintheNextDecade,31July2019.

Global battery prices have fallen 85% since 2010. IEEFA

expects a further halving over the coming decade.

Flexing India’s Energy System Through Market Mechanisms

TataPower’sJuly2019announcementforaUS$600mlithium-ionbatterymanufacturingplantintheDholeraSpecialInvestmentRegion(DSIR),Gujarat,isanimpressivecommitment.3

ItislikelyjustthefirstofseveralinitiativestosupporttheGovernmentofIndia’s(GoI)2014“MakeinIndia”strategyintheenergysector,locallyinvestinginkeygrowthindustriesofthefuturetomaximiseverticalintegrationbenefits.

GIVENINDIA’SAMBITIOUSVRETARGETS,IEEFAWOULDRECOMMEND:

• Implementationoftime-of-dayorcontracts-for-differencepricingtoincentivisefirmingpowersupplyonamulti-technologyapproachtofuturegridstability;

• Interstateandinternationalgridconnectivityenhancements,notingabroadercoveragebothsomewhatsmoothsVREsupply,assistsingridintegrationandbalancing,andopensupinternationalBIMSTEC4gridconnectivityoptionsaswell;5

• Acceleratingdeploymentandretrofitsofpumpedhydrostorage(PHS)capacity,bothonexistinghydroelectricitydamsandclosedloop“off-river”systems;6

• Fasterrampingcoal-firedpowerplants;

• Co-locatedwind-solar-batteryhybridprojects;7

• Gaspeakingplants,givenIndiahas25GWofstranded‘baseload’gasplantsalreadybuilt,withinsufficientfuelaccessandaninabilitytosecureasufficienttariffwhencompetingwithleastcostrenewableenergy;

• Utility-scaleanddistributedbatteries;

• Demandresponsemanagement(DRM)toshiftenergyconsumptionfromthepeakhoursinthe24hourday;and

• Solarthermalwithstorageinthelongertermasthistechnologycostdeclines.

GivenIndiahasalreadyinvestedin201GWofcoal-firedpowerplantsnowoperatingwithsub-optimalplantloadfactors(PLFs)of~60%,andwithafurther85GWofnewcoalplantproposalsinthepipeline,IEEFAalsoseesmeritinexpeditingtheintroductionoffasterrampingcoal-firedpowertechnologiesasabalancetoleastcostbutvariablerenewableenergy.

3EconomicTimes,TataGrouptosetupRs4,000crlithium-ionbatteryplant,12July2019.4BIMSTEC:TheBayofBengalInitiativeforMulti-SectoralTechnicalandEconomicCooperation5IEEFAIndia:Gridinvestmentneedstomatchenormousgrowthinrenewableenergyinvestment,21January2019.6IEEFA,PumpedHydroStorageinIndia,March2019.7UtilityDrive,Solar+wind+storagedevelopers'gearingup'ashybridprojectsedgetomarket,9July2019.

Flexing India’s Energy System Through Market Mechanisms

InAustralia,AGLEnergyhaspioneeredfacilitatingfasterrampingcoal-firedpoweratlimitedcapitalcostinanapproachingend-of-lifeplant-its2.0GWcoalplantatLiddell,NewSouthWales-bydiallingdownexpectedaverageutilisationratesandintroducingnewoperationalprocedures(includingbettercommunicationwiththegridoperator).8

DRMislikelytoproveacost-effectiveandcriticallyimportantsolutionwithamultitudeofapplications.AsdiscussedintheGermanysectionbelow,aluminiumsmeltersareextremelylargeusersofelectricity,withtheeightaluminiumsmeltersinIndiaaccountingforalmost60terawatthoursannually.Withnewcost-effectiveretrofittingtechnology,energymodulationofthemagnitudeof+/-30%allowssmelterstobeusedasavirtualpowerplant(VPP)orvirtualbattery,modulatingdownenergyusewhenthereisexcessivedemandonthegrid,andmodulatingupenergyusewhenthereisexcessivesupply.Theproponentsofthistechnologyestimateatotalretrofitcostfor8smeltersofUS$400m,afractionoftheUS$2bncostofanequivalentbatterysystem,withtheaddedbenefitofnotimelimitation.

AgreaterdiversityofgenerationsourceswillalsohelpmanageVRE.

