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, 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.
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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

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.

Sugar Cogeneration projects in Maharashtra

Project developers filed petition for fuel cost increase Commissions 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
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Wind Power in India; Capital Costs in 2007

Client Submission Cost per MW date (Rs. Crore) 17.3.2007 04.4.2007 23.4.2007 15.6.2007 16.6.2007 5.14 5.36 5.16 6.08 7.45

Gujarat Alkalies and Chemicals Ltd Chennai Port Trust Rajasthan State Mines & Minerals Ltd ONGC Gujarat Bharat Electronics Ltd, Karnataka

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.
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Interest & Discount Rates; ROE

Only for Illustration purposes

Solar

CERC FiT with 13.25% interest rate and 15.88% discount rate (Rs/kWh) 15.39 15.04

With lower interest (6%) and discount rates (6.6%) 12.98 12.34

Price drop

ROE 10%

Price drop

PV CSP

16% 18%

10.11 9.6

34% 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.
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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. Germanys wind sector, a case in point. 3 year wind resource data by three independent agencies.
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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)
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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.

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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 societys resources. Hence a rationalization of incentives needed prior to FiT setting.
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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.
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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%)
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CERC tariff of Rs 17.91 / kWh

PV Tariffs in Rs/kWh

16 14 12 10 8 6 0 15 30 45 60 75 90 105 120 135 150

Rs 12.76 / kWh

Rs 10.95 / kWh

PV Capacity in MW
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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%)
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CST tariffs in `/kWh

16 14 12 10 8 6 0 100 200

CERC Tariff of Rs 15.31/kWh

Rs 12.24/kWh

Rs 10.49/kWh

300

400

500

CST capacity in MW
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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.
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THANK YOU
ashwin [at] prayaspune [.] org Prayas Energy Group www.prayaspune.org/peg

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