Promoting Renewable Energy in India through Renewable Energy Certificates
Current Power Status of India
Energy demand in India is fuelled by rapidly growing economy and the rising population of urban India which consumes much more electricity than the rural folks. Rightly or wrongly current policies are encouraging urbanization, therefore rapid growth in the power sector is a must.
The power sector in India had an installed capacity of 258.7 GW at the end of Jan 2015. In 2013, India became the world's third largest producer of electricity with 4.8% global share in electricity generation surpassing Japan and Russia. In March 2013, the per capita electricity consumption was 917 kWh as per official figures; so it is speculated to be about 950 kWh in Feb 2015, which is only about a quarter of the world average. Transmission and Distribution losses in India are also quite high – about 26% in distribution and more than 7% in transmission.
According to the Load Generation Balance Report 2014 – 15 from the Ministry of Power the country is expected to experience a peak power shortage of 2.0% (demand 147.82 GW, supply 144.79 GW) and energy shortage of 5.1% (demand 1048.67 G units, supply 995.18 G units. The worst sufferers are the Southern (energy shortage 12.7% and peak deficit 22.2%) and North-Eastern Regions (energy deficit 17.4% and peak shortage 12.9%).
Thanks to fast-paced industrialization of the economy in recent years, India can now easily boast to be the third largest global polluter after the US and China! (The more you "develop", the more you pollute!!)
India’s plans are not limited to building just renewable plants, it also want to have 63 GW of nuclear power capacity by 2032 – an almost 14-fold increase on current levels. It currently has 22 nuclear reactors and plans to build 40 more in next two decades. India had 115 GW of coal-fired capacity on May 31, 2012 and an additional 87 GW is under construction. Thus, coal will continue to play a crucial role towards the proposed energy sufficiency but the focus will shift to the renewables.
Thrust on Renewable Energy
In India, “Renewable energy (RE) sources” mean small hydro (below 25 MW), wind, solar including its integration with combined cycle, biomass, bio fuel co-generation, urban or municipal waste and other such sources as recognized (or approved) by the Ministry of New and Renewable Energy.
Driven by climatic concerns and energy security, the Indian government has launched an ambitious plan to harness the renewable energy resources of the country. The National Action Plan for Climate Change (NAPCC) sets a target for the share of renewable energy based power generation from the current 4% to 15% by 2020. Then, in 2014 the new Indian government of Modi launched a much more ambitious plan and launched a $160 plan which includes creating 100 GW solar and 55 GW wind capacities by 2022 apart from saving 20 GW power through energy efficient means.
It is committed to provide “Power for All” by 2019 at a cost of $250 billion. While official claim that electricity has reached around 96% of all villages in India, it does not mean that all homes there get electricity. Thus, according to the 2011 census only 55% of rural homes use electricity as the primary source of lighting and around 300 million people have no access to grid power. By comparison, electricity has reached 99.7% homes in China – almost universal coverage.
Currently, India has just 33 GW of clean energy capacity – with 22 GW from wind, about 3 GW from solar energy and the remaining from small hydro and biomass projects. In comparison, China’s installed PV capacity increased from 0.8GW in 2010 to 18.6GW in 2013; now it is aiming for 70 GW by 2018.
Indian Renewable Energy Inching towards Market-Driven Mechanisms
Renewable energy scenario in India is slowly, yet decisively, moving away from direct government support to more market-driven mechanisms. It is widely accepted that by 2017 solar energy will reach grid parity and will be driven by purely commercial calculations and open market forces.
In the mid 1990’s tax incentives kick-started the Indian renewable energy economy, leading to significant investments into wind parks. Accelerated Depreciation was the early form of government support. Then around 2007, India moved towards Generation-based incentives (for wind and solar power) and Feed-in-Tariffs. They attracted further international investment, intensified competitive bidding, and improved efficiencies of renewable energy plants. Lately, the rapidly falling solar component costs coupled with fiercely competitive bidding for projects ensured that the buyers (distribution utilities) did not end up overpaying project developers.
Then in 2010, another thrust was given towards market driven mechanism in the form of Renewable Energy Certificate (REC). It was introduced in order to help distribution companies meet their binding obligatory targets (called renewable purchase obligation (RPO)) of having a certain percentage of electricity from renewable sources in their total energy mix. The central regulatory agency wants the renewable component to rise progressively from 7% in 2012 to 15% in 2020 (with a sub-category for solar power of 0.25% in 2012, rising to 3% in 2020).
It is expected that this will give the market more freedom to choose the most cost-effective way to meet renewable energy targets.
India’s First Solar REC
On April 4, 2012 M&B Switchgear became India's first solar developer to be registered by the 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.
What is a Renewable Energy Certificate (REC)?
The concept of Renewable Energy Certificate (REC) already exists successfully in Europe, USA and Australia. They are tradable instruments similar to carbon credits and are also known by other functionally equivalent names such as Green Tags, Renewable Obligation Certificates or Tradable Renewable Certificates.
