IV. ECONOMIC CASH FLOW ANALYSIS

IV. ECONOMIC CASH FLOW ANALYSIS

Farmers’ and developers’ motivation to solarize will depend largely on expected financial returns. At a minimum, the method of solarization must meet their cost of capital (interest on debt and acceptable return on equity) in order to be considered viable. The following section details the estimated solar generation expected from solar feeders and solar pumps, and the financial value offered to the solar project developers and farmers who would need to invest in solarization. In all cases, value was determined via discounted cashflow analysis that considered capital and operating costs, revenues, and cost savings. Additionally, to evaluate solar pumps’ and solar feeders’ potential to relieve state and Discom financial burdens, the value of each to Discoms and GoR was also determined via discounted cashflow analysis.

KUSUM A

Generation and Sizing

Based on modeling by the research team, as currently scoped in the scheme’s guidelines,

KUSUM A generates less than half the energy needed for irrigation. The amount of solar generation that is used to meet agricultural load is important, given that the benefits of KUSUM rely, in part, on the co-location of solar generation and agricultural load leading to reduced transmission and distribution losses. Based on the KUSUM A array sizes tendered for pump use, Figure 4 shows the solar electricity generated as well as the residual grid electricity that farmers need to power their pumps for a range of four, six, and eight midday hours. Across all Discoms, even the four-hour irrigation scenarios show that KUSUM A generation (blue bars) meets less than half of pump electricity demand, indicating that under the scheme as currently specified there is relatively low solarization of agricultural load. The grey bars in Figure 4 show the total PV generated in each of the Discoms, which imply that not all PV that is generated goes to pumps given the difference between the blue bars (PV used by pumps) and the grey bar. This may be an artefact partially of the assumed mid-day operating hours for the pumps.

Figure 4: PV Generated and Purchased Under KUSUM A for four/six/eight hour a day scenarios for each Discom. For each Discom, this calculation assumes an installed PV capacity equal to the sum of PV capacity allowed at each substation and an installed agricultural load equal to the sum of agricultural loads at each substation, both as enumerated in the KUSUM A tender document for the Discom. See Appendix A for additional details.

Determining the plant size required to meet more of the agricultural demand would require an understanding of how agricultural load is distributed throughout the day, which varies with farmer behavior and preferences. Even in the model presented above there are some hours of the day when the feeders are generating more energy than pumps use and were farmers to change irrigation patterns accordingly use of feeder energy could increase. The modeling also highlights the need to better understand how farmers will use their pumps if agricultural feeders are solarized. This will require collecting data on farmer behavior. Determining the appropriate array size to meet that load would require knowledge of daily and annual electricity needed for adequate irrigation, as well as estimates for future consumption to ensure sizing is appropriate for farmer needs. This could then be analyzed to see how much solar generation potential exists to be captured at those times and what size array would be needed to do it. Absent that data no judgement can be made of optimal plant size. For a full account of PV sizing and generation methodology, please see Appendix A.

In Rajasthan, the Discoms currently use an approximation method for sizing load, where maximum load is assumed to be 70 percent of connected load. Figure 5 plots the feeder sizes of all substations within each Discom, based on Rajasthan’s sizing criteria of 70 percent of the connected load. Based on this sizing criteria, only 60 percent of the feeder systems are appropriately sized for the load, and the remaining loads would be undersized due to the 2 MW constraint. For example, increasing the capacity limit for feeders under KUSUM A to 4.5 MW would enable solar panel sizing for 90 percent of the loads.

Figure 5: Feeeder Size per Substation Across Discoms.

The feeder size (using the Rajasthan design criteria of 70 percent of total connected agricultural load) is plotted for all substations in each of the three state Discoms. This shows that the 2 MW only enables appropriate sizing for 60 percent of substations. Sources: RRECL Request for Selection (RfS) for KUSUM A Annexures91,92,93

Financial Outlook for Farmers

Landowning farmers whose property is located near substations stand to benefit from leasing

land for solar feeder projects. Early reports from Discoms indicate strong developer interest in leasing land from farmers under KUSUM A. That said, anecdotal evidence from a past solar initiative (see: SKY Initiative, Appendix D) suggests that developers may prefer to invest in larger-scale projects or urban, rooftop generation projects rather than conduct business in remote, rural areas. It may be that farmers in more well-connected areas will be able to lease out land while those in remote areas will not have the opportunity to provide land for leasing. Developers may also attempt to negotiate contracts at very low lease rates to the detriment of farmers. By fixing a schedule of attractive leasing rates to implement program-wide, a different solar initiative (see: Delhi initiative, Appendix D) avoided such concerns. GoR could consider adopting a similar mechanism to protect farmers interested in leasing land for KUSUM A.

