Impact of risk on the levelised cost of energy: The case of solar tariffs in India

Abstract

Setting optimal tariffs that adequately compensate the investment and project risks is crucial to sustain the participation of private sector in India's ambitious solar programme. However, driven by fiscal priorities, state programs are increasingly resorting to aggressive tariff reduction to minimise compliance costs. This article first highlights the trends in solar tariffs and estimates the underlying levelised cost of energy (LCOE). We further delve into the broader institutional context and sectoral issues that motivate these trends. Finally, we evaluate the implications of low tariffs from the perspective of risk using quantitative simulations. Our results suggest that the levelised costs vary widely when evaluated against different risk scenarios. Based on these results we propose recommendations for policy makers in the context of determining tariffs that balance the interests of different stakeholders.