The power sector in India has undergone a significant transformation, both at the central and state levels. Several efforts have been made in the last few decades to revamp the distribution sector, such as unbundling state electricity boards, allowing open access in distribution, and making regulatory bodies autonomous. However, the sector continues to face considerable challenges.

Distribution utilities (discoms) continue to struggle with challenges such as theft, billing and metering inefficiencies, high cross-subsidy burden, higher T&D losses, legacy PPAs, and underinvestment in infrastructure (Regy and Sarwal 2021). Ultimately, these challenges have led to a large number of discoms facing capital challenges and insolvency. The residential and agriculture consumers are at the heart of these financial challenges (Regy and Sarwal 2021). Under current conditions, electricity supplied to these consumers is highly subsidised across states, resulting in low revenues and leading to under-recovery of costs by discoms. The difference between cost and revenue is primarily compensated by imposing high tariff rates on commercial and industrial consumers, while the remaining revenue gap is supported through state subsidies and revenue grants under the Ujwal DISCOM Assurance Yojana (UDAY) scheme. In 2019–20, discoms recovered only 95 per cent of the total expenditure incurred on supplying electricity to consumers, after taking into account state subsidies, revenue grants, and other incomes (PFC 2021). Tariff subsidies constitute a significant portion of the total revenue, amounting to 17 per cent (PFC 2021). The cost of under-recovery by discoms impacts the overall financial health of the power sector (Garg and Shah 2020). This condition threatens the viability of the sector and handicaps the sector’s ability to contribute to meeting national climate and renewable energy goals.

Operational performance of discoms across India lags behind performance of discoms in other modern countries. The T&D3 losses at the national level stand at ~20.66 per cent, with distribution losses amounting to INR 31,672 crore (or USD 4.17 billion4 ) (CEA 2022; PFC 2021). The aggregate technical and commercial (AT&C) losses have been improving, down to ~22 per cent, but are still considerably high as compared with performance in other countries such as Japan (4 per cent), China (5 per cent), the United States (6 per cent) (Regy and Sarwal 2021). The billing and collection efficiency of discoms has also improved but remains far from achieving 100 per cent and currently stands at 85 per cent and 92 per cent, respectively. The profitability gap continues to be positive, as demonstrated by the average cost of supply (ACS) being higher than the aggregate revenue requirement (ARR)5 and is currently at ~INR 0.6 per kWh (PFC 2021). The operational and financial performance varies considerably across states and between private and state discoms. The AT&C losses vary from more than 30 per cent in Madhya Pradesh, Jharkhand, and Bihar, to less than 15 per cent in Tamil Nadu, Kerala, Punjab, Gujarat, Andhra Pradesh, etc. (PFC 2021). A few states and union territories perform well and incur surplus instead of revenue losses per unit, such as Gujarat, Assam, Chandigarh, and Mizoram (PFC 2021). The inefficiencies in the distribution sector impact the financial health of discoms and result in massive overdue balances to generators. As of March 2022, the discoms’ overdue balance to generation companies at the national level is INR 92,184 crore (or USD 12 billion) (Ministry of Power n.d.).

Several central schemes have been introduced to fastrack the upgradation of distribution infrastructure and improve operational efficiencies, such as UDAY, Integrated Power Development Scheme (IPDS), and Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) (Regy and Sarwal 2021). However, the distribution sector continues to face clear barriers. Transitioning to distributed renewable energy (DRE) is emerging as an opportunity that can also contribute to meeting various objectives envisioned in the above-mentioned schemes, and this can lead to improved discom performance such as making the residential consumer self-sufficient, reducing billing and collection issues, and reducing losses by co-locating the systems at the point of consumption, among others.

Low-income households and the discom’s challenges

In most of the states in India, the electricity consumption is positively skewed, with more than 70 per cent of households consuming less than 100 kWh a month (Agrawal et al. 2020b). A large portion of these households resides in rural and semi-urban areas. These consumers’ usage characteristics and payment habits contribute significantly to financial and operational challenges faced by discoms. The linkage between low-income households and discom challenges is explained in detail below.

