Tariff determination approaches for RE projects

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The tariff determination for solar PV projects initially started in the form of feed in tariff (FIT) which was primarily arrived based on a certain rate of return on equity. Over the period most of the state have moved away from FIT regime to reversed bidding approach which left to the tariff of solar project as low as 6.5 Rs/unit. The prime motivation to investor is the accelerated depreciation benefit which is about 0.88 Rs/unit.

There have been various approaches adopted for determinant tariff for solar projects internationally. In UK the price of solar PV is determinant base on system marginal accruement price. Which typically reflect the additional cost of generation from their existing plants. This promotes efficiency in electricity accruements from renewable.

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The typical FIT mechanism in India is based on cost base tariff methodology and the capital cost of renewable power source remain higher and benefits the manufacturer of the technology. This is the reason most of the manufacturer have kept there system cost as high as 6- 6.5 crore Rs/Mw.  On one side the cost base methodology to define FIT helps projects to achieve financial closer due to clarity in case flows, however this doesn’t help in reducing the tariff and the average procurement price to the utilities win in high. The FIT is typically introduce to promote new technologies and over the period it is expected that cost of technology will come down due to technological improvements & economies scale. However there is no incentive to the manufacturer to reduce price and there is a typical movements of tariff determination approach from FIT regime to the competitive pricing regime. This is the reason when technology mature most of the regulators introduce procurements of solar PV through market is competitive procurement procedure to reduce cost of solar PV.

In India the competitive procurement is adopted through introduction of bidding and also introduction of REC certificates which can be traded in the open markets. On one side the utilities are having RPO obligations to procure solar power either through competitive bidding or through meeting their obligation Marely by purchasing REC certificates. The success of this is heavily dependent on the enforcement of these regulatory provisions it can be seen that so far most of the state have not fulfilled their RPO obligation nor they have bought REC certificate from the solar power generators. If regulatory uncertainty continuous in Indian market, it will be difficult to attract investors in developing solar projects.

Article By: Dr. Sanjay Vashishtha & Kapil Dev Sharma

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