Renewable Energy Certificates is a relatively new and challenging market based instrument, but holds great promise in promoting the renewable energy market development in India.
In a bid to promote renewable energy market in India, the Indian government has framed policies under the Electricity Act, 2003 and the National Action Plan on Climate Change (NAPCC) to increase the total renewable power generation capacity in the country. Renewable Energy Certificates (REC) is a policy instrument to catalyze the development of renewable energy. It is a market based mechanism which will help the states meet their regulatory requirements (such as Renewable Purchase Obligations (RPOs)) by overcoming the geographical constraints on existing renewable potential in different states.
RECs unbundle the electricity component (commodity) from the green/environmental attributes of the power generated from renewable sources. Both the components can then be traded separately. Thus RECs help in incentivizing the production of renewable energy over and above the RPO state limit as tradable certificates are not constrained by the geographical limitations of commodity electricity.
The table below describes the concept in more detail.
Source: IEX, Renewable Energy Certificate Registry of India
As per the CERC guidelines, a generating company which uses renewable sources of energy 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 does not have any power purchase agreement for the capacity related to such generation to sell electricity at a preferential tariff determined by the Appropriate Commission; and
3. it sells the electricity generated either
a. 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
b. to any other licensee or to an open access consumer at a mutually agreed price, or through power exchange at market determined price.
The REC mechanism has the following steps as described below.
Accreditation: The generating company will submit its application for accreditation to the host state nodal agency. A separate application needs to be submitted for each RE generation project in case a project developer has multiple projects.
Registration: After getting accreditation from the state agency, the applicant needs to apply for registration to the central agency. 'Certificate for Registration' will be granted to the applicant after necessary verification and due diligence
Issuance: Application for the issuance of RECs is also to be made to the central agency
Trading and redemption: RECs shall be traded in the power exchanges within the price band specified by CERC.
The price of Certificates shall be as discovered in the Power Exchange. Though they would be allowed to trade only within the range of floor price and forbearance price set by the CERC. The current price range for RECs as valid till March 2012 is as follows:
Via its order dated 23rd August 2011, CERC has issued new forbearance and floor price for RECs for the next 5 years viz. 1st April 2012 to 31st March 2017.
Issues and challenges
There exist certain issues and challenges with the concept of RECs and their trading. The chart below shows the number of RECs issued and redeemed in India from March 2011 to August 2011. Though it shows a tremendous growth in the issuance of RECs over the last few months, it also shows the increasing gap between RECs issued and those redeemed. If the sale and redemption of RECs becomes back loaded in a financial year and is erratic during the whole year, it will affect the cash flows of the RE project developers who won’t be able to rely on them as a source of revenue.
Some of the other challenges which currently exist with the Indian REC market include:
1. Lack of long term visibility
Most of the state RPO obligations have been fixed only till 2012-13. This leads to lack of visibility in terms of the future demand and growth trajectory of the REC market and questions their bankability
2. Enforcement of RPO
There needs to be stricter enforcement of state RPOs. If states don’t fulfill their mandatory renewable energy requirements then the penalties must be strictly enforced.
3. Awareness regarding RECs
State agencies need to create more awareness about RECs amongst the obligated entities and ensure the higher uptake of RECs. Increased awareness would provide a much needed boost to this market.
Though the concept of Renewable Energy Certificates is plagued by some challenges, it is still relatively new in India and holds great promise in promoting the growth of renewable energy and taking India on path of being a low carbon economy.
The author, Aparna Khandelwal is a Senior Consultant at a sustainability consulting firm cKinetics.
1.Notification No. L-1/12/2010 issued by Central Electricity Regulatory Commission, Dated: 14th January, 2010
2.‘Pooled Cost of Purchase’ means the weighted average pooled price at which the distribution licensee has purchased the electricity including cost of self generation, if any, in the previous year from all the energy suppliers long-term and short-term, but excluding those based on renewable energy sources, as the case may be.
Christina Welsh (Rin)