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Context: India has stated its target of having a renewable generating capacity of 450-500 GW by 2030. Therefore, there is a need to create a proper environment and ensure adequate returns to invite fresh investments into renewable generation. In this regard, it is important to look at tariff structure for renewables.
What are the two parts in Power generation tariffs?
In power generation, there is a two-part tariff system:
(1) The first part: It is the fixed cost that is incurred by a generator. It is not linked to the amount of power generated. It is determined by regulatory commissions. It has a graded payment system depending on the capacity of the plant to generate.
A plant, that is in a position to generate, even if it actually doesn’t generate power, can recover the fixed cost (or some part of it).
(2) The second part: It is a variable cost. It varies with the quantum of power generation. It is calculated on the cost of fuel i.e., coal or gas or lignite. It is also determined by the regulatory commissions.
What are the tariff structures in the power sector in India?
The Two-part tariff system is found in hydropower generation. The hydro generators do not have any variable cost of generation. Therefore, the entire cost of a hydro station is fixed cost. Notionally, half of this cost is treated as variable cost.
The one-part tariff system is applicable to solar and wind generation and also nuclear are only governed by a single-part tariff).
What are the issues with a single-part tariff in case of renewable energy?
The contribution of solar and wind generation accounts for about 10% of the overall power generation in India. It is expected to be ramped up to 50% by 2030 (Commitment in COP26 in Glasgow).
A “must run” status has been applied to the renewable sector. This means that the state load dispatch centres (SLDCs) have to dispatch or use renewable power first even if another cheap source of power is available. Therefore, it leads to a high variable cost in the renewable energy sector. In contrast, the variable cost of the NTPC coal-fired is far lower due to two part tariff structure.
Therefore, the SLDCs flout the principle of “must run”. The discoms would ask the renewable generator to halt and would buy from a coal-based generation. It would save money for the discoms.
Why should a two-part tariff be adopted in the solar and wind generation sector?
In a single-part tariff, If the renewable generator is asked to halt for maintaining grid balance, it is paid nothing.
Therefore, a two-part tariff would ensure a certain minimum return is given to the developers. The return will be ensured even if the developer is not generating the power during certain hours. It will make the renewable sector at par with the coal and hydro plants.
What are the ways forward?
A principle should be developed for the share of variable cost in the renewable generators. For example, 50% of the total cost is attributed as a variable cost in the hydro energy.
A fine balance should be maintained between the proportion of the fixed and variable costs. For example, the variable cost should be ensured at lowest so that the “must-run” principle is not violated. In addition, the fixed cost component should not be kept so high as it may hurt the consumers.
Source: The post is based on an article “Renewable energy has a tariff problem. Here’s how to fix it” published in the Indian Express on 04th April 2022.
