Renewable Energy Pricing Presentation Outline Overview

Renewable Energy Pricing

Presentation Outline ¢ Overview of key issues in Renewable Energy (RE) pricing l Global renewable energy status • Grid-connected electricity generation l Barriers and limitations to renewable energy growth l Need for renewable energy support l Renewable energy policy experience l Key issues in renewable energy pricing ¢ Review of tariff setting methodologies for grid connected RE power l l International best practices Dominant RE pricing mechanisms

Global renewable energy status Renewable Power Capacities for Developing Countries, EU, and Top 6 Individual Countries, 2005 Source: Renewables Global Status Report 2006 Update

Global renewable energy status Renewable Electric Power Capacity, GW existing as of 2005 World Total Developing Countries EU-25 China Germany U. S. Spain India Japan Small hydropower 66 44 12 38. 5 1. 6 3 1. 7 3. 5 Wind power 59 6. 3 40. 5 1. 3 18. 4 9. 2 10 4. 4 1. 2 Biomass power 44 24 8 2 1. 7 7. 2 0. 5 0. 9 >0. 1 Geothermal power 9. 3 4. 7 0. 8 ~0 0 2. 8 0 0 0. 5 Solar photovoltaicgrid 3. 1 ~0 1. 7 ~0 1. 5 0. 2 <0. 1 ~0 1. 2 Solar thermal electric 0. 4 0 0 0. 4 ~0 0 0 Ocean (tidal) power 0. 3 0 0 0 0 Total renewable power capacity 182 79 63 42 23 23 12 7 6 Technology Source: Renewables Global Status Report 2006 Update

Global renewable energy status Cumulative Number of Countries/States/Provinces Enacting Feed-in Policies Source: Renewables Global Status Report 2006 Update

Barriers and limitations to renewable energy growth Economical and Technological Investment costs, technology maturity level, etc Market Related Electricity pricing, unbundling and restructuring, power purchase structure, etc Barriers Institutional Nature and allocation of incentives, availability of finance, etc

Barriers and limitations to renewable energy growth ¢ Economic and Technological l Investments costs • High levels of capital cost, low volume production, current manufacturing practices l Technology Maturity-level • E. g. Renewable Energy Technologies (RETs) such as Solar l l l Resource Availability and Demand/ Supply Match Location of Supply Sources Grid Stability

Barriers and limitations to renewable energy growth ¢ Market-related l Privatization • Increasing private privatization can increase the cost of capital and make high initial investment in RETs unattractive l Restructuring and Unbundling • Such reform measures may reduce incentives for distributed generation l Energy and Electricity Pricing • Rational tariff structure; internalization of socio-economic costs l Power Purchase Structure • Insufficient incentive of power generation from RETs in case of fixed cost based PPAs

Barriers and limitations to renewable energy growth ¢ Institutional l Nature and allocation of Incentives • Need for clear policy guidelines, proper allocation of government incentives l Availability of Finance • Difficulty in obtaining competitive forms of finance due to lack of familiarity and high risk perception l Infrastructure Availability • Non-availability of land, transmission and distribution networks leads to low exploitation of such resources

Need for renewable energy support Pricing of power generated from renewable energy sources Lack of access to credit Regulatory and Policy Intervention Intermittent nature of electricity from wind and small hydropower Restrictions on siting and access to grid

Renewable energy policy experience ¢ ¢ Feed-in Tariffs (E. g. Germany, Denmark) l A minimum guaranteed price per unit of produced electricity to be paid to the producer; it is a premium that is paid in excess of the market price for electricity Renewable Energy Obligation/ Renewable Portfolio Standard (E. g. UK, Texas) l This is an obligation on licensed suppliers to supply a specified proportion of their electricity supplies to their customers from renewable sources of energy • Renewable Energy Credits • Tendering System ¢ Other Fiscal Incentives and Subsidies (Germany, Thailand, China) l Production Tax Credits, Investment Tax Credits

Key issues in renewable energy pricing ¢ Characteristics of Renewable Energy Plants l l l ¢ ¢ Small size (installed capacity) Large in number Dispersed High Initial Capital Costs Intermittency and Grid Interconnection l l l Is it possible to integrate small RE power plants into the system despatch schedule? Problems of ensuring grid discipline Who (the developer or power purchaser or the transmission/distribution company) should bear the cost of evacuation facility up to the nearest receiving sub-station?

