Financially settled contracts have the potential to transform India’s electricity sector. With decarbonisation goals looming, policymakers, regulators, utilities and distribution companies are confronting multiple challenges – like improving power system reliability, protecting consumers from high prices, and accommodating new sustainable energy as efficiently as possible.
In this paper, authors Dominic Scott, Alejandro Hernández and Kumaresh Ramesh spell out what financially settled contracts are and how they differ from the currently predominant power purchase agreements. We also present a primer on the operation and mechanics of financially settled contracts, and survey the significant international experience with their use.
At the core of the paper is our analysis and illustrative modelling of the potential impact of financially settled contracts to help address current challenges and generate broad benefits for the energy sector. We demonstrate how shifting from traditional power purchase agreements to instruments like contracts for difference for renewables and call options for thermal resources can deliver major benefits for India:
- Lower system costs and consumer bills through more efficient scheduling of resources. Our modelling of illustrative distribution companies points to annual cost savings of around 7% (0.33 INR/kWh) in the procurement of flexible resources that accommodate growing shares of renewables. These savings can be used to relieve the financial stress of DISCOMs, to lower consumer bills and to invest in renewable resources.
- Stronger incentives for generator availability to improve reliability.
- Consumer protection from high prices without relying on wholesale price caps.
- Safeguarding investor confidence through revenue certainty for high-performing renewable resources.
- Greater market liquidity to improve price formation and support smarter investment.
- All distribution companies enjoy lower costs, with 5%–8% savings in our modelling.
Finally, we outline a policy roadmap to access these gains: launching pilot projects, resolving regulatory uncertainties, ensuring equal treatment in regulatory frameworks like resource adequacy, and developing standardised contracting and governance tools.
Read the full report.
We also explore different benefits of financially settled contracts in our blogs in Power Line Magazine:
From shortages to security: How financially settled contracts support generator availability