• Low paying capacity: Due to low consumption and low paying capacity, these consumers receive electricity at highly cross-subsidised rates. The retail tariff rate paid by these consumers is not reflective of cost causation, which is evident from the significant gap between tariff rate and the average cost of supply across states, as shown in Figure 1. Therefore, their contribution to the discoms’ overall revenue is not reflective of the costs for services they receive. Since it frequently costs discoms more to supply than they can collect from low-income consumers, they are disincentivised from serving these consumers, and billing and collection efficiency remain poor.
• Low demand: The low-income rural households reside in sparsely populated areas. Along with distance, overall low consumption and the propensity to use electricity at peak times make serving these consumers more expensive. The usage pattern of these customers and the lack of revenue they generate disincentivises discoms from upgrading the distribution infrastructure, further contributing to inefficiencies and higher power losses. This leads to a poor quality of service being supplied from the grid, with frequent power cuts and voltage fluctuations as a normal occurrence.
• Universal access to electricity: India has nearly electrified 100 per cent of its households with impetus from central schemes (such as Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), DDUGJY, and Saubhagya) (Saubhagya portal, n.d.). However, to achieve its objective of universal electricity access, there is also a need to improve the reliability and quality of the power supply. This requires investment to improve the distribution infrastructure. However, the discoms’ poor financial health hinders the sector’s transformation. The schemes focused on rural electrification are at odds with supporting the financial turnaround of the discoms because they do not address the challenges around tariff realisation (Regy and Sarwal 2021).

Figure 1 The difference between tariff rate and cost of supply is significant across states

Source: Agrawal et al. 2020b; PFC 2021

Community solar model – a viable pathway to the discom’s fiscal health

Distributed solar can play a pivotal role in the financial turnaround of the distribution sector by injecting low-cost solar to serve the subsidised consumers, and it helps to reduce the average cost of supply. It can also be instrumental in the decarbonisation of the residential sector, critical to achieving India’s renewable energy ambitions and net-zero goals. In addition, it offers several potential co-benefits such as job creation, better facilities for education and health, and improved power supply quality, among others (Purkayastha et al. 2021; Regy and Sarwal 2021; Tyagi et al. 2021). Distributed solar can come in many forms, from small modular rooftop units sited on consumers’ homes, to medium-sized units that serve the entirety of a multi-household building, to large units (e.g., 100kw) sited at a feeder or substation which pushes power to the grid and provides a variety of power and grid services.

Community solar models are a popular business model in the United States for deploying distributed solar technology. The model aggregates demand and proposes installing a larger system on the community premises owned either by the utility, developer or community. These units connect at the distribution level, providing larger and more controllable power supplies than household units. The medium-sized community solar model offers opportunities to solarise rural and semi-urban areas where consumers lack adequate roof space, in shaded areas, or face difficulties getting access to solar (such as low-income households). However, India’s discoms are not leveraging the benefits of distributed solar, and rather, many are opposing their adoption. Some discoms perceive the increased uptake of distributed solar as a disruption to their existing business model. The apprehensions among the discoms include the growing adoption of distributed solar by commercial and industrial consumers, further negatively impacting their revenues. Other key concerns include inequitable tariff mechanisms, the need to augment infrastructure, impact on the grid stability, increase in administrative responsibility, greater operations and maintenance, difficulty in recovery of fixed costs, etc. (Shakti and Deloitte 2016). The central government is pushing the deployment of rooftop solar through various schemes, such as a scheme for grid-connected rooftops and offering capital subsidies. However, the uptake of rooftop solar in the residential segment has been marginal over the years, particularly among low-consumption households in rural and semi-urban localities.

Within the residential segment, the early adopters so far are the high paying residential consumers and not rural and semi-urban households. While the opportunity exists in rural and semi-urban areas, there is significant inertia to move to rooftop solar due to limited awareness, high upfront costs, lack of financing, low paying capacity, etc. The consumer-centric challenges could be overcome through innovative models such as discom-owned community solar. This model also helps to overcome the discoms’ concerns over revenue loss, and supports accelerated distributed solar deployment.

Utility-driven community solar models are an attractive proposition for discoms. They enable the discoms to financially allocate the cheap, fixed price solar to the highly subsidised customers. It thereby benefits discoms in avoiding power purchase costs, meeting renewable energy obligations, reducing transmission and distribution loss, and transmission and generation capacity procurement. This will improve the financial health of the discoms by closing the gap between the cost of supply and revenue generated, resulting in reduced tariff rates in the long run. Over time, improvement to the financial health of the discoms by virtue of closing the gap between the cost of supply and collections will translate into savings for these consumers in the long run. These units can also provide balancing services and other grid needs. In addition, it helps them to contribute to the state’s solar energy goals through the accelerated deployment of distributed solar.

