2016

Information asymmetry in solar power markets

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“The more you know, the more you know you don’t know”-Aristotle

Information asymmetry closely follows the quote albeit in a different way. It reflects upon the unknowns in any market over a transaction. The information asymmetry in electricity market is subtle but is turning to be prominent. The stakeholders in this sector include the electricity market regulators, the utilities, power generating companies, project installers and the end consumer. The information asymmetry at the national level between the government agencies and top power companies is well documented which allows me to look at the domestic scale.

Lets look at the market for residential solar projects in a country like India. A consumer with a requirement of a 1-2kWp rooftop unit for his house approaches a bank for financial assistance. It is unlikely that the consumer gets a loan, let alone walking away with funds straight away. Under current circumstances in a nascent market for solar rooftops in India, the banks are sceptical due to a lack of information.

  • No expertise in evaluating the solar rooftop project proposals
  • No reliable guarantee from the system installer on the project performance
  • Multiple components in the system with individual warranties ranging from 5 years to 25 years
  • If at all a Power Purchase Agreement (PPA) executed with a local utility is presented the chances of securing a loan increases but again depends on the reliability of the utility. Not every utility is reliable for the financial commitment.

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At the consumer’s end the information asymmetry stems from multiple sources.

  • First, there is no guarantee on securing a financial assistance from the bank.
  • Unless technically qualified or inquisitive, there will be lack of knowledge in understanding and comparing various solar solutions.
  • Lack of policy clarity. The issue with policy is not an isolated case in India. Residential rooftop projects across the globe have been subjected to this through Feed in Tariffs (FiT) and metering regulations. Its hard for residential consumers to invest in a technology without being sure of the payback.

Like in all cases of information asymmetry there will be someone who could leverage on the uncertainties and in this case it turns out to be the system installers. The system installers are solution providers who integrate the various components of solar Photo Voltaic (PV) system and offer it as a package to the consumer, like the residential consumer.

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  • They are better off because they know the technical nuances of solar PV.
  • Wouldn’t read good, but they are capable of identifying the gullible consumers under any policy and tariff contexts. Of course it is business.
  • It is good to see the prices of solar modules and other components drop significantly in the last few years but it has also opened up the market to the problem of lemons. In order to offer a net low price for the product, components with below par performance end up on the roofs of consumers inadvertently (or otherwise?).

It doesn’t justify to blame the system installers for leveraging this situation. Its a perfect market and companies like SolarCity have proved that it is possible to build business models under these circumstances. Taking the complete risk of project including capital cost and allowing consumers to benefit from solar power at a discount of retail tariffs is proving to be a success. System installers in India have taken cue and have started offering third party investment-energy sale model for residential scale solar PV rooftop projects. Utilities and regulators who often look up to system installers to evaluate the policy effectiveness have taken note of this initiative from Indian system installers and now offer PPA agreements with third party investors. Overall, information asymmetry is a natural phenomenon in any free market and its only a matter of time before all stakeholders are brought on level terms.

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Where have the industrial buyers gone?

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Continuing my recent trend on emphasising a need to restructure the electricity tariff structures in this post I present the case of missing industrial consumers.

I recently analysed the data of industrial consumers over the past decade for Bangalore Electricity Supply Company (BESCOM). I wasn’t entirely surprised with the decline in energy sales over the past few years considering BESCOM has been highlighting this every year before electricity tariffs are hiked. What is entirely surprising is the link between rise in consumers and drop in energy sale.

Summary

The data from the utility reports indicate that the number of industrial consumers have been rising over the past decade however between the period of 2013 to 2016 the total units sold to industrial consumers have dropped. In a recent filing [ARR, 2016-17], BESCOM attributes a loss of 1148MU energy sale due to consumer opting for power through open access which is an increase from 12% to 20% between 2013 to 2016. The loss is significant considering industrial consumers contribute to nearly 30% of BESCOM’s annual revenue [ARR, 2016-17]. Every retail tariff revision in this period has been attributed to the fall in revenue and widening deficits. Interestingly, tariff revisions by the utility during the same period indicate the annual increase has been consistent across all consumer segments. The negative effect of this is that the vulnerable consumers with low income and consumption are subjected to the same burden as others.

Why are industrial consumers crucial to Indian utilities?

  • The retail electricity tariff is different for industries and domestics users
  • Utility recovers most of the fixed cost incurred in maintaining the power infrastructure from billing the industrial consumers a premium
  • In short they have been cross subsidising power for the rest

“Large industrial electricity buyers who are likely to exit are also those keeping the system afloat by cross-subsidising other users such as farmers and households. If, because of open access they were to shift their power purchases to independent private generators, the finances of the public utility would become untenable, leading to declining quality of supply to poor, but politically important constituencies” Navroz K Dubash Senior Fellow Centre for policy research,Business Standard, 2011

 Industrial consumers have been on a love-hate relationship with the utilities for a long time.

