Designing Effective Incentives for Wind Power Development

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Designing Effective Incentives for Wind Power
Development
Presentation for Quantum Leap in Wind Power in
Asia Asian Development Bank, Manila, 20-21
June 2011

• G M Pillai
• Founder Director General
• World Institute of Sustainable Energy (WISE),
  PUNE, INDIA
• Email gmpillai_at_wisein.org
• Website www.wisein.org

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PRESENTATION PLAN

• Global wind power review
• Cost structure - LCOE comparison
• Development barriers
• Support incentives and mechanisms
• Global experiences and their evaluation (EU
  USA)
• Support incentives in India A brief case study
• Conclusion

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GLOBAL WIND POWER REVIEW

• Current global installed capacity is 197 GW.
• Global market to add 262 GW by 2015, reaching
  cumulative capacity of 459 GW by 2015.
• Global annual market to grow from 38.3 GW (2010)
  to 62.5 GW (2015).
• Asian annual market to grow from 21.5 GW (2010)
  to 28 GW (2015) GWEC projection.
• Asias market share in global wind power
  presently gt 55 (2010).
• About 1/3 cumulative global installed capacity
  (end 2010) is in Asia Asia set to overtake
  Europe by 2012.
• 3000 MW offshore wind worldwide, mostly in EU.
• China has an offshore target of 15,100 MW by
  2015. Installation in progress.
• India has no targets.
• THE DISCUSSION HERE IS ON ONSHORE WIND ONLY.

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COST STRUCTURE-LCOE COMPARISON BY COUNTRY
LCOE Levelised cost of energy (LCOE)
represents the sum of all costs over the lifetime
of a given project, discounted to the present
time, and levelised based on annual energy
production. Does not account for any residual
cost or benefits incurred beyond the assumed
project life.
Country LCOE (Euro/MWh) LCOE (/MWh)
Switzerland 120 167
The Netherlands 94 131
Germany 85 118
Spain 83 115
Sweden 67 93
United States 65 91
Denmark 61 85
CHINA 61 84
INDIA 61 85

• Assumptions for LCOE differ from market to
  market.
• Developed country wind markets have better wind
  resources, higher capacity factors, lower
  interest rates for debt, and longer (13-20 years)
  loan tenure.
• Developing markets in Asia like India and China
  have lower /moderate wind resources, low capacity
  factors as compared to developed markets,
  relatively much higher interest rates and lower
  loan tenure.
• However, the advantage is much lower
• capital costs (20-25 lower) in Asia.

(Source IEA Wind Task 26, March 2011 India
WISE Estimates China Media reports)
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DEVELOPMENT BARRIERS FOR WIND POWER

• Lack of level-playing field due to large public
  subsidies for competing fossil and nuclear fuels.
• Future fuel price risk and supply risk not
  considered for conventional power plants and
  hence tariff determination skewed in their
  favour.
• Environmental externalities Not factored into
  conventional electricity pricing.
• High initial capital costs, transaction costs,
  longer payback periods.
• Unfavorable power pricing rules Locational
  value of wind power plants is not captured in
  pricing.
• Other barriers include Legal, regulatory, access
  to credit, high interest rates, etc.
• HENCE WIND POWER NEEDS INCENTIVE SUPPORT
  MECHANISMS

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SUPPORT INCENTIVES AND MECHANISMS
DESIGN AND GROUPING

• Incentives can be designed for
• - Technology upgradation, adoption, RD.
• - Product commercialization.
• - Manufacturing scale-up.
• - Lowering energy prices.
• - Market development.
• - Rewarding environmental benefits.
• Incentives can be effected through
• - Policy/regulatory intervention.
• - Creating a legal framework (Renewable Energy
  Law, Feed-in Law, etc.)
• - Voluntary green marketing systems

• Support incentives/mechanisms can be grouped as
• Fixed Prices The government or regulator decides
  the electricity tariff to be paid to the producer
  (feed-in tariff) and lets the market determine
  the quantity.
• Fiscal and Financial Incentives Like tax
  holidays, tax offsets, performance-oriented
  incentives, etc.
• Quotas The government or regulator decides the
  quantum of renewable electricity and leaves it to
  the market to determine the prices (RPS or RPO).
• Tendering systems or competitive bidding.
• Green Marketing Regulated or voluntary systems
  where markets determine the prices and quantity
  for electricity systems. (eg Tradable
  Certificates).