TheGoIislookingtoaccelerate10GWoflong-stalledhydroelectricityinitsmediumtermplans,9withnearly100GWofuntappedelectricitypotential,admittedlyrequiringalonglead-timeduetotheexpensive-to-accessremoteHimalayanlocations.GivenNationalHydroPowerCorporation’saveragetariffsareRs3.34/kWh,thisisentirelycost-competitivewhendiversificationandtime-of-dayflexibilitybenefitsarecostedin.10

Theproposedgap-fundingofUS$900mforthefirst1GWofoffshorewindproposedforGujarat11islikewiseaboldmovetoprogressivelyopenupthispotentiallyhuge,new,sustainable,zeroemissions,zeropollution,domesticenergyresourceforIndiaoverthecomingdecade.12ThiswillprovideadditionalgenerationsupplydiversitytohelpmanageVREgridintegration.IEEFAcommendstheGoIforcarefullyproceeding.Thistechnologywilllikelyseecostshalveby2025.

Internationalexperienceshowsamorediverse,predominantlydomestic-sourcedgenerationfleetwillprovidegetterenergysecurityandimproveflexibilitytomanagetime-of-dayandseasonalsupplyanddemandvariabilitybetter.

8AGLEnergy,NSWGenerationPlan,18July2018.9BusinessStandard,Centretomovepolicytopromotehydropowerwithunitsof10GWcapacity,5December2018.10Livemint,IshydropowerbackinplayinIndia'senergymix?10August2019.11RechargeNews,Indialinesup$900m'gapfunding'forfirstoffshorewindfarm,28June2019.12Platts,Europe'soffshorewindindustryexpandingintoAsia:event,25June2019.

Flexing India’s Energy System Through Market Mechanisms

International Electricity Sector Case Studies IEEFAdrawsuponthreeinternationalcasestudiesincludingCalifornia,13GermanyandAustraliatohighlightvariousleadingtechnologiesandadaptivemarketstructuresdesignedtomanagetheincreasingshareofVREintheelectricitymix.Foramorecomprehensivereview,pleaserefertoIEEFA’s2018study:‘HereandNow’—NineElectricityMarketsLeadingtheTransitiontoWindandSolar.

California is Targeting 60% Renewables by 2030 and 100% Carbon-free Electricity by 2045 California,thefifth-largesteconomyintheworld,hasbecomeagloballeaderinrenewableenergy.Withrenewablessupporting34%ofthestate’stotalenergyneedsin2018(twoyearsaheadofthe33%by2020mandate14),thecommunityhascalledforanevengreatercommitmenttocleanenergyasanessentialbenchmarkfortheeconomicsuccessofthestate.

InAugust2018,CaliforniaenactedSenateBill100,settingatargetof100%carbon-freeelectricityby2045.AngelinaGaliteva,vicechairoftheCaliforniaIndependentSystemOperator(ISO)whichoverlookstheenergymarket,seesthetaskofreachingthe100%renewableenergytargetasentirelyachievable.15

TheSenateBillmandatedamoveto60%renewablesby2030,withallnewhousestohavesolarby2020andcommercialbuildingsby2025.WenotedistributedrooftopsolarinCaliforniaisalsoplayinganincreasinglyimportantroleinmitigatingmiddaydemandpeaks.

In2018,California’sPacificGasandElectricCompany(PG&E)launchedconstructionoftheworld’stwolargestutility-scalebatteryprojectsto-date.Theyincludea300MW/1,200MWhprojectbyVistraEnergyanda182.5MW/730MWhproject(bothtobesuppliedbyTesla),16nearlythreetimesthesizeofthelargestlithiumbattery-storagefacilitycurrentlyinoperationinSouthAustralia(Tesla’sHornsdalePowerReserveat100MW/129MWh).

