Background of Renewable Energy Certificates (RECs)
Released in June 2008 by the Government of India, the National Action Plan for Climate Change (NAPCC) laid out a roadmap for increasing the share of renewable energy in the total generation capacity of the country. The Plan set the minimum renewable energy target at 5% of the total energy procurement by 2010 across the country, with a 1% year-on-year increase for the next 10 years, that is, 10% by 2015 and 15% by 2020. The solar RPO requirement currently ranges from 0% to 0.5% of total electricity consumed. It is expected to go up to 3% by 2022.
The potential of renewable energies (RE) is spread throughout the country and power generation from them is fairly decentralized. Therefore, the Electricity Act, 2003 has assigned the responsibility of RE promotion to the respective state electricity commissions (SERCs). Accordingly, the SERCs are empowered to ensure a certain pre-fixed percentage of renewable energy – known as renewable purchase obligation (RPO) – in the electricity mix in their respective states. But there is an in-built problem with this preposition: some states have low renewable energy potential and hence, they are constraint to fix low RPOs because it is an intra-state affair. Likewise many states are quite high on renewable energy potential, but they lacked incentive to develop it beyond their RPO requirement due to high project costs.
Therefore, in order to achieve the ambitious goal of RE development a nation-wide mechanism was needed that could allow RE deficit states to aim for bigger RPO targets and also encourages development of renewable resources in the RE rich states. Thus, the concept of renewable energy certificate (REC) was developed learning from the experiences of other countries. Besides allowing inter-state transactions, it also serves others goals, such as
- Overcoming geographical hurdles in the development of renewable energy resources.
- Creating competition among various RE technologies
- Effective implementation of RPO targets across all states
- Being a market based mechanism, it would ultimately allow the government to move away from subsidy based promotion of RE which is a drain on the exchequer
The REC essentially represents two different products: One is the commodity electricity and the other is the environmental benefit of renewable energy power. These two entities can be sold separately and independently. The electricity is sold to the local distributing company (discom) and the environmental benefit represented by the REC is paid for by the economic system of the country.
It must be noted that the REC mechanism is not an incentive scheme. It is merely a market mechanism to enable various obligated entities to meet their RPO norms specified by their respective SERCs. The mechanism co-exists with all the current incentive schemes which are generally designed for generation only.
RPOs – The Main Drivers of RE Development in India
State level Renewable Energy Purchase Obligation (RPO) regulations/norms are put in place by SERCs in most of the states. The RPO regulations are required to be met by obligated entities (distribution licensees, group captives and open access customers) by purchasing renewable energy either by entering into PPAs with renewable energy assets and/or by purchasing renewable energy certificates.
RE Producers Eligible for REC Mechanism
In order to be eligible the generating company has to meet one of the eligibility criteria, as defined by the CERC, so that the central agency (NLDC) can grant registration to the “Eligible Entity”. These are given below:
- Will get accreditation from the state agency as notified by the SERC concerned;
- Will not have any PPA with distribution utilities at a preferential tariff determined by the SERC; and
- Will sell the electricity generated either to the distribution licensee of the area in which the eligible entity is located, at a price not exceeding the average pooled cost of power purchase (APPC) of such distribution licensee, or to any other licensee or to an open access consumer at a mutually agreed price, or through power exchange at the market-determined price.
Existing projects for which long-term PPAs are already in place will be allowed to participate in the REC scheme after the expiry of their existing PPAs. Since March 2011, RECs are traded on the power exchange for market-based price discovery, with the floor and cap being set by the CERC.
Pricing of the Electricity and the REC Component
The pricing of the electricity and the REC has to follow separate mechanisms. The electricity tariff is generally fixed as the average power purchase price (APPP) of the distributing licensee. The state electricity commissions regulate all sources of power purchase and the procurements of all distribution licensees. Thus, the power purchase expenses are calculated on the basis of the aggregate revenue requirements of the generators.
The average power purchase (APP) cost is calculated by pooling the price of all the sources of power, for which all relevant information is available well in advance. Thus there is increased certainty both for the project developers and the end consumers regarding the price of power. The most important benefit of this method is that it doesn’t unnecessarily overburden the consumer.
As per the August 23, 2011 order of CERC, the cap (forbearance) and floor prices have been fixed for five years starting from April 1, 2012. Thus, they will remain effective till March 31, 2017. It should reduce regulatory uncertainty and provide comfort to investors and lenders.
Non Solar REC (Rs/MWh)
Solar REC (Rs/MWh)
*Forbearance Price: It is the highest difference between the CERC tariff and the APPC across states.
**Floor Price: This is the price to keep the project viable in terms of meeting the O&M expenses, Interests on loan and working capital, principal repayment etc. It is taken as the highest difference between the minimum requirement for project viability and respective state APPC of pervious year.
These new forbearance and floor prices indicate downward revision from the previous prices (ie, for solar RECs the previous cap and floor prices were Rs 17,000 and Rs 12,000).
The REC trading started in March 2011 and it is too early to draw any meaningful conclusions from the trading prices and volumes. The REC market is still evolving with the REC trading volume is significantly low compared with the overall RPO requirements in the country. Looking at the status of RE development in the country, the supply of RECs is expected to trail the RPO demand in the coming years across states.
