Ashwin Gambhir - Setting the Right FiT Rates Challenges in India

8/6/2019 Ashwin Gambhir - Setting the Right FiT Rates Challenges in India

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Setting the right FiT rates:Challenges in India

Prayas Energy Group, Pune

Ashwin Gambhir,

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

June 20-21, 2011, Manila

Workshop on Feed-in Tariff Policy


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Feed in Tariffs (FiTs)

FiT is a combination of policy instruments.

The FiT rate is only as good as the data and

assu p o s a go o a g .

For a successful RE program, a number of

other policy and regulatory enablers need tobe 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

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1. Information asymmetry

the Commission observed that no developer came upwith relevant data as was required and also that developersor their representative associations failed to bring in

transparency as mandated under the ERC Act, 1998 in thewhole process by refusing to divulge details. Thus theCommission was constrained to proceed without adequate

Data mainly from developers and industry.

Very little independent analysis. No way to judge the appropriateness.

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.


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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

ocuments or t e operat ona cogenerat on pro ects n or erto 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 Submissiondate

Cost per MW(Rs. Crore)

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

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ONGC Gujarat 15.6.2007 6.08

Bharat Electronics Ltd, Karnataka 16.6.2007 7.45

45% variationTariffs increasing over time.

FiTs & capacity based incentives like accelerated depreciationcoupled with vertical integration (especially in the wind sector)

discourages competition and cost reduction.


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Interest & Discount Rates; ROE

Solar

CERC FiT with

13.25% interestrate and 15.88%

discount rate(Rs/kWh)

With lower

interest (6%)and discountrates (6.6%)

Pricedrop

ROE -10%

Pricedrop

Only for Illustration purposes

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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%, usedonly 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 basedtariffs.

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

.

Lack of independent institutional capacity to declare sitesaccording to wind zones.

Germanys wind sector, a case in point.

3 year wind resource data by three independentagencies.

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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

(generation & grid infrastructure).

No mechanism to distribute additional costs equitably.

The National Tariff Policy (recently amended) suggests that allstate 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 makesfor a highly non-level playing field.

cu o compare e rea cos o e ec r c y rom erentechnologies & 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), theirconsiderations and constraints (cost of capital, discount rates, needfor 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 inwindfall profits and a non-optimal use of societys resources.

Hence a rationalization of incentives needed prior to FiTsetting.

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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 higherinitial costs.

. . , ,

Commission notes that in Cost Plus Approach, rate per unitcharged 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

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s/kWh

CERC tariff of Rs 17.91 / kWh

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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10

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0 15 30 45 60 75 90 105 120 135 150

PVTariffsin

PV Capacity in MW

Rs 12.76 / kWh

Rs 10.95 / kWh


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Comp bidding of 479 MW of CSP

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20

kWh

CERC Tariff of Rs 15.31/kWh

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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10

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0 100 200 300 400 500

C

ST

tariffsin

`

CST capacity in MW

Rs 12.24/kWh

Rs 10.49/kWh


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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 (toreview 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 playingfield across technologies and investors.

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Documents

Ashwin Gambhir - Setting the Right FiT Rates Challenges in India