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Renewable Energy Pricing
Presentation Outline
Overview of key issues in Renewable Energy (RE) pricing Global renewable energy status
• Grid-connected electricity generation Barriers and limitations to renewable energy growth Need for renewable energy support Renewable energy policy experience Key issues in renewable energy pricing
Review of tariff setting methodologies for grid connected RE power 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
TechnologyWorldTotal
Developing
Countries EU-25 ChinaGerman
y U.S. Spain India Japan
Small hydropower 66 44 12 38.5 1.6 3 1.7 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 photovoltaic-grid 3.1 ~ 0 1.7 ~ 0 1.5 0.2 <0.1 ~ 0 1.2
Solar thermal electric 0.4 0 0 0 0 0.4 ~ 0 0 0
Ocean (tidal) power 0.3 0 0.3 0 0 0 0 0 0
Total renewable power capacity 182 79 63 42 23 23 12 7 6
Renewable Electric Power Capacity, GW existing as of 2005
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
Market Related
Institutional
Barriers
Investment costs, technology maturity level, etc
Electricity pricing, unbundling and restructuring, power purchase structure, etc
Nature and allocation of incentives, availability of finance, etc
Barriers and limitations to renewable energy growth
Economic and Technological Investments costs
• High levels of capital cost, low volume production, current manufacturing practices
Technology Maturity-level• E.g. Renewable Energy Technologies (RETs) such
as Solar Resource Availability and Demand/ Supply
Match Location of Supply Sources Grid Stability
Barriers and limitations to renewable energy growth
Market-related Privatization
• Increasing private privatization can increase the cost of capital and make high initial investment in RETs unattractive
Restructuring and Unbundling• Such reform measures may reduce incentives for
distributed generation Energy and Electricity Pricing
• Rational tariff structure; internalization of socio-economic costs
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 Nature and allocation of Incentives
• Need for clear policy guidelines, proper allocation of government incentives
Availability of Finance• Difficulty in obtaining competitive forms of finance due
to lack of familiarity and high risk perception
Infrastructure Availability• Non-availability of land, transmission and distribution
networks leads to low exploitation of such resources
Need for renewable energy support
Regulatory and Policy
Intervention
Pricing of power generated from renewable energy
sources
Intermittent nature of electricity from
wind and small hydropower
Restrictions on siting and access
to grid
Lack of access to credit
Renewable energy policy experience
Feed-in Tariffs (E.g. Germany, Denmark) 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) 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) Production Tax Credits, Investment Tax Credits
Key issues in renewable energy pricing
Characteristics of Renewable Energy Plants Small size (installed capacity) Large in number Dispersed
High Initial Capital Costs Intermittency and Grid Interconnection
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 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 Primarily in the context of marginal cost pricing of
renewable based generation
Key issues in renewable energy pricing
Cost sharing mechanism 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 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 Should there be tariff escalation for all RETs? If
so, should it be uniform? Competition/ Level playing field
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 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
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
Salient features of the Renewable Energy Sources Act 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
Electricity Feed-in law (StrEG), 1990 – Sale of Electricity to Grid Act
Renewable Energy Sources Act (EEG), 2000
RE Technologies 2005 (Cent/kWh) Degression (%/a)
Hydropower 6.65-9.67 0
Biomass (<20MW) 8.27-17.33 1.5
Geothermal energy (<20MW) 7.16-15.00 1.0
Wind energy (onshore) 5.39-8.53 2.0
Wind energy (offshore) 6.19-9.10 2.0
Solar energy 43.42-59.53 5.0
International Best Practices
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 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 kWh
Renewables Obligation (RO), 2000• An obligation on licensed suppliers to supply a specified
proportion of their electricity supplies to their customers from RES
Mechanism of operation of RO 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 kWh) The supplier can either meet the obligation by purchasing
ROCs or by paying a penalty of 3p/kWh 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
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
Total Cost of Renewables Electricity needed to meet the Obligation
= +
Cost of Alternative Electricity Supplies (Non-Renewable Power Purchase Price); 2.3p/kWh
Buy-out Price (paid to OFGEM); 2p/kWh
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 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
Renewable Energy Credit• A tradable certificate of proof that 1kWh of electricity has been
generated by a renewable-fueled source• Denominated in kWh; separate commodity from the power itself
Salient Features of the Texas RPS 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
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 Tradable RECs with yearly compliance period 3 month grace period after compliance period
allowed for fulfillment Certificates
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
International Best Practices
Other Financial Instruments Investment Tax Credit
• To support investment in RETs; lowers high upfront capital costs
Production Tax Credit• A tax credit to Energy Producer as an incentive for renewables
deployment
RebatesProduction PaymentsLow Interest Loans and Loan Guarantees
Dominant Renewable Energy Pricing mechanisms
Emerging generation tariff setting methodologies based on international experience Avoided cost based tariffs
• Energy only
• Energy and Capacity Credits 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 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
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
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 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 Short run marginal cost analysis done for the state of
Andhra Pradesh has estimated the approximate SRMC as Rs. 2.21/ kWh 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 Approximate marginal cost of power
purchase Estimated for Andhra Pradesh for FY 2006-
07• Rs. 3.32/ kWh, 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 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 /kWh 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 1st year reducing to Rs.0.90 in 10th year+ variable cost Rs.1.02 in 2005-05 escalating to Rs.1.24 in 2008-09
4 Biomass Fixed cost Rs. 1.61/ kWh in 1st year decreasing to Rs.0.87 in 10th 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 Application under energy deficit scenario ?
• Present energy deficit 3% to 21% • Projected peak deficit of 16% and energy deficit of 13%
(assuming 10th plan capacity additions of 32000MW, till May 2006 achievement is about 14300MW)
Estimation of marginal cost• Uncertainty• Frequency
Uniform across technologies?
Analysis of renewable energy pricing options
Cost Based Tariffs Depend on benchmarks
• Costs: Issue of transparency Do not lead to cost reduction on its own!
• In Indian scenario where quota obligation is also in place
Advantages for new technologies • First tariff order in 2002• MNES guidelines since 1994
The policy indicates use of ‘preferential tariffs’ initially
Analysis of renewable energy pricing options
Pricing of non firm power 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
Marginal cost pricing and pricing based on cost-plus principles do not consider the availability or dispatchability of non-conventional power plants
Analysis of renewable energy pricing options
Options for pricing non firm power1. Short run marginal pricing/ avoided cost
2. Unscheduled Interchange (UI) mechanism formulated under ABT
• 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/ kWh at a frequency of 50.5 Hz to 570 paisa/ kWh at 49.02 Hz
Analysis of renewable energy pricing options
Frequency duration curve (August)
49
49.2
49.4
49.6
49.8
50
50.2
50.4
50.6
50.8
51
0.00 0.20 0.40 0.60 0.80 1.00
Fre
q (
Hz)
Trend of Average UI rates in the months of April and August 2005
Frequency duration curve (April)
4949.249.449.649.8
50
50.250.450.650.8
51
0.00 0.20 0.40 0.60 0.80 1.00
Fre
q (
Hz)
Analysis of renewable energy pricing options
Options for pricing non firm power contd.
2. Unscheduled Interchange (UI) mechanism formulated under ABT contd.
Monthly average UI rates for FY 2005-06, in the adjoining table show a highly variable trend
Impacts of UI pricing:• Impact on Viability
Months Average UI Rates (Rs./ kWh)
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.3. Renewable Energy Certificates (RECs)
• 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 I
Disco II
Disco III
Independent REC issuing authority