Fulbright US-India Series: Vibhav Nuwal | Founder of ReConnect Energy

2022-08-17
In this episode we will be speaking with Vibhav Nuwal, the co-founder of REConnect Energy, which is India's largest REC Trader and one of India’s largest provider of Forecasting, Scheduling and advanced analytics services to the Renewable Energy Sector. We discuss ReConnect's origins and the challenges within the REC market. Hope you enjoy this wide-ranging conversation!

Transcript

00:06 Karan Takhar
Hello everyone. This is Karan Takhar. Welcome to the Zenergy podcast. Over the past decade, India has done an impressive job of integrating renewable energy into its energy mix. For this Fulbright Podcast series, I sought to investigate the enabling factors and potential of India's global leadership in renewable energy, with a focus on solar. This Fulbright series is broken down into Four Seasons. This season, we look at the next set of key technologies and regulations integral to unlocking India's continued renewable energy success at the system level. It includes conversations with leading regulators and thought leaders across energy management, storage, transmission, and distribution. 
In this episode, we will be speaking with Vibhav Nuwal all, the co-founder of Reconnect Energy, which is one of India's largest providers of forecasting, scheduling, and advanced analytical services to the renewable energy sector. We discuss how that idea came about and the important factors that go into the calculations or reconnect carried out. I hope you enjoy this wide-ranging conversation. 
Thank you, Mr. Nuwal all, for participating in this interview. I really appreciate you taking the time, and for those listeners who may be unfamiliar with your work, could you briefly just introduce yourself?

01:49 Vibhav Nuwal
Thanks, Karan, for having me here. So I'm Vibhav Nuwal. I'm a co-founder of Reconnect energy at a reconnect energy. We do a bunch of things. We provide technology focused on energy and especially the renewable energy sector yeah. We use AML techniques to provide a variety of solutions, which includes forecasting, scheduling, dispatch automation, also working on asset monitoring, etcetera. So we work with a lot of asset managers, for example In India, as they kind of operate their wind farms and solar farms, we also work with large transmission utilities and distribution utilities as more and more renewable energies kind of getting integrated into India, we play a big role in helping that with that integration and I can talk about that in more detail as well. So we work with various technology tools to kind of help the energy sector, and especially the renewable energy sector, perform better, right we also. We also are Rex traders, so we trade renewable energy certificates. It's a domestic market in India, and we are the largest Rex trader in the country. Again, I can talk about that more as we go along.

03:14 Karan Takhar
Let's see. Thank you. And what percentage would you say, if possible, to even determine this? Like is your work focused on Rex trading versus like helping integrate renewable energy?

03:29 Vibhav Nuwal
Well, over the years, our technology side practice has become much larger. So, so we are probably 90% now a technology company are working much more on the on the tech product side. Rex, we still play a big role in the Rex markets though unfortunately, Rex markets themselves have not grown much for various reasons, but that has been Rex markets were started back in 2010. That's how we got started. But over the years, the capacities that have come into those markets has remained static, in fact, has gone down a little bit, and more recently, various regulatory challenges and various challenges in the courts have resulted in the markets kind of remaining stuck in a sense. They're not trading, for example, right now, but it's also, it's a market that's not been growing much. Why exactly is that so? So various reasons. Uh, Rex So, so the genesis of Rex in India has been Uh, from the Electricity Act, which is the fundamental? A regulation, or law, if you will, which governs the electricity markets, and one of the requirements in the Electricity Act is that states, also various other states, will be required to mandate a percentage of renewable consumption from all consumers, right? So as these laws were put in place, one major challenge has been that enforcement has been pretty LAX. So many states in many states, we see that distribution companies and other consumers do not comply with these regulations, and regulators, have kind of not really penalized non-compliance. The fundamental reason for all of this comes back to the issue that distribution companies are state-owned or they heavily subsidize electricity, and as a result, they're just financially very weak. So, you know, lack of compliance over a period of time has resulted in very little or, you know, marginal trades in the Rex space. They haven't grown as much as they should. That's one reason. The other reason is that over a period of time, India has had two parallel systems of and of developing or encouraging renewable energy projects to be set up. So generally, one sees that renewable energy projects are either set up through a market-based mechanism. Say, Rex, where the premium, if you will, of green energy that renewable energy projects generate is paid through a market-determined price and a market-determined mechanism, and the other system is where this premium is paid through feed-in tariffs. So India, till 2010 and even beyond, had a very strong feed-in tariff mechanism where states would determine the tariff, projects would be set up, and that tariff would be paid. That would be generally significantly higher than, say, coal-based or conventional energy. When the Rex markets came in, the market side was kind of expected to become the predominant method, but because of LAX Enforcement of regulation, the feed-in tariff mechanism continued, and as we kind of went along over the years, the feed-in tariff mechanism changed into a reverse auction mechanism and but it still continues, and that remains the primary way in fact now you know 95% I would say of projects come under still the reverse auction feed-in tariff mechanism. So so, as these two systems have kind of gone remained in parallel, or the market side of it has kind of fallen away if you will, and as a result, Rex markets and also not grown.

