Long-term lending with lower interest rates for renewable energy (RE) projects should be for incentivising performance and not act as “market distortions”, says a report.
The report of the expert group of Niti Aayog on 175 giga watt (GW) RE target by 2022 also suggested that generation-based incentives (GBIs) can act as a bridge instrument, till the time utilities pay out for RE power is greater than marginal cost of conventional power.
“Interest rate/ tenure-based interventions would have to be designed to ensure that they incentivise performance and do not act as market distortions,” the report said.
Such interventions should be made available to identified pool of projects and their tariff considerations should be done separately, it added.
“In absence of such specific arrangements, availability of these incentives to a handful of projects/ discoms/ states could be a potential distortion against the remaining market,” it said.
The report further recommended that another way of operationalising such an intervention is by offering such low cost/ long term capital (lending) at all RE projects through balance sheet based refinancing to lenders through a central entity.
“The project risk would still have to be borne by the lenders in the normal course so that their due diligence process does not get impacted. The assumption here is that enough low-cost long-term money can be made available to the identified central entity,” it added.
On GBIs, the expert group suggested that till the time utilities pay out for RE power is greater than marginal cost of conventional power, GBI can act as a bridge intervention.
Giving examples, it said if accelerated depreciation (AD) can bring down costs partially, GBIs could bring it down further to meet the utility’s cost of procuring alternative power source.
“In addition, GBI is also an output/performance linked incentive and hence very limited possibilities of misuse,” it added.
An inherent limitation for GBI has been its ability to offer tariff comfort at the procurer’s end as most feed-in tariffs approved by the state regulatory commissions do not even consider GBI to be available (or not available), it added.
On viability gap funding (VGF), group said: “The current model of VGF for solar projects is unique. It is a high initial cost option, with part of the payments being deferred to ensure performance.”