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Setting the right FiT rates: Challenges in India
Setting the right FiT rates:
Challenges in India

Ashwin Gambhir,

Senior Research Associate, Prayas (Energy Group), India.

June 20-21, 2011, Manila

Workshop on Feed-in Tariff Policy

Prayas (Energy Group), India. June 20-21, 2011, Manila Workshop on Feed-in Tariff Policy Prayas Energy Group,

Prayas Energy Group, Pune

Feed – in – Tariffs (FiTs)

• FiT is a combination of policy instruments.

• The FiT rate is only as good as the data and assumptions that go into making it.

• For a successful RE program, a number of other policy and regulatory enablers need to be in place.

into making it. • For a successful RE program, a number of other policy and regulatory

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Outline

• Important parameters while setting FiT

– Capital Cost

– Cost of Capital; financing considerations

– Capacity Utilization factor (Generation)

• Examples

– Wind; Bagasse Cogeneration; Solar (PV and CSP)

• Other considerations

– Retail Tariff Impact on consumers

– Tariff period & exit rules

– Other Govt and International subsidies/incentives

• Conclusions

on consumers – Tariff period & exit rules – Other Govt and International subsidies/incentives • Conclusions

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1. Information asymmetry

“…the Commission observed that no developer came up with relevant data as was required and also that developers or their representative associations failed to bring in transparency as mandated under the ERC Act, 1998 in the whole process by refusing to divulge details. Thus the Commission was constrained to proceed without adequate

data and financial information. (Mah Wind Order 2003)

• Data mainly from developers and industry.

• Very little independent analysis.

• No way to judge the appropriateness.

Data mainly from developers and industry. • Very little independent analysis. • No way to judge

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Sugar Cogeneration projects in Maharashtra

• Project developers filed petition for fuel cost increase

• Commission’s observations (Order dt. 11 Jan 2010)

– “the petitioner has neither provided any statistics, computations of cost of generation nor any supporting documents for the operational cogeneration projects in order to substantiate the cost of generation”.

– “Thus, relying on un-audited information based on limited number of projects with wide variation may not be prudent”.

Still commission increased purchase price by 35% Similar Issues in Biomass pricing

wide variation may not be prudent”. Still commission increased purchase price by 35% Similar Issues in

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Wind Power in India; Capital Costs in 2007

Client

Submission

Cost per MW (Rs. Crore)

date

Gujarat Alkalies and Chemicals Ltd

17.3.2007

5.14

Chennai Port Trust

04.4.2007

5.36

Rajasthan State Mines & Minerals Ltd

23.4.2007

5.16

ONGC – Gujarat

15.6.2007

6.08

Bharat Electronics Ltd, Karnataka

16.6.2007

7.45

Tariffs increasing over time.

45% variation

FiTs & capacity based incentives like accelerated depreciation coupled with vertical integration (especially in the wind sector) discourages competition and cost reduction.

coupled with vertical integration (especially in the wind sector) discourages competition and cost reduction. 6

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Interest & Discount Rates; ROE

Only for Illustration purposes

 

CERC FiT with 13.25% interest rate and 15.88% discount rate (Rs/kWh)

With lower interest (6%) and discount rates (6.6%)

Price

ROE -

Price

Solar

drop

10%

drop

PV

15.39

12.98

16%

10.11

34%

CSP

15.04

12.34

18%

9.6

36%

The CERC discount rate of appraising thermal power projects is 10.19%, used only for comparison. However in RE, levelized tariffs for actual payments.

thermal power projects is 10.19%, used only for comparison. However in RE, levelized tariffs for actual

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Wind zone based tariffs

• CERC has come out with guidelines for wind zone based tariffs.

• Maharashtra SERC too has come out with 4 different wind tariffs (considering CUFs of 20, 23, 27 and 30%).

• However these have not been made operational.

• Lack of independent institutional capacity to declare sites according to wind zones.

• Germany’s wind sector, a case in point. – 3 year wind resource data by three independent agencies.

wind zones. • Germany’s wind sector, a case in point. – 3 year wind resource data

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Tariff Impact – uneven across the country

• Very important consideration for regulators while setting FiTs.

• Different mix of consumer base across states (industrial, commercial, domestic, agri) - significantly varying impact.

• RE development thus far has been uneven and consumers in RE resource rich areas have had to bear the additional costs (generation & grid infrastructure).

• No mechanism to distribute additional costs equitably.