07:36 Karan Takhar
I see. Thank you for explaining the thing on that, and just to make sure that I understand clearly so with regards to the rex market. For example, If over time, the government has required like states to purchase a certain amount of renewable energy and If a state has not integrated that much renewable energy into their own system. Then they can go into the Rex market and buy the remaining balance, or the gap between how much renewable energy they have and how much they're required by the federal government to integrate Into their state. So they go to the rex market to fill that gap, and accordingly, the demand for the Rex will then dictate the price. Is that essentially how overall the system is supposed to work?

08:40 Vibhav Nuwal
That's broadly correct. The only difference is that while the federal regulation mandates requiring what is called RPO regulations or renewable purchase obligations, it's really states that actually set up these regulations. So it's let's say the state of Madhya Pradesh or the state of Maharashtra can mandate its own RPO. Percentages or requirements. So so Maharashtra can mandate. As an example, 10% of all energy consumed within Maharashtra needs to be from renewable energy, while Madhya Pradesh can mandate a different percentage. So these state governments or the state electricity regulators are actually the people who mandate or the other institutions which mandate these percentages and consumers within that state. So these state distribution companies or the utilities within the state and other consumers, large industrials or companies that purchase power from the exchanges or power exchanges, etc., are then required to meet those percentages. So that's how the regulations are set up, and you're right about how then the price is discovered, so if there is a difference between what the percentage of consumption needs to be and what the consumer or, you know, the distribution utility or large industrial has met and the difference needs to be filled by buying Rex on the exchanges, these have traditionally traded within certain price bands which are set up by the regulator.

10:28 Karan Takhar
Understood. Essentially, if I understand correctly, the reason that the rex market has not really been that active is because the states themselves are not enforcing RPO compliance upon the state-run distribution companies because one reason is the distribution companies themselves do not have. The adequate liquidity to be able to go into the rex market and meet those RPO obligations, is that correct?

11:03 Vibhav Nuwal
That's right. Yes. So, these state regulators are also tasked with enforcing these regulations, but we have seen actually that most state regulators have been Pretty lenient on enforcing, uh, we have seen instances of these regular, you know, the mandates getting rolled forward there's actually been, in the last ten years or 11 years, not a single instance where penalties for non-compliance have been imposed and collected. So, you know, overall, the kind of enforcement. Uh, the mechanism is very ineffective, if you will. And yes, the primary reason for this is that, uh, the regulators also kind of need to look at the financial situation of the distribution company, and in most states, the distribution company is essentially bankrupt, right? So they don't have money to buy renewables beyond what they already do, and whatever they do is still fairly just driven by what you know. Each utility kind of decides whatever best they can do but don't really necessarily follow the mandate.

