Nurturing through a favourable FIT policy

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: Feed-in tariff (or, FIT) is the guaranteed tariff at which power/energy is purchased by a utility or an agency like a power transmission gridline authority. Energy regulators have mandated this as a support price at which a producer sells power/energy to a buyer. It is normally applicable for the buying and selling of renewable energy at a preferential rate, different from commercial and conventional energy, mainly thermal and large hydropower plants. FIT is set for a specific timeframe and is an instrument to encourage an upcoming industry. The advantage of FITs is extended to solar, wind, biomass, bio-energy and small hydropower renewable resources producing clean energy.

The philosophy behind encouraging renewable energy for speedy development is well known and dictated by the pressing demand to reduce fossil fuel-based thermal power plants from emitting greenhouse gases and contributing to global warming. The added importance of renewable energy is predominant in both developed and developing countries where energy consumption is growing rapidly. Countries like India are also motivated by their finite fossil-fuel reserves being subject to geopolitical changes and price volatility to search for alternative options, and renewable resources offer substantial potential.

In India, the growth of renewable energy is slow, ostensibly both because of the high initial investment, which has a heavy impact on fixed charges in the tariff, and also due to the low plant load factor, especially in the case of wind and solar power. This is equally true at the global level. Current estimates show that solar photovoltaic (SPV) power is about five times costlier and wind power nearly 1.5 times higher than conventional power.

But promoting them is essential and urgent given the demand- and supply-side management of the energy scenario, and also in the context of many adverse factors encountered in thermal power generation, which constitutes about 60% of capacity. The potential from both sources are huge, and in the case of solar power, whether through SPVs or concentrating solar power, it is estimated to be around 6,00,000 mw at a plant load factor of 14-16%. That of wind power is about 45,000 mw at plant load factors of 20-25%.

FIT has been a successful mechanism in the development of renewable energy over a short span of time in more than half the global installations. It is an important financial package to promote these resources, along with tax benefits, soft interest on loans, etc. Renewable energy is growing at above 25% in developed countries, driven by this encouraging mechanism, even as R&D constantly endeavours to reduce cost. Justification for an attractive FIT is also relevant considering the under-pricing of conventional coal-based power, which levies no penalty on environment pollution nor takes into account irreplaceable loss of deposits.

In India, compensation for land, rehabilitation or destruction of flora and fauna is too little or even missing altogether. The cost of thermal power is more than three times the current level when all such factors are taken into consideration. SPV prices are coming down by 50% each decade and, hopefully, in another ten years, energy cost from SPVs will become competitive, more so on account of the continuous rise in the price of conventional power.

So, nurturing the renewable sector through a favourable FIT is of utmost social necessity in this intervening period. Renewable energy, as the case elsewhere, will boost the economy both by stepping up the manufacture of new products, and also from the marketing and servicing efforts. Technological innovation and financial engineering are now drawing over $50 billion in annual investment at global levels and the prospects in India are estimated at about Rs10,000 crore, or $2 billion, annually.

Current tariff rates for renewable energy are too conservative and do not in many cases even guarantee a 10% return on investment. The benefits of the accelerated depreciation option are in the exclusive domain of big companies earning huge profits. Existing FIT on solar and wind power should ensure a reasonable positive return within ten years of loan repayment in a regime where interest rates are over 12%.

Regulatory authorities and statutorily empowered institutions should review the FIT polices in force and the government may undertake an exercise to ensure greater linkages between tax benefits and production so that the incentives promote renewable energy by attracting large investments. This also conforms to the urgency embodied in the terms of the National Action Plan on Climate Change initiated by the PMO.

If 10%, or 20,000 mw, of installed capacity is to come from renewable resources out of 2,00,000 mw planned and deliver about 35-40 billion units of the total of 1,100 billion even at double the price, it will still only have a negligible impact on the overall tariff structure to be borne by the supplier and consumers. In resolving future power problems, a coordinated approach to a different energy mix is unavoidable, as also the need for tapping renewable resources, which is eagerly awaiting a more remunerative tariff. The sooner this is done, the better for the pursuit of clean energy.