• The National Tariff Policy (recently amended) suggests that all state should go in for same RPOs (more or less), incl solar – implies varied tariff impacts)

) suggests that all state should go in for same RPOs ( more or less ),

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Other Govt Incentives

• A host of Central and State incentives (Capacity, performance based & fiscal) which vary in applicability and quantum across technologies, locations & investors makes for a highly non-level playing field.

• Difficult to compare the real cost of electricity from different technologies & set appropriate incentives which that do not result in wind fall profits.

• Regulators may or may not include while deciding FiTs.

incentives which that do not result in wind fall profits. • Regulators may or may not

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Non-level playing field

• Incentives not available uniformly to all investors.

• Given the variety of obligated entities and investors (State and

private Utilities, balance sheet financers, IPPs, CPPs and OA), their considerations and constraints (cost of capital, discount rates, need for working capital, risk of payments, existing financial health etc) vary.

• A uniform FiT (based on std assumptions of interest / depreciation &

discount rates etc), given the non-level playing field may result in windfall profits and a non-optimal use of society’s resources.

• Hence a rationalization of incentives needed prior to FiT setting.

and a non-optimal use of society’s resources. • Hence a rationalization of incentives needed prior to

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Tariff periods & exit rules

• Old RE projects with FiTs but shorter PPA periods

– Developed under FiT regime prior to REC

– Long term benefits should flow to consumers who supported higher initial costs.

• Example: Section 1.4.2, MH Wind Tariff Order, 2003:

“Commission notes that in Cost Plus Approach,… rate per unit charged by such projects during initial period of 10 years is bound to be higher as during this period the project has various debt related obligations. However, it is essential that the consumer is able to enjoy the benefit of cheaper power once all debt related obligations are paid off and project has virtually no variable costs.”

benefit of cheaper power once all debt related obligations are paid off and project has virtually

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Competitive bidding 150 MW; 5 MW-size PV

• Average PV tariff ~ 30% below CERC tariff

• Cost savings over 25 years ~ Rs 1,300 Cr / 300 Million USD (NPV 10%)

20 CERC tariff of Rs 17.91 / kWh 18 16 14 Rs 12.76 / kWh
20
CERC tariff of Rs 17.91 / kWh
18
16
14
Rs 12.76 / kWh
12
Rs 10.95 / kWh
10
8
6
0
15
30
45
60
75
90
105
120
135
150
PV Tariffs in
Rs/kWh

PV Capacity in MW

12 Rs 10.95 / kWh 10 8 6 0 15 30 45 60 75 90 105

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Comp bidding of 479 MW of CSP

• Average CSP tariff ~ 24% below CERC tariff

• Cost savings over 25 years ~ Rs 3,400 Cr / 750 Million USD (NPV 10%) PV + CSP Cost savings ~ Rs 4,700 Cr / 1 Billion USD (NPV 10%)

20 18 CERC Tariff of Rs 15.31/kWh 16 14 Rs 12.24/kWh 12 10 Rs 10.49/kWh
20
18
CERC Tariff of Rs 15.31/kWh
16
14
Rs 12.24/kWh
12
10
Rs 10.49/kWh
8
6
0
100
200
300
400
500
CST tariffs in ` /kWh

CST capacity in MW

16 14 Rs 12.24/kWh 12 10 Rs 10.49/kWh 8 6 0 100 200 300 400 500

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Conclusions

• Need to consider developing country political economy context

and national - sectoral priorities. (Utility financial health, shortages, universal access, paying ability, tariff impacts, caps for high cost solar)

• Changes to consider in Indian FiTs

– Degression (FiTs increasing over years)

– A mechanism like RE Fund (to spread costs equitably in country)

– Clear exit rules

– Monitoring, Verification and Reporting in a transparent manner (to

review performance and effectiveness).

• Balancing project viability and windfall profits is a science and art. Regulator needs to do this tight rope walk.

• Need effective institutional structures (to compile and analyze data) coupled with independent analyses to take into account latest technological and cost trends to try and ensure a level playing field across technologies and investors.

account latest technological and cost trends to try and ensure a level playing field across technologies

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THANK YOU

THANK YOU ashwin [at] prayaspune [.] org Prayas Energy Group www.prayaspune.org/peg 16

ashwin [at] prayaspune [.] org

Prayas Energy Group www.prayaspune.org/peg

THANK YOU ashwin [at] prayaspune [.] org Prayas Energy Group www.prayaspune.org/peg 16

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