Renewable Energy Development: REC vs Preferential feed-in-tariff

Renewable Energy Certificates (RECs)

Charanka Solar Park, Gujarat

Charanka Solar Park, Gujarat

In January 2010, the Central Electricity Regulatory Commission (CERC) announced Regulation on Terms and Conditions for recognition and issuance of Renewable Energy Certificate for Renewable Energy Generation. Accordingly, a generating company involved in electricity generation from renewable sources of energy will be eligible to get Renewable Energy Certificate (REC) for each 1 MWh (1000 unit) of generation subject to:

  • It has got accreditation from State Nodal Agency
  • It does not have any PPA for the capacity related to such generation with distribution licensee at preferential tariff (state regulated tariff),
  • It sells electricity generated either to the distribution licensee at price not exceeding average pooled cost of power purchase (APCPP) of the distribution licensee for last year, or
  • To any other licensee or to an open access consumer at mutually agreed price, or through Power Exchange.

Captive RE Generators are also eligible for REC if they are not availing promotional Wheeling or promotional banking and not getting any electricity tax/duty exemption from the state.

This provision ensures supply of REC in the market; the demand is ensured through the mandatory Renewable Portfolio Obligations (RPO) across all Indian states. The RPOs are imposed on “Obligatory Entities” – distribution licensees, captive consumers and open-access consumers – to consume certain % of their total energy consumption through renewable energy sources. They can buy RECs from the market equivalent to the short fall in their RE purchase.

The legislative support for RPO comes from section 86 (1) (e) of the Electricity Act,-2003 which says: “to promote co–generation and generation of electricity through renewable sources of energy by providing suitable measures for connectivity with the grid and sale of electricity to any persons, and also specify, for purchase of electricity from such sources, a percentage of the total consumption of electricity in the area of a distribution licensee.”

Procedure for RE generators to avail REC

The first step on the path of REC is to get accreditation from the State Nodal Agency and then register with the Central Agency (NLDC). Thereafter the RE generator is required to verify its RE generation through the State Load Dispatch Center (SLDC). Then an application is filed with the Central Agency to get RECs issued in the dematerialized form which can be traded at the designated Power Exchanges in Delhi or Mumbai.

Salient Features of the REC Framework

  • Renewable Energy Certificate (REC) mechanism is a market based instrument to promote renewable energy and facilitate renewable purchase obligations (RPO).
  • RE generations with existing Power Purchase Agreement on preferential tariff are not eligible for REC mechanism.
  • REC mechanism is aimed at addressing the mismatch between availability of RE resources in the state and the requirement of the obligated entities to meet the renewable purchase obligation (RPO).
  • The State Electricity Commissions define who the obligated entities are: distribution companies, open access consumers, captive consumers.
  • Cost of electricity generation from renewable energy sources is visualized as consisting of two components: (a) cost of electricity generation equivalent to conventional energy sources and (b) the cost for environmental attributes.
  • Price of the electricity component would be equivalent to the weighted average power purchase cost of the discom including short term power purchase but excluding renewable power purchase.
  • 1 REC will be issued for each 1 MWh of electricity injected into the grid from renewable energy sources.
  • REC would be issued only to the accredited projects of RE generators.
  • Grid connected RE Technologies with minimum capacity of 250 KW and approved by MNRE would be eligible under this scheme.
  • CERC has designated National Load dispatch Centre (NLDC) as Central Agency for registration, repository, and other functions for implementation of REC framework at national level.
  • Central Agency would issue REC to RE generators for specified quantity of electricity injected into the grid.
  • REC would be exchanged only in the CERC approved power exchanges.
  • Price of electricity component of RE generation would be equivalent to the weighted average power purchase cost of the discom including short term power purchase but excluding renewable power purchase.
  • REC would be traded only within the limits of forbearance price and floor prices. These prices would be determined by CERC in consultation with Central agency and FOR (Forum of Regulators) from time to time.
  • In case of default SERC may direct obligated entity to deposit into a separate fund to purchase the shortfall of REC at forbearance price.
  • Central Agency will extinguish the RECs sold in Power Exchanges in its records as per information provided by the Power Exchanges. The certificates will be extinguished by the Central Agency in the “First-in-First-out” order.

Feed-in Tariff

A feed-in tariff (FiT) or preferential tariff is a policy mechanism designed to encourage the development of renewable energy (RE) sources and help them move toward grid parity. It typically includes three key provisions

  • Guaranteed grid access
  • Long-term contract for the electricity produced
  • Purchase prices that are methodologically based on the actual cost of renewable energy generation and tend towards grid parity. This is also known as Cost-plus approach.

Under the preferential tariff, the regional or national electric grid utilities are obliged to buy renewable electricity (electricity generated from renewable sources, such as solar, wind, biomass, hydropower, etc), at the price determined by regulators using cost-plus approach. This approach enables development different RE sources and investors to obtain a reasonable return on their investments.

Salient Features of PPA framework

  • A Power Purchase agreement (PPA) in the field of solar power plant development is a twenty five (25) year buy back agreement done by the government with the developer.
  • The tariff in case of a PPA is fixed for twenty five years or as defined in the PPA agreement.
  • Normally PPA based projects are allocated through a competitive bidding process where the developers interested to develop a solar power plant bid through a closed reverse bidding process to get the project.
  • The developer who bids at the lowest tariff is allotted the project and so on.
  • All expected capacities to be allocated through the PPA framework in the National Solar Mission as well as Rajasthan State Solar Policy will be through a competitive bidding process.

Snapshot of REC vs Preferential Tariff Mechanisms

REC projects PPA projects
Open access Entry through competitive bidding
High but variable returns Average but fixed returns
Any capacity above 250 Kw Minimum 5 MW
Allotment is assured Allotment depends on competition
Get RECs trading Not eligible for REC trading
Variable tariff Fixed tariff
No cap Limited allotments
Tariff variable but minimum revenue REC floor + APPC Tariff fixed for 25 years
Accelerated benefit allowed No Accelerated Depreciation benefit

You may also like to explore:

Promoting Renewable Energy in India through RECs

Frequently Asked Questions on Solar PV Power

About Goodpal

I am a firm believer in healthy people (mind and body both), healthy societies and healthy environment. Please feel free to comment, share and broadcast your views. Thanks for stopping by. Have a Good Day!
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2 Responses to Renewable Energy Development: REC vs Preferential feed-in-tariff

  1. @bhi says:

    I HAVE A DOUBT WHY A DISCOM WOULD BUY POWER AT PREFERENTIAL TARIFF WHEN IT CAN BUY POWER AT APPC( AVG. POOLED COST OF POWER) WHICH IS MUCH LOWER THAN PREFERENTIAL TARIFF.

  2. Goodpal says:

    Government entities enter into long term agreement with solar power producers to make their products viable. Renewable power generation is a new route, so the producers need some incentive for the risk of new technology. But the rates have come down significantly compared with what was paid just 2-3 years ago. Such power producers don’t have things like RECs to be sold in the open market, their revenue flow solely depends upon the agreement with the electricity buyer.

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