InJune2019,theLosAngelesDepartmentofWaterandPower(LADWP)signedapowerpurchaseagreement(PPA)with8minuteEnergyfortheproposed400MWElandsolarprojectatUS1.997c/kWh(zeroescalatorfor25years),including200MW/800MWhofenergystorageatanadditionalUS1.3¢/kWh.17Thislandmark

13IEEFAupdate:HowCaliforniabecameagloballeaderinrenewableenergy,11April2019.14CaliforniaEnergyCommission,CaliforniaOnTrackWith2020RenewableEnergyGoal,22February2019.15RenewEconomy,EnergyInsidersPodcast:100percentrenewables–IsCaliforniadreaming?20February2019.16GTM,PG&EProposesWorld’sBiggestBatteriestoReplaceSouthBayGasPlants,2July2018.17PVMagazine,LosAngelesseeksrecordsettingsolarpowerpriceunder2¢/kWh,28June2019.

California is right on track to reach its 100% renewable

energy target.

Flexing India’s Energy System Through Market Mechanisms

transactionsawa15%reductiononthepreviousrecordlowsetinJune2018atUS2.3c/kWh(again,withazeroescalator).

InJune2019,GeneralElectriccloseditsCaliforniangas-firedpowerplantcommissionedonlyadecadeearlier,one-thirdofthewaythroughitsengineeringlife18andtakinganestimatedUS$700mwritedownintheprocess.

IEEFAnotestheinevitablestrandedassetnatureofIndia’s25GWofbaseloadgas-firedpowerplants.Alreadyintheworld’slowestpricegasmarket,VREiscombiningwithbatteriestochallengebaseloadgasplantviability.

Theabilityofexpensiveimportedliquifiednaturalgas(LNG)toplayanythingotherthanaback-uppeakingpowerroleinIndiaisrapidlydiminishingintothenon-economicrealmsofnowobsoletetechnologyideasthatsoundedlogicalatthestartofthedecade.

In Germany, Renewables Reached a Record 77% Penetration in May 2019 Renewableenergyhascontributedarecord47.2%ofnetelectricitygenerationacrossGermanyyear-to-datetoJuly2019(withVREat34.6%plushydroat4.1%andbiomassat8.6%).

Anewmonthlyrecordhighof54.6%oftotalgenerationwassetinMarch201919whilerenewableenergycontributedarecord77%ofelectricitydemandinGermanyforonedayinMay2019(andover100%forthefivehoursbetween11amto4pm).

Germanyisconsistentlysettingnewrecords.The47.2%achievedto-datein2019representsasignificantincreasevsthepreviousannualrecordsetin2018at40.6%.Germanyiswellontracktoachieveitstargetofgenerating65%ofitselectricityfromrenewablesourcesby2030,20andontherighttrajectorytoreach100%by2050(thattargetwassetbackin2010).21

InternationalgridconnectivityisakeybalancingfacilitatorofGermany’srapidlyrisingVREshare.In2018,Germanyhadanetexportsurplusof49TWh(80TWhofexportsless31TWhofimports)ofelectricitybringingin€1.8bn.France,theNetherlands,SwedenandtheCzechRepublicarethefourprimarymarkets.

Germanyisalsooneoftheleadingbatterystoragemarketsglobally.Bytheendof2018,

18Reuters,GeneralElectrictoscrapCaliforniapowerplant20yearsearly,22June2019.19FraunhoferISE,NetpublicelectricitygenerationinGermanyin2019,2019.20Reuters,Germanyneedstoeaserulestohit2030renewablestarget,19June2019.21TheGuardian,Germanytargetsswitchto100%renewablesforitselectricityby2050,8July2010.

Germany is on track to achieve its target of

generating 65% of its electricity from renewable

sources by 2030.

Flexing India’s Energy System Through Market Mechanisms

some120,000householdsandcommercialoperationshadalreadyinvestedinsolarintegratedbatterysystems.Thisisexpectedtoaccelerate,asretailgridparityofsolarplusstoragewasachievedbytheendof2018.22Cumulativeinstallsoflarge-scalebatteriesacrossGermanymorethandoubledin2019toreach371MW(adding199MWin2018).Beyondcost-reductions,technologicalbreakthroughscontinue,withtheexpectationthattheenergydensityofbatterypacksshouldincrease50%between2016-2025.

Additionally,Germanyisexploringhydrogenandrenewableenergy-to-gastechnologydevelopmentsforlongertermstorageanddemand-supplymanagement.TheGermangovernmentistrackingcorporateplansforover€2bnofhydrogenmobilityinvestmentby2024.

