The Case for Indexed Renewable Energy Tariffs: An Interim Solution To Buy Time for Indian Discoms To Make Durable, Long-Term Reforms

Overview

This briefing note evaluates the potential of indexed renewable energy (RE) tariffs to provide financial respite to discoms, thereby giving them vital breathing room to implement more durable and lasting reforms. RE tariffs have been on a downward trend for several years with record lows recently set once again despite a Covid-19 overhang. However, the scale of India’s RE ambitions is such that incremental capacity will inevitably result in a significant added cash outflow burden to discoms. The ability of demand to absorb the resulting increase in power generation is also a matter of concern.

Flat RE tariffs have been the norm in India in recent years, with only a few instances of auctions for capacities held under indexed tariffs. In this context, wider adoption of indexed tariffs can help ease the unsustainable near-term financial pressure on discoms. Additionally, front ending RE tariffs (via indexation) at levels which are at par with the prevailing variable charge for coal-fired power can also play a contributing role in nudging discoms to hasten the switch from polluting coal to RE.

Key Highlights

• Growing RE from the current 86.8GW to 450GW by 2030 will require ~35GW of RE capacity to be installed annually over the following 10 years, resulting in annual incremental power generation of 76.7 TWh from RE alone.
• In contrast, incremental annual power generation from all sources in the preceding five years never crossed 70 TWh.
• Indexation can result in significant near-term savings even if flat solar tariffs were to further decline 2.5% annually from their recently set lows of INR 2.36.
• Resulting savings from indexation to discoms over a five-year period are estimated to be INR 28,880 crore (USD 3.0 billion).
• Post-tax equity IRR’s for developers can also be maintained at levels that are at par with those achieved from flat tariffs.