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Clean energy investors suffer as REC market goes downhill in India

According to reports, With buyers showing little enthusiasm, the market for renewable energy certificates (REC) in the non-solar energy segment appears to have tanked.

RECs are market-based instruments that were created to promote renewable energy development in India. They enable entities such as distribution utilities and large captive consumers as well as open access consumers to meet their renewable purchase obligation (RPO).

Electricity distribution companies are obligated to buy five per cent of their electricity from renewable sources, and those falling short can make up the deficit by buying these certificates. Captive and open access consumers, too, are required to buy a prescribed amount of electricity from renewable energy sources or buy RECs.

One REC is equivalent to 1,000 units (kilo-Watt hours) of electricity generated from renewable sources. Thus, an electricity distribution utility that is 10,000 units short of its purchase obligation for a month can make it up by buying 10 RECs.

There are two types of RECs, Solar and non-Solar (hydel, wind, biomass etc). The bulk of them are traded on the Indian Energy Exchange (IEX) on the last Wednesday of every month. The certificates have a life of one year, and expire thereafter.

With installed capacity of solar power still at a nascent stage in India, most RECs are from the non-solar segment.

RECs have been devised to encourage investments in renewable energy projects. Promoters of renewable energy plants, who sell electricity to the grid at pooled tariffs, get RECs, which are issued by the National Load Despatch Centre, a Government of India entity. Since these developers would not have availed of feed-in tariffs (incentivised tariffs), they sell RECs in the open market and earn some extra revenue.

According to IEX data, in the October trading session, there were fewer buyers for non-solar RECs. There were 851,177 RECs available for sale, but only 132,231 were picked up.

The price, too, has seen a sharp fall – at Rs 1,500 per certificate it was at the bottom of the price band. In January this year, there were only 186,610 certificates available for sale against 414,387 purchase bids. The lowest price discovered then was Rs 3,051 per certificate, which worked out to about Rs 3 per kWh.

The fall in REC prices has hurt investors. Even at the lower end of the price spectrum, not all certificates are getting sold, says Vineeth Vijayaraghavan, a renewable energy expert and Editor of Panchabuta, an online industry newsletter. He blames the trend on the failing health of electricity distribution companies, and different interpretations by states on what an obligated entity is.

Barring distribution entities such as Torrent Power or states such as Gujarat, there is not much enthusiasm among the utilities to purchase RECs.

According to Rajesh K. Mediratta, Director (Business Development) at the Indian Energy Exchange, the apparent over-supply is misleading, since there is a real shortage of renewable power generation in the country. If every obligated entity were to bid, demand would have surpassed supply manifold, he says. “We need to push hard for compliance. This scenario of over-supply does not augur well for the REC market.”

On Thursday, quoting Bloomberg New Energy Finance in a report on the crash of the REC market, The Economic Times noted that the first three quarters of this calendar year saw VC and PE investments in the renewable energy space drop to $125 million as against $ 337 million in 2001.

“The policy framework is already there. What is lacking is compliance, and if regulators, like Punjab did recently, enforce policies, demand will come back and REC prices will go up,” says Shiv Nimbargi, MD & CEO of Green Infra Limited, a renewable energy company, which has an installed capacity of 279 MW. The bulk of this capacity is in wind.

Vijayaraghavan is hopeful that demand for RECs will come back as courts have been dismissing the assertions of large captive consumers that they do not have to buy RECs. In August this year, the Rajasthan High Court dismissed petitions by companies such as Vedanta Resources and Ambuja Cements, which had challenged the Rajasthan regulatory commission’s order directing them to buy a prescribed amount of electricity at their plants from renewable sources.

The latest initiative by the Government of India to recapitalise distribution companies may also revive the market.

The National Action Plan for Climate Change has set a target that by the year 2020, 15 per cent of the country’s electricity supply must come from renewable sources.

One comment

  1. refer to the picture posted on our web site wherein i had asked the Joint Secretary Mr.Tarun Kapoor about he sanctity and the blow of REC non buying on the Cash flow on RE Generator….he had replied that Govt will ask or make the buying more streamline…. this question was in EBTC conference conducted on 14th Nov 2011, it is one year from then, the matter has worsen and proves a point that REC Mechanism is a failed story and this policy need to be scrapped and there shall be one policy of PPA backed up by Escrow amount… many policies means poor control and misgovernance….. when PPA is low why any fool has to pay more in the name of REC or RPO, the basic objectives are defeated and proves poor foresight, but, no point in blaming….. we need to take corrective action and change the policy on REC much early and why depend on government to allot with PPA…..let there be a tariff regime like hydro, biomass every year and let anybody come and sell as per that PPA…. it will be less than the present REC + APPC, thus the total energy addition by solar will increase by only the serious players who want to remain in Renewable energy and not the tom dick and harry like companies who will spoil the market without any sustainability……too many policies by too many government with too many subsidies, will make non transparent and havoc and the SERCs or discoms will not be able to be in green with this green power…, we need to device an average PPA with Interest subsidy till the loan is repaid, so that only serious players will remain in the market and equity sellers will be out of market and corrupt practices will come down as the system can not offer any money for corruption due to low margin…. let any body establish the power plant with defined PPA for every financial year and no capital subsidy to create good quality assets, instead interest subsidy for 12 or 15 years of debt term, which will compel the project developer to remain in the market for 12 to 15 years atleast, otherwise, like in Biomass power, the promoter will take away Viable Gap fund or capital subsidy and execute the project with poor quality material and run away with his or her equity, hence, the nation will be the looser…..if it is interest subsidy, the government money will be paid every year based on the performance and existence of the project, which makes only serious players to play this RE field…..

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