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FIT DESIGN OPTIONS AND METHODOLOGIES
FIT considered the most effective incentive
hence some details

• Design Options
• Eligible technologies
• Eligible plants
• Tariff calculation methodology
• Technology-specific tariffs
• Size-specific tariffs
• Duration of tariff period
• Financing mechanisms
• Purchase obligation

• FIT Determination Methodologies
• 1 . Cost-plus methodology Tariff is
  determined considering the levellised cost of
  generation plus guaranteed return typically set
  by the regulators and policy makers. Most
  countries including India have chosen this FIT
  methodology.
• Premium-price FIT Methodology Tariff is
  determined by adding a premium over the spot
  market electricity price. Premium is usually
  designed to approximate avoided externalities of
  RE generation. Followed in EU countries .
• FIT based on value of RE generation to society
  or utility value to society value of
  electricity climate change mitigation health
  impacts energy security other externalities .
  Whereas value to utility avoided cost of
  generation. eg. Sri Lanka.
• Competitive bidding Tariff is discovered via
  tendering. Practiced in some cases in India and
  China.

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PROS AND CONS OF SOME GLOBAL SUPPORT MECHANISMS
Mechanism Advantages Disadvantages
Feed-In Tariffs Provides attractive and stable returns to developers. Suppliers receive payments immediately. Puts pressure on lower equipment prices. More consistent than unclear RPS. Little incentive may exist to drive electricity rates down or to innovate. Initially inflates the cost of electricity until significant amounts of renewable energy are deployed.
Tax Credits Wide in scope. Socializes the costs of renewable energy. Can be insufficient to attract new investment. Significant budget must be available with the government. Producers must have significant tax appetites. Exclusionary to IPPs, individuals and small firms.
Renewable Portfolio Standard (RPS) /Renewable Purchase Obligation (RPO) Diversifies investment risk. Creates continuous pressure for lower electricity prices. Minimizes government intervention. Provides flexibility when coupled with a renewable energy certificate credit market. Will not initially support higher cost renewable energy. Does not support off-grid systems. Renewable energy certificate credit prices will fluctuate and diminish in price. Not effective without penal provisions.
Tendering System Government can control level of renewable penetration. Provides an incentive to keep costs low. Distributes savings onto consumers. Fixed price distorts the market does not allow indexing. Reduces investor margins and can hurt R D. Tends to hurt domestic manufacturing as investors seek least cost international suppliers.
Green Marketing (Voluntary Green Power Programs) Allows consumers in areas without plentiful renewable resources to support them. Does not impose the cost of renewable energy on those who do not wish to pay for it. Voluntary nature means no guarantee that new projects get built. Does not uniformly promote renewable energy projects. Inflated cost of renewable energy may create little incentive to improve efficiency among providers.
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GLOBAL EXPERIENCE IN INCENTIVES

• Feed-in tariffs have been the mainstay of
  European wind power development.
• Whereas the quota system and tax credits have
  worked well in the United States.
• Some countries/provinces have adopted a
  combination of both the above incentive
  mechanisms.
• By early 2010, more than 78 countries, states,
  provinces, enacted feed-in tariff. Most of the
  major wind power markets have feed-in tariff for
  wind power.
• By end 2009, about 50 countries, states,
  provinces, have established RPS/RPO
• Criteria for assessing the success of the support
  instrument
• Effectiveness Leading to a substantial increase
  in the deployment of capacities within certain
  time period, in relation to the potential.
• Economic Efficiency Absolute support level as
  compared to the actual generation cost and the
  trends in support over time.
• One major study assessing the success of the
  support instruments was done recently in Europe
  viz. RE-Shaping (2011).

