How renewable purchase obligation targets can advance energy transition in India

The performance of states in meeting renewable purchase obligation (RPO) targets by State Electricity Regulatory Commissions (SERC) has a strong correlation with renewable energy (RE) resource endowment, implementation of tariff-based annual bidding trajectory and institutional performance of the state power procurers. 

An analysis of states based on publicly available data (indiaredata.org and other online resources) reveals a shortfall in nearly 25 out of 30 states in meeting their annual solar RPO targets.

The implications of a continuous shortfall in meeting targets restrict private capital investments to only better-performing states, discourage a gradual shift to RE-based power procurement even in states with low RE generation, and may lead to lock-in of thermal power beyond the targeted phase out year.

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Understanding renewable purchase obligations

Renewable purchase obligations are mechanisms designed to compel power procurers in every state, like distribution companies (DISCOMS), captive power producers and open-access consumers, to annually purchase a certain minimum amount of renewable energy. 

The underlying idea behind setting RPO targets is twofold: Firstly, to significantly promote power procurement from expanding renewable sources, and secondly, to establish a viable market for clean energy technologies that are presently not cost-competitive but actively contribute to climate action goals. 

In instances where targets are not met, states can utilise the tradable renewable energy certificate (REC) mechanism, which holds comparable equivalence to RE-based power.

According to the initial notification in 2010, State Electricity Regulatory Commissions (SERCs) are required to determine incremental annual RPO targets based on factors such as RE resource potential, current and projected load-demand shapes and the impact on the retail tariff of supplied power.

The RPO trajectory witnessed periodic increase to nearly 23 per cent in 2023 from 2.75 per cent in 2016. In 2023, the Union Ministry of Power revised the RPO targets to reflect the increasing share of renewable energy in generation, aiming for 39 per cent by 2028. These revisions came into effect from April 1, 2024.

Performance of states in meeting RPO targets

The rapid decline in solar power tariffs from 2015 to the present — dropping to around 2.5 per kilowatthour (kWh) from nearly Rs 6/kWh — has rendered solar tariffs cost-competitive with conventional thermal power. Ideally, the availability of competitive solar tariffs should encourage greater adoption of solar energy, thereby influencing clean energy investment decisions in the states. 

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However, since most DISCOMS are bound by legacy PPAs for thermal power, their capacity to procure solar based power gets reduced, thus affecting the overall RPO targets. 

The table below categorises states based on their RPO compliance and shortfalls from 2014. 

Only five states have consistently met their solar RPOs  — Karnataka, Andhra Pradesh, Gujarat, Punjab and Uttar Pradesh. The eastern states have performed below 40 per cent since 2014, with several instances of unavailable data (West Bengal and Odisha) and low levels of integration despite potential (Jharkhand, Chattisgarh and Odisha). 

Northern states, such as Rajasthan, despite having the highest installed solar capacity, have not met targets from 2014 to 2019, and thereafter have not publicly disclosed their performance. Some states in the region may still heavily rely on costly thermal PPAs (Delhi and Haryana), which hinder cheaper solar power procurement.

Deficits by states in meeting RPO targets

Source: Author’s analysis from data on indiaredata.org by PEG, approximations have been taken based on data unavailability

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It appears that the eastern states, in particular, are inadequately prepared for the energy transition and lack market-enabling mechanisms to decarbonise their electricity sectors compared to other states. The absence of data on RPO targets also suggests a lack of governance capacity within the respective SERCs.

It should be noted that several states, such as Telangana, Bihar, Chattisgarh, Odisha, West Bengal and Tamil Nadu, have not consistently published their data.

Previously, both the Standing Committee on Energy of the 17th Lok Sabha in 2021 and a Comptroller and Auditor General report in 2015 highlighted dismal performances by state DISCOMS in meeting RPO targets, as well as the non-enforcement of penalties and the allowance of carry-forward deficits from previous years by respective SERCs.

According to apex policy think tank Niti-Aayog paper, Resource Adequacy Planning to Meet RPO targets by States, All India Roadmap 2024, the current deficits in the targets are also attributed to inadequate generation of solar power. This is evident from the consistent shortfall in meeting RPO targets and the reluctance of utilities to purchase RECs for compensation.

This suggests that either the targets were unrealistic from the outset, especially for states with low solar potential, or there was insufficient capacity addition by respective states.

It may also be the case that states did not create enough mechanisms to stimulate demand for solar power in line with the deployment trajectory within the state. This indicates that capacity planning has been an afterthought in most states, leading to unsatisfactory RPO compliance. 

Central Electricity Authority report 20th Electric Power Survey of India also highlighted this generation deficit.

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Implications of non-compliance, their consequences

Firstly, meeting the RPO obligations appears strongly linked to solar resource potential in most cases, as evidenced by the examples of Karnataka, Gujarat, and Andhra Pradesh. Other factors, such as flexible power procurement and high deployment targets, encourage developers to continually invest in projects in these leading states, leading to a concentration of solar generation in western and southern India. 

This asymmetric growth may pose risks to grid operations from concentration of variable RE in some regions and further lead to narrowing of investments solely towards solar energy than other RE technologies.

Secondly, the lack of enforcement of obligated targets by SERCs sends negative signals in the energy markets. Extensions of shortfalls in targets to the following year, the non-enforcement of penalties for deficits, and the absence of participation in REC markets are indicative of inadequate governance by SERCs.

Consequently, such states may appear unattractive to developers despite their high RE potential. The capital risk in these states is high, and missed opportunities further reduce investment pipelines for RE resources.

Additionally, states with low RE generation and existing thermal power continue to procure power from conventional resources, leading to a lock-in of thermal power beyond the target years. 

This may impede decarbonisation efforts, especially in eastern states where the availability of cheaper power could hinder the transition to clean energy.

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Thirdly, with the implementation of new RPO targets from 2024, the pace of solar installations must align with commensurate RPO trajectories, and any deficits must be procured through the REC mechanism. 

Failure to do so would force DISCOMS to comply with penalties, thereby increasing their non-revenue costs and impacting their ability to exit current thermal PPAs and transition to lower costs of RE. The extension of thermal power arrangements will be necessary to balance the inadequacies from solar generation and thus affect decarbonisation goals.