Key issues in renewable energy pricing ¢ ¢ Requirement of renewable energy obligation along with feed-in tariffs (E. g. India) Quantifying Environmental Benefits l ¢ Is there a mechanism by which the environmental benefits that accrue by producing power using RE sources can be quantified? In a cost-plus tariff regime, can incentives be introduced by the regulator and be built-in the tariff structure of such sources? Capacity Credits l Primarily in the context of marginal cost pricing of renewable based generation

Key issues in renewable energy pricing ¢ Cost sharing mechanism l ¢ What would be the appropriate cost sharing mechanism if tariffs set using the cost-plus principles exceeds the average cost of generation from RE sources? Who bears the burden of the additional cost of generation? Will the Government subsidize the entire cost differential or whether this amount will be cross-subsidized through consumer tariffs? Royalty l Is there a need to introduce royalty for RE sources such as small hydro and wind based power plants? Should this be quantified in the tariff structure?

Key issues in renewable energy pricing ¢ Issue of tariff escalation l ¢ Should there be tariff escalation for all RETs? If so, should it be uniform? Competition/ Level playing field l What would be the appropriate time to introduce competition among RETs and between RETs and conventional sources

International Best Practices ¢ Feed-in Tariffs in Germany l Feed-in Law • An obligation by the utility to pay an independent power producer the government-specified price for the renewables based electricity production over a fixed number of years l Feed-in Tariffs • A minimum guaranteed price per unit of produced electricity to be paid to the producer; it is a premium that is paid in excess of the market price for electricity

International Best Practices ¢ Policy Transition Electricity Feed-in law (Str. EG), 1990 – Sale of Electricity to Grid Act ¢ Renewable Energy Sources Act (EEG), 2000 Salient features of the Renewable Energy Sources Act l l l 5% ceiling on support for RE sources done away with Feed-in tariffs paid by utilities replaced with minimum price paid by grid operators for purchase of electricity from RES Prices under new Act = Fixed Price Scheme + decreasing price element

International Best Practices RE Technologies 2005 (Cent/k. Wh) Degression (%/a) Hydropower 6. 65 -9. 67 0 Biomass (<20 MW) 8. 27 -17. 33 1. 5 Geothermal energy (<20 MW) 7. 16 -15. 00 1. 0 Wind energy (onshore) 5. 39 -8. 53 2. 0 Wind energy (offshore) 6. 19 -9. 10 2. 0 43. 42 -59. 53 5. 0 Solar energy Degression: The tariff remains constant for commissioned installations, but depends on the year of the initial operation. The later an RE installation is commissioned, the lower the tariff

International Best Practices ¢ RE Support Mechanisms in UK l Non-fossil fuel obligation, 1990 • A tendering process - generators using eligible types of RES compete for limited capacity within specified technological bands • Regulators specify an amount of capacity or share of total electricity to be achieved, and the maximum price per k. Wh l Renewables Obligation (RO), 2000 • An obligation on licensed suppliers to supply a specified proportion of their electricity supplies to their customers from RES

International Best Practices ¢ Mechanism of operation of RO l l l An obligation is placed on a supplier to meet a certain percentage of the previous year’s supply from eligible renewable electricity Proven to Ofgem by ROCs (1 ROC = I k. Wh) The supplier can either meet the obligation by purchasing ROCs or by paying a penalty of 3 p/k. Wh in 2001 (raised each year) The penalty fund is recycled back to the suppliers in the proportion that they met the total annual RO target Renewable electricity only has value up to annual obligation % Supplier and renewable generator agrees price, contract length, volume

