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.