Financial Outlook for Developers

For Developers, KUSUM A is likely profitable at the current tariff rate, though that is sensitive to risks to the cost of capital and supply chain constraints. For KUSUM A, Rajasthan’s existing ₹3.14/kWh tariff elicits a slightly negative net present value (NPV) under our assumptions, as shown in Table 1. However, due to substantial uncertainties in costs that have a large impact on the NPV results, the current KUSUM A tariff likely allows developers to achieve close to their required rate of return. The NPV of solar feeders is most sensitive to: (i) the capital cost of solar modules, (ii) the

operational and maintenance cost of solar modules, (iii) the cost of land where solar modules are sited, and (iv) panels’ capacity utilization factor (a full sensitivity analysis is provided in Appendix C).

Table 1: Discounted Cash Flow Analysis Results using central estimates for cost and performance, normalized to 1 MW solar PV capacity

Feeder Under KUSUM A (No Subsidy) NPV with a tariff of ₹3.14/kWh: -₹0.19 crore NPV of 0 achieved with a tariff of: ₹3.27/kWh

The viability of the scheme may depend on GoR’s willingness to adjust tariff ceilings as needed to allow developers to place profitable bids based on potential changes to cost of

capital and capital costs. First, the cost of capital is sensitive to the project risk profiles. If the project risk increases or the banking sector becomes constrained, developers’ cost of equity and/or debt may rise above current best estimates, requiring a higher tariff to maintain profitability. A full capital cost sensitivity analysis is provided in Appendix C. KUSUM’s domestic manufacturing requirements may also increase the cost of panels. In the event of severe supply chain constrictions, a flexible tariff cap could help developers continue to bid on feeder projects that would otherwise have been unprofitable at the ₹3.14/kWh ceiling. In order to deter potential abuse of a flexible cap by developers, regulators could ensure that the price rises only if certain unfavorable economic conditions exist and the existing tariff is failing to entice developers to bid at or below the current rate.

Financial Outlook for Discoms

For Discoms, KUSUM A leads to significant savings at the ceiling tariff across all pumping scenarios modeled, but total NPV savings are sensitive to the cost of supplying agricultural

electricity. Discom savings under KUSUM A derive from a lower-than-average power purchase cost, as well as co-location of the generation and agricultural load that eliminates transmission losses and minimizes distribution losses. Discom savings, shown in Table 2, are estimated for the ceiling tariff and may be higher if competitive bids result in a lower tariff. The benefit-cost ratio compares Discom savings to subsidy costs for KUSUM A and is very high, as only a small PBI from GoI for the first five years of operation is provided for KUSUM A.

Table 2: Discounted Cash Flow Analysis Results for Discom Savings under KUSUM A Pilot

Feeder under KUSUM A Savings Per Unit Discom Savings for First Year NPV Per Pump Discom Savings NPV Discom Savings Benefit-cost Ratio ₹ 1.49/kWh ₹ 194,060 ₹ 2,505 crore 15.15

NPV per pump savings are estimated based on assumption of 8 hours of pumping per day, or 2,424 hours per year. NPV Discom Savings and NPV Subsidy Payment are estimated for the deployment of 725 MW under the KUSUM A pilot. Benefit-cost ratio is the ratio of the Discoms’ estimated net savings to the estimated cost of the scheme (through subsidies) to government. For detailed calculation assumptions and methodologies, please refer to Appendix B.

An important sensitivity to the estimated Discom savings is the current cost of serving agricultural load in Rajasthan. This analysis uses the average power purchase cost, transmission and distribution losses across all three Rajasthan Discoms to estimate current cost of electricity, but costs of serving agricultural load may be lower. Current agricultural electricity use is often restricted to late night hours when the cost of supplying power is likely cheaper, because the system demand is low such that the highest cost generators are less likely to be operating. If electricity displaced from the grid is less expensive than the average estimate, savings under KUSUM A would be lower than estimated. The minimum average grid electricity power purchase cost for which the Discom would realize savings under KUSUM A is ₹2.63/kWh. This means that even if the current power purchase cost is less than the KUSUM A ceiling tariff, KUSUM A may still provide savings due to its colocation with load.

