FiT: A robust all-round strategy
- Feb 7, 2021 6:56 pm GMT
Over the last few years, we have seen that the governments or government owned utilities and such bodies, are keen to bring down the cost of Renewable Energy (RE) based electricity generation to a bare minimum through an auction or bidding mechanism. The need to bring down procurement costs, apart from the fact that it is desirable, also stems from the fact that any government set-up or bureaucracy is trained to minimise expenditure of public money, whether directly from the government or the public at large. It’s a philosophy, doctrine, policy or a procurement strategy pursued by a government body. We term it as a Cost Minimization Strategy (CMS).
No doubt, a typical approach of a government body is to work with CMS but at the same time, CMS cannot be its main function. More important from a governmental point of view is the sustainability of its program, economic development, energy security and energy access. While reduction in GHG emissions is the overarching objective, there are many inter-linked sub-objectives that cannot be overlooked. Different dimensions, objectives and success factors of such a policy framework are listed in Figure 1 below. A government is concerned with all these aspects and must ensure success of all the objectives
Does the CMS really serve all the dimensions associated with the RE program? It’s a question worth examining.
In the table below we examine, in the backdrop of CMS, some of the main aspects of RE deployment associated with human society, though there can be many more such as gender, education, health etc.
This is the direct physical outcome of a Renewable Energy Device. CMS an attempt to bring down the cost/unit of the electricity output
The main driver of Renewable Energy, across the world, is reduction in GHG emissions so as to arrest Climate Change. While here too, cost is an important factor, many other aspects, some of them mentioned in Figure 1 are equally or more important.
Every country would want to manufacture equipment in their own country, provided the equipment serves the purpose and meets the quality standards. Its good for the economy and generates employment. However, if the main motive is to bring down the costs, then only very large and established multinationals can compete well – and in every country (the market), a localised small time or even medium scale manufacturer or business can never make it. Therefore, this purpose gets defeated by a CMS
Many disasters in recent times from earthquakes in Nepal to Hurricanes in Florida to floods in Kashmir and Kerala and the COVID-19 Pandemic have established the fact that “Resilience” has to be a very important aspect of any National Policy. We have seen that these disasters can have a short time-frame such as Cyclone or a much longer time frame as in the case of COVID. Suddenly, when there are lock-downs, one cannot import equipment from outside the country e.g, China, etc.. Therefore, Resilience is directly linked to local manufacturing as well and is a very important aspect of any National Policy. CMS with its single point agenda missises out on these objectives.
From an economic and program sustenance view point, any policy should lead to improvement in the health of businesses involved. A CMS obviously impacts the businesses involved. They have to deliver more at less profit and this gets pushed all along the supply chain. Therefore, if you are setting up a wind turbine, the cost pressure will be felt by the supplier Generator, Cables, Foundation Bolts and even the engineers of the contractors and consultants. This is fine as long as growth and expansion in CMS framework does not impact the health of business. However, when costs are driven to a bare minimum, it cannot be good for the economy. Even in the Feed-in-Tariff (FiT) mechanism, the FiT was being determined by the regulators assuming a certain assured return to the investor.
Economic Development has different aspects, one is that of electricity generation and the other is in set up of local businesses, manufacturing and employment generation. CMS can only lead to economic development in a limited way
Small and Medium Enterprises and Start-ups
Such businesses cannot achieve the scale of economy required for the competitive edge in auctions. Thus, such entities are actually out of the RE program in a CMS scenario and can only participate as consumers of electricity.
There is always a trade-off between quality and cost. No owner of projects should completely compromise on quality, however, under cost pressures, he/she may not have a choice. Therefore, under a CMS, quality of the equipment and project implementation is likely to get compromised. Projects may deteriorate in performance within 2-3 years
It is important for the program to be sustained and at the right pace. With cost pressures, companies can face difficulty in continuing and some projects may not come up because the bidder might have bid too low a price. CMS does not ensure Program Sustainability
As a policy measure, a CMS addresses the many-faceted objectives and desired outcomes in a government program and policy thrust. The question is then why has this approach become the favorite of the day.
The countries that still have a rudimentary, monolithic and government-controlled and owned electricity sector need time to set in place a sophisticated regulatory framework with regulators who have independence. Such countries, that need to quickly scale up RE, may find the CMS an easy and straightforward approach, albeit with its limitations. The reasons otherwise are entirely monetary and intended to protect the financial interests of the utilities or distribution companies. Since these entities occupy a strategic position and are monopolies or licensees, often protected by law, it becomes difficult to argue with them a somewhat different strategy for RE offtake.
However, in countries that have established and functional regulatory set up such as US, Germany, India, and many other developed and developing countries, a CMS is a retrograde step. It erodes the functionality of a painstakingly developed regulatory framework and Institutional infrastructure. The evolution of a fully functional regulatory framework does not happen just with a government order but requires 5 – 10 years to take shape. Therefore, given the fact that a CMS has a limited monetary function, it is not desirable to carry on with it in countries with a mature policy-regulatory-institutional framework.
It is instead worthwhile and desirable to work with a FiT Strategy, where the Feed-in-Tariff is determined by an independent regulator, who takes into consideration interests of a wider societal group including SME, Small businesses, RE-based Captive units etc. There are many arguments in favor of the FiT strategy including long-term economic development, employment, industrial development, local manufacturing, skill development, capacity building etc.