International Journal of Power and Energy Systems, Vol. 40, No.

4, 2020

ASSESSING THE IMPACT OF

RENEWABLE PURCHASE OBLIGATION
ON INDIAN POWER SECTOR
Prateek Mundra,∗ Anoop Arya,∗ and Suresh K. Gawre∗

Abstract

In the present scenario, almost all countries are struggling to meet

their power shortage issues. An emerging notion states that there
is a need to shift towards the unconventional sources of energy,
therefore, necessary policy frameworks are needed across nations,
which would progressively phase out the usage of non-renewables
and employ renewable energy (RE) in the power sector. Most of
the countries, including India, have instructed their power sectors
to gradually shift their power generation portion by portion to RE
sources by mandating some obligatory purchase by power sector
entities, which is known as renewable purchase obligation (RPO).
To fulfil the prescribed RPOs by the Government of India (GoI), the
Indian power sector would encounter some economic backlash. This
paper aims to capture quantitatively this impact of the power sector
on economies and then perform efficiency analysis of the same. This
study has considered data of 10 different states of the Indian power
sector to calculate the impact of their respective RPOs on tariff as
well as average power purchase cost (APPC) and then calculate their
relative efficiencies by incorporating the data envelopment analysis
(DEA) technique.
Key Words
Renewable energy (RE), renewable purchase obligation (RPO), re-
newable energy certificate (REC), data envelopment analysis (DEA)
1. Introduction
For any country, the power sector infrastructure is a crit-
ical factor in defining its economic prosperity and overall
welfare. Currently, India is meeting its electricity demands
but, to maintain a reliable power supply, there is a need
for an annual growth of 8% to 9% in power produce [1],
[2]. Growing concerns for local and global environment
add another dimension to energy usage patterns, as con-
ventional energy resources are diminishing at an alarming
rate coupled with severe environmental compromises, and
∗Department of Electrical Engineering, Maulana Azad
National Institute of Technology, Bhopal, Madhya Pradesh,
India; e-mail: {prateekmundra93, anooparya.nitb, sgawre28}@
gmail.com
Corresponding author: Prateek Mundra
Recommended by Dr. Yao Xu
(DOI: 10.2316/J.2020.203-0252)
208
Figure 1. Current scenario of the Indian power sector (till
31/12/2019) [3].
the electricity sector has a big contribution to greenhouse
gas emissions [3]. It was reported in 2012 that the elec-
tricity sector was contributing as much as 45% to the to-
tal greenhouse emissions in India [4]. It should be noted
that the costs of renewable energy technology have shown
to fall with an increase in investment and expansion of
capacity. Evidently, the most suitable measure to make
India a power-secured and self-reliant nation is to switch
to renewable energy (RE) [5]. The current scenario of the
Indian power sector is shown in Fig. 1.
By understanding the present scenario of RE in the In-
dian electricity sector, it is observed that it is transforming
to cleaner ways of electricity production. Owing to their
location of countries like India which lie in global sunbelt
area,1 have immense potential to exploit RE sources espe-
cially solar energy. Poudineh et al. [6] have collectively
addressed the issues that are hurdles in the deployment of
RE in these countries. Despite solar retail prices in India
being declined by nearly 50% over the past five years [7],
the installed capacity of solar energy has grown nearly 11
times during the same period, from 2.6 GW in March 2014
to 28 GW at the end of April 2019 [1], [8].
The Government of India (GoI) has also initiated
its shift towards the renewable energy to make the
environment clean and reduce its carbon footprints. The
1 Sunbelt areas are those which lie within 40 degrees of the
equator their total average annual direct normal radiation is
higher than rest of the world.
GoI has taken this initiative with a target to produce 175 Table 1
GW of electricity from renewable energy resources by 2022, Percentage Target and Capacity Addition for States as
in which 100 GW and 75 GW are produced from the solar per RPO by FY 2022
and wind energies, respectively. In fact, India has commit-
Sr. State RPO RPO Capacity Capacity
ted to install 40 GW of rooftop photovoltaic (RPV) capac-
No Target Target Addition Addition