An additional uncertainty is whether and how Discoms will restrict electricity availability under KUSUM A. As noted earlier, the PV system capacities identified in Discom tenders for KUSUM A are generally sized for 70 percent of the corresponding substation-specific agricultural load except as limited by the feeder capacity limit, such that the identified KUSUM A capacities may not provide sufficient electricity for agricultural pumping needs. Therefore, farmers may still require grid electricity to meet a portion of agricultural pumping load. To consider the Discom savings when electricity access may be restricted, a comparison of Discom savings under 4, 6, and 8 hours of available electricity is presented in Appendix B.

The third uncertainty is whether Discoms can use the excess solar generation to serve other load. Because the solar feeders are generally undersized in Rajasthan (as limited by the 2 MW limit), the default assumption for the solar feeder savings estimates shown in Table 2 is that excess generation is minimized, and the relatively small amount of excess generation is likely able to be utilized locally. However, if the Discom is unable to use the excess generation, the Discom savings would only derive from displacing grid electricity for agricultural load, and would be lower, as shown in Appendix B.

Financial Outlook for the Government of Rajasthan

Under KUSUM A, GoR is likely to continue paying the subsidy for agricultural electricity users, and any reduction in the subsidy burden is highly uncertain and dependent on

agricultural tariffs being decreased. While KUSUM A would decrease the cost of serving agricultural load due to the lower cost of solar energy, RERC may be unwilling to reduce agricultural tariffs, and instead distribute the Discom savings in supply costs by reducing the cross-subsidy of agricultural electricity charged to industrial and commercial customers. In the long term, GoR is likely to benefit from increased revenues from retention of these reliably paying customers, but if savings from agricultural subsidies are simply redistributed to industrial and commercial customers, it is unclear whether GoR will face a reduced subsidy burden in the short run.

While there may not be direct reduction in subsidy burden under KUSUM A, GoR benefits from the certainty and significant amount of Discom savings, as better Discom finances can help relive the systemic strain on state finances the Discoms currently present.

KUSUM C

Solar Generation and Sizing

For KUSUM C, the MNRE has proposed three primary modalities that have very different cost structures: pump-level solarization without net metering, pump-level solarization with net metering, and feeder level solarization (analogous to KUSUM A, but with a 30 percent upfront subsidy). Given that the KUSUM C feeder-level solarization is only recently announced, the ceiling tariff under this scheme remains to be determined. While the developer and Discom will depend on the choice of ceiling tariff, the costs and benefits are analyzed for the new feeder-level scheme to show the potential break-even tariff, as well as the maximum potential Discom savings.

Guidelines for pump-level KUSUM C projects permit installations of capacity up to twice that of the connected pump, though recent analysis from the World Bank uses a more conservative 1.5 scale to account for the financial constraints of farmers unable to purchase higher-capacity pumps, even using government subsidies. This analysis assesses scales of 1, 1.5, and 2 times the pump load to consider a range of financial capabilities. Under pump-level solarization, KUSUM C permits farmers to sell excess electricity to the Discom. Figure 6 shows the portion of PV electricity used to run pumps for four, six, and eight midday hours per day relative to the portion sold back to the Discom under three different generation scenarios. The generation profiles and consumption associated with each of the four, six, and eight-hour scenarios are estimated with methodologies explained in Appendix A. When pumps are run for fewer hours, a higher portion of electricity can be sold back to the Discom. Unlike KUSUM A, a very high portion of the pumping load is supplied by PV, with and without net metering.

Figure 6: KUSUM C Net Metering Scenarios With a 5 HP Pump in Jaipur Discom For four-hour scenarios across Discoms, a higher portion of electricity is sold back to the Discom vs. the six and eight hour scenarios. Results look similar across other Discoms as well. See Appendix A for additional details.

Financial Outlook for Farmers

The financial analysis assumes that farmers are positioned to take advantage of KUSUM C pumplevel solarization and that developers are positioned to take advantage of KUSUM C feeder-level solarization. Whether KUSUM C solar pumps will raise farmers’ incomes depends primarily on the amount of capital subsidization for the scheme, since farmers may be unwilling or unable to afford to finance the total project capital cost.

Farmers are not likely to benefit from pump-level modalities of KUSUM C at the current level

of capital subsidy and expected FiT, though there are large uncertainties. As shown in Table 3, KUSUM C requires either additional capital subsidies to reduce the initial investment or higherthan-proposed tariffs in order to return a positive NPV, for both pump-level solarization options. The discounted cash flow analysis for KUSUM C with net metering indicates that farmers will require a 74 percent subsidy to break even on the project, assuming a reasonable market FiT of ₹3.44/kWh. Alternatively, a FiT of ₹9.91/kWh will also tip the NPV positive. While these findings demonstrate that farmers could benefit from KUSUM C, the project currently features only a 60 percent subsidy and is unlikely to offer FiTs anywhere near ₹10/kWh. KUSUM C without net metering is even less financially viable, as the generation analysis shows that a lower share of electricity would be sold back to the Discom (see Appendix A for the full solar generation analysis). If the net-metering revenue stream is excluded, an additional subsidy of approx. ₹3.16/kWh would be required in order for the solar pump to be financially viable for farmers.