Community solar models are driven by discoms and also provide different grid services than utility-scale installations. Solar units sited at feeders and substations provide power where users locally consume power and mitigate grid inefficiencies that are currently present from the traditional model of pushing power out from a centralised generation source. It offers the discoms greater operational control at the community level, to serve the local load. The distributed nature of these systems adds to grid reliability and adds system benefits. The locally situated and load matched distributed resource reduces pressure on the grid by reducing congestion and avoiding distribution system upgrades, to accommodate unidirectional power that larger resources might push. It also solves the grid stability challenges arising from rooftop solar’s fragmented and haphazard penetration, such as reverse power flow, voltage fluctuations, and power loss (Uzum, et al. 2020). Community solar systems are also opportune sites for introducing battery storage solutions, creating further opportunities for grid support and other services.

Community solar as a concept helps overcome market barriers in serving residential households in rural and semi-urban localities, such as lack of awareness, access to finance, and inadequate roof space. It provides an opportunity to community members to be part of the energy transition by sharing the benefit of solar power. The deployment of community solar models in the United States has been done primarily in three ways – utility-owned-and-operated, developer-ownedand-operated, and community-owned-and-operated (Coughlin et al. 2010). However, each ownership mode presents its own set of challenges. In the case of the community-owned-and operated model, major barriers are the need to sensitise consumers about the potential benefits, lack of access to upfront capital by consumers, and the need for bringing about regulatory changes to facilitate such a model (such as introducing virtual net metering regulations, updating billing and metering mechanisms, etc.).

Considering the low success of RESCO models in India for RTS, developers will have similar apprehension for RESCO-based community solar models, such as the risk of consumer default, policy uncertainty, and burden of maintaining the system for 25 years, etc. Therefore, in the case of India, utility-led community solar models are more promising. This is because discoms are best placed to overcome these challenges (operations and maintenance, upfront cost, billing and metering, virtual net-metering, etc.) and could also achieve scale.

Under the discom-owned-and-operated model, the discom deploys a medium-sized solar PV system (100– 150 kW). The installation is carried out either on the discom’s substation land or on community land, in close proximity to a residential feeder. In the case of nonsegregated feeders, the feeder serving predominantly residential consumers is targeted. The energy generated by these systems is directly fed into the feeder supplying the residential load. The system will be set up by a solar developer/EPC company selected through a tendering process. The responsibility of operating and maintaining the system lies with the discoms.

In this model, discoms benefit from the reduced cost of providing electricity to sparsely distributed rural consumers. This model involves no direct community engagement but provides indirect benefits to consumers. That is, the overall savings under this model improve the discoms’ financial health and reduce supply costs. This translates into a reduction in tariff rates in the long run for consumers. In addition, the quality of power supply also improves for consumers with the co-location of the generating station closer to the feeder. The responsibilities of different stakeholders are described as follows, and shown in Figure 6.

Figure 5 Responsibilities of different stakeholders under the community solar model

Source: Authors’ analysis

Figure 6 Schematic of a utility-owned community solar model

Source: Authors’ analysis

Business case for utility-owned community solar in Bihar and Meghalaya

The project is supported by the US-India Clean Energy Finance (USICEF) task force which is a coalition between the Ministry of New and Renewable Energy and the US Department of State. Bihar and Meghalaya were selected as the potential states under the project, to assess the utility-led community solar model’s feasibility in targeting residential communities. Both states are predominantly comprised of rural households, with more than 80 per cent of households living in rural areas (Census 2011). In Bihar, more than 60 per cent of energy is sold to domestic consumers, whereas their share in the revenue is 31 per cent, resulting in a revenue gap (BERC, 2022; PFC 2021). A similar trend is observed in the case of Meghalaya, with a share of about 26 per cent in energy sold and about 24 per cent in revenue (MSERC 2021; PFC 2021). To compensate for the revenue gap, Bihar and Meghalaya discoms received a subsidy of INR 5,193 crore (or USD 0.7 billion) and INR 10 crore (or USD 1 million), respectively (PFC 2021).

In terms of per-unit basis, Bihar received a tariff subsidy of INR 1.63/kWh and Meghalaya INR 0.04/kWh, to cover up for the revenue gap of more than INR 4/kWh (PFC 2021). Therefore, both states became suitable candidates for the installation of utility-owned community solar models to improve the discoms’ financial health.

