REC -Mechanism and solutions
Article is a part of INDIA SOLAR COMPASS an quarterly market report of BRIDGE TO INDIA
In India power consumers are required to buy a certain part of their consumption from renewable energy generators. This is known as Renewable Purchase Obligation (RPO). The State Electricity Regulatory Commission (SERCs) of each state has notified minimum percentage of RPO for every financial year and also the obligated entities. Obligated entities includes DISCOMS, open-access consumer, captive generators and any other consumer as specified. The renewable energy sector in India has been segregated into two types namely non-solar and solar for defining percentages of RPO.
An obligated entity can meet their obligation by purchasing the required quantum of solar power directly from the producers. Alternatively, they can buy solar Renewable Energy Certificates (RECs) to fulfill their RPOs. The REC mechanism was launched on November 16, 2010 by the Government of India (GOI). Under the REC mechanism any grid connected solar power generator can register their project for RECs given that it fulfills certain eligibility criteria. Each REC is equivalent to one MWh of generated power. The RECs are issued by the nodal agency and can be traded in the power markets. Initially the floor price of INR 12000 per REC and the forbearance price of INR 17000 per REC were fixed only for FY-2010-11 and FY-2011-12. The consumers who buy the RECs are entitled to reflect the same as buying of solar power to fulfill their RPO requirement.
With total installed capacity of less than 50MW of solar power until 31st August 2011 no project has been registered for Renewable Energy Certificate (REC) in India. The REC project market hasn’t started until now due to uncertainty of REC pricing over the plant life. They are not expected to see any new projects in near future even now due to lowering in the REC price band. The August 24th, Suo-Moto order of the CERC has slashed the REC floor price by 28% and the forbearance price by 22% for post April 2012. The floor price of INR 9300 per REC is declared taking INR 11.05 per kWh as the minimum required tariff for a viable solar project. The floor price is the maximum difference between the minimum required tariff and the Average Pooled Purchase Cost (APPC) of different states. The forbearance price of INR 13400 per REC is the maximum difference between CERC tariff of INR 15.39 per kWh and APPC of various states. One of the major flaws in deciding this price band is taking APPC in consideration. Method of calculating APPC differs from state to state and even from utility to utility, thus taking APPC as a reference point to calculate price band does not make any sense. Moreover most of the state does not declare their APPC, leaving a question mark on credibility of data. Also, there is no explanation given that how minimum required tariff of INR 11.05 for a viable project is calculated. Solar potential in not evenly distributed all over the country. Projects in states with lower solar irradiation require higher returns to be profitable, but REC mechanism set common pan India prices making it an unviable proposition.
The CERC has declared current REC price band for 5 year to reduce the uncertainties about returns but it is still less than loan repayment period of 10-12 years. The CERC is abided by Electricity Act 2003, to provide power at the cheapest available price to the consumers so it cannot fix REC price for longer term due to southward trends in solar power generation cost. The developers will even now face the problem in raising debt from the banks due to the mismatch. Apart from this even for these five years returns are not certain and will be fluctuating between price band according to the market conditions of demand and supply. The banks which are already reaching their sectorial cap for power sector will unlikely to invest in high risk REC projects when other better and safe opportunities are available.
The government of India (GOI) had introduced the REC for two main reasons first to provide support to the developer to get a viable tariff. Secondly to make solar power available to the states which don’t have the potential, as transmission of solar power over long distance is not possible due to its un-firm nature and grid complexities. The GOI tried to protect the developer and in the process failed to foresee the fact that REC mechanism has the problem of duplication of solar energy. This can be explained by a simple example let’s say a solar power generator sell 1MWh power to state DISCOM at APPC, this power will be counted as RE power which will fulfill RPO requirement of that DISCOM. Now, this generator sells the one REC obtained by generating 1MWh power which he sold to DISCOM, to an open access consumer in some other state which will fulfill the RPO requirement of that open access consumer in its state. So, in this way this 1MWh power is counted twice as RE power. Thus REC actually curtail the growth of RE power and also result in misleading figures about the RE generation in the country.
Thus on the one hand where REC projects lacks interest of developers due to lesser and uncertain returns it also adversely affect the basic principal of REC mechanism that is increase the solar power consumption due to this double count mechanism.
Let us keep the double count mechanism aside and look REC from a developer’s perspective. In the current scenario investors will look to get FIT based projects offered under various national and state policies as they offer better fixed returns. The developers will like to wait until solar tariff get stabilized under open market conditions to enter REC market. Most of the experts believe that this will happen once solar tariff reaches grid parity in next 5-7 years, as at that time return on REC will become equivalent to FIT based project. BRIDGE TO INDIA assessment is that grid parity is still a distant phenomenon. With highest APPC of INR 3.38 per kWh and falling prices of power in short term and bi-lateral market due to large scale capacity addition and increased efficiency of grid solar power will take 10-12 years to reach the grid parity, even though the price of conventional fuels are rising.
The BTI suggest some changes in REC mechanism so to boost solar REC market and to make it viable to attract investments. To attract initial investment in REC projects the DISCOMS of states which are dependent on REC market should be allowed to enter into pre-agreement of buying REC from developers at certain fixed price in between the REC price band and allowing DISCOMS to sell excess REC in the market. This will give developers fixed returns at least for the given period and make their projects more bankable. Implementation of penalty in case of non-fulfilling the RPO should be more stringent policy wise and higher than forbearance price in monetary terms to make DISCOMS to enter into such pre-agreement. The problem of double count of solar energy can be solved by dividing the green attribute of solar power to fulfill RPO of the consumer in ratio of REC price and APPC paid by consumers.