Moreover, note that, unlike solar feeders, pump-level solarization under KUSUM C presents further costs to farmers in the form of learning about, maintaining, and securing the solar panels. Premature depreciation or panel theft may end any increases in income long before the PPA term expires.

Under the KUSUM C feeder scheme, farmers will likely benefit similarly to the KUSUM A scheme. The primary benefit to all farmers would be increased access and reliability of electricity. In addition, landowning farmers will also be able to benefit from leasing their land for the feeder-level solar panel, which may significantly increase their incomes, as was suggested for KUSUM A in Section IV.A.

The primary factors contributing to uncertainty around the NPV of solar pumps under KUSUM C are: (i) the capital cost of pumps, (ii) the price of avoided electricity purchases, and (iii) the ratio of installed PV capacity to pump power. For example, a 50 percent increase in capital cost would require an additional subsidy of ₹6.45 crore/MW. The level of variability in these factors results in greater overall uncertainty for solar pump projects than for solar feeder projects. A full sensitivity analysis is provided in Appendix C.

Financial Outlook for Developers

For developers, feeder-level KUSUM C is likely more profitable than solar pumps, principally due to greater economies of scale from larger solar feeder systems compared to smaller solar

pump systems. Assuming that Rajasthan’s KUSUM A ₹3.14/kWh tariff is relevant for feeder-level KUSUM C, developers could expect a slightly positive NPV, as shown in Table 3. Compared to the other two KUSUM C modalities, a much lower tariff of around ₹2.72/kWh is required to meet the assumed cost of capital. This lower breakeven tariff should be considered in setting the ceiling tariff for feeder-level KUSUM C.

Table 3: Discounted Cash Flow Analysis Results for Farmers and Developers

Solar Pumps Under KUSUM C (No Net Metering) NPV with a tariff of ₹3.44/kWh: -₹5.73 crore Capital Subsidy Required for NPV = 0

81%

NPV of 0 achieved with a FiT of: ₹13.07/kWh Solar Pumps Under KUSUM C (Net Metering) NPV with a tariff of ₹3.44/kWh: -₹10.60 crore Capital Subsidy Required for NPV = 0 74% NPV of 0 achieved with a FiT of: ₹9.91/kWh Feeder Under KUSUM C (30% CAPEX Subsidy, or ₹2.52 crore/MW CAPEX) NPV with a tariff of ₹3.14/kWh: ₹0.85 crore NPV of 0 achieved with a tariff of: ₹2.72/kWh

The Net Present Value (NPV) of Feeders and Pumps under KUSUM A and C, given best estimate assumptions for the cost of inputs. Results are for 6 hours of pumping and are normalized for 1 MW solar PV capacity. For detailed calculation assumptions and methodologies, please refer to Appendix B.

Financial Outlook for Discoms

For Discoms, pump-level solarization under KUSUM C leads to significant savings assuming 8 hours of pumping per day, but savings are highly sensitive to the hours of pumping and

level of feed-in tariff. Under pump-level KUSUM C, Discoms are no longer the primary electricity supplier for farmers with solarized grid-connected pumps and must purchase excess PV generation that farmers sell to the grid for ₹3.44/kWh. As shown in Table 4, the benefit-cost ratios for both modalities of pump-level KUSUM C are substantially lower than those shown earlier for KUSUM A, due to the 60 percent total capital subsidy required from GoR and GoI.

KUSUM C feeders also likely result in significant Discom savings, contingent on the ceiling

tariff yet to be determined by RERC. Potential savings to Discoms are analyzed based on the lower breakeven cost that the 30 percent capital cost subsidy from GoI enables. As shown in Table 4, at a breakeven cost of ₹2.72/kWh, the Discom savings are ₹217,303 per pump for 8 hours of pumping, which is twelve percent higher than the comparable Discom savings in KUSUM A shown in Table 2. Compared to KUSUM A, the KUSUM C feeders are likely less cost-effective overall, because the maximum additional Discom savings do not offset the additional costs to GoI for the 30 percent capital subsidy.