For the feasibility assessment, we adopted the approach developed by Kuldeep et al. (2019) to estimate the value of a grid-connected rooftop solar system, the VGRS framework. The approach estimates the direct benefits to discoms of installing distributed solar such as savings in terms of the average power purchase cost (APPC), avoided generation capacity costs (AGCC), avoided transmission charges cost (ATRC) and avoided renewable energy certificate cost (ARECC). These benefits are compared with overall capital investment to estimate the return on investment. The detailed methodology of the VGRS framework and assumptions are discussed in the annexures. APPC savings refers to the discoms savings in terms of the variable component of the power purchase cost. AGCC captures the saving in terms of avoiding fixed expenses of signing a new PPA as generation from the solar plant can decrease the contracted capacity for a new PPA. An increase in distributed solar capacity within a discom’s distribution network reduces its overall energy requirement. This reduces the need for additional transmission capacity, and these savings constitutes the ATRC benefit. The ARECC refers to the cost of avoiding the purchase of renewable energy certificates by discoms to meet their renewable purchase obligations. The findings from the benefit analysis are presented here:

• System-level analysis: If NBPDCL installs a 100kW community solar system at the cost of INR 39,08,000 (or USD 51,503), it saves INR 2.7 crore (or USD 3.5 million) during the lifetime of the project. In the case of Meghalaya, the MePDCL saves INR 2.8 crore (or USD 4 million) during the project lifetime for an installation of 100 kW. The reduction in power purchase costs largely contributes to the savings for both states. In terms of per kW, Bihar saves INR 2.7 lakh (or USD 3,558) per kW and Meghalaya INR 2.8 lakh (or USD 3,690). As discussed in Figure 1, more than 80 per cent of consumers in Bihar are consuming less than 100 units and facing low tariff rates, which is non-cost reflective. This translates into significant savings in terms of avoided power purchase costs if these consumers are served by low-cost solar, as shown in Figure 7. The consumer benefits indirectly from the improved financial health of discoms, resulting in reduced cost of power and improvement in the quality of supply in the long run.

Overall, the return on investment is positive for discoms if they own and operate the model with net benefits11 of INR 62 lakh (or USD 81,709) in the case of Bihar. For Meghalaya, the net benefits of a 100 kW community installation are INR 61 lakh (or USD 80,391). Therefore, there is a significant role utility-owned community solar could play in improving the financial health of discoms.

• Impact on system-level benefits from scaling up: A significant scale-up of the utility-owned community solar model could also provide increased benefits to discoms. We conducted the state-level analysis for Bihar to identify the potential benefits of scaling up. The analysis presented three scenarios – a moderate scenario with a target of 500 MW, an ambitious scenario with a target of 1000 MW, and a highly ambitious scenario with a target of 2000 MW. Under the moderate scenario, if 500 MW of community solar systems are installed, the net system-level benefit (including AGCC, APPC, ARECC and ATRC) for discoms over 25 years could be projected up to INR 10,478 crore (or USD 1.4 billion), as shown in Figure 8. In this scenario, the first-year benefits could reduce the subsidy requirement by 8 per cent for Bihar (BERC, 2022). As we increase the target installations, the net benefits increase significantly. Under ambitious and highly ambitious scenarios, the net benefits stand at INR 20,956 crore (or USD 2.7 billion) and INR 41,913 crore (or USD 5.6 billion), respectively. The return on investment is positive under all three scenarios for discoms in Bihar.
• Trajectory of system benefits: If we analyse the benefits over a 10-year trajectory for NBPDCL, the number of units purchased from conventional sources declines by 2 per cent under a moderate scenario, compared to the business-as-usual (BAU) scenario. The decline increases further to 4 and 7.9 per cent under ambitious and highly ambitious scenarios, respectively. A similar trend is observed in the case of power purchase cost with a decline of 2.4 per cent, 4.8 per cent and 9.5 per cent under three different scenarios, compared to the BAU. The utility-owned community solar installation also accelerates the rate of decline in AT&C losses over a 10-year trajectory, following a decline in the energy requirement. Figures 9 and 10 represent the benefits of the first year under three different scenarios. There is a significant reduction in the power purchase cost and units required from year 1. The benefits increase with scaling up. This helps to reduce the revenue gap that discoms face and improves their overall financial health.

