REC market on its way to brighter days

REC market on its way to brighter days“Since the trading of REC began in March 2011, the REC market has grown to a degree of achieving critical mass,” emphasises Rajesh Mediratta, Director Business Development, Indian Energy ExchangeAs on date, more than 760 renewable energy projects with total capacity of more than 3,600 MW are registered under REC mechanism. However, the REC demand has dropped as very few buyers participating in the REC market. Rajesh Mediratta discusses how REC demand would increase in the coming months due to stricter compliance.Please give us an overview on the market status for Renewable Energy Certificates (REC) in India.REC mechanism was introduced in India in 2010 to promote generation of power through renewable energy sources by implementing Renewable Purchase Obligation (RPO). Since the trading of REC began in March 2011, the REC market has grown to a degree of achieving critical mass. As on date, more than 760 RE projects with total capacity of more than 3,600 MW are registered under REC mechanism. In these last two and a half years, more than 67 lakh RECs (non-solar and solar) have been issued to the RE generators and more than 39 lakh RECs have been traded at both the exchanges. Still there is inventory of about 28 lakh non-solar RECs. In the past few REC trading sessions, it has been observed that the REC demand has dropped with very few buyers participating in the REC market,  but it is expected that due to stricter compliance in the coming months, REC demand would increase. I believe RECs have gained sufficient support from the generators, and due to its ability to avoid geographic and physical limitations, it has potential to become the currency of renewable energy markets.A degrowth in buying RECs observed during the last one year or so. What are the reasons? Weak compliance of the RPO by the obligated entities is one of the key reasons for fall in demand of RECs, causing supply surplus in excess of demand. Non-solar RECs are being traded at floor price for past 11 sessions now. Even solar RECs have touched its floor price since last two sessions as obligated entities are not buying RECs. Moreover, the wait and watch attitude of obligated entities primarily the discoms, which are the major obligated entities, is also having a negative impact on the other REC buyers. These buyers are sincere in complying RPO due to which REC demand shrinks further leaving a huge gap between demand and supply. Also, due to no penalty levied on to the obligated entities for not complying the RPO, it adds to vows of RE generators.In many states, Renewable Purchase Obligation (RPO) is not being honoured by discoms. So, how is the road ahead?Discoms being the key obligated entities are also the main drivers of REC market. The huge inventory of REC is the result of weak compliance by the discoms who are usually the major buyers of REC, thus this supply demand gap would continue to widen unless discoms participate in REC market. Almost all state regulations have provision to impose penalty on the obligated entities if they fail to fulfil RPO compliance. A majority of regulations have proposed penalty at REC ceiling price. However, the irony of the situation is that none of the SERCs have invoked penal provisions mentioned in their regulations. As a result, the obligated entities do not accord much priority to fulfilling compliance.However, in states like Maharashtra, Punjab and Gujarat, SERCs have shown strong commitment to implement RPO, and this trend will continue with other states also. The main reasons quoted by the states were relating to their poor financial condition. This condition is also improving with states when higher tariffs are being approved and utilities finding themselves in better financial condition. This will help create demand. There will be improvement in next 6 months when utilities and other obligated entities will buy RECs to fulfil their compliance.Are there any means of keeping discoms obey RPOs?There are few states which have renewable potential. So discoms in such states are achieving their yearly targets but certain states where there is not enough RE potential need to buy RECs to fulfil the RPO compliance. But these discoms do not intend to purchase RECs because it is an extra expenditure that adds to the vows of loss-making discoms which are already in debt. Though this expenditure on buying RECs or buying RE power to fulfil RPO is already approved by the commission still discoms are reluctant to spend on RECs. Recently, MERC has passed an order where it has formed a committee comprising of representatives from state nodal agency, state discoms, private discoms, state load dispatch centre, state ERC and electrical inspector which would look after monitoring and verification of the RPO compliance of the obligated entities in the state. Hence, measures like this can help in closer monitoring and supervision on the discoms and obligated entities to comply with RPO.According to you, keeping the present conditions in mind, what is more suitable — buying power from renewable resources or buying REC?For discoms located in renewable-rich state, it’s best to buy renewable power for the state. It also gives comfort to generators. However, if you are an obligated entity in a state which doesn’t have wind or solar generators, the buying RECs is the easier, most suited way of achieving RPO targets. On the other side, if obligated entities wish to buy RE power to fulfil RPO, there are several problems like infirm nature of RE power, schedulability issues, losses and charges etc. which makes it difficult for an obligated entity. Thus, RECs is the cheapest, easiest way to comply RPO today.Could you brief us on your MoU with US-based PJM Technologies?In our constant attempt to bring the best global practices to the Indian market, IEX last year entered into a tie-up with PJM Technologies, the largest independent system operator of the US. The MoU will allow IEX and PJM to undertake joint training programmes for professionals in the power sector in India and neighbouring countries, and other technical collaboration programmes in the power sector.The MoU would help us in bringing the best international practices in the power trading sector to India. We are confident that with the strengthening of ties, we will be able to harness the innovation potential and develop products that meet the changing demands of the Indian and regional electricity markets. Also, we’re confident to learn from PJM’s vast experience in operating the largest competitive marketplace in the American continent.