Change In FDRE Bidding Norms Can Aid RE Growth: EMBER

EMBER recently released a policy paper highlighting the importance of changing the approach to bidding in the FDRE tenders to increase renewable energy (RE) capacity growth in India. It also stated that it’s unfair to make developers responsible for handling the unpredictable nature of renewable energy in contracts and that this should be rethought.

EMBER in its recent policy report, “RE Capacity Growth in India Needs a Wholesale Change in Approach to Bidding in the FDRE Tenders”, emphasizes that the FDRE tenders have come up after an evolution. It included changes made in the tenders. They highlighted the change in the tendering which has evolved to develop different types of PPAs. This has reportedly, led to the growth of shorter durations PPAs of 5-year, 10-year which command a premium over longer ones.

However, currently, FDRE tenders are being used but not without their shortcomings, for instance, the report compared and contrasted findings in India. Based on the analysis the study showed, SECI underwent a long evolution before introducing Firm & Dispatchable Renewable Energy (FDRE) tenders in 2023.

The study shed light on the growth of tendering systems that have transitioned from round-the-clock (RTC) tenders, peak power tenders, hybrid wind-solar tenders, and now FDRE tenders.

The report stated, “FDRE should refer only to fully shaped PPAs, where the utility specifies hourly demand profiles for the entire PPA duration. The demand must be matched every hour. Currently, FDRE tenders allow up to 25% relaxation annually.” The report also emphasized, “FDRE may not be the final stage in the evolution of renewable energy tenders (as power markets have not yet played a central role in India’s transition), but it is the most advanced version so far. These tenders require detailed analysis for bidding.”

The policy paper outlined the proposed solution is to reduce the Power Purchase Agreements (PPAs) that place an undue burden on developers to manage the intermittency of renewable energy. A proposed solution is to reduce the Demand Fulfilment Requirement (DFR), which would relax the constraint of meeting the committed hourly demand 90% of the time annually.

The study acknowledges the undue burden on developers to manage the intermittency of renewable energy, however, it also proposed a solution to reduce the Demand Fulfilment Requirement (DFR). Doing so, could help to relax the constraint of meeting the committed hourly demand 90% of the time annually. The study further emphasizes that in a market dominated by renewable energy, participants, including utilities and private consumers, will likely demand PPAs that fully align with their hour-by-hour energy needs.”

Need For Developers To Evolve Version 2.0 For Power Market Players

The report highlighted the importance of shifting focus from efficiency gains in EPC contracting and other CAPEX savings, to Developers 2.0, according to which there is a need to emphasize topline optimization through trading and portfolio management.

The report recommends developing IPPs that can strengthen their market modeling and power trading functions, as current competencies in the Indian renewable energy sector are weak by international IPP standards. It hopes that this evolution into Developers 2.0 will equip players to manage the higher volatility in power markets as renewables continue to grow.

Developers 1.0 in India have focused on the first two bars, as seen in the figure above. These cover only the technology costs over the lifetime of the generating asset, to get to a levelized cost of renewable generation.

To level up to Version 2.0, developers need to consider a full 25 or 30-year outlook on the market price—fully variable across the project life. This will enable them to assess the additional costs that will be imposed by the merchant exposure of part of the oversized RE capacity.

It further enlists the multiple risks for the RE asset to meet the PPA requirements over its life. For instance, it stated,

1. Price Risk: Volatility in market prices can be higher or lower than expected, affecting revenue. For instance, in 2023 in India, price volatility posed significant challenges. I.e., what if due to an increase in volatility like in 2023 in India, prices are much higher or lower in a year than expected?
2. Volume Risk: Weather uncertainty introduces the risk of lower-than-expected solar and wind generation, impacting the ability to meet PPA commitments as well as lower generation and revenue.
3. Cannibalisation Risk: As more renewable energy generation enters the market simultaneously, it can drive down prices. This geographical and temporal concentration of RE generation can lead to self-cannibalization, where additional RE capacity reduces its profitability. In extreme cases, this can even result in negative prices in certain markets