The RECs are awarded in electronically (demat) form to those who generate electricity from renewable sources such as wind, biomass, hydro and solar, provided they opt not to sell the electricity at a preferentially higher feed-in-tariff (FiT). Only grid connected RE technologies are eligible under REC mechanism. Under the REC Mechanism, renewable energy is separated into two components – the commodity part – electricity – and the trade-able “environmental" attribute – REC. The REC is valid for 730 days and can be traded at the energy exchanges.
In India, one REC is created for generation 1 MWh of renewable energy. The RECs are divided into two categories: Solar and Non-Solar. Solar RECs are issued to eligible entities for generation of electricity based on solar as renewable energy source; and, non-solar RECs are issued to eligible entities for generation of electricity based on renewable energy sources other than solar.
How REC Projects Earn Revenue
Under REC mechanism there are two sources of revenue for a generator, one from the sale of electricity component and another from sale of certificates. Revenue from the sale of electricity could be at the rate of average pooled purchase cost of local distribution licensee in case of sale of electricity to such local distribution licensee or it could be at the mutually decided rate in case of sale of electricity component to any open access user and at market determined rate in case of sale of electricity component through a power exchange.
Revenue from sale of electricity can be visualized for the future years. However, revenue from the sale of certificates entirely depends upon demand and supply.
REC Price Bands
The ‘floor’ and ‘forbearance’ prices for solar RECs are Rs 3,500 and Rs 5,800 respectively. For the non solar RECs the prices are Rs 1500 and Rs 3300 respectively.
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 previous year.
How these prices are calculated can seen on this CERC page.
Trading of RECs
RECs can be traded at the Power Exchanges: the Indian Energy Exchange Limited (IEX) in New Delhi or at the Power Exchange India Limited (PXIL) in Mumbai. REC trading is done on the last Wednesday of each month. The renewable energy producer and buyer of the RECs need not be located in the same state. Hence, it promotes inter-state RE transactions.
The buyers of the RECs are ‘obligated entities’, who can be open-access consumers, generation companies, captive power producers and electricity distribution companies. These obligated entities must buy a certain quantum of green power or these certificates (RECs) to meet their obligations. Quite often buying RECs is easier than buying renewable energy. Within their obligation, there is a small slice for ‘solar RECs’ that drives the solar REC market.
Salient Features of REC
730 Days after issuance
1. Solar and 2. Non-Solar
Power Exchange Only
National Load Despatch Center (NLDC)
Only Single transfer; Repeated trade not allowed
Penalty for Non-Compliance
"Forbearance" Price (Max Price)
"Floor" Price (Minimum Price)
Price Discovery Mechanism
Closed Double-sided Auction*
Last Wednesday of each month
13:00 -- 15:00 hrs
17:00 hrs (Same Day)
Buyers pay Upfront (Same Day); Sllers receive next day
*As Advised by CERC
What REC is NOT
The concept of REC must be clearly understood; one should also know what REC is not. For instance
- REC is NOT an incentive mechanism: it only enables the sale / purchase of the renewable component across the state boundaries.
- It does NOT represent fiscal attributes such as “Accelerated Depreciation”: it should be clearly distinguished from the “Production Tax Credits.”
- Although REC represents environmental attribute, it is NOT related to carbon credits. The two mechanisms are independent of each other.
You may also like to explore Frequently Asked Questions on REC.
Advantages of the REC Mechanism
- Inter-state Operation: The electricity generated from renewable sources is consumed or fed to grid locally, but the RECs can be sold to the obligated entities located anywhere in India. This allows the State Commissions to set higher RPOs even in states with low RE potential and at the same time encourages companies to produce more RE power in high potential state.
- Promotion of stand-alone systems: Since transmission of electricity is independent from the REC, the additional revenue from sale of RECs could help improve viability of standalone systems. In usual scenario it may not be economical to transmit electricity from such isolated regions.
- Increases Competitiveness of Renewable energy: Separating “RECs” from “electrical energy” and selling them separately eliminates the cost disadvantage of renewable energy technologies.
- Promoting green electricity: Tradability of RECs allows wider participation by NGOs, development agencies as well as the corporate sector to purchase RECs as a part of their social corporate responsibility.
- Promote Investment in Renewable Energy: The un-bundling of “RECs” from electricity and their competitive trading at power exchanges can allow investors in renewable energy technologies to use them to hedge electricity price risk. This should encourage investors to enter in the renewable energy generation.
REC Eligibility Criteria
Currently, only grid connected RE projects with 250 kW and higher are eligible to participate in the REC mechanism. Existing RE generators who have power purchase agreement (PPA) with the distribution licensees would not have the option of participating till the validity of their PPA.
