Market Power And Generation from Renewables: The Case of Wind and Solar in India

VENKATACHALAM ANBUMOZHI

ECONOMIC RESEARCH INSTITUTE FOR ASEAN AND EAST ASIA (ERIA)

V.ANBUMOZHI@ERIA.ORG

Power of the Markets: Indroduction Energy markets around the world face many challenges

conventional supplies of fossil fuel reserves are becoming scarce but also cheap recently .

Concerns over climate change are growing - decouple economic growth from emissions

All of these pressures have greatly raised the profile of Renewable Energy Technologies (RET), with governments normally providing a range of support frameworks and incentives to attract investments

Market support of RE in developing countries is complicated by the need to simultaneously expand access and keeping energy affordable for consumers and industry (Mohanty and Bhattacharya, 2012); (Marke Howeden, 2013).

In order to achieve this difficult balancing act, policy makers must know (i) what kind of market incentives are most effective at raising capital? (ii) What size of support is affordable and reasonable

Markets and the Power of RE – Theoretical Underpinning

3

Market based instruments modify the behavior of economic entities by changing the financial incentives and disincentives (Martinot et al.-2001; Cunha, 2012)

Operate by adjusting the relative prices or creating markets that did not previously exist (Anbumozhi, 2008, Sengupta, 2010)

Attractive alternative to Command and Control regime (Midttun, 2007; Singh, 2010; Sonnerborn, 2012)

Provide firms greater flexibility to most cost –effectively achieve the required RE uptake to meet national targets (Garret, 2001; Holt, 2007; Bowen, 2011)

4

Type of Instrument Example

Subsidies Tax Incentives Korea, India-Tax exemptions for biofuel

Feed-in tariffs India, China- Feed-in tariffs for electricity from renewable

energy sources(RES)

Preferential financing Indonesia - National Development Bank financing for

electricity production from RES and ethanol

Credit guarantees Malaysia- Credit Guarantee Funds for green technologies

Taxes

Emission Tax Japan - Tax on high CO2-emitting vehicles and electricity from

non-RES

Reduction or removal of high carbon taxes and subsidies Korea and India - Removal of price support for anthracite coal

production

Differentiated pricing

China - Higher industrial electricity prices for more energy-

intensive enterprises

Trading Systems

Energy efficiency and renewable energy target-based India - Energy intensity-based cap-and-trade for industry and

tradable renewable energy certificates

Cap-and-Trade Korea - Emission trading legislation; China-pilot emission

trading systems

Baseline-and-Credit Korea - Voluntary emission reduction program

Research Question

5

What are driving forces and options to enable markets to facilitate large scale RE capacity addition in the longer run?

What are the effective policy steps toward MBI eg..Renewable Energy Certificates (REC) - concerns of market players – buyers and sellers ?

Hypothesis:

Market distortions, lack of strong institutions and program support have influence on RE uptake

Approach:

Trend Analysis of Solar and Wind investments in India

Research Method

6

Trend Analysis of REC in India Gap Analysis of REC with Renewable Obligation Certificate (ROC) Questionnaire survey

Solar and Wind Prospects in India

India has ambitious renewable (non-hydro)energy goals

- Existing share 9.9% (2012)

- Solar Mission: 20 GW of solar by 2022

-Wind Mission: 31 GW of wind by 2017

It has done reasonably well

- Under Phase I of solar mission, 1 GW of solar by 2012, compared to <50 MW in 2010

- 16 GW of wind by 2012, an increase of 20 % during the 11th FYP period (2007-2012)

- India ranks 5th in wind and 10th in Solar in-terms of investment attractiveness and growth

7

India has witnessed Strong renewable energy development in the last decade

Wind Power Capacity & Targets Grid connected Solar PV Capacity

10,000

17164

31,078

2006 2012 2017

Wind - Installed Capacity (MW)

214 456

737

2138

2006 2009 2011 2013

PV Solar Installed Capacity (MW)

Source: Central Electricity Authority: Ministry of New and Renewable Energy, yearly data is at the end of the December. India’s financial year is April-March, which is target year month

8

Renewable Energy Investment Trends

9

4.8 5.5

4.5 4.3

7.8

12

13.7 14.2

2006 2007 2008 2009 2010 2011 2012 2013

Inve

stm

en

t (b

illio

ns

of

USD

)

RE Investment Trends in India

0.5

1.2

4.6

5.3

2.2

3.3

6.2

7

2009 2010 2011 2012

RE Investment Trends in India by Technology

Solar Wind

Source: Bloomberg New Energy Finance, UNEP FI Reports

A lot of progress depends on Progressive Policies….