Additionally, for KUSUM C feeders, savings to Discoms also depend on the implementation

model. The CAPEX model likely allows the Discoms to maximize their savings compared to the RESCO model. When the Discom takes on the risks of developing solar feeders under the CAPEX model, they directly benefit from the capital cost subsidy. On the other hand, in the RESCO model, the developers will receive the capital subsidy, and it is unclear how much of the savings would be passed on to Discoms. The maximum savings shown in Table 4 are more likely to be representative of the CAPEX model, as the RESCO model would likely have a ceiling tariff above the breakeven cost to allow the developer to make a profit.

Table 4: Discounted Cash Flow Analysis Results for Discom Savings under KUSUM C Pilot

Solar Pumps Under KUSUM C (No Net Metering) Per Unit Savings for First Year ₹2.79/kWh NPV Per Pump Savings ₹241,608

NPV Discom Savings

₹308 crore Benefit-cost Ratio 1.00 Solar Pumps Under KUSUM C (Net Metering) Per Unit Savings for First Year ₹2.32/kWh NPV Per Pump Savings NPV Discom Savings ₹208,884 ₹266 crore

Benefit-cost Ratio 0.88

Solar Feeders Under KUSUM C Maximum Per Unit Savings for First Year Maximum NPV Per Pump Savings Maximum Benefit-cost Ratio ₹1.91/kWh ₹217,303 3.69

NPV per pump savings are estimated based on assumption of 8 hours of pumping per day, or 2,424 hours per year. NPV Discom Savings, NPV Subsidy Payment, and the Benefit-cost Ratio (ratio of the Discoms’ estimated net savings to the estimated cost of the scheme to government) are estimated for the deployment of grid connected pumps for all 60,008 HP of load identified in the KUSUM C Tenders. For detailed calculation assumptions and methodologies, please refer to Appendix B.

Two major sensitivities for pump-level KUSUM C include the hours per day of pumping and the cost of supply replaced by solar generation. Estimates of agricultural electricity consumption and pumping in Rajasthan are not available at high spatial resolution. As such, this analysis makes simplifying assumptions regarding hours of pumping for four, six, and eight hours per day. The solar pumps analysis shows that when a farmer runs a pump for 4 hours per day or 6 hour per day as compared to 8 hour/day, the farmer’s return on investment for solar pumps is higher. However, with lower farmer electricity consumption, the Discoms’ savings under KUSUM C significantly decrease; savings per pump drop by more than 60 percent when the average hours of pumping are 6 hours/day and are negative when the average hours of pumping are 4 hours/day. Higher returns might incentivize farmers to achieve lower levels of pumping, which would aid in conserving water but conflict with the aim of reducing Discoms’ financial burden.

Additionally, as with KUSUM A, the KUSUM C savings also depend on the cost of supply replaced by solar generation. The minimum power purchase cost of grid supply replaced by solar generation for which the Discom would realize savings under KUSUM C is ₹1.79/kWh with no net metering and ₹1.98/kWh with net metering, assuming 8 hours of pumping.

Discoms could benefit from greater savings if excess solar power can be used to meet non-agricultural demand at lower cost than current grid electricity. Because PV systems for pump-level KUSUM C are oversized and would produce significant excess generation, it is uncertain whether the excess solar generation can be used to serve non-agricultural load. Supplying non-agricultural load with excess solar power generation depends on the amount of load aligned with hours of solar generation and

how closely the load is located to the solar plant, among other factors. If excess solar generation can be utilized to meet non-agricultural demand, displacing a larger quantity of higher cost grid electricity, the expected Discom savings per pump for KUSUM C pumps could be at least doubled, as shown in Appendix B.

Financial Outlook for the Government of Rajasthan

For GoR, KUSUM C solar pumps could result in modest savings, but uncertainties are

substantial. Under the solar pumps model for KUSUM C, GoR savings result from no longer needing to provide an agricultural tariff subsidy (equal to ₹4.65/kWh) for each unit of avoided grid electricity use. As such, net savings reflect the avoided tariff subsidies, offset by the 30 percent capital subsidy provided by GoR to farmers. As shown in Table 5, GoR’s savings from solar pumps are only slightly higher than the cost of providing the 30 percent upfront subsidy. Net savings under KUSUM C are approximately ₹47,000 per pump with no net metering and ₹13,600 per pump with net metering, assuming 8 hours of daily pumping. Furthermore, the electricity subsidy savings are very sensitive to the amount of hours of current consumption; if farmers currently pump 6 hours or less per day, GoR savings from avoided tariff subsidization is less than the upfront capital cost subsidy.

