Solar REC mechanism in India

Solar REC mechanism in IndiaAs the concerted efforts to robust RPO compliance regime, India can expect an assured compliance and its monitorVikalp Mundra, Joint Managing Director, Ujaas Energy Ltd.With the rapid industrial growth and the increasing need of power, it has become more important for the nation today to address issue of energy security. Along with the energy security, we need to shift from economic activity based on fossil fuels to non-fossil fuels which are basically renewable source of energy. Parallelly, we need to address the ecologically sustainable growth and a major contribution to meet the challenges of climate change.A contribution from each state of the country is needed in this regard in terms of compliance of the renewable purchase obligation which is for both solar and non solar.India is a tropical country where sunshine is available for longer hours per day and in great intensity. However, in some parts of the country or some states it is not feasible to harness solar energy either because of the solar resource or the constraint of land. The Renewable Energy Certificate was instituted in order to make a state capable of meeting its RPO by taking credit for a project set-up in a different state which enjoys better potential.To address this issue of availability of RE and its compliance, the REC mechanism plays a vital role. It is also expected to encourage the RE capacity addition in the states where there is potential for RE generation as the REC framework seeks to create a national level market for such generators to recover their cost.Based on the recommendations of the National Solar Mission — which is one of the core missions of the national action plan on climate change — the national tariff policy has also prescribed a minimum solar renewable purchase obligation of 0.25 per cent by 2013 increasing up to 3 per cent by 2022 for the obligated entities with solar RPO can make a buy bid at any of the power exchange (IEX and PXIL).The commission has issued the Central Electricity Regulatory Commission (terms and conditions for recognition and issuance of REC for renewable energy generation) Regulations, 2010 on January 1, 2010 (hereinafter referred to as REC Regulations).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 incentivising 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.Under this mechanism, a project developer can set up a project in any state and sell electricity to the grid of the respective state at Average Pooled in Power Cost (APPC) — approximately Rs. 2 to Rs. 3 per unit — or can sell the electricity to any 3rd-party consumer at a mutually agreed price or can use for captive consumption. For every 1,000 units of electricity generated 1 REC would be earned by the Project Developer, which can be bought by the obligated consumer over Indian Power Exchanges to meet its own RPO. RECs are expected to become the currency of renewable energy markets because of their flexibility and the fact that they are not subject to the geographic and physical limitations of commodity electricity. Participation in the investment under solar REC mechanism is voluntary and a developer can have a solar plant of any capacity more than 250 KWp to register under REC mechanism. These certificates are issued by the central agency “NLDC” and have a validity of 730 days. The certificates can then be traded on power exchanges “IEX” and/or “PXIL” where both sellers make a sale bid and buyers (obligated entities) like distribution licensees, captive consumers and open access users make a buy bid and in a closed double-sided auction on the last Wednesday of every month.All renewable energy generators already not having PPA with the distribution licensees for contracted quantum are eligible for RECs. Trading and redemption of RECs are traded in the power exchange within the price band specified by CERC. CERC has issued new forbearance and floor price for solar RECs up to March 31, 2017.CERC has finalised the floor and forbearance price of REC based on variation in cost of generation of different renewable energy technologies, falling under solar and non-solar category across the states, variation in the pooled cost of purchase across states, expected electricity generation from renewable energy sources including and related matters. Based on the same, the forbearance price and floor price for solar RECs is Rs.13,400 and Rs. 9,300 per REC respectively.These prices are calculated as under:Forbearance price = maximum (preferential tariff-average power pool cost) Floor price = market equilibrium price (minimum requirement for project viability of re technologies – average power pool cost)With the state regulatory commissions understanding the importance of the compliance of the renewable purchase obligation and instructing obligated entities to comply the same in word and spirit, sale of the solar RECs is picking up gradually. The regulatory commissions have further in the true ups, and the tariff orders have allowed the distribution companies to consider the impact of even purchase of solar REC for the compliance of their RPO.The solar RECs have been considered as one of the valid instrument for the compliance of the solar RPO in the RPO regulation released by most of the SERCs for full or partial discharge of the mandatory obligations set out in the regulations for the obligated entities to buy electricity from renewable energy sources.Solar RECs in practical came in picture when Ujaas Energy Ltd. (formerly known as M and B Switchgears Ltd.) installed the first 2 MW solar power plants under REC mechanism in India and traded successfully the RECs in the exchange.Today, there are around 189 MW of solar power plant registered and accredited under REC mechanism in the India, and equal or more numbers of solar power plant under REC mechanism are operational in the country.Although in India, putting up solar power plants under fixed PPAs at preferential tariffs are the most preferred ways as it is easy to achieve financial closer. For the compliance of the solar RPO, obligated entities (OEs) have following three options:To invest and put their own solar power plantsTo enter into long term solar power purchase agreementTo purchase solar RECs.Although PPAs are seemed to most popular as of date, a shift will occur and RECs will become most preferred option.Benefits for investors of solar plantsAs they will have a pan-India market and de-risk investment from a single buyer to open market. The revenue stream will be from two sources, i.e. sale of power and RECs. This further reduces the risk.Benefits for obligated entitiesIn longer terms as the market will mature, it will be more cost effective to buy RECs.RPO is a new regulation; typically most of the OEs are government owned or controlled. There is an inertia to act pro-actively. Hence, it will take some time to mature this phenomenon.Today most of the states utilities and other category of OEs have miserably failed repeatedly on the compliance of their solar RPOs. Time has come now with the enforcements being coming in place with some of the states and initiatives by the forum of regulators solar RECs will play a major role in the compliance in the solar RPO. Time is not far when India will witness multi-fold increase in installations under REC mechanism and buy bids of the solar RECs. In a landmark order, Madhya Pradesh Electricity Regulatory Commission (MPERC) has said that all DISCOMs of the state to comply with RPO. MPERC has come up explicitly mentioning that any variation in power purchase costs will be considered and correspondingly accounted for in the true exercise.The centre is also getting tougher on the states which are not meeting the clean energy/RPO targets. The Ministry of New and Renewable Energy has also suggested the Ministry of Power to make it mandatory for states to fulfil their RPO, if they want to get central support for financial restructuring of their electricity distribution companies.Maharashtra also cracked the whip on the electricity distribution firms to meet their obligation of buying renewable energy or face stiff penalty. Punjab has also released a similar direction to its distribution companies and other large entities.With the concerted efforts to put up in place a “robust RPO compliance regime”, we can expect an assured compliance and its monitor.Time is not far when India will witness multi-fold increase in installations under REC mechanism and buy bids of the solar RECs.