From a regime of long term power purchase agreements (PPAs) and predetermined pricing, private players are quite excited about merchant power; as they have the opportunity to negotiate prices bilaterally or via an exchange. But merchant power is also inherently risky, since it is not backed by the kind of guarantees that long term PPAs provide. That is why banks are also more confident of funding projects with at least 60-70% of long term PPAs. In the short term, power demand can fluctuate menacingly, so private players may be exposed to significant risks (prices, demand shortfalls & payment defaults) before the market matures as a whole; on the lines of developed markets like UK, where 2 years is considered long term. Finally, considering the cost of producing power and its environmental impact, we would risk playing devil’s advocates and mention that the price of power has to be carefully calibrated to curb excesses. Kameswara Rao agrees, “It’s not just revising tariffs to reflect costs but to look at allocative efficiency as well; i.e. the type of consumption (time of day, seasonal, et al) and the size of the user (slabs, categories) to encourage conservation and economic use of electricity. Even a simple indexation to inflation would have helped, but unfortunately in many states the tariffs have not been revised for several years.” This provides India with a miserable record of one of the lowest energy intensities in the world. Yes, the private sector may achieve the goal of ‘Power for All’ ultimately and light the ‘bulb’, but Indian consumers would do well to keep its true cost in mind every time they switch it on.B&E: How has the policy landscape changed for the renewable energy in the last few years?
MT: In India, the Ministry of New & Renewable Energy introduced the concept of generation based incentives to promote grid-connected solar power plants for the first time in January 2008. However, this policy had an extremely small target of 50 MW with payment guarantees of only 10 years compared to the global practice of 20 – 25 years. Because of these and other reasons, the policy did not result into any actual projects. The solar mission (announced in June 2008) has laid out an extremely ambitious target of generating 20,000 MW of solar power by 2022. This is set to transform not just the solar industry in India but also the energy map.
B&E: How are tariffs of power from renewable energy getting set?
MT: The generic tariff for the renewable power is set by following an established procedure involving a public hearing of interested parties by the CERC. CERC looks at what should be fixed as the normative capital cost for one MW of a renewable energy project. Then it looks at all other costs including the cost of finance and O&M costs etc. It then fixes the levellised tariff for the next 20-25 years as the case may be so that the investor can get a pre-fixed rate of return on his equity investment. For solar this normative return on equity has been fixed at 19% pre-tax for the first 10 years and 24% for the years 11 to 25.
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Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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