Policy Framework Wind Solar

Accelerated depreciation RE projects can depreciate 80% in the first year

Introduced in mid 1990s; discontinued in 2012

Introduced in mid 1990s

Generation Based Incentive As an alterative to accelerated depreciation

Introduced in 2009; lapsed in 2012 (GBI = 0.5/kWh is in addition to the preferential tariffs)

Introduced in 2008: not available any more

Feed –in Tariffs Determined in a cost plus manner; and involve long contracts (20-25 years), priority purchase

Introduced at the state level since early 2000

Introduced at the central govt level (through national solar mission) in 2010 and at the state level in 2011

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…. To correct the Market Failures Policy Framework Wind Solar

Renewable Energy Certificates Market based instruments to meet the state renewable purchase obligation (RPO)

Introduced in 2011

Introduced in 2011

Income Tax Exemption A 100% tax waiver on profits for any single year period during the first 15 years of the operational life of a power generation project

Introduced in 2002: expired in 2013

Introduced in 2002: expired in 2013

Other Benefits (excise, wheeling) Concessional rates of excise (reduced from 8% to zero) and customs duty (reduced by 5 – 2.5%)

Introduced in 2002 (Rotors and turbine controllers are fully exempted from excise duty)

Introduced in 2002 Introduced at the central govt level (Transmission equipment used in the setup stage is exempted from excise duty)

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Market based Policy Incentives for the RE Projects

Policy Wind Project Solar Project

Feed-in/Preferential tariff

30% 57%

Accelerated depreciation

- 18%

Generation based incentive

10% -

Income tax Exemption 6% 5%

Clean Development Mechanism

5% 4%

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Status of REC Registered Projects in India

13

Energy Source Old Projects (commissioned

before 14/01/2010 and

registered under REC)

New Projects (commissioned

before 14/01/2010 and

registered under REC)

Total

No. of Projects Capacity No. of Projects Capacity No. of REC

registered

Projects

Capacity

Wind 117 281.08 391 1,632.92 508 1,914

Bio-

Cogeneration

46 532.68 24 150.32 70 683

Small Hydro 5 47.5 17 140 22 187.5

Biomass 29 293.60 29 269.4 58 563

Solar PV 20 62 20 62

Others 1 1.7 1 1.7

Total 197 1,155 482 2,256 679 3,411

Demand and Supply of RECs

14

Price of RECs

15

Factors Influencing the Market - Buyers

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Name of the Buyer Type of obligated

entity

No. of RECs

purchased

%

Electricity

Department,

Chandigarh

Distribution licence 2,000 3

Tata Power,

Maharashtra

Distribution licence 30,200 41

Others – 464 entities Open Access and

Captive users

41,765 56

Total RECs 73,965 100

Factors Influencing the Market – RPO Compliance

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State Total Procurement (MU) Total RE

Procured

(MU)

