The tyranny of energy uncertainty

Two states, pioneers in renewable energy, Tamil Nadu and Rajasthan, were in the news recently for contrasting reasons, and neither was about tariffs. One set a new national record for renewable energy capacity dispatched, and the other reported that the industry was in distress due to widespread back-down wherein discoms have been unplugging from the grid, delaying payments and shying away from power purchase agreements.

The nature of the headlines inspired by renewable energy is changing. Its rapid growth disrupted power markets elsewhere, in terms of higher costs (Germany), low returns (Texas) and load-shedding (South Australia). There are clear signs now that we must reset policy from encouraging investments to introducing serious reforms necessary to sustain growth.

This is because the disruption caused by renewables affects everyone, including renewables. It is not about lower tariffs or new technology (power markets have long known negative prices, and use sophisticated equipment), but the increased uncertainty arising from power generation based on the natural elements. Just imagine trying to get to work exactly on time, every day, using a train service that doesn’t follow a fixed schedule and sometimes may not run at all.

Utilities manage uncertainty and plug shortfall by signing long-term contracts with conventional power plants whose full costs they have guaranteed to pay. This “insurance” cover becomes inadequate as uncertainty grows when more renewable capacity is added. In such events, utilities can only reduce uncertainty by shutting them down temporarily.

This matters because renewable power projects are paid only when power is purchased, and none when disconnected. The must-run criteria, which gives them priority for supply, is no good when faced with a technical constraint. So, private sector returns are affected by how public sector utilities operate, making it costlier to raise new capital.

Compensating them is not a real solution, and even in developed markets, curtailment payments range from partial and conditional (Spain, California) to none at all (Texas, New England). Instead, we must turn to market reforms, automation, and new ways of organizing to manage this risk.

Managing uncertainty individually is expensive. The current regulations do just that—asking each operator to furnish a production schedule is neither cheap nor an improvement (the risk of divining weather conditions is merely passed on to others). Many developed power markets use a collaborative model. For example, Denmark sources about 40% of its power from wind farms by relying on Norwegian hydro to balance the variability. We must create regional structures so that utilities are not limited by state borders in maximizing the use of national renewable energy resources.

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