(Source Renewables 2010, Global Status Report,
REN21)
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MAIN RE SUPPORT INSTRUMENTS IN THE EU-27
(Source RE-Shaping, 2011)
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EVOLUTION OF RE SUPPORT INSTRUMENTS IN EU
(1997-2012)

• In most of the EU-27 countries, feed-in tariff is
  the popular and accepted support mechanism.
• Quota/tradable green energy certificate is the
  second best instrument adopted in EU.
• Few countries tried tendering mechanisms, and
  over the period, shifted to quotas/feed-in
  tariffs.
• Most of the countries offer tax
  incentives/investment grants.
• 1)

(Source RE-shaping 2011)
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EU INCENTIVES EVALUATION - 1

• Countries with highest average effectiveness
  index during last seven years
• Germany, Spain, Portugal and Irelandapply
  feed-in tariff for onshore wind power.
• Upward reasonable average policy effectiveness
  observed in 2009 in Belgium, Estonia, Hungary,
  Italy, Sweden and the UK.
• In France, effectiveness of the policy is
  improving. Despite favorable feed-in tariff,
  barriers persist with permission procedures and
  opposition from anti-wind lobby.

(Source RE-Shaping, 2011)
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EU INCENTIVES EVALUATION - 2

• Absolute market size and share of exploited
  potential is in medium range for Portugal,
  Denmark, and Ireland. Wind electricity
  contributes more than 10 in these countries.
• Germany has largest onshore wind market and
  has developed 57 of its onshore potential
  contribution to the electricity sector is just
  6.
• Spain scores high on all sub-indicators.

(Source RE-Shaping, 2011)
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EU INCENTIVES EVALUATION - 2
EU INCENTIVES EVALUATION - 3

• All EU member states appear to provide
  sufficiently high support level for onshore wind
  electricity.
• In Austria and Luxembourg, the support is just
  enough to cover lower limit of electricity
  generation.
• Countries having quota system with tradable green
  certificates such as Belgium, Italy, Poland,
  Romania, and the UK, offer the support level
  which exceeds the average level of cost of
  generation.

(Source RE-Shaping, 2011)
Overall, FITs have been most successful in Europe.
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USA SUPPORT INCENTIVES - 1

• Main support mechanisms in the USA are RPS and
  Federal Tax Incentives.
• FITs in various stages of development.
• Renewable Portfolio Standard (RPS)
• 29 states have RPS.
• RPS mandates utilities to purchase a certain
  percentage of their electricity from renewable
  sources.
• Supports utility scale renewable power
  generation.

29 States have RPS (8 states have goals)
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USA SUPPORT INCENTIVES -2

• Federal Tax Incentives
• Tax breaks for businesses, utilities, and
  governments, under the American Recovery and
  Reinvestment Act 2009.
• Corporate Tax Credits Production Tax Credit
  (PTC).
• Performance-based Incentive Renewable Energy
  Production Incentive (REPI).
• 1. Production Tax Credit  (PTC) A tax credit
  for utility-scale wind power generation by
  commercial and industrial sectors.
• 21 per MWh or 2.2 cents/kWh for first 10 years
  of operation (in operation till 31 December
  2012).
• 2. Renewable Energy Production Incentive
  (REPI) A performance-based incentive
  complementing the PTC (but mutually exclusive)
  for renewable electricity generation for
  local/state/tribal governments, municipal
  utilities, electric cooperatives, etc.
• 21 per MWh or 2.2 cents/kWh for first 10 years
  of operation (subject to availability of annual
  appropriations in each federal fiscal year).

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FIT EXPERIENCE IN THE USA

• Even though feed-in tariff has not been a
  prominent instrument for RE promotion,
  fixed-price incentives for renewable energy have
  been around in the US since the 1970s.
• The Federal Public Utility Regulatory Policies
  Act (PURPA), 1978, was the first major
  legislation to offer a fixed payment to
  small-scale renewable power producers.
• The state of California implemented PURPA through
  standard offer contracts, which helped in the
  addition of 1200 MW of wind capacity between 1984
  and 1991.
• However, the FIT movement did not gather momentum
  in the US for a long time.
• Even though RPS is the predominant instrument in
  the US, both RPS and FIT can be structured to
  work togetherthey can in fact do so
  synergistically.
• Many states have subsequently experimented with
  FIT for solar power.
• It is reported that, of late, discussions for
  comprehensive FIT programs at the legislative or
  regulatory level were taking place in about 18
  states of the US.

