September 30, 2009
The world’s largest single political jurisdiction to date, India, has made a strategic move to use a comprehensive system of feed-in tariffs to develop its renewable energy potential.
China had previously announced feed-in tariffs for wind energy only. The country is expected to reveal feed-in tariffs for solar energy later this year.
India’s Central Electricity Regulatory Commission (CERC) in New Delhi announced September 17, 2009 new regulations launching a system of feed-in tariffs for renewable energy, including both wind and solar energy.
India’s 1.1 billion people together with China’s 1.3 billion and the bulk of Europe’s 300 million inhabitants –about one-third of the world’s population– have committed to developing renewable energy with feed-in tariffs.
It was not clear from CERC’s press release that the feed-in tariff regulations were in response to the National Action Plan on Climate Change. The action plan calls for five percent of electricity generation in India to be from renewable sources by 2010 and to increase one percent per year for the next ten years. Yet, the move by CERC on feed-in tariffs strengthens India’s position in the run up to the climate change negotiations in Copenhagen.
China’s introduction of feed-in tariffs this year and recent pronouncements by the government are also seen as positioning the developing world, especially Asia’s two economic powerhouses as taking action in regard to laggards in the developed world, such as the US, Canada, and Australia.
Neither the US nor Canada has a climate change action plan nor a national goal of renewable energy in either nation’s electricity supply.
However, it remains uncertain whether CERC would set specific tariffs or whether each project would apply for tariffs individually. In most jurisdictions, feed-in tariffs are specified for each technology or application.
CERC’s regulations are a merely a primer on how to calculate tariffs for each technology. CERC said they focused on setting preferential tariffs for the period of debt repayment while maintaining an “adequate IRR” or internal rate of return. Yet there are no tariffs in CERC’s published documents.
Interestingly, CERC specifies the tariffs before tax. Unlike the practice in the US, where federal tax subsidies play such an important part in project finance, the Indians specify a “normative return on equity” used in the calculations of 19 percent pre-tax during the first 10 years, and 24% after 10 years. This is comparable to the method used in Europe.
CERC also said that developers can approach the commission for project-specific tariffs as well as take the posted tariffs.
If Indian practice follows that in North America, CERC will open a regulatory docket to determine specific tariffs. And in fact, CERC has posted a public notice on its web site dated September 23, 2009 calling for comments on the regulations.
The new regulations spell out what assumptions need to be made to calculate the tariffs. For example, the regulations say that the discount rate used in determining the tariff will be the average weighted cost of capital. Further, the tariffs, defined as the levelized cost of energy, are derived from the specific “useful life” of each technology.
Wind projects will only receive the tariffs if they are located on sites with a minimum of 200 W/m² at 50 m. This is equivalent to a Class 2 or 5.5 m/s wind resource in the Battelle system of wind classes.
As successfully used in Germany and France and now proposed in China, India’s new regulations will vary the tariff for wind energy based on resource intensity. CERC does this in an unusual way. They specify the capacity factor, or Capacity Utilization Factor in Indian English, to be used in four bands of wind power density in watts/m².
- 200-250 W/m²: 20%
- 250-300 W/m²: 23%
- 300-400 W/m²: 27%
- >400 W/m²: 30%
The first band represents Class 2 wind resources, the second band is between Class 2 and Class 3, the third band is in Class 3, and the final band is greater than Class 3 in the Battelle system.
Below is a summary of key elements in the Indian program.
- Includes all renewables
- Tariffs based on cost of generation plus profit (19% ROE)
- Contract terms: 13 years
- Contract term for Solar PV & Solar Thermal: 25 years
- Contract term for hydro <3MW: 35 years
- Wind tariffs based on resource intensity
- First review within three years, except for solar PV which begins after one year
- Market size: ~1.1 billion people
In an unusual degree of synchronicity, the contract term for small hydro projects less than 3 MW is 35 years. Ontario’s new feed-in tariffs for small hydro are for a contract term of a remarkably similar 40 years.