Germanyisalsoundertakingtheworld’sfirstcommercialscaledeploymentofDRMtechnologiesinthealuminiumsmeltingindustry(whichaccountsfor5%ofworldelectricitydemand).TheTRIMETsmelterinEssenhasbeenretrofittedtoallowenergydemandtobeincreasedordecreasedbyupto30%fromnormaloperatingamperage,theequivalentofavirtualbatteryof2,000MWh.23

Itisearlydays,butwithincreasedVREpenetrationtoover65%by2030,DRMisgoingtoneedtoplayacriticaldemandsiderole.

Australian Renewable Energy Contributed 23% of Generation Renewableenergycontributed23.1%oftotalgeneration(includingrooftopsolarat4.5%andhydroelectricityat7.3%)acrosstheAustraliannationalelectricitymarket(NEM)inthetwelvemonthstoJuly2019.

SouthAustraliaistheleadingrenewableenergystateinAustralia,withVREgenerating48.9%oftotalgenerationinthesame12-monthperiod.24SouthAustraliahasa10GWpipelineofnewrenewableenergyprojectsunderwayplusalmost4GWassociatedstorageprojects,puttingitwellontrackforanet100%renewablesby2030target.25

TheAustralianEnergyMarketOperator(AEMO)isproactivelymanagingthedevelopmentoflongtermthinkingwithitselectricityIntegratedSystemPlan(ISP),26notingend-of-lifeclosuresofmostAustraliancoal-firedpowerplantsoverthecomingtwodecades,andhencetheinevitableincreaseinleast-costVRE.

DespitethelowpopulationdensityofAustralia,inter-stategridconnectivityplaysanimportantroleinbalancingthegrid.TheISPincludesamorethandoublingofgridcapacityoverthecomingdecade,tofacilitateatreblingofVREandtoaccesssignificantnewPHScapacityforbalancing,particularlyformedium-andlong-termseasonalrequirements.NewlinksbetweenSouthAustralia-NewSouthWales

22GermanyTrade&Investment,TheEnergyStorageMarketinGermany,2019.23LightMetalAge,TrimetStartsTrialOperationofits“VirtualBattery”,10June2019.24OpenNEM,EnergySouthAustralia,webpageaccessed19August2019.25RenewEconomy,SouthAustraliahas10GWwindandsolarinpipelineasitheadsto100%renewables,23July2019.26AustralianEnergyMarketOperator,IntegratedSystemPlan,2018.

Flexing India’s Energy System Through Market Mechanisms

(NSW),Victoria-NSW,Queensland-NSW,andasecondsubsealinkforTasmania-Victoria,havebeenputforwardforacceleratedevaluation.

AustraliaisevaluatingamassiveexpansioninPHS.ThelargestprojectsaretheUS$4bnSnowy2.0proposalof2,000MW/350GWh27andtheHydroTasmaniaBatteryoftheNationproposalofupto2,500MW/30GWh.28Inaddition,therearenumerousdistributedPHSprojectsbeingdevelopedbyprivateindustry.MostadvancedoftheseistheGenexPower250MWoff-riverPHS,supportedby250MWofsolaratthenowclosedKidstongoldmineinfarnorthQueensland.FundingisnowinplacefollowingcompletionofaA$610m(US$425m)debtfacilityinJuly2019.29AEMOmodels4.1GWofadditionalPHStobeoperationalacrossAustraliaby2030,and14GWoftotalstoragerequiredby2040.30

Australialeadstheworldindistributedresidentialrooftopsolarsystemsandisontrackforarecord2GWofrooftopsystemstobeinstalledin2019alone,takingthecumulativetotalto10GW.

Incontrasttotheheavycommercialandindustrial(C&I)emphasisinIndia,Australiaisstilloverwhelminglyfocussedonresidentialrooftopsolarsystems(at10GW),reflectingamirrorreversalofthetariffpricingstructureinIndia(Australianresidentialtariffs(atUS$200/MWh)aredoublethatpaidbyindustry).Fromasmallbase,AustralianC&Iinstallsalmostdoubledin2018toreachacumulative270MW.31

LikeGermany,AustraliaisrapidlyenhancingtheUS$10bninvestmentto-dateinrooftopsolarwithtime-of-usepricingsupportedbysmartmetersandbehind-the-meterbatterystorage.InSeptember2018,Victorialaunchedaprogramtoincentivise10,000residentialstoragesystems,32buildingona50,000solarandstoragesystemsprograminSouthAustralia.33

