Here comes the sun, and it’s all right. The surge in distributed solar over the last eighteen months has led to an exodus from the electricity grid, as the reduction in the price of solar panels has made distributed solar more affordable. Growth in the adoption of solar has changed the way households and industries alike consume electricity.
During the past decade, peak consumption was largely during the day when industries and households consumed electricity for production and cooling purposes, respectively. However, as distributed solar energy started becoming more affordable, there has been diversion of consumption from the grid to distributed solar.
Such diversion has led to the emergence of a phenomenon called a ‘duck curve’ globally, whereas the sun starts shining bright, energy generated through solar starts kicking in, reducing consumption of electricity through the grid.
Effectively, due to favourable economics of solar, peak energy requirements shifted from the daytime to late at night at 11pm, extending to 2am. This provides an opportunity to adjust peak time-of-use (TOU) prices — currently for 6pm to 10pm during which peak consumption actually doesn’t exist.
The surge in distributed solar leading to surplus capacity can allow industries to purchase electricity at marginal price
Peak consumption late at night effectively means that surplus capacity is available during the day, which can be redirected for industrial consumption. Doomsayers suggest that industrial consumption moving off-grid would be the death knell for the grid — however, the data may suggest otherwise.
A review of industrial consumption over the last two years suggests that there has been a drop in consumption year-on-year. Industrial growth as measured by the Large Scale Manufacturing (LSM) index stayed flat between FY23 and FY24 — when electricity consumption from the grid actually reduced. Adjusting for it, it is estimated that around 300 megawatts of industrial demand moved to solar.
However, that doesn’t mean that any industrial growth that will come in the future would come from solar — it will require the grid, as any surplus space available for solar close to industry would soon be filled up, or become too expensive for solar to make economic sense.
The surge in solar consumption has led to surplus capacity during the daytime. First, principles of economics suggest that there are buyers of a certain commodity at various prices, and any surplus can be cleared out through a marginal price. Moreover, in the case of power, the marginal cost would be the cost of the fuel that is being utilised to dispatch that additional unit of electricity.
Due to the surge in solar consumption, during peak daylight hours, between 7am and 2pm, the average surplus capacity available relative to the peak was in the range of 3,000MW. Similarly, during June 2024, the same was in the range of 1,500MW. Effectively, during a 24-hour period, the variation between peak consumption and average consumption during peak daylight was in the range of 1,500MW and 3,000MW for June 2024 and September 2024, respectively.
During the same daylight interval of 7am and 2pm, the average marginal cost of electricity was Rs20.4 per kilowatt hour (kWh) for June 2024 and Rs13 per kWh for September 2024. This provides an opportunity to sell surplus capacity at the marginal cost.
Industries can be provided an incentive to consume incremental electricity at the marginal cost, plus a buffer for prudence. As they consume more electricity, their average electricity costs reduce, improving the overall economics of production in the process.
Maximum industrial electricity consumption in the country has not exceeded 3,800MW from the grid; any additional utilisation that may come, even if consumption is maxed out may not be more than 400-600MW depending on the current numbers.
Effectively, over the short run, it is entirely possible to allow industrial users to utilise surplus capacity available during peak daylight at marginal costs. Such a maneuver would not just increase consumption from the grid, but also reduce average costs of industries in the process.
The marginal cost would be different every month, depending on the season, temperature during the day, cloud cover, etc. Similarly, for different electricity distribution companies, the surplus capacity available relative to peak capacity is in the range of 13pc for K-Electric and 28pc for the Sukkur Electric Supply Company.
Adjusting for variation, marginal costs can be further adjusted to stimulate consumption for different distribution companies. Such a regime that prices incremental consumption between certain hours of the day at a marginal cost can be institutionalised through TOU metres.
In the mid- to long run, marginal costs can be projected on an hourly and monthly basis. Surplus capacity available can be auctioned off through a Dutch auction process to industries that are willing to incur capital expenditure to expand production, and eventually consume more electricity.
Surplus capacity and solarisation is a good problem. The solution to the problem lies in clearing out such surplus capacity through a market-driven pricing process. The country has a shrinking industrial base — it is time to grow it and leverage surplus power generation capacity through an efficient pricing regime.
The writer is the CEO of National Credit Guarantee Company Ltd and assistant professor of practice at IBA, Karachi
Published in Dawn, The Business and Finance Weekly, December 9th, 2024