International Best Practices ¢ Electricity suppliers are allowed to buy out all or part of their Obligation in any particular year, as an alternative to supplying RE or purchasing Green Certificates Total Cost of Renewables Electricity needed to meet the Obligation ¢ = Cost of Alternative Electricity Supplies (Non-Renewable Power Purchase Price); 2. 3 p/k. Wh + Buy-out Price (paid to OFGEM); 2 p/k. Wh Buy-out Price sets a ‘Price Cap’ that suppliers are willing to pay for electricity from renewables; an ‘Upper Limit’ to the impact of Renewables Obligation on consumer prices

International Best Practices ¢ Results Target Achieved % 2002 -3 3. 0 1. 8 60 2003 -4 4. 3 2. 4 56 2004 -5 4. 9 3. 4 69

International Best Practices ¢ RE Support Mechanisms in US l Renewable Portfolio Standard • A market driven policy ensuring the benefits of wind, solar, biomass and geothermal energy to the public, as electricity markets become more competitive • RPS requires the utility to include some portion of renewable energy based generation in its power portfolio. Percentage can vary from programme to programme l Renewable Energy Credit • A tradable certificate of proof that 1 k. Wh of electricity has been generated by a renewable-fueled source • Denominated in k. Wh; separate commodity from the power itself

International Best Practices ¢ Salient Features of the Texas RPS l Renewable Energy Purchase Obligations • Capacity targets of 400 MW of eligible new renewables by 2003, 850 MW by 2005, 1400 MW by 2007, and 200 MW by 2009 and through 2019 • Annual energy based purchase obligations beginning in 2002 and ending in 2019 derived based on capacity targets and average capacity factor of renewable generation l Obligated Parties • All electricity retailers in competitive markets share this obligation based on their proportionate yearly electricity sales

International Best Practices ¢ ¢ Tracking and accounting method l Tradable RECs with yearly compliance period l 3 month grace period after compliance period allowed for fulfillment Certificates l Issued on production, unit 1 MWh, 2 years of banking allowed after year of issuance, borrowing of up to 5% of the obligation in first 2 compliance periods allowed, development of web-based certificates tracking system

International Best Practices ¢ Other Financial Instruments l Investment Tax Credit • To support investment in RETs; lowers high upfront capital costs l Production Tax Credit • A tax credit to Energy Producer as an incentive for renewables deployment Rebates l Production Payments l Low Interest Loans and Loan Guarantees l

Dominant Renewable Energy Pricing mechanisms ¢ Emerging generation tariff setting methodologies based on international experience l Avoided cost based tariffs • Energy only • Energy and Capacity Credits l Cost based tariffs • Levelized tariff • Tiered tariff • Performance benchmarked tariffs • Tariffs set on the basis of Yardstick Regulation

Dominant Renewable Energy Pricing mechanisms ¢ Salient features of avoided cost based tariffs l Incremental cost to the electric utility that the utility would either generate itself or purchase elsewhere if it did not purchase from a (renewable energy) supplier l Prices being set equal to marginal cost results in market equilibrium at a certain level and pattern of electricity supply that leads to the most efficient allocation of scarce resources l A detailed performance data of all conventional power plants, in terms of plant availability and energy generation is required

Dominant Renewable Energy Pricing mechanisms ¢ Salient features of cost based tariffs l l Based on a project developer’s operating and capital costs along with an assured return on capital Cost components typically comprise of Operation & Maintenance expenses (including any escalation), Loan repayment and Fuel Cost (if any) Technology specific tariffs based on performance and costs The cost based approach is heavily dependant on cost and performance parameters as input data

Analysis of renewable energy pricing options ¢ Marginal cost based pricing l Short run marginal cost analysis done for the state of Andhra Pradesh has estimated the approximate SRMC as Rs. 2. 21/ k. Wh in 2005 -06 • The marginal cost is estimated as the weighted average of variable costs of all plants operating in margin with the time for which they are operational in the margin being used as the ‘weighting factor’ • The data for variable costs of thermal plants in Andhra Pradesh has been obtained from APTRANSCO