India’s First Solar REC
M&B Switchgear has become India’s first solar developer to get itself registered by National Load Despatch Centre (NLDC) for solar renewable energy certificates (RECs) for its 1.5 MW solar plant. It is also planning to raise its capacity to 6MW and put the entire capacity under REC. Three other companies in line are Jain Irrigation (8 MW), Kanoria Chemicals (5 MW) and Numeric Power (1 MW).
Latest Solar Forbearance and Floor Prices
(Data from CERC Order of August 23, 2011: Annexure-5)
|Rs/KWh||Solar PV||Solar Thermal|
|Interest on Term Loan||3.92||3.75|
|Interest on Working capital||035||0.35|
Calculation for Solar PV
CERC Tariff (PV)
Gap Between Tariff & APPC
Gap Between Min Req. & APPC
Therefore, the current forbearance and floor prices are Rs 13,400 and Rs 9,300 (rounded to next hundred) and will remain valid till March 2017. A similar calculation for solar thermal projects using CERC tariff of Rs 15.05 and Minimum requirement of Rs 11.05 yields lower figures than these prices; so they are discarded in favor of these prices.
There is a wide variation in the APP costs in different states. Because of this, an obvious outcome is that the RE project implementer might sense better opportunities in states with higher APP cost rather than states which have better renewable energy generating opportunities.
Comment: The forbearance and floor prices are thus decided by the state with the lowest APPC – Kerala here. Therefore, if the calculations of CERC are realistic, any RE project should be viable anywhere in the country.
Example: Suppose you decide to set up a 1 MW solar power in Uttar Pradesh and go for REC mechanism. So you will sell the electricity at Rs 2.62 per unit and if the solar REC at the floor price of Rs 9.30, you earn Rs 11.92 per unit electricity produced. Add to that the benefit of GBI of Rs 0.50 per unit and you make Rs 12.42 per unit. If the demand-supply mechanism operates in the REC trading and the RPOs are strictly enforced in the future and you are able to sell the REC part at the mean of the cap and the floor price (ie, Rs 11.35), you end up earning Rs 14,47 / unit electricity.
A Critical Bottleneck
RPO levels are not in line with the NAPCC Roadmap
There are really two issues with the RPO targets across Indian states. First: the RPO targets (for example for 2012) vary considerably from 1 to 11 percent and are not in line with the recommended level of 7% suggested by the NAPCC. Some states such as Chhattisgarh, Haryana, Kerala, Tamil Nadu, Uttar Pradesh and West Bengal have revised their target RPO levels significantly downwards for 2012 compared with the earlier set targets. For instance, Tamil Nadu (which is rich in wind energy) has reduced the 2012 target to 9 percent compared with 14 percent of 2011. This most likely reflects poor financial health of state utilities.
Second: Only few states have set their RPO targets for longer periods into the future; most have targets only till FY 2012 or 2013. Coupled with the tendency of downward revision and lack of clear and strict enforcement mechanism, it creates uncertainty for the investors and developers, which is not good for the future of REC mechanism.
A Suggestion to Deepen the REC Market
Mr Vineeth Vijayaraghavan, Editor of Panchabuta, an online newsletter, has given this suggestion to stir enough demand for RECs. These are bought by “obligated entities” if they fail to buy the prescribed percentage of renewable energy – known as renewable purchase obligation (RPO). Normally these “obligated entities” include distribution companies, captive consumers, and open access users. They are expected to meet their shortfall in renewable energy portfolio by buying RECs.
The suggestion is to include the thermal power plants in the list of “obligated entities”; they are themselves big consumers of electricity. These plants consume power in their functioning; for example, for lighting and fans, to run coal and ash handling plants, etc. This “auxiliary consumption” is typically of the order of 7 percent of the generating capacity of the plant. Thus, a 1,000-MW thermal power plant consumes 70 MW power.
The thermal power capacity in the country is over 100,000 MW, the “auxiliary consumption” of these plants works out to 7,000 MW. Imposing a 10 percent RPO adds over 700 MW worth demand for RECs.
Let us see if and when the CERC concurs with this idea.
Summary of REC Price Trend and Outlook
We believe that the rising international prices of fossil fuel and the persistent domestic coal shortages make will continue to close the gap between the RE prices and low cost thermal power. We also expect the new RE projects/IPPs to prefer the REC route as opposed to the preferential tariff. As the REC trading takes roots, the demand and supply forces would begin to govern the REC prices which should allow a win-win situation both for the “obligated entities” and RE producers. Stricter and periodic (monthly or quarterly) enforcement of RPOs is certainly indicated for good health of REC mechanism. This, however, demands improving financial health of state electricity utilities. Current scenario can be summed up as follows:
- The installed RE capacity is very low compared to the potential and the Renewable Purchase Obligation (RPO) requirements.
- Many states (such as UP, Haryana, Delhi) have very low supply of RE against their RPO requirement. The generation from projected RE capacity addition will leave a shortfall for their RPO requirement in the coming years.
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