ity by 2022, and the distribution companies (DISCOMs) Solar Non-solar Solar Non-solar
are mandated to buy 10.5% of their total power purchase (%) (%) (MW) (MW)
from solar power by 2022 as a part of renewable purchase
1 Andhra 20 21 9,834 8,643
obligations (RPOs) mandate [9]. To follow the given target
Pradesh
of RE generation, the GoI has introduced RPO targets for
all the states. Renewable purchase obligation (RPO) is 2 Maharashtra 10 10 11,926 10,119
mandated by the State Electricity Regulatory Commission 3 Tamil Nadu 10 17 8,884 12,624
(SERC) for the promotion of renewable energy [10]. In
this process, the GoI has obliged all the states’ power 4 Karnataka 10 19 5,697 9,120
generation units to generate some percentage of the target 5 Kerala 10 1 1,870 100
through renewable energy resources. While following these
6 Gujarat 8 12 8,020 9,133
RPOs, the states are going through a severe impact on
their power purchases, tariffs as well as the overall efficien- 7 Rajasthan 9 17 5,762 8,600
cies of their power units. In this paper, we have assessed 8 Madhya 10 14 5,675 6,343
the impact of this renewable addition by states based on Pradesh
their power purchase cost as well as change in their tariff
9 Uttar 10 4 10,697 3,524
of electricity, considering RPO targets for FY 2022 as the
Pradesh
main factor of these changes. The efficiency analysis has
been carried out for all the states discussed in this paper 10 Punjab 12 1 4,772 294
using data envelopment analysis (DEA). The renewable
share percentages have been taken from the Ministry of
New and Renewable Energy (MNRE) [11].
where DC = depreciation, TR = tax rate, AC = annual
costs, IV = initial investment, DR = discount rate, RV =
2. Assessment of Impact residual value, SDR = system degradation rate.
Xi, Xii,. . . , Xn denote the average per unit power
As per the RPO target allocation to each state, there
purchase cost for the respective utilities in a state, and Qi,
are several changes in their financial datasheet due to the
Qii,. . . , Qn denote the power quantum purchased then
necessary purchase of renewable energy. The percentage of
solar and non-solar and capacity addition (MW) needed to 
nXnQn
fulfil the RPO targets provided by the GoI in FY 2022 are APPC (for state) =  (2)
given in Table 1 [2]. nQn
The changes can be seen in the form of various fac-
The calculated impact based on the tariff and APPC
tors. Here, we have considered two major factors for the
is provided in Table 3 in Section 4.
calculations: the first one is the average power purchase
cost (APPC) difference with and without renewable en-
ergy, and the second one is the difference in their tariff due 3. Methodology Used
to renewable energy addition. To calculate the APPC, we
need to consider the following factors: the impact of cost There are different approaches for the measurement of rel-
of peak power requirement as renewable energy cannot ative efficiencies. These approaches can be classified into
supply us the peak power, the impact of both fixed and two paradigms of parametric and non-parametric tech-
variable costs for thermal as well as renewable energies, niques. This bifurcation is done based on how the frontier
the impact of deviation settlement cost, solar subsidies for is estimated. In each of these two methodologies, the fron-
rooftops, etc. For the tariff calculations of solar and non- tier is defined by the most efficient unit of data set. The
solar energy, the following assumptions given in Table 2 technique engaged in this study is DEA. DEA is a pre-
have been taken into consideration. The impacts on tariff ferred tool here because less efficient entities are compared
have been discussed in Section 4. with actual entities rather than some statistical measure
[12], [13].
The impact on tariff is basically calculated by having
the difference in tariffs with and without renewable energy.
3.1 Data Envelopment Analysis
The calculation for the levellized tariff can be disaggregated
for solar generation as follows:
DEA is called so because of the way it “envelops” observa-
tions to recognize a “frontier” that acts as a benchmark for
N (DC)n  (AC)n
IV − ×(T R)+ N
n=1 (1+DR)n
RV
n=1 (1+DR)n × (1−T R)− (1+DR)n the rest of the entities. Thakur et al. [14] defined DEA as
LT= N Initia kwh/kwp×(1−SDR)n
n=1 (1+DR)n “a multi-factor productivity analysis model for measuring
(1) the relative efficiencies of a homogeneous set of DMUs”.
209
 Table 2
Parameter Assumptions for Solar and Non-solar Tariff Calculation