RPO Compliance RPO Target

% FY2012

Andhra Pradesh

87,381 2,934 3.36% 4.75%

Assam 6,211 7 0.12 2.80 Bihar 11,676 144 1.23 2.50 Chhattisgarh 22,603 737 3.26 5.00 Delhi 26,674 Goa 3740 119 3.18 1.70 Gujarat 77,864 2,833 3.70 5.00 Haryana 37,298 28 0.08 1.00 Himachal Pradesh 7,085 1,494 2109 10 Jharkhand 7,085 244 3.44 2.50 Karnataka 60,611 5,149 8.49 9.75 Kerala 18,535 65 0.35 3.05 Madhya Pradesh 38,060 42 0.11 2.10 Maharashtra 118,094 5,441 4.61 6.75 Manipur 499 - 0.00 2.75 Megahalaya 1,066 - 0.00 0.45 Mizoram 483 - 0.00 5.75 Nagaland 439 - 0.00 6.75 Orissa 23,489 300 1.28 1.20 Punjab 43,792 237 0.54 2.37 Rajasthan 50,672 2,558 5.05 5.5 Tamilnadu 69,653 6,976 10.02 8.95 Uttar Pradesh 73,962 3,174 4.29 4.50 Uttar hand 9,423 384 4.08 4.50

Status of Accreditation and Registrations

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Period RE Projects

Accredited

(MW)

No. of Projects

Accredited

RE Projects

Registered

(MW)

No of Projects

Registered

FY 2011 172 46 109 14

FY 2012 2,328 400 2,108 346

FY2013 1,345 301 1,273 325

FY 2014 1,527 275 1,475 305

Total 5,372 1,016 3,508 990

Results of Questionnaires – Reasons for Non –participation of Distribution Companies

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Poor financial health of the distribution companies REC not viable option for resource rich sates

REC providing only electronic certificate and not energy

Reluctance due to in-firm in nature

RPO Compliance Cost for Resource Rich Kartnataka (Rs/Kwh)

20

APPC

including

Transmission

Loss

Transmission

cost

Total APCC

Cost

(A)

REC Price

(B)

Energy Cost

(FiT)

Including

transmission&

balancing Cost

(C)

A+B-C

REC @ Floor

Price

3.46 0.5 3.97 1.5 4.59 0.87

REC@Avg

Price

3.46 0.5 3.97 2.4 4.59 1.77

REC

@forebearanc

e Price

3.46 0.5 3.97 3.3 4.59 2.67

RPO Compliance cost for resource deficit state

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IPCC+REC Rs/Kwh (A) Fi TRs/Kwh (B)

IPCC 3.34 -

REC (Floor Price) 1.50 -

FiT 4.63

Transmission Cost 0.10 0.23

Transmission Loss 0.04 0.14

Sub-Total 4.98 5.00

Balancing Energy Cost 0.33

Total Cost 4.98 5.33

Difference

REC at Floor price (1.50) 0.33 – 0.58

REC at Av. Price (2.55) 0.55

REC at Forbearance (3.40) 1.45

Comparison of the RE Cost of India with US

US LCOE = 0.19 USD/kwh

100

29

5

22

88

0 20 40 60 80 100 120

US ENERGY COST

CAPITAL COST

PERFORMANCE

FINANCE

INDIA ENERGY COST

Onshore Wind

100

25

23

28

126

0 20 40 60 80 100 120 140

US ENERGY COST

CAPITAL COST

PERFORMANCE COST

FINANCE

INDIA ENERGY COST

Solar PV

differences

US LCOE = 0. 9 USD/kwh

differences

22

23

Parameter REC India ROC UK

Coexistence with RiT Developers have a choice to select between both the schemes i.e. REC and FiT Micro-generation technologies production less than 50 kw of electricity are eligible only for FiT.

Others get ROC Credits

Institution involved Central Electricity Regulatory commission that specifies REC framework, State Electricity Regulatory

Commission that recognises REC as valid instrument of RPO compliance, State Accreditation Agencies

and Central Agency for issuance of REC

Office of the Gas and Electricity Markets (OFGEM) administer the following functions:

Accreditation, Issuing and revoking ROCs, establishing and maintaining of RECs, monitoring

compliance, Calculating annually the buying price, Receiving buyout payments and redistributing

the buyout fund

Sunset clause and long

term viability

There is no specific sunset clause specified for which RECs are issued ROC cannot be issued beyond 31 March 2037, RE generator can be issued for ROC for 20 years

only

RE Purchase Obligation

target

Each state commission specifies RPO target for its own state, No national level target specified in the

Act, RPO is fixed based on the resources available in the States, RPO across the country varies from 1.5

