The Central Electricity Regulatory Commission(CERC) has announced the floor and forbearance prices to be used for solar/non-solar projects from the FY 2012-13 upto 2016-17. The prices set are shown in the table below

Background

Earlier, the CERC had proposed a few changes (refer table below) to be made to the REC prices and invited comments/suggestions on the same.

The final prices to be enforced from April 2012 were arrived at after considering the comments/views of stakeholders and participants at the public hearing on the proposed floor and forbearance prices. As can be seen, the final prices decided upon are considerably lower than the earlier proposed prices.

Analysis

Financial feasibility studies of power plants under the REC mechanism almost always consider the floor price for calculating returns. With this in mind, the evaluation of REC for the primary renewable energy generation systems looks quite healthy.

• Non-solar – the floor price remains unchanged. Thus biomass/wind generators are expected to get the same minium revenue as they have been getting earlier.
• Solar – the floor price has seen a cut of about 23% from current levels. Although this might seem drastic, it is not likely to have a significant impact on solar power projects (refer section below).

APPC – Non preferential tariff and REC

CERC stipulates that for a project to be eligible under the REC mechanism, the power producer has to sign a PPA with the state utilities at a price equal to the APPC price. The APPC price for a state for a particular time period is determined by the State Electricity Regulatory Commissions(SERC).

Looking at the current APPC prices in various states, a combination of REC and a PPA signed at APPC rates seems comparable with the preferential PPAs signed with the state utilities.

For example,  let us consider a solar PV plant to be setup in Tamil Nadu where the APPC price for 2011-12 is Rs. 3.38/kWh. Under REC regulations, if a RE developer were to get the floor price for the solar REC, the income for the solar PV plant would be Rs. 12.68 /kWh (Rs. 3.38 + Rs.9.3). Another case is Rajasthan, which has a very high potential for solar PV – where the income would be Rs. 11.9 /kWh. In comparison, under the phase 1 (batch 1) of JNNSM, the average price settled on through the reverse bidding process was  about Rs. 12.5 per kWh.

As can be seen, these prices are comparable to tariff set through reverse bidding under batch 1 of the JNNSM scheme.

Prices can only go higher

APPC prices are set based on the cost of power generation from fossil fuel based power plants. It is highly likely that this price would increase in the future due to the increase in fossil fuel prices and scarcity of supply. This ensures that the APPC prices would continue to increase for the foreseeable future, thus ensuring higher year on year returns under the REC mechanism provided the PPA signed with the state utilities has provisions for purchase at floating APPC prices rather than fixed price.

The table below gives a comparison between preferential tariff (reverse bidding under JNNSM) and REC mechanism for a plant in Tamil Nadu. The following assumptions were made for the sake of calculations

• Average bid price under phase 1 batch 2 of JNNSM could be around Rs. 12.5 /kWh(on the higher side)
• APPC prices could rise by 15% annually (base price used is that of Tamil Nadu) – reasons for this were mentioned earlier.
• REC price after 2016-17 period (i.e. from FY 2017-18 onwards) is reduced by 25%

Table: REC vs preferential PPA for 10 years post 2012

As can be seen from the above table, the REC mechanism is quite comparable, if not better when compared to the assured tariff provided by NVVN over 10 years of operation of the solar powerplant. Overall, the REC mechanism can clearly drive the solar market, provided the Renewable Purchase Obligation (RPO) is strictly enforced by the various SERCs.

The CERC release can be found here.

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