12:22 Karan Takhar
Understood. And yeah, thank you for clarifying upon that and I actually just did see as I was preparing for this interview that the UP Electricity Regulatory Commission, I think just like either today or within the last few days, has asked the UP Power Corporation Limited to deposit 73 Billion Rupees I assume? In a regulatory fund, did you see this development? Yes, yes, and that's quite interesting, right? That you bring it up. It is a really large number like it would add up to. I would say close to a billion dollars of, you know, money is to be deposited for non-compliance with RPO regulations. So it's a large number. It's also an interesting development, in my sense. So it's something to watch, but my sense again is that you know we are probably going to see a further. You know, fights around this in the courts, and really actually, I'm pessimistic about how much this money will really be deposited, partly because, you know, a lot of utilities you pay included. I don't think the utilities have the capacity to really pay this out, and also, one must keep in mind that all util all state-run utilities are not only are they bankrupt, they're also driven by or run by, you know, the political and bureaucratic setup so within that confines I see it really difficult. I don't see how this money will actually or this penalty will really, you know, translate into money being deposited or finding its way into the into the ranks of the renewable markets, If you will.

14:30 Karan Takhar
Understood. Yeah, I guess we have to keep our eyes on that development.

14:34 Vibhav Nuwal
Huh. Yes. It'll be interesting to see how that develops. Absolutely.

14:39 Karan Takhar
Because that could potentially be a very symbolic kind of measure in terms of reflecting that maybe States are becoming more strict or even supportive of renewable energy integration into their own portfolio, that's fair to say.

15:05 Vibhav Nuwal
Yes, I mean if it kind of reaches to its logical conclusion in the sense that even if that penalty is just a way to kind of highlight the issue and results in actual compliance, that will still be a good significant win. I would say because we've seen penalties being imposed in the past, but not really going anywhere in terms of the utilities actually paying or, Uh, changing their behavior significantly, so if it does, if it does really result in, you know, real change that'll be. That'll be good and will be worth keeping an eye on.

15:47 Karan Takhar
So what is the reason for? Why State distribution companies or utilities are not able to meet their RPO targets at a time? Often renewable energy is more economical to integrate at the LCOE level. What are your thoughts around? Why like distribution companies are not meeting these targets?

16:19 Vibhav Nuwal
Right. That's a, you know, that's an interesting question, especially because you mentioned that it's now a lot more economical. You know recent bids and recent kinds of tariffs are really low and well below coal-based power prices, right? I think there are a bunch of reasons. One is that while a lot of the new renewable capacities and more recent bids have come out at a very low price, there is still a fair amount of legacy projects which are at a higher price. So it's not uncommon to see projects in Maharashtra, Tamil Nadu, and Karnataka, which are traditionally where large capacity gas exists, have existed to see tariffs in the range of, say ₹5 or 4 1/2 rupees per unit, which is still definitely higher than coal-based prices. So there is a large legacy kind of projects which are relatively expensive or the lower cost ones, and new a lot of them are yet to be set up, so hopefully what that means is that down the road we should see. Uh, uh, more openness from utilities to procure renewable power. The other aspect has been there are two other aspects. I feel one is that there is a lot of kind of state mindset, if you will. I have seen that as we have interacted with a lot of utilities that why should I pay for power which is generated in another state, especially when it comes to red because there is this thinking that what is being paid for is for paper only, if you will get on notional I mean the Utility manager thinks of it as I'm not actually getting, I'm not getting actual power, I'm paying for something which is notional and that two outside my state. So why should I do that? Especially because there are no consequences, there are no penalties, right? So that's been kind of 1 aspect, and the other has there been a wide disparity between Uh, what traditionally been known as the renewable energy-rich state. So a lot of while India has a very large base of renewables lot of it is concentrated in a handful of states. Wind, especially, is mostly in western states. They've traditionally been known as re-rich states. It's a function of resources also. Some states, and coastal states, especially in the western side, have had very good wind resources, but also because they've had good wind resources or renewable resources in the past, their policies traditionally have been more conducive to putting up renewable assets. So even though solar assets are solar resources are probably more evenly distributed across the country. We still see most capacity coming in states like Gujarat, Maharashtra, and Rajasthan, traditionally RE-Rich states. And so there is this element of, you know, uh, electricity markets and electricity regulations are state regulations, and so there is this element of, You know, why should I go outside my state? I'm buying a utility manager, thinking I'm buying everything that's in my state. I don't really need to do more than this, and there is no consequence to not meeting our pose. So you see this wide disparity between states where some states are kind of exceeding what they need to do while others are not doing anything. That's one aspect of it. The other aspect is that there is a wide disparity in consumption. A good example is, you know, Delhi is a very small urban state with very high consumption but almost no renewable resource within its boundaries, while Rajasthan is a very large state with lower consumption. And so Interstate markets have only just, especially for renewables have, only just started to take off, and we haven't seen a lot of that Interstate markets existing between state boundaries. So that has been a constraint in the past as well.