– 10%, RPO is specified for a minimum of 5 years only, no long-term certainty for investors

The obligation size is set by a series of fixed annual targets that increase linearly to 15.4% in

2016. The end date of RO is extended up to 2037 for new projects to provide long term certainty

for investors and to ensure continued deployment of renewables to meet UK`s 2020 target and

beyond, Under the current RO mechanism, obligation is capped at 20% of electricity supplied

Eligibility A generating company engaged in generation of electricity from renewable sources and not having

PPA under FiT is eligible for REC

ROC is issued to an accredited generator for eligible renewable electricity generated within the

UK and supplied to consumers by licenced electricity supplier

Categorization Non Solar RE Technology: Wind, Small hydro, biomass, Bio fuel based cogeneration, Municipal solid

waste; Solar technology – Solar PV and Solar thermal

Hydro-electric, onshore wind, Offshore wind, Wave, Tidal stream, Solar PV, Geo-thermal, Geo-

pressure, Landfill gas, Anaerobic digestion, Co-firing of biomass, energy crops

Banding/Multiplier RECs are divided into two categories solar RECs and Non-solar RECs. No technology specific banding is

provided

Various REC technologies categories under four bands . Technologies in the established band will

receive 0.25 REC/MWh, Reference band 1 ROC/Mwh, Post demonstration band 1.5 ROC/Mwh,

Emerging technologies will receive 2 ROCs/MWh

Pricing The price of one ROC is set by the market and to be traded between the floor and forbearance price;

Central commissions specifies floor and forbearance price for solar and non-solar RECs. The floor and

forbearance price is set for 5 years up to FY2017, and there is no price visibility beyond that.

The price of the ROC is set by the market and reflects the size of the difference between the

percentage of RE electricity generated in the UK and the RO percentage. The ROC buy out price

was set at 30 Euro in 2002 and adjusted every year

Trading RECs are traded separately from electricity, they can be traded only through power exchange.

Voluntary market is negligible

ROCs can be sold directly to suppliers, ROCs can also be traded separately from electricity, REC

market is characterised by obligatory market and voluntary market

Monitoring and

Compliance

State commission specifies RPO for obligated entities, RPO is administered by state commission;

Regulations provide that if the obligated entities do not meet their RPO targets, which may create

shortfall in the units of RPO and in such cases, the Commission may instruct the obligated entity to

pay into an amount equivalent to shortfall in quantum of RPO multiplied by the forbearance price of

REC,

The RO order places a mandatory requirement on licenced electricity supplier; supply of

electricity from eligible RE sources or pay a penalty; Obligates supplier to meet their obligation

on or before 1 Sep; The order allow suppliers to meet their RO by either presenting ROCs or

paying an equivalent amount into the buy- out fund; All buy outs are redistributed to suppliers

who have presented ROCs against their obligation in proportion with the number of ROCs that

each has presented. Late payments can be made by the suppliers up to 31 October

Mitigating the Institutional, economical and financial Risks

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Clear mandate and Sunset clause (20% target by 2020)

Categorized Vs Unified market for ROCs to support emerging technologies – wind and solar.

Exchange vs Forward market for trade

Validity duration of the certificates & Safeguard policies

Penalty for non-fulfillment Vs redistribution

Banding, banking and buyout

Conclusions

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Market based instruments for Renewable electricity projects can potentially create several income streams such as REC credits for national targets – a nominal market value; carbon credits – a range of permit prices; Green power premium – more for RE than standard rates; and Standard price of electricity – to the customers. They should be identified and integrated.

Many renewable energy projects, especially off-grid solar projects, are often small, making the cost of monitoring the MBI uneconomic and also making the REC prices fluctuating. A large pool of RE projects could balance these fluctuations. Certification, verification and the sale of credits from numerous small to medium sized RE projects could be bundled and sold

Multiple institutions without targets and non-standardised approach will increase the cost and decrease effectiveness. Correcting existing institutional conditions and providing policy and program support of a legislative nature are thus pre-requisites to the RE success under market-based approaches.