Analysis of renewable energy pricing options ¢ Analysis of total cost of power procurement l l Approximate marginal cost of power purchase Estimated for Andhra Pradesh for FY 200607 • Rs. 3. 32/ k. Wh, which is the total power procurement cost of the most expensive power plant

Analysis of renewable energy pricing options ¢ Tariffs based on cost plus approach l l Tariffs for renewable power in India as determined by the SERCs is presently based on the Cost Plus principles E. g. of tariff rates for renewable power in Andhra Pradesh S. No RETs Tariff Rates 1 Wind Rs. 3. 37 /k. Wh with 5% simple escalation 2 Small Hydropower Rs 2. 60/Unit for the first year 3 Bagasse based cogeneration Fixed cost Rs. 1. 72/unit in 1 st year reducing to Rs. 0. 90 in 10 th year+ variable cost Rs. 1. 02 in 2005 -05 escalating to Rs. 1. 24 in 2008 -09 4 Biomass Fixed cost Rs. 1. 61/ k. Wh in 1 st year decreasing to Rs. 0. 87 in 10 th year. The variable cost for 2004 -05 Rs. 1. 27 escalating to Rs. 1. 54 in 2008 -09

Analysis of renewable energy pricing options ¢ Marginal cost/avoided cost l Application under energy deficit scenario ? • Present energy deficit 3% to 21% • Projected peak deficit of 16% and energy deficit of 13% (assuming 10 th plan capacity additions of 32000 MW, till May 2006 achievement is about 14300 MW) l Estimation of marginal cost • Uncertainty • Frequency l Uniform across technologies?

Analysis of renewable energy pricing options ¢ Cost Based Tariffs l Depend on benchmarks • Costs: Issue of transparency l Do not lead to cost reduction on its own! • In Indian scenario where quota obligation is also in place l Advantages for new technologies • First tariff order in 2002 • MNES guidelines since 1994 l The policy indicates use of ‘preferential tariffs’ initially

Analysis of renewable energy pricing options ¢ Pricing of non firm power l Definition: Electric power which is supplied by the power producer at the producer's option, where no firm guarantee is provided, and the power can be interrupted by the power producer at any time • Only wind and small hydro plants supply non firm power? • Can biomass and bagasse cogeneration be considered as firm power • Issue of scheduling l Marginal cost pricing and pricing based on costplus principles do not consider the availability or dispatchability of non-conventional power plants

Analysis of renewable energy pricing options Options for pricing non firm power ¢ Short run marginal pricing/ avoided cost Unscheduled Interchange (UI) mechanism formulated under ABT 1. 2. • • UI charge is applicable in case of any deviation from the scheduled generation or drawal of power. This charge is linked with the frequency of the grid and is announced by CERC from time to time. The presently applicable UI rates vary from 0 paisa/ k. Wh at a frequency of 50. 5 Hz to 570 paisa/ k. Wh at 49. 02 Hz

Analysis of renewable energy pricing options Trend of Average UI rates in the months of April and August 2005

Analysis of renewable energy pricing options Options for pricing non firm power contd. ¢ 2. Unscheduled Interchange (UI) mechanism formulated under ABT contd. q Monthly average UI rates for FY 2005 -06, in the adjoining table show a highly variable trend q Impacts of UI pricing: • Impact on Viability Months Average UI Rates (Rs. / k. Wh) April 05 2. 57 May 05 2. 82 June 05 3. 12 July 05 3. 09 August 05 4. 12 September 05 3. 45 October 05 3. 47 November 05 3. 57 December 05 3. 93 January 06 3. 68 February 06 3. 38 March 06 2. 75

Analysis of renewable energy pricing options Options for pricing non firm power contd. ¢ Renewable Energy Certificates (RECs) 3. • • • RECs are used to demonstrate the compliance with quota obligation without actually buying power from non conventional energy sources It serves to separate the actual power generation and the quota obligation The REC represents the renewable energy part, of the power generated, which can be tradable, independent of the power

Analysis of renewable energy pricing options 3. Renewable Energy Certificates (RECs) contd. Renewable Energy Producer Transco Disco II Independent REC issuing authority Disco III