For solar feeders under KUSUM C, any change to GoR’s agricultural tariff subsidy burden is

highly uncertain, and any potential savings for GoR would be modulated by the RERC tariff setting process. Thus, the authors of this study chose not to speculate on such savings in this analysis. While there may not be direct reduction in subsidy burden from the KUSUM C feeder scheme, GoR benefits from the certainty and significant amount of Discom savings across levels of pumping consumption, as better Discom finances can help relieve the systemic strain on state finances the Discoms currently present.

Table 5: Discounted Cash Flow Analysis Results for GoR Savings under KUSUM C Pumps Pilot

Solar Pumps Under KUSUM C Per Unit Savings for First Year (Avoided Tariff Subsidy)

₹4.65/kWh NPV Per Pump Subsidy Cost (30% CAPEX Subsidy) ₹294,505 Solar Pumps Under KUSUM C (No Net Metering) NPV Per Pump Subsidy Savings ₹341,774 Benefit-cost Ratio 1.16 Solar Pumps Under KUSUM C (Net Metering) NPV Per Pump Subsidy Savings ₹308,140 Benefit-cost Ratio 1.05

NPV per pump savings and Benefit-cost Ratio are estimated based on assumption of 8 hours of pumping per day, or 2,424 hours per year. For detailed calculation assumptions and methodologies, please refer to Appendix B.

SUMMARY COMPARISON: KUSUM A AND C

Based on the current policy design, farmers appear more likely to benefit from solar feeders

than solar pumps. The current KUSUM C solar pumps feed-in tariff of ₹3.44/kWh is not sufficient to mobilize investment from farmers, given farmer’s current cost of electricity. For solar feeders, certain farmers could gain income from leasing land, as has been suggested for KUSUM A.

The current ceiling tariff for KUSUM A feeders is likely high enough to incentivize investment

from developers. Of the two solar feeder options, KUSUM C requires a lower breakeven tariff (₹2.72/kWh) than KUSUM A (₹3.27/kWh), which should be considered in setting the ceiling tariff for KUSUM C.

Discoms’ savings from KUSUM A and C are similar, with slightly higher potential savings

under KUSUM C. However, the risks associated with KUSUM C are much higher, as Discom savings significantly decline and can even become negative if farmers were to sell back higher proportions of solar generation by reducing their daily hours of pumping, compared to more stable savings across pumping levels in KUSUM A. Discoms may have slightly higher savings under KUSUM C feeders than KUSUM A, and the KUSUM C feeder CAPEX model is likely to offer more savings in the long run than the RESCO model

For GoR, solar feeders may not have an impact on the agricultural tariff subsidy burden, as

savings would depend on tariff adjustment by RERC. On the other hand, solar pumps can result in slight benefits for GoR if current consumption represents 8 hours of daily pumping or more but may pose a net cost if current consumption is 6 hours or lower.

In conclusion, solar feeders pose lower risks to the financially burdened Discoms and GoR, while being cost-effective for developers and offering a passive income source to certain farmers through land leases.

Potential Tensions with Electricity Sector Grid Management and Fixed Costs

Though KUSUM appears to pose myriad benefits for the Discoms and GoR, there are also potential sources of tension. Discoms have noted concerns around the grid integration of renewables. KUSUM guidelines require that Renewable Power Generators (RPGs) under KUSUM A are assigned “must run” status, meaning generation cannot be curtailed for any reason other than grid security. Though Discoms are required to specify a grid security issue when curtailing “must run” resources, they have at times curtailed “must run” generators in deference to thermal generators with fixed costs to meet. In states with high renewable penetration - where intermittency complicates grid management and grid-balancing, demand, and renewable generation forecasting are not always sufficient - Discoms have curtailed high levels of variable renewable energy. 94 The deployment of distributed solar plants under KUSUM may further increase the challenge of grid management, as managing many distributed resources can be more challenging than few, large capacity plants.

Excess generated PV electricity will not necessarily result in cost savings for Discoms considering the Discom’s fixed costs and grid costs. Under typical terms of local PPAs between Discoms and thermal

generators, Discoms must pay high fixed costs to generators even if capacity utilization is low.95 Thus, Discoms have a financial disincentive to dramatically step up renewable energy capacity. However, the aggregate impact of KUSUM solar capacity on thermal capacity utilization and grid stability is small compared to other currently planned solar PV capacity expansion, whether from utility-scale projects or self-generation from larger consumers.