Sr. No. Parameters Assumptions (for Solar) Assumptions

(for Non-solar)
1 Cost (Rs per MW) 10.00 (Crores) 575 (Lakhs)
2 Debt-equity ratio 70:30 70:30
3 Pre-tax return on equity 18% per annum 20% pre-tax
4 Interest on debt 12.50% 12%
5 Working Operation and maintenance O&M expenses;
capital expenses; Maintenance spare Maintenance spares
@ 18% of operation and @ 18% of O&M expenses
maintenance expenses
6 Interest on working 12% 12%
capital
7 Salvage value 11.00% 11.50%
(% of asset value)
8 Depreciation (% of 6.00% 6.00%
project cost per annum)
9 O&M cost (% of 1.5% for first year of operation 1.5% of the capital cost in
project cost) escalated at the rate of 5.25% p.a. first year with an escalation of
from second year onwards 5.25% for each year thereafter
10 Capacity utilization 21.5% 23%
factor (CUF)
11 Auxiliary consumption 6.25% _
12 Salvage value _ 11.50%
(% of asset value)
13 Plant life – 25
(years)

The related term here is decision making units (DMUs), multiple outputs (MIMO), the expression for the efficiency
which means any entity within the set of data that con- is given as follows:
tains other such entities to be evaluated. These evalua-
tions result in a performance score that ranges between weighted combinations of outputs (known as virtual outputs)
zero to unity, thus indicating a degree of efficiency for each weighted combinations of inputs (known as virtual inputs)
DMU. The DMUs with the highest score i.e., 1 become (3)
evaluating entities and serve as benchmarks. The scores of
less efficient DMUs are given relative to the benchmarked To create a mathematical model of the same, a data
DMU, thus implying improvement prospects in the future set having “a” utilities, “n” outputs (y) is produced by
trends. In a nutshell, DEA measures the relative effi- “m” given inputs (x), such that equations below give the
ciency of each DMU with respect to the best performing expression for “rth” DMU (in MIMO form):
DMU [15], [16].
max θr
n
p=1 vp ypr
3.2 Types of Models
m
q=1 uq xqr
DEA models may be input oriented and output oriented
based on the calculation of efficiency scores with the objec-
such that
tive of input factor minimization and output maximization,
respectively. n
p=1 vp ypi
CCR Model [16]: This model assumes constant re- m (4)
turns to scale (CRS) assumptions. For multiple inputs q=1 uq xqi

210
where i = 1 to a; q = 1 to m; p = 1 to n; xqi and ypi are the Table 4
“qth” input and “pth” output, respectively, of “ith” DMU; Efficiency Scores for States using DEA
vp and uq are the combined weight multipliers to ypi and
xqi , respectively. Sr. State Efficiency Return Benchmark
no. (%) to Scale
V = (v1, v2 . . . vn)T ≥ 0; U = (u1, u2 . . . um)T ≥ 0 1 Andhra Pradesh 46 Increasing 4,5
2 Maharashtra 88 Increasing 4,5,6
A mathematical dual of (4) on subsequently converting
it into linear programming format becomes (5): 3 Tamil Nadu 82 Increasing 4,5,6

min λ, θ 4 Karnataka 100 Constant 4

5 Kerala 100 Constant 5
a

such that θxqr − λi xqi ≥ 0 ∀q 6 Gujarat 100 Constant 6
i=1
a 7 Rajasthan 97 Increasing 5,10

