Renewable Energy Pricing. Presentation Outline Overview of key issues in Renewable Energy (RE) pricing Global renewable energy status Grid-connected electricity.

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


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



Cumulative Number of Countries/States/Provinces Enacting Feed-in Policies


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


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


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


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?


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


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?


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


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


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


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


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


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


Results

Target Achieved %

2002-3 3.0 1.8 60

2003-4 4.3 2.4 56

2004-5 4.9 3.4 69


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


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



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


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


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 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


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


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?


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


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


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


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)


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


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


3. Renewable Energy Certificates (RECs) contd.

Renewable Energy Producer

Transco Disco I

Disco II

Disco III

Independent REC issuing authority

Renewable Energy Pricing. Presentation Outline Overview of key issues in Renewable Energy (RE) pricing Global renewable energy status Grid-connected electricity.

Documents

renewable energy pricing

renewable energy growth

pricing mechanisms

update slide

individual countries

wind power596

biomass power4424821

geothermal power9