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INDIA SUPPORT INCENTIVES - 1

• Power A Concurrent Subject
• Power is a concurrent subject wherein both the
  central government and state governments are
  empowered to enact policies and regulations.
• India established the institution of Electricity
  Regulators in 1998, with a Central Regulator and
  State-level Regulators in each state.
• The Regulators are autonomous and legally
  empowered.
• Hence the policy and regulatory environment in
  India is a mix of Federal Government policies,
  Central Electricity Regulators guidelines,
  directives of State Electricity Regulators and
  policy prescriptions of State Governments.
• Regulatory Support
• The Central Electricity Regulatory Commission
  (CERC) has issued RE tariff guidelines in
  September 2010. The CERC suggested wind power
  tariff ranging from INR. 3.55/kWh to INR. 5.33
  kWh, on the basis of zoning.
• State-specific feed-in tariffs (INR 3.39-5.32 per
  kWh/US 0.075-0.118 per kWh) began to be
  prescribed from 2003 onwards.
• State/utility specific Quotas/RPO/RPS (1 to 14)
  in 25 states.
• Recent (January 2010) introduction (operational
  from March 2011) of tradable renewable energy
  certificates (RECs) too early to assess impact.
• Federal Government Legal Policy Support
• Electricity Act, 2003 Contains enabling
  provisions (Sections 61 and 86) for fixing
  preferential feed-in tariffs, mandatory quotas,
  delicensing, and open access to the grid for RE
  power generators.
• The National Electricity Policy (year 2005) and
  National Tariff Policy (year 2006) were framed as
  per provisions of the Electricity Act, 2003.
• National target of 15 renewable power by 2020
  under the National Action Plan on Climate Change
  (NAPCC).

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INDIA SUPPORT INCENTIVES - 2

• Fiscal/Financial Incentives by Federal Government
• Generation-based Incentive (GBI) from December
  2009.
• 80 accelerated depreciation in the first year of
  the project.
• The 13th Finance Commission sanctioned statutory
  devolution of 1100 million (INR 5000 crore) as
  central assistance to states doing well in
  grid-connected RE.
• 10-year income tax holiday for income from wind
  power projects.
• In 2010, the central government levied a cess of
  1.10 (INR 50) on every tonne of coal consumed in
  the country to create a National Clean Energy
  Fund (NCEF).
• Assistance from NCEF available for transmission
  infrastructure development for wind power.
• Concessions on import duty on certain wind
  turbine components.
• 100 FDI allowed in RE generation projects.
• Special incentives for setting up
  projects/manufacturing in special economic zones
  (SEZ).
• Provincial/State-level Policy Support
• Wheeling, banking, third-party sale, and buy-back
  facility by states.
• Leasing of government land at nominal lease rent.
• Some states have created state-level clean energy
  funds by levying a green cess on conventional
  power. Support for development of transmission
  infrastructure for wind available from these
  funds also.

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INDIA DETAILS OF ACCELERATED DEPRECIATION GBI

• Accelerated Depreciation (AD)
• It is a kind of Investment Tax Credit.
• 80 of the initial capital investment as income
  tax set-off, at the corporate tax rate of 33.22.
  So effectively, the investor receives 26.5 of
  his capital investment in the first year as tax
  set-off.
• Investment in wind power in the initial years
  spurred by AD. Corporate investors with tax
  appetite invested in captive wind power projects
  about 70 investment in wind (till recently)
  fall in this category.
• Besides the tax set-off on capital investment,
  they also benefited from captive consumption at
  the low generation cost of wind power, compared
  to high utility tariff for industrial electricity
  consumption.
• The main drawback of this incentive is that
  independent power producers/foreign investors
  with no tax liability cannot avail of this
  benefit .
• Also, the incentive is capital cost-based and not
  generation-based. Could be misused by
  over-invoicing of capital cost.
• Generation Based Incentives
• Introduced in December 2009 INR 0.5/kWh (1.1
  dollar cents) for non-depreciation availing
  investors for 10 year period with a cap of
  0.136 million (INR 62 lakhs).
• There was a cap on capacity upto 50 MW, which was
  subsequently increased to 4000 MW upto March
  2012.
• As of now, only approx. 701 MW projects
  registered for GBI benefit.
• Investors found the GBI to be insufficient and
  stressed the need to raise it.

