Feed-in Tariff: Computing and Comparing

At the QLW workshop at ADB in Manila, there was lot of discussion about Feed-in tariff and what is a fair level of FiT. While the debate rages on, this blog will focus on two aspects of FiT: analytical aspect and qualitative aspect. In my presentation at the Clean Energy Forum, I spoke about the problems of comparing FiT of two countries. I described as an apples-to-oranges comparison, and what really needs to be compared in the entire fruit basket of tariffs and incentives that make up the total package for financial analysis.

Lets start with definition of Feed-in Tariff. FiT started in late 70s in the US, where renewable energy prices were set based on the cost of generation. Two other key provisions were guaranteed grid access and long-term contract. Let us focus on the pricing mechanism of FiT, which is cost of generation. Cost of generation is computed to ensure that a generator makes a reasonable return on investment, while operating the generation plant efficiently. The FiT computation therefore is based on:

  • Technology (wind, solar, bio-mass)
  • Quality of resource in a geographical area
  • Financing structure: % debt, duration of debt, interest rate, rate of return on equity
  • Capex cost, which depends on: Delivered cost of equipment and balance of plant Opex cost, which depends on cost of O&M
  • Incentives offered: Investment-based, generation-based and others

As one would imagine, this gets complicated and political. Complicated because there are lot of factors involved like quality of resource, certainty of resource, length of transmission line, interest rate, currency, etc. Judgments have to be made, often, without adequate studies. Political because the generation industry wants to get a higher tariff and consumer groups want to ensure that the tariff is low.