Hence, renewable energy producers who have opted for the preferential tariff agreement with the distribution licensees are NOT eligible for the REC route. As per the CERC guidelines, a generating company is eligible to apply for registration and issuance of RECs if it meets the following criteria:
1. It has obtained accreditation from the State Agency;
2. It sells the generated electricity either
- To the distribution licensee of the area in which the eligible entity is located, at a price not exceeding the pooled cost of power purchase 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 a market determined price;
3. All REC based captive power producers shall be eligible for their entire energy generation including self consumption.
Thus, a solar power producer has two options for selling the produced power: Either through the preferential tariff agreement or through the REC mechanism that utilizes market forces and feeds the demand from the Renewable Purchase Obligations (RPOs).
Eligibility Criteria for Solar projects for REC Benefits
Solar Power Plants need to be Grid-Connected on order to avail REC benefits. There have been recommendations on multiple occasions that Off-Grid Solar Power plants be made eligible for RECs, but the proposal is still under consideration. Solar Power plants setup under the following 3 modes are eligible for REC benefits:
- Captive Power plants
- Sale of power to Govt. at APPC
- Sale of power to 3rd party at mutually agreed price
Captive Power Plants are eligible for RECs subject to the condition that Concessional / Promotional Transmission or Wheeling Tariffs and/or banking facility benefit are not availed. Also, Solar Power plants set up under Preferential Tariff schemes are not eligible for RECs.
Also, there is no minimum size of the solar plant for eligibility under the REC model. As per the Second Amendment of REC Principal Regulations – 2013, there is no lower limit for Solar Power plants to be eligible for RECs – earlier the minimum capacity was 250 KW.
Renewable Purchase Obligation (RPO) – The Key Driver for RECs
Mandated by SERCs for power utilities, the RPOs are the key driver for implementation of REC mechanism in India. The RPOs are minimum percentage purchase targets of RE power in the total power mix of the ‘obligated entities’. The RPOs are fixed by the state electricity commissions (SERCs). Although the obligated entities can produce or buy renewable power also but rather than the RECs, there are practical reasons why it is often not possible.
One aspect is that the renewable energy is not uniformly distributed through different States. States like Rajasthan, Gujarat, and Tamil Nadu have significant RE potential, but States such as Delhi do not possess enough RE potential. This RE potential disparity makes it difficult for obligated entities in all states to comply with the mandatory RPO’s. It is here that the RECs come handy; it can be bought anywhere in India regardless of production.
Another aspect is the high cost of RE generation. Even in States with good RE potential which generally set higher RPO targets, RE power producers would not produce beyond State’s RPO limit. But since the RECs are traded at the national level, they can develop RE resources to the optimum.
How Obligated Entities (OE) can meet their Obligations
The Electricity Act (2003) has mandated the State Electricity Regulatory Commissions (SERCs) to promote renewable energy (RE) by fixing Renewable Purchase Obligations (RPOs) for “Obligated Entities.” These entities are obligated to purchase a minimum share of their electricity from renewable energy sources. State policies on RPOs vary in terms of targets and eligibility; therefore RE developers and companies with RPO targets looking to register for Renewable Energy Credits (RECs) should carefully consult their respective state policies.
“Obligated Entities” (OE) commonly include distribution licensees, captive power plant (CPP) owners, and open access consumers. They can meet their obligations in three ways:
- By generating RE power for self consumption
- Buying power from other RE generators
- Buying Renewable Energy Certificates (RECs)
While the first two options are explicit, it must be noted that all RE power is not qualified to meet RPO requirements. Most generally, if an RE generator is availing other RE incentives, such as feed-in-tariffs, concessional or preferential transmission and wheeling charges, such power would not be qualified to meet RPO requirement. Using option 3 requires buying REC from the designated Exchanges in India. However, to participate in trading, the buyer must be registered with the exchange; if not, REC can be purchased through other registered traders.
They can only be traded within the price band set by the Central Electricity Regulatory Commission (CERC).
Why India’s RPO Mechanism is Failing?
The RPOs were expected to play an important role in the advancing the development of renewable generation capacity, but it did not turn out that way. While the REC trading has improved since 2010, trading has been utterly lacklustre with supply of RECs far exceeding the demand from the RPOs.
There is no urgency for the ‘obligated entities’ to buy REC until the end of the fiscal year in March to meet their compliance numbers. And whatever little trading takes place happens at the floor price. While the government wants SERCs to penalise defaulting distributions companies who do not meet their RPOs, the central electricity regulation commission (CERC) advocates a wait-and-see policy.
The high cost of solar RECs was another discouraging factor for the cash starved discoms. Thus, they have been too reluctant to comply with the RPOs or pay penalties. Therefore, the REC policy is not turning out to be a success.
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Non compliance of the RPOs since the launch of RECs has virtually failed the REC mechanism. Now that the government is talking of imposing penalties on the erring obligated entities there is hope that the REC route for RE power developers would become more acceptable. There have also been suggestion of monthly and quarterly compliance of RPOs to provide regular revenue to the project developers. Until these things happen, RE project developers would remain unmotivated to step forward and the ambitious power plans would remain mere dream.