InDecember2017,SouthAustraliacommissionedNeoen/Tesla’sHornsdalePowerReserveat100MW/129MWh,thelargestBESSgloballyatthetime.Aninitialsystemevaluationstudyconcludedtheprojectwasverysuccessfulindeliveringonthe

27SnowyHydro,AboutSnowy2.0,webpageaccessed19August2019.28ARENA,BatteryoftheNation–TasmanianpumpedhydroinAustralia’sfutureelectricitymarket,June2018.29NorthAustraliaInfrastructureFacility(NAIF),NAIFFACILITYBOARDAPPROVESINVESTMENTDECISIONFORUPTO$610MOFCONCESSIONALDEBTFUNDINGFORTHEKIDSTONPHSPROJECT,11July2019.30AEMO,Buildingpowersystemresiliencewithpumpedhydroenergystorage,July2019.31TheAustraliaInstitute,NationalEnergyEmissionsAudit,May2019.32VictorianGovernment,CheaperElectricityWithSolarBatteriesFor10,000Homes,11September2018.33SouthAustralianGovernment,Solarphotovoltaicsystemsandbatterystorage,2018.

Australia is rapidly enhancing the US$10bn investment to-

date in rooftop solar with time-of-use pricing, supported by smart meters and behind-

the-meter battery storage.

Flexing India’s Energy System Through Market Mechanisms

SystemIntegrityProtectionSchemeandincontributingtotheFrequencyControlAncillaryServices(FCAS).34TheresultsfromthefirstyearhighlightedtheexcellentsavingsintermsofgridservicescostspaidbytheSouthAustralianconsumer,andalsothe‘aboveexpectations’financialresultsfortheBESSowner,Neoen(generatingagrossreturnoninvestmentof20-30%).35

Australiahassubsequentlycommissionedgrid-scaleBESSinVictoriaatBallarat(30MW/30MWhbyFluence)andatGanawarra(25MW/50MWh).36IndustryisnowintegratingBESSintoanumberofnewVREdevelopments.InJuly2019thelatestproposalwasannounced,a200MWsolarprojectsupportedbya100MW/300MWhbatteryinSouthAustralia.37

BuildingupontheproposedNEMsettlementperiodshorteningfrom30to5minuteintervalsfrom2022,38inJuly2019theAustralianEnergyMarketCommissionreleasedadraftproposaltoallowforamuchwiderparticipationofDRMinthewholesaleelectricitymarket,againfrom2022.39ThenewsystemallowsC&Ielectricitycustomerswillingtoreducetheirpoweruse,toselltheirdemandreductionintothegridthroughanewthird-partybody.Thatbodywillbidtheirelectricityintothemarketaswholesalepricespeak,andwithgridpriorityoverexistinggenerators.Ineffect,the"negawatts"availablefromenergyusers–whoaresavingenergy–wouldbecompetingagainstthemegawattsabletobesuppliedbygenerators.40

GivenAustraliaoperatesawholesalepricingmarketthatcanrangefromanegativeA$1000/MWhfloortoapeakofA$14,000/MWh,theintroductionofDRMtechnologiesislikelytoplayakeyroleincriticalpeakpowermanagement(especiallyforthemostdifficult10-20hoursannually).41

34AEMO,InitialOperationoftheHornsdalePowerReserveBESS,April2018.35RenewEconomy,DeepdiveintofirstyearofTeslabigbatteryatHornsdale,7December2018.36VictorianGovernment,BatteriesandEnergyStorage,2018.37RenewEconomy,AlintasignsupforhugesolarandbatteryprojectinSouthAustralia,18July2019.38RenewEconomy,GarnautslamsAEMCmovetodelay5-minutesettlementswitch,5September2017.39RenewEconomy,Newdemandresponseruletoerodemarketpowerofgeneratorcartel,18July2019.40AustralianFinancialReview,How'negawatts'couldhelpbusinessescuttheirpowerbills,18July2019.41AEMO&EnergyNetworksAustralia,OpenEnergyNetworks,RequiredCapabilities,July2019.

