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

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1 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)

2 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

3 Markets and the Power of RE Theoretical Underpinning 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) 3

4 Type of Instrument Subsidies Tax Incentives Feed-in tariffs Preferential financing Credit guarantees Taxes Emission Tax Reduction or removal of high carbon taxes and subsidies Differentiated pricing Trading Systems Energy efficiency and renewable energy target-based Cap-and-Trade Baseline-and-Credit Example Korea, India-Tax exemptions for biofuel India, China- Feed-in tariffs for electricity from renewable energy sources(res) Indonesia - National Development Bank financing for electricity production from RES and ethanol Malaysia- Credit Guarantee Funds for green technologies Japan - Tax on high CO2-emitting vehicles and electricity from non-res Korea and India - Removal of price support for anthracite coal production China - Higher industrial electricity prices for more energyintensive enterprises India - Energy intensity-based cap-and-trade for industry and tradable renewable energy certificates Korea - Emission trading legislation; China-pilot emission trading systems Korea - Voluntary emission reduction program 4

5 Research Question 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 5

6 Research Method Trend Analysis of REC in India Gap Analysis of REC with Renewable Obligation Certificate (ROC) Questionnaire survey 6

7 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 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 GW of wind by 2012, an increase of 20 % during the 11 th FYP period ( ) - India ranks 5 th in wind and 10 th in Solar in-terms of investment attractiveness and growth 7

8 India has witnessed Strong renewable energy development in the last decade Wind Power Capacity & Targets Grid connected Solar PV Capacity Wind - Installed Capacity (MW) PV Solar Installed Capacity (MW) 31, , 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

9 Investment (billions of USD) Renewable Energy Investment Trends RE Investment Trends in India RE Investment Trends in India by Technology Solar Wind Source: Bloomberg New Energy Finance, UNEP FI Reports 9

10 A lot of progress depends on Progressive Policies. Policy Framework Wind Solar Accelerated depreciation RE projects can depreciate 80% in the first year Generation Based Incentive As an alterative to accelerated depreciation Feed in Tariffs Determined in a cost plus manner; and involve long contracts (20-25 years), priority purchase Introduced in mid 1990s; discontinued in 2012 Introduced in 2009; lapsed in 2012 (GBI = 0.5/kWh is in addition to the preferential tariffs) Introduced at the state level since early 2000 Introduced in mid 1990s Introduced in 2008: not available any more Introduced at the central govt level (through national solar mission) in 2010 and at the state level in

11 . To correct the Market Failures Policy Framework Wind Solar Renewable Energy Certificates Market based instruments to meet the state renewable purchase obligation (RPO) 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 Other Benefits (excise, wheeling) Concessional rates of excise (reduced from 8% to zero) and customs duty (reduced by 5 2.5%) Introduced in 2011 Introduced in 2011 Introduced in 2002: expired in 2013 Introduced in 2002: expired in 2013 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) 11

12 Market based Policy Incentives for the RE Projects Policy Wind Project Solar Project Feed-in/Preferential tariff Accelerated depreciation Generation based incentive 30% 57% - 18% 10% - Income tax Exemption 6% 5% Clean Development Mechanism 5% 4% 12

13 Status of REC Registered Projects in India 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 , ,914 Bio Cogeneration Small Hydro Biomass Solar PV Others Total 197 1, , ,411 13

14 Demand and Supply of RECs 14

15 Price of RECs 15

16 Factors Influencing the Market - Buyers Name of the Buyer Type of obligated entity No. of RECs purchased % Electricity Department, Chandigarh Tata Power, Maharashtra Distribution licence 2,000 3 Distribution licence 30, Others 464 entities Open Access and Captive users 41, Total RECs 73,

17 Factors Influencing the Market RPO Compliance State Total Procurement (MU) Total RE Procured (MU) RPO Compliance RPO Target % FY2012 Andhra Pradesh 87,381 2, % 4.75% Assam 6, Bihar 11, Chhattisgarh 22, Delhi 26,674 Goa Gujarat 77,864 2, Haryana 37, Himachal Pradesh 7,085 1, Jharkhand 7, Karnataka 60,611 5, Kerala 18, Madhya Pradesh 38, Maharashtra 118,094 5, Manipur Megahalaya 1, Mizoram Nagaland Orissa 23, Punjab 43, Rajasthan 50,672 2, Tamilnadu 69,653 6, Uttar Pradesh 73,962 3, Uttar hand 9,

18 Status of Accreditation and Registrations Period RE Projects Accredited (MW) No. of Projects Accredited RE Projects Registered (MW) No of Projects Registered FY FY , , FY2013 1, , FY , , Total 5,372 1,016 3,

19 Results of Questionnaires Reasons for Non participation of Distribution Companies 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 19

20 RPO Compliance Cost for Resource Rich Kartnataka (Rs/Kwh) APPC including Transmission Loss Transmission cost Total APCC Cost (A) REC Price (B) Energy Cost (FiT) Including transmission& balancing Cost (C) A+B-C Floor Price Price e Price

21 RPO Compliance cost for resource deficit state IPCC+REC Rs/Kwh (A) Fi TRs/Kwh (B) IPCC REC (Floor Price) FiT 4.63 Transmission Cost Transmission Loss Sub-Total Balancing Energy Cost 0.33 Total Cost Difference REC at Floor price (1.50) REC at Av. Price (2.55) 0.55 REC at Forbearance (3.40)

22 Comparison of the RE Cost of India with US Solar PV Onshore Wind INDIA ENERGY COST 126 INDIA ENERGY COST 88 FINANCE 28 FINANCE 22 PERFORMANCE COST 23 differences PERFORMANCE 5 differences CAPITAL COST 25 CAPITAL COST 29 US ENERGY COST 100 US ENERGY COST US LCOE = 0.19 USD/kwh US LCOE = 0. 9 USD/kwh 22

23 Parameter REC India ROC UK Coexistence with RiT Institution involved Sunset clause and long term viability RE Purchase Obligation target Developers have a choice to select between both the schemes i.e. REC and FiT 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 There is no specific sunset clause specified for which RECs are issued 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 %, RPO is specified for a minimum of 5 years only, no long-term certainty for investors Micro-generation technologies production less than 50 kw of electricity are eligible only for FiT. Others get ROC Credits 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 ROC cannot be issued beyond 31 March 2037, RE generator can be issued for ROC for 20 years only The obligation size is set by a series of fixed annual targets that increase linearly to 15.4% in 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 Categorization Banding/Multiplier Pricing Trading Monitoring and Compliance A generating company engaged in generation of electricity from renewable sources and not having PPA under FiT is eligible for REC Non Solar RE Technology: Wind, Small hydro, biomass, Bio fuel based cogeneration, Municipal solid waste; Solar technology Solar PV and Solar thermal RECs are divided into two categories solar RECs and Non-solar RECs. No technology specific banding is provided 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. RECs are traded separately from electricity, they can be traded only through power exchange. Voluntary market is negligible 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, ROC is issued to an accredited generator for eligible renewable electricity generated within the UK and supplied to consumers by licenced electricity supplier Hydro-electric, onshore wind, Offshore wind, Wave, Tidal stream, Solar PV, Geo-thermal, Geopressure, Landfill gas, Anaerobic digestion, Co-firing of biomass, energy crops 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 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 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 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 23

24 Mitigating the Institutional, economical and financial Risks 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 24

25 Conclusions 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. 25