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INDIA STATUS OF RPO COMPLIANCE IN 5 STATES

• Reasons for non-compliance
• Slower growth in capacity addition due to state
  level issues of land and environment.
• Operational constraints due to grid problems,
  lower generation than projected.
• Unscientific RPO target fixation by regulator
  without proper potential assessment.
• Absence of an effective penalty mechanism.
• Only one of the states mentioned alongside
  (Rajasthan) has a segmented RPO for wind.
• Two states viz. Maharashtra and Rajasthan did not
  meet RPO targets.
• Some states like Tamil Nadu had historical
  advantage of high capacity addition and very good
  wind resource.

States RES RPO Targets () RPO Targets () RPO Targets () RPO Performance () RPO Performance () RPO Performance ()
2007-08 2008-09 2009-10 2007-08 2008-09 2009-10
Gujarat All 1 2 2 2.07 NA 2.55
Karnataka All 7-10 7-10 7-10 9.3 10.8 11.04
Maharashtra All 4 5 6 3.35 3.36 4.25
Rajasthan Wind 4 5 6 2.18 3.42 2.74
Tamil Nadu All 10 10 13 11.65 12.08 13.79
(Source India Infrastructure Report 2010)
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INDIA FIT IN 5 STATES

• The methodology adopted for determining tariff is
  called Cost-Plus methodology.
• Under this, the FITs should cover the RE project
  cost, plus an assured Return on Equity (19 for
  first 10 years and 24 thereafter).
• MERC was the first to promulgate FIT order for
  wind in November 2003.
• Since then, 13 state ERCs have declared FIT for
  wind power.
• In September 2010, the CERC came out with RE
  tariff guidelines.
• CERC has recommended zone-wise tariff depending
  on wind power density.
• Maharashtra and Rajasthan have adopted zoning
  recommendations.
• These two states have also allowed annual
  revision of tariff based on revision of capital
  cost.
• Growth accelerated significantly after FITs.
• FIT, the most effective incentive mechanism.

State FIT (Rs/kWh)
Gujarat 3.56
Karnataka 3.70
Maharashtra Wind Zone I 5.37 (200-250 watt/m²) Wind Zone II 4.67 (250-300 watt/m²) Wind Zone III 3.97 (300-400 watt/m² ) Wind Zone IV 3.58 (above 400 watt/m²)
Rajasthan 4.22 (3 Districts) 4.44 (Other Districts)
Tamil Nadu 3.39
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POLICIES, INCENTIVES, AND WIND POWER DEVELOPMENT
IN INDIA
Private Power Policy 1991
MNRE tariff guidelines
First feed-in tariff order in Maharashtra in
2003/04
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CONCLUSION

• Major Asian markets will be China and India.
  Asian Countries need to design viable policies.
• Offshore development will take off soon in Asia.
  The sector will need separate policies, feed-in
  tariff and other support mechanisms.
• Support mechanisms/incentives should be designed
  as a combination of instruments customized for
  each country. No single mechanism will be
  effective enough.
• In fact, a critical issue in developing countries
  in Asia with high interest rates would be to
  provide soft loans with longer loan tenures to
  the wind (and RE) sector. Other instruments can
  fail if low-cost debt is not available.
• The most effective proven single instrument is
  feed-in-tariff followed by quota system
  (RPS/RPO).
• Issues to be resolved for providing level-playing
  field for wind power and for realistic feed-in
  tariff determination
• Phasing out subsidies for conventional/fossil-fuel
  -based generation or factoring this into their
  tariff determination.
• Cost of social, environmental, health and
  economic externalities needs to be factored-in
  during tariff determination of conventional
  power.
• Consider multiple cost-curves of cost escalation,
  cost reduction, and technology/efficiency
  improvement curves while determining tariff.
• THANK YOU!