The Renewable Energy (RE) contribution to mitigating climate change is critical to keeping global warming below 1.5 degrees Celsius. Consequently, large-scale RE projects account for a significant percentage of Verified Emission Reduction (VER) transactions (e.g., 26% in 20181). Yet the actual investments in RE projects are insufficient to slow, let alone enough to reverse the global temperature trend. The 2020 move by some certifiers of carbon credits (e.g., Gold Standard2 and Verra3) to discontinue the registration of new RE projects (with limited exceptions) may further hinder their development. These certifiers noted that, in the global perspective, the cost of delivering large-scale renewable projects was reduced, so they concluded that these projects may no longer need funding from carbon credit sales to ensure their feasibility and therefore are likely to fail the additionality test. However, one of them admitted that such an approach would lead to the exclusion of certain truly additional projects from registering with the VCS Program4.
The justification underpinning discontinuation of registration of RE projects is problematic on several aspects. For one, it apparently applies an overly simplistic approach essentially ignoring the unique circumstances affecting each one of the projects – and which are critical to understanding whether carbon financing may be vital for initiation or continuation of them. Another major drawback of such assumption is that the actual data show that a decrease in costs does not necessarily lead to an increase of profits as these significantly depend on benefits (e.g., revenues from the sale of energy represented by e.g., electricity tariffs) and the revenues may decrease as shown in real examples presented in Figures 1 and 2 below.
Figure-1: Wind power projects located in Gujarat, India
Figure-2: Solar power projects located in Rajasthan, India
Figures 1 & 2: Changes in investments cost (per MW of installed capacity), electricity tariff (per kWh of electricity delivered to the grid) and post-tax equity IRR (%) of selected RE projects (registered by CDM, VCS, GS and GCC) in the period 2006 – 2022. Solar projects data is for State of Rajasthan and wind projects data is for State of Gujarat in India5.
Data presented in Figures 1 and 2 allow for conclusion that changes in investment cost for RE projects are broadly reflected in changes in electricity tariffs for energy delivered to the grid with a long-term tendency to decrease these tariffs. Consequently, post-tax equity IRR approximately representing attractiveness of a particular project to potential investors closely follows the changes in tariffs while remaining below the state- or country-wide benchmark representing the level of equity expected by investors.
Moreover, due to their dependence on fluctuating and partly available resources, solar and wind energy plants do not provide the same level of reliability and load factor of energy supply to the grid that fossil fuel-fired plants do. To achieve comparability with fossil fuel-fired plants, solar and wind energy plant operators must invest in the installation of battery storage, which further increases RE projects investment cost. Therefore, to achieve comparability of cost of energy generation in solar PV and wind energy plants and in fossil fuel power plants, it is necessary to include the costs of battery installation and usage.
For these reasons, the GCC strongly believes that one-sided conclusion, with focus exclusively on a broad decreasing cost picture, does not do justice to the realities on the ground that are highly complex with individual projects firmly varying in elements deciding on their additionality.
Therefore, the GCC approach to RE projects invariably focuses on detailed assessment of each project to allow for registration of only those that undeniably demonstrate their additionality.
1 https://redshawadvisors.com/the-beginning-of-the-end-re-ver-projects/
2 https://www.goldstandard.org/sites/default/files/nl_24_oct_2019.pdf
3 https://verra.org/verra-announces-release-of-vcs-version-4/
4 https://verra.org/wp-content/uploads/2018/05/VCS-v4-Consultation-Scope-of-VCS-Program.pdf
5 The cost of electricity generation in grid-connected wind projects in Gujarat decreased by almost 38% while the electricity tariff decreased by 33% resulting in the post-tax equity IRR reduction by 24%, in the period 2017 – 2020. The cost of electricity generation in grid-connected solar projects in Rajasthan decreased by 82% while the electricity tariff decreased by 72% resulting in the post-tax equity IRR reduction by 14.5%, in the period 2012 – 2022.
