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I keep returning to the same paradox: utility-scale renewable power in India is at historically low prices, yet state distribution companies (discoms) are signing new coal contracts at much higher tariffs. I read the recent Mint coverage on this trend with more than a little unease — it captures a structural puzzle that goes well beyond simple price comparisons “Green power is cheaper than ever; so why are discoms chasing coal?” (Mint).
How cheap is "green" today?
- Solar and wind bid tariffs at central and state auctions have, over the past half-decade, averaged in the low- to mid-Rs 2–3/kWh range in many large tenders; hybrid and storage-backed bids are higher but falling fast IEEFA; JMK/renewable auction reviews and Renewable Watch summary.
- Recent solar+storage and BESS auctions imply delivered round‑the‑clock clean power at prices that challenge new coal on a levelised basis: several tenders show solar+storage bids in the ~Rs 3–3.5/kWh band for portions of delivery, and analyses project 24x7 solar+storage below Rs 6/kWh for high‑availability blocks — competitive with or lower than new coal when lifecycle fuel risks are included (Berkeley / IECC analysis) (solar+storage analysis).
So why are discoms still chasing coal? I see several overlapping, real-world reasons — some technical, many financial and regulatory, and a few political.
1) Reliability, contracts and the fear of "no power"
- Discoms have to deliver 24x7 to millions of consumers. Renewables are variable; batteries and hybrid solutions are newer to large-scale Indian procurement and require reliable supply-chains and proven long-term performance. For a risk‑averse procurement head, a coal PPA that promises continuous dispatch is easier to justify on reliability grounds. Mint reporting notes this operational anxiety and the premium buyers are willing to pay for assured availability Mint article.
2) Contract design, payment security and legacy liabilities
- DISCOMs are financially stressed. The sector has accumulated large losses and high borrowing (aggregate liabilities into trillions of rupees). That fragility influences procurement choices: discoms resist merchant or partially‑merchant contracts and prefer long-term, fuel-secured assets that are seen as bankable or supported by state guarantees (see PRAYAS/NIPFP and PFC overviews on DISCOM finances) (Prayas/NIPFP analysis) (PFC/PFC performance coverage).
- Payment security mechanisms, late‑payment rules and LPS implementation helped but have not eliminated trust issues between developers, lenders and discoms. Many renewable bids depend on counter‑party credit; if discoms are perceived as weak, lenders and developers structure higher risk premia or demand guarantees — pushing up prices or scaring off bidders.
3) Market and regulatory frictions
- Policy moves intended to strengthen domestic manufacturing (basic customs duty on modules and ALMM — the Approved List of Models and Manufacturers) have raised costs and introduced procurement uncertainty, which has not always flowed through immediately to lower auction tariffs IEEFA analysis on ALMM/BCD impacts.
- Ancillary services, grid codes and short-term markets are still evolving. Thermal plants historically provided inertia, spinning reserves and ramping; the market mechanisms that remunerate non‑synchronous resources (storage, advanced inverters, demand response) are nascent and fragmented. CERC and system operator reforms are in train — but discoms and system planners operate today, not tomorrow CERC / Grid‑India materials on ancillary services and market evolution.
4) Grid integration and transmission bottlenecks
- Renewables are often concentrated geographically; transmission evacuation, intra‑state congestion and curtailment risks mean that cheap energy may not be deliverable where and when a discom needs it. Building transmission takes time and capital, and in the interim discoms default to fuel‑secure local supply.
5) Political economy and vested interests
- Coal generates local jobs, state revenues, and entrenched procurement chains. Electricity is a political good — tariffs, subsidies and farmer power supply are politically sensitive. Decisions about long-term capacity additions are therefore shaped by state-level political incentives as much as by pure economics.
What needs to change? Practical policy and regulatory fixes I would push for
- Fast‑track an open, co‑optimised market design that co‑clears energy and ancillary services (MBED-like principles) so storage and renewables can monetise full value streams; speed up market reforms for SRAS/TRAS and voltage/black‑start products [CERC/IEEFA proposals].
- Make storage and hybrid projects bankable: clarity on GST/duties, capacity‑payment design for firm dispatchable renewables (FDRE), and standardized, short-notice PSAs that isolate payment risks.
- Strengthen payment security: enforce the LPS rules, keep PRAAPTI transparency, and separate subsidy flows from discom working capital with clear fiscal accounting so suppliers are paid on time.
- Transmission first: accelerate inter‑state evacuation corridors, priority corridors for renewable‑rich zones; pair procurement of RE with committed transmission build-out.
- Reform DISCOMs: smart metering, time‑of‑day tariffs, better targeting of subsidies, and corporatised governance will reduce the financial risk premium that currently supports costly thermal PPAs (see recent RDSS, PFC reporting).
- Procurement tools: encourage reverse auctions for FDRE, capacity‑market features for inertia and ramping, and public procurement windows for grid‑scale storage with clear VGF or revenue models.
Conclusion
Green power is cheaper in many economic metrics — but price alone does not determine procurement choices. Discoms operate at the intersection of reliability obligations, balance‑sheet constraints, political pressures and immature markets for flexibility. The solution is not wholesale condemnation of discoms or an ideological embrace of coal; it is targeted, practical reform: make flexibility and firming services tradable and remunerated; fix DISCOM balance sheets and payment discipline; and build transmission and storage at scale. If policymakers and regulators act on those levers, the economics will follow — and the next generation of PPAs will favour cleaner, cheaper, and reliable power.
I have been writing about the vulnerability of coal and the falling cost curve of solar and storage for years; the current disconnect between spot prices, auction results and procurement choices is the policy challenge we now have to solve in practice (see my earlier commentary on coal and renewables on my blog).
Regards,
Hemen Parekh
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