Cost-effectiveness of India in achieving renewable energy target
climate change
In May 2015, the International Climate Policy Centre (CPI) and the Indian Business School (Indian School of Business) jointly released a report entitled "meeting India's Renewable Energy goals: an effective Project allocation Mechanism" (Reaching India's Renewable Energy Targets: Effective Project Allocation Mechanisms). Auctions can help India deploy renewable energy in a cost-effective, fair and transparent manner if risk management is properly designed.
The Government of India has set ambitious renewable energy targets for 2022 to meet its climate targets and enhance energy security. Given India's limited budget, a cost-effective policy path will be critical to achieving these goals. One way to reduce the cost of government support for achieving its renewable energy goals is to purchase renewable energy through the use of tariffs. The federal and local governments of India purchase renewable energy through two mechanisms: (1) feed-in electricity prices, where the government sets tariffs for the project (that is, estimated how much electricity can be purchased); and (2) auctions, where project developers quote tariffs to the government and choose according to predefined technical and financial criteria. Usually, wind power is purchased through online electricity prices, and solar power is purchased through auction.
For governments, renewable energy auctions are becoming more and more popular around the world as a potentially more cost-effective mechanism. The report selects 20 renewable energy auction samples from around the world to assess the following two questions: 1 as a project allocation mechanism, whether the auction is effective or desirable 2 how to design the auction to achieve India's renewable energy goals or how to make the auction feasible.
1 effectiveness
In terms of cost-effectiveness, auctions are almost always cost-effective. First, the tariffs found in auctions are almost always below the baseline of feed-in electricity prices. 47% of the auction samples saved more than 20% of the grid price baseline, 24% of the auction samples saved 10% of the 20% of the auction samples, and 29% of the auction samples saved up to 10%. Second, the tariffs found in the auction of Indian solar projects are close to market tariffs. In 2010-2011, the tariff found in the auction was 23% / 35% of the market competition tariff, compared with 1% / 6% in 2012-2013. Thirdly, compared with the feed-in electricity price, the auction does not lead to any additional transaction costs. However, due to the uncertainty of the auction results, developers are concerned about indirect financing costs.
In terms of configuration effectiveness, in these auctions studied, although some auctions can successfully allocate capacity, many auctions can not configure complete expected capacity. Only 17% of the auction samples can auction more than 75% of the configured capacity, 8% of the auction samples have 50% to 75% of the configured capacity, and 75% of the auction samples have less than 25% of the configured capacity. Configuration effectiveness can be improved through better risk management, and poor risk management is the main reason for the failure of auction deployment effectiveness.
In terms of market development, when the policy is aimed at encouraging the high level of participation of each bidder and limiting the allowable capacity, auctions enable projects to be allocated fairly in most cases. Among the auctions studied, about 2max 3 are competitive or moderately concentrated, which means that the capacity is allocated to most developers; about 1max 3 auctions are highly concentrated, and only a few developers get most of the capacity auctions.
2 Feasibility
The report examines how best to design auctions to achieve India's renewable energy goals by assessing seven risks that may affect the success of the auction. Cost-effectiveness is most affected by auction design risks (that is, risks associated with auction design, such as the capacity to be auctioned and the type of bid). The effectiveness of allocation is most affected by auction design risk, completion risk (all factors that may delay project production) and financial risk. The study found that the correct policy design can reduce the risk, so that the auction can achieve both cost-effectiveness and allocation effectiveness.
3. Policy suggestions
Studies have shown that if risk management is properly designed, auctions can deploy renewable energy capacity in a cost-effective and equitable manner. The following policy designs may make the auction more successful:
(I) in order to improve cost-effectiveness, sufficient competition can be ensured by setting the volume of capacity auctions within the supply capacity of the market.
(II) in order to improve the effectiveness of allocation, implement strong late fines in implementing projects, implement supportive policies to improve transmission infrastructure, and provide government guarantees for reducing the risk of off-take.
(3) use auction design factors that can reduce risk to achieve cost-effectiveness and allocation effectiveness. In the specific case of wind energy in India, auctions were introduced in a controlled environment, including the location of the project has been identified, the transmission infrastructure has been planned, and the resource assessment study has been completed before the tender.
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