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Discoms trip on renewable obligations

According to reports, about a year back, this writer asked the Chairman of the Central Electricity Regulatory Commission Pramod Deo, whether the State electricity regulatory commissions would enforce the ‘renewable purchase obligation’. (Under this, specified ‘obligated entities’ are mandated, by law, to either purchase costlier green power, or buy ‘renewable energy certificates’ from the market.) He replied that it was like asking whether policemen would catch thieves.

Going by recent trends, it does appear that the ‘policemen’ are rather disinterested in catching ‘thieves’. Most of the ‘obligated entities’ — large consumers of electricity or State-owned electricity distribution companies — seem to be indifferent to meeting their obligations, knowing well that they are not going to be hauled up by their respective State regulators.

Some of the ‘obligated entities’ which were good boys in meeting their obligations, are now