−ypr + λi ypi ≥ 0 ∀p (5) 8 Madhya Pradesh 85 Increasing 5,6
i=1
λi ≥ 0 ∀i 9 Uttar Pradesh 78 Increasing 6,10
10 Punjab 100 Constant 10
where “θ” and “λi ” are the dual variables. The above
problem runs “a” times, computes efficiency scores, and
weights in the above stated dual model for all DMUs. tariff as well as the difference in APPC has been calculated,
which is given in Table 3.
4. Results and Discussion The result in Table 3 clearly shows the impact on the
factors like change in tariff as well as purchasing cost due
Solar tariff is considered to be Rs 3.5/kWh and non-solar to the addition of renewable energy percentage for different
to be Rs 3.75/kWh for FY 19 based on the parameter states of the electricity sector. The results of efficiency
assumptions given in Table 2, and 2.5% annual reduction indices for state electricity utilities for 10 states of the
thereafter as well as the necessary impact of risk factors Indian power sector are reported in Table 4.
have been incorporated. Assuming, the present plant Table 4 shows the change in efficiency due to the in-
load factor (PLF) nearly 60%–75% for thermal projects, a corporation of RE resources that is the movement towards
variation in PLF slab to 52%–65%, an increase in average the production frontier. This shows that the impact causes
variable cost has been considered to be Rs 0.04/kWh. The smooth and hard variation in the performance of states’
average fixed cost for thermal generation is considered to electricity utilities. So, the higher investments in this in-
be Rs 1.5/kWh, which is an average for all custom-made dustry are needed for the techno-economic progress. We
thermal generation. On the above basis, the difference in can easily see in Table 4 that states like Karnataka, Ker-
ala, Gujarat, and Punjab have the least impact by the
Table 3 RPO targets but states like Andhra Pradesh, Maharash-
Impacts for States as per RPO by FY 2022 tra, Tamil Nadu, Rajasthan, Madhya Pradesh, and Uttar
Pradesh will get severely affected by RPO as per targets
Sr. State Difference in Difference till FY 2022.
No. Tariff in APPC
(Rs/Unit) (Rs Crores) 5. Conclusion

1 Andhra Pradesh 0.42 3,452 After the final evaluation of efficiencies using DEA, it is
2 Maharashtra 0.41 8,420 found that non-solar RPO targets has to be revised for
non-windy states wherein MNRE non-solar target alloca-
3 Tamil Nadu 0.06 698 tion translates to less than 5% non-solar RPO target. The
4 Karnataka 0.75 8,305 current allocation of non-solar targets (wind targets) only
to renewable energy rich states needs a relook by also
5 Kerala 0.42 1,412 incorporating non-solar or wind procurement targets on
6 Gujarat 0.38 6,150 non-windy states as part of the inter-state sale. Accord-
ingly, a suitable framework needs to be developed that
7 Rajasthan 0.34 3,512 will encourage renewable rich states to export power and
importing states to procure renewable power by limiting
8 Madhya Pradesh 0.76 7,002
the impact on their overall cost of power purchase. The
9 Uttar Pradesh 0.58 11,325 impact of RE addition on these states ranges from Rs
0.06/kWh to Rs 0.76/kWh. The state utilities in India
10 Punjab 0.33 2,259
are under financial stress and have accumulated a high
211
level of losses. Most of the key states with high RE ca- Biographies
pacity addition have higher impact per unit, which further
translates into higher financial stress on the DISCOMs to Prateek Mundra was born in
procure the higher cost renewable energy. The per unit 1993 in India. He received his B.E.
impact across states is estimated to be in the range of Rs (EEE) degree from Rajiv Gandhi
0.06/kWh to Rs 0.76/kWh. In these 10 states, renewable Prodhyogiki Vishvavidhyalaya,
capacity addition would require approximately Rs 52,535 Bhopal and M.Tech. (Power Sys-
crore funding support to states. Financial support for key tems) degree from Maulana Azad
renewable states to procure the renewable power in these National Institute of Technology
10 states is estimated to be in the range of Rs 698 crore in (MANIT), Bhopal, in 2014 and
Tamil Nadu to Rs 11,325 crore in Uttar Pradesh. 2017, respectively. Currently, he
is pursuing his Ph.D. degree from
Electrical Engineering Depart-
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