Flexing India’s Energy System Through Market Mechanisms

A Price Signal to Incentivise Peaking Supply in India IEEFAnotestheneedforcreatinganeffectivemarketsignalviaatime-of-day(TOD)pricingstructure.Thiswouldincentivisefirmingofflexiblesourcesofgeneration,42andprovidebankablepricesignalsforon-demand,flexible,peakingpowersupply,therebybalancingpeakpowersupplyandpeakdemand.SuchamovewouldbuildonthereverseauctionsuccessinVRE.

WithIndiaprocuringever-moreverylowcostbutvariablerenewableenergy,electricityproductiontariff(pricing)structuresneedtobebetteralignedtoincentivisefasterrampingandflexiblepowergeneration.Thisisimportantindeliveringatleastcostonintermediateandpeakingpowerneeds,whilealsoprovidinggridstabilitywiththeincreasingshareofVRE.Suitablesupplysidepricingstructuresneedtobeevolvedtobetterincentiviseflexiblegenerationsolutions.Further,asademandsideresponse,time-of-daysmartmeteringandpricingstructuresforconsumersalsoneedtobeevolvedforpeakloadmanagement.

Additionalvariables,suchasenergyefficiencytechnologies,seasonalchangesintemperature,andthegrowinguseofairconditioners,suggesttheshape/width/magnitudeofIndia’sloadcurvewilllikelyundergochangeintothefuture.

Forinstance,aspertheInternationalEnergyAgency’s(IEA)WorldEnergyOutlook2018,thenumberofhouseholdsinIndiaowninganairconditioner(AC)increasedby50%inthelastfiveyears.By2040,two-thirdsofhouseholdsareprojectedtoownanACunit,astaggering15-foldincreasefromtoday.Whiletheshareofcoolinginelectricitysystempeakloadsis~10%in2016,thissharewilllikelyincreasetoover40%by2040undertheIEA’sNewPolicyScenario,alteringtheshape/width/magnitudeofloadcurvesubstantially.

ThecurrentpricingsysteminIndiaisalargelyflattariffprovidinglittleincentivefornetworkorconsumerefficiencythroughloadsmoothing.IfIndiatookintoaccountthedifferentcategoriesandtypesofenergydemand,andthevariationsinsupplyandcostsofservice,itwouldlikelybringefficiencygainsfromdifferentialpricingatpeakperiods.

Betterconsumerpricesignalsduringpeakperiodswillincentivisetheuseofenergyduringperiodsoflowdemandandreducetheburdenonthegrid,whileaToD

42IEEFAIndia,FlexingIndia’sEnergySystem:MakingtheCasefortheRightPriceSignalsThroughTime-Of-DayPricing,8January2019.

Better consumer price signals during peak periods will incentivise the use of

energy during periods of low demand and reduce the

burden on the grid.

Flexing India’s Energy System Through Market Mechanisms

pricingsignalwouldbetterincentivisevariablegeneration‘kickingin’attimesofpeakdemand.

WenotethepositiveprogressatIndia’sCentralElectricityRegulatoryCommissioninworkingtowardsreformingtheenergymarkets,includingtheproposaltochangethemarketdesigntoshifttowards:morecentralisednationalproductionandeconomicdispatchofelectricityinaday-aheadmarket;43areal-timeenergymarketwithgateclosure(onehourbeforethetimeofoperation);andafurtherstrengtheningoftheexistingancillaryservicesframeworkandgraduationtoamarket-basedmechanism.44Furthermore,oncethehourlymarketmatures,Indiacouldthinkofreducingthegateclosuretimeto15minutes.Thiscouldgeneratesignificantcostsavingsforthenationalsystemasawhole.Further,TODpricingwillprovidetherightpricesignalsforthecreationofbalancingcapacity,whileprovidinggridstability,subjecttosufficientinterstategridtransmissioncapacitybeingestablished.

Capital Requirements IEEFAhasanalysedthelikelyrequirementsforsourcesofcapitaltofundtheambitious2030visionforIndia.Theexpansionto523GWofrenewableenergyincludinghydroelectricitymeanstheinstallationof400GWofnewzero-emissionscapacity.

OverUS$700billionofnewinvestmentwillbeneededtodeliverIndia’stotalnewgeneratingcapacity,aswellasgridtransmissionanddistributioncapacityacrossIndiaby2030.Thiswillrequireadramaticupscalingofdomesticandinternationaldebtandequitycapacity.

WhileIndiacurrentlyhasanother85GWofcoal-firedpowerplantsunderconstructionoratvariousstagesofplanning,45currentcommissioningratesofcoalhavedroppedby80%fromthe20GWnetannualadditionsevidentinthefouryearsto2015/16,tojust3GWin2018/19.

IEEFAemphasisescapacitystudiesneedtolookatbothnewcommissionsandend-of-lifeplantclosures,giventheCEAestimates46GWofcoalplantclosuresby2026/27(4-5GWpa).

TheJune2019quartersawjust45MWofnewthermalpowerplantadditions(wellbelowtheCEAexpectationsof1.2GW)(SeeFigure2),whileVREinstallsof2.82GW

43CERC,DiscussionPaperonMarketBasedEconomicDispatchofElectricity:Re-designingofDay-aheadMarket(DAM)inIndia,December2018.44CERC,DiscussionPaperOnRe-designingAncillaryServicesMechanisminIndia,September2018.45GlobalEnergyMonitor,July2019.

Over US$700 billion of new investment will be needed to deliver India’s total new generating capacity as well

as grid transmission and distribution capacity.

Flexing India’s Energy System Through Market Mechanisms

arerunningatfortytimesthisrate.IEEFAnotesthisinstallrateneedstotrebletoputIndiaontrackforits523GWby2030target.

Figure 3: India's Electricity Capacity and Generation (June 2019)

Source: CEA, MNRE, IEEFA Estimates

Conclusion India’selectricitysystemtransformationandconcurrentmovetoaccelerateanddeepentheambitious100%electrificationtargetisexceptionallyambitious.

Plansfor523GWofrenewableenergyby2030andconcurrenttargetsfor34GWofbatterystorageareimpressiveandworldleading.

Itfulfilstheneedtoenhanceenergysecuritybyreducingover-relianceonexpensiveimportedfossilfuels.

Indiaissettotakeonagloballeadershiproleinbuildingalowemissions,leastcostelectricitysystemofthefuture,leapfroggingnowoutdatedtechnologies.

However,withtransitioncomesinvestmentandimplementationrisks,andtheneedtomoverapidlytoensuremarketandregulatorystructureskeeppacewiththerapidtransformation.

Source Mar 2019 Jun 2019 Change (GW)

Renewables 77.6 80.5 2.82Large Hydro 45.4 45.4 0.00Nuclear 6.8 6.8 0.00Thermal 226.3 226.3 0.05Total Ongrid Capacity 356.1 359.0 2.87

Flexing India’s Energy System Through Market Mechanisms

About IEEFA TheInstituteforEnergyEconomicsandFinancialAnalysisconductsresearchandanalysesonfinancialandeconomicissuesrelatedtoenergyandtheenvironment.TheInstitute’smissionistoacceleratethetransitiontoadiverse,sustainableandprofitableenergyeconomy.www.ieefa.org

About the Authors Tim Buckley TimBuckley,IEEFA’sdirectorofenergyfinanceresearch,Australasia,has25yearsoffinancialmarketexperiencecoveringtheAustralian,Asianandglobalequitymarketsfrombothabuyandsellsideperspective.Timwasatop-ratedequityresearchanalystandhascoveredmostsectorsoftheAustralianeconomy.Formanyyears,Timwasamanagingdirector,headofequityresearchatCitigroup,aswellasco-managingdirectorofArkxInvestmentManagementP/L,agloballistedcleanenergyinvestmentcompanythatwasjointlyownedbymanagementandWestpacBankingGroup.Vibhuti Garg VibhutiGarg,anIEEFAenergyeconomist,hasadvisedprivateandpublicsectorclientsoncommercialandmarketentrystrategies,investmentdiligenceonpowerprojectsandtheimpactofpowersectorperformanceonstatefinances.Shealsoworksoninternationalenergygovernance,energytransition,energyaccess,reallocationoffossilfuelsubsidyexpendituretocleanenergy,energypricingandtariffreforms.InadditiontoIndia,shehasworkedinNepal,Bangladesh,VietnamandintheCaucasus.