“…distribution companies in Rajasthan told industrial consumers that they ought to fend fr themselves and that there is no more any obligation to serve them. … On the other hand, West Bengal has argued that there is no way that it can let go such consumers who bear the subsidy”- Pramod Deo, Chairperson, CERC, 2012

A classic economic equation of supply and demand is unlikely to be reflected in an electricity market, especially a deregulated market where there is an option for open access electricity.

Open Access

Incidentally BESCOM is not alone. A recent report has indicated that the Tamil Nadu utility has seen over 10% loss in industrial energy sale year on year for the few years. (read more)

You might also like Electricity markets and solar rooftop: a case study.

 

Market for Ancillary Services in India

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As India takes giant strides in the integration of renewable energy in the grid mix, in addition to a big market for renewable energy developers and service providers a new market for ancillary services becomes vibrant. If current projections hold true, from a market of over 250GW of power with nearly 13% of renewable energy, India will achieve a renewable energy target of 40% by 2030. The projected growth will require a whole new level of electricity services moving from just a market for power trading to a market of electricity services, capacity market, and demand management. If the vision statement of the current Indian government ‘One Nation, One Grid, One Price’ is to be realised, the development of ancillary services is as crucial as the development of power infrastructure and projects.

Ancillary Services in India

India dint really miss the lack of structured ancillary services in the electricity grid until the blackout in 2012. The blackout portrayed the network operator in a bad light. The situation which turned out to be demand/supply mismatch is what primarily constitutes the genesis of ancillary services. The situation was just before the time when the southern grid was integrated to the NEW grid.
The Indian ancillary market revolves around the operation of powergrid who in turn control the Regional Load Dispatch Centres (RLDC). The RLDC along with their state counterparts coordinate on a daily basis with all the power generating companies in forecasting and scheduling the demand/supply. The required ancillary services are mostly provided by the vertically integrated utilities. The Automatic Generation Control is still in its nascent stages and hence India traditionally relies on Frequency Controlled Ancillary Services (FCAS) and Voltage Control Ancillary Services (VCAS) for grid operation.
The Central Electricity Regulatory Commission didn’t have a regulatory framework for ancillary services until recently which evolved from what was called a ‘Staff paper on introduction of ancillary services in Indian electricity market. The Ancillary Services Operation Regulations which came into effect in 2015 defines the guidelines for participation in Reserves Regulation Ancillary Services (RRAS). The RRAS is the first of the ancillary services which reigns in the grid frequency within operational limits by calling on participants to increase/decrease generation.

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The future

Although Reserves Regulation Ancillary Services (RRAS) looks to define the scope for solving the key problem in an electricity network, it is just the beginning. The services are typically referred to as balancing services around the world. Balancing frequency alone could be achieved in a multitude of ways, for e.g. UK regulates frequency balancing through five different approaches ranging from mandatory frequency response to enhanced frequency response with each one of them differing in terms of contract regulations and response times. Drawing comparisons between two different economies is not always plausible but policy drivers in the electricity sector have for long been adapted from the developed world. It will only prepare the policy makers, regulators and the industry to anticipate change and deliver on time.

BatteryThe ancillary services have evolved from a market which called for increase/decrease of power by turning off loads or turning on the power plants. Emerging technologies are increasingly becoming indispensable in terms of operation within this market space. Energy storage systems including pumped storage or battery technologies have proven to provide significant benefits to the developers and utilities. Ancillary services in UK is increasingly being provided by the new age entrepreneurial ventures who are trying to integrate big data, smart meters & devices, smart grids and energy storage technologies into the market which is currently valued at over £1Bn a year. Nearly half of the market has been evolved by policy options of the national grid which has brought in new players with interesting solutions into the electricity grid. The requirement sought from players in each sector of frequency response has ensured each service provider has developed a niche technology and service scope to deliver the particular requirement. The market is clearly demarcated in terms of the capacity under offer, response time and asset owners/clients under control. For example, a company like Flexitricity has evolved from being just a frequency service provider to offering unique services like footroom which incentivises participants to consume more when there is excess of wind energy in the grid.
Ancillary services in Indian market will take time to reach the diversification as seen in an UK market but it brings along its own opportunities. India will witness technological adoption in this sector faster in comparison owing to the availability of technology and the declining cost of technologies. The market in UK has been operational for a long time but the smart meter rollout plan has just begun which in contrast to India will witness smart meter rollouts before the ancillary service market reaches a maturity. The proposition could provide a unique opportunity for domestic and small scale industrial consumers who have been adopting rooftop solar in a big way which when coupled with smart meters and devices will be an interesting proposition to offer domestic scale demand reduction services. UK, however offers an example of how policies in this sector have to evolve, it has seamlessly integrated companies who offered services in the traditional large scale route and then sought services that could be possibly offered by small scale providers and start-ups with certain services being sought well in advance thereby allowing companies to plan in advance. Overall, I believe multi nationals and traditional players will fancy a pie in the ancillary markets in the long run and a mix of competitive markets and energy supplier services will be key factors. The market will truly open up when the proposed privatisation of distribution is achieved to an extent and when there are a few pilot projects that are up and running. Technological solutions in terms of hardware devices and software will deliver the requirement but like in any power sector reform unless there are favourable policies and regulations at the right time the true potential will not be realised.

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