20:29 Karan Takhar
When you refer to the Interstate market is that are you talking about the real-time power trading platform? I remember I think, it got launched last summer, if I'm not mistaken. Is that what you're referring to when you're talking about an Interstate market, or could you expand on this term?

20:55 Vibhav Nuwal
Right. So, so I'm not just talking of that. In fact, what I'm talking about is the ability for a, let's say, take an example of a wind farm in Gujarat to sell power to the state of Delhi or utility in Delhi, right? So, so that has been only in recent years this kind of transaction have they've always been technically possible, but regulations haven't supported it. You know, costs around deviation, settlements at the state level, this or costs of transmission have been exorbitantly high in the past. More recently, last few years, Interstate wind or solar transmission has been made free, if you will, by the Central Central Regulatory Commission. So that has helped, but also for a while. In this example, selling a wind farm selling power to a utility in another state, say Delhi, is possible. It's actually still not possible for a large industrial, say in Uttar Pradesh, to buy power from a wind farm in Gujarat lots of constraints around permissions open Access, as it's called Super Open Access permissions. Lots of constraints around transmission costs so that market of, you know, producing power or in what should be the least cost location renewable power to its least cost location to a consumption center, especially at an individual consumer level a large industrial, so a cement plant or us or a steel plant in Bihar or Jharkhand buying power from a wind farm in Gujarat, Maharashtra. It still does not exist, and that's really the Interstate market that I've I'm talking about.

22:38 Karan Takhar
In a state, this comes in like UP, for example, given the current regulatory climate by power from a solar or wind farm in Rajasthan.

22:53 Vibhav Nuwal
Yes, that's enabled both from a regulations perspective and also because intermediaries like secky or other intermediaries kind of sit in between and are able to manage and dyris these transactions, but mostly regulate, right? Mostly regulatory reasons are where distribution utilities can buy such power, but not individual consumers like large factories or large consumers.

23:24 Karan Takhar
I think it would be nice to like ask you one final question to Conclude what does the future of the Indian electricity system looks like In your mind?

23:40 Vibhav Nuwal
That's, uh, that's interesting current. So I think the future looks something like this, right, uh, I do feel that all future capacity growth will come through renewables. I think there is very little appetite for coal-based plants, not just for all reasons around climate change, but also because solar and wind can really now price out, have really already priced out coal-based plants. So, so we'll see a lot more renewables, we will also see a lot more of smarter grid integration, so for example, you know, renewables along with, say, wind and solar hybrids or solar and storage like you mentioned Etc. So that's kind of one side of what? UM and much more digital in that sense because of this integration requirement and the flexibility requirements, so that's kind of one side of how the future looks like. I think the other very important side of what the future looks like is a lot of smart metering, something that we didn't talk about today, but a lot of smart meters, smart metering that utilities will implement potentially will also lead to reform of utilities that will be absolutely essential that utilities are reformed, and their financial situation improves. There has been a lot of talk about direct benefit transfer around subsidies, so we should see that. But all of this or the underlying aspect of it will be our smart metering and smart.

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