Figure 7 Significant system-level benefits if a 100 kW community solar system is installed by NBPDCL and MePDCL

Source: Authors’ analysis using the VGRS framework developed by Kuldeep et al. (2019)

Figure 8 System-level benefits of community solar system installation in Bihar are positive under three scenarios

Source: Authors’ analysis using the VGRS framework developed by Kuldeep et al. (2019)

Figure 9 Significant decline in power purchase requirement and cost under three scenarios for NBPDCL

Source: Authors’ analysis using the VGRS framework developed by Kuldeep et al. (2019)

Figure 10 Scaled community solar installation increases the pace of decline of AT&C losses

Source: Authors’ analysis using the VGRS framework developed by Kuldeep et al. (2019)

Comparative assessment of different ownership modes of the community solar model

Source: Coughlin et al. 2010; Heeter et al. 2021

Discom financial benefits are highest in the utility-owned community solar model, with no sharing of direct savings either with consumers or developers. Considering the operational challenges, it is easier to implement the utility-led model as it is a new concept for India. Other ownership models could be tested later on, as the utility-owned installation proves the validity of its concept and scales.

Is the Indian ecosystem ready to adopt the utility-owned community solar model?

Despite the significant potential to scale up, the Indian ecosystem faces real barriers to adopting community solar in the described context. There are several challenges faced by discoms, restricting its adoption in India.

• Lack of access to finance: One of the critical concerns for discoms is access to capital for financing such projects. Due to their poor financial health, discoms receive poor credit ratings, restricting their access to cheap capital. Given their limited access to capital, distributed solar is not prioritised over other system investments.
• Tedious tendering process and low participation rates: Discoms are required to issue tenders for installing these projects under the CAPEX model. In general, low participation is observed from solar companies for distributed solar tenders. This is largely driven by multiple challenges such as different tendering guidelines across states, higher earnest money deposit (EMD) requirements, variation in qualification criteria, unreasonable timelines, certification requirements, and restrictive benchmark rates.12 Tendering for community solar projects might also encounter similar challenges. In addition, the process of seeking approvals by discoms may face procedural delays and impact the progress of these installations.
• Lack of discom appreciation of the benefits: Similar to community solar, the Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan Yojana (PM-KUSUM) scheme targets the agriculture feeder for solarisation. The scheme has seen a low participation rate from discoms as they prefer to procure low-cost power from utility-scale projects rather than undertaking efforts to install distributed solar projects (Rahman, Aggarwal, and Jain 2021). Community solar projects could also witness such competition and trade-offs, and initially, it would be difficult to get discoms on board.
• Underdeveloped internal capacity for control of distributed energy resources: Discom grid operators and executives have expressed their ongoing challenges with balancing the grid due to the growth and expansion of distributed rooftop solar systems. These concerns have also been articulated in relation to the application of community solar. The ability to manage a dynamic grid is essential as more intermittent generation resources join the grid to meet decarbonisation goals. Grid management could improve with the potential integration of battery systems which, however, would increase the cost of the system.
• Absence of financial incentives: Presently, there are no financial incentives that could nudge the discoms into undertaking community installation. The incentive available through the MNRE rooftop solar scheme also limits the subsidy to consumers who install systems within their premises and are direct beneficiaries. However, under the utility-led community solar projects, community engagement is limited, but the consumer benefits indirectly in the long run. Therefore, these incentives could not be leveraged for community solar installations due to the larger system sizes. These incentives would have enabled faster uptake of distributed renewables and the achievement of India’s ambitious clean energy targets.

As Section 3.2 shows, there are long-term benefits for discoms from scaled community solar installations. However, these models have not been tested so far in India. A pilot of such a project will demonstrate the potential benefits to discoms, as supported by enabling policies. Community solar installations in the United States have been supported by enabling regulations and policies, which contributed significantly to scaleup (Heeter et al. 2021). Therefore, there is a need to create a supportive ecosystem that would require persistent efforts to nudge the discoms into undertaking community solar installations.

Methodology and assumptions for estimating benefits for discoms and consumers

Table A1 Assumptions for levelised cost of energy (LCoE) calculations

Source: (BERC, 2017, 2022; MNRE, 2021; MSERC, 2014, 2021)

Table A2 Assumptions for cost-benefit analysis

Source: (BERC, 2017, 2022; MNRE, 2021; MSERC, 2014, 2021)

The methodology to calculate cost and benefit are derived from Valuing grid-connected rooftop solar study (Neeraj et. al, 2019).

Table A3 Formulas for estimation of different benefits

Source: (Kuldeep et al., 2019)

Table A4 Assumptions for state-level analysis

Source: Authors' analysis