2-part tariff in renewable generation
In August 2020, the Govt. came up with a “Must-Run” status to address the curtailment issues in renewable energy projects. However, despite this announcement many renewable projects are still being curtailed & there is a lack of clarity as to the reason behind it. Although many reasons can be speculated for generation curtailment, the commercial aspect could be possibly one of the major reasons contributing to it. Therefore, to fix this issue of curtailment, the introduction of a 2-part tariff mechanism is being contemplated in many states.
What is a 2-part tariff mechanism?
2-part tariff as the name suggests is a mechanism wherein the total tariff is split into 2 parts, namely, the fixed-part & the variable-part. The fixed-part of the tariff usually signifies the CAPEX (Capital Expenditure), while the variable-part of the tariff signifies the running costs / OPEX (Operational Expenditure). If such a mechanism is introduced with regards to renewable energy projects, the fixed-tariff could cover the capital cost associated to the setting up of the project, while the variable-tariff could cover the quantum of electricity generation from the renewable sources.
Why is it needed?
Currently, the renewable energy-based generation is governed by the conventional single-part tariff. Within this current single-part tariff mechanism, the total cost/tariff is variable & at Rs. 2.50 per unit of solar generation, it is not exactly the cheapest source for electricity generation. For older solar plants, the generation cost is at Rs. 3.00 per unit generation, while for wind projects the cost is at Rs. 4.50 per unit generation. These costs are much higher in comparison to the unit generation costs of conventional sources (Rs. 1.30-2.00). Furthermore, the total costs are generally minimized by dispatching the electricity from sources having the cheapest variable cost (i.e., generation costs). This in-turn leads to SLDCs (State Load Dispatch Centres) defying the ‘Must-Run” status of renewables, so that DISCOMs can save money by curtailing the generation from renewables. Therefore, a 2-part tariff mechanism can possibly act as the solution to this issue. Through this mechanism, a certain percentage of the total tariff can be allocated as the variable cost, which can make sure that the generation from these renewable sources has the lowest variable cost/tariff & subsequently result in the upkeep of the “Must-Run” status. Additionally, with an appropriate balance between the fixed & variable cost/tariff, the project developers can be ensured of a certain minimum return irrespective of when/how the renewable generation takes place. This can subsequently boost the interest of new investors & invite large investments in the renewable energy sector in the near future.
The transition from the conventional single-part tariff to the 2-part tariff mechanism for renewable energy generation is of utmost importance & has to be realized as soon as possible. By this way, India can overcome the issue of curtailment to a considerable extent & thereby progress smoothly towards the large-scale renewable share in electricity generation.