There are sometimes provisions for adjusting Renewable Tariffs for inflation, however, the amount of adjustment varies widely.
Between Germany, with no adjustment for inflation, and Spain, with nearly full adjustment for inflation, Canada’s Prince Edward Island and France have opted for adjusting a portion of their Renewable Tariffs with inflation. Prince Edward Island adjusts $0.02 CAD/kWh with inflation of the $0.0775 CAD/kWh paid under their fixed tariff, or the equivalent of 26% of the total tariff. France has chosen to adjust 60% of its tariffs with inflation.
In Ontario, contracts awarded under the Canadian province’s RFP adjust 15% of the contracted payment with inflation. Ontario’s Stadard Offer Contract Program offers 20% adjustment of the tariff for wind, hydro, and biomass.
There are two types of inflation adjustment: within an existing contract, and adjustment of the initial or starting tariff. The French system adjusts both the initial tariff from one year to the next as well as adjusts the tariff within existing contracts to reflect inflation.
Contrary to a common misperception, adjusting the tariff for inflation is not to compensate for increases in the cost of operations and maintenance. The most important function of inflation adjustment is to protect the equity invested in long-lived capital projects like renewable energy technologies. Without the inflation protection, investors need a higher price relative to investments with inflation protection before they put their capital at risk.
In the contract Ontario negotiated for the refurbishment of two units at the Bruce nuclear power plant, the province agreed to fully adjust prices for inflation up to a maximum amount and a percentage of inflation beyond that amount. This protects ratepayers from any excessive inflation due to a dramatic rise in fossil fuel prices. The Ontario mechanism hasn’t been applied to contracts for renewable generation but if it did, a proposal could like the following:
· 100% adjustment up to a maximum inflation of 3% per year, but
· limit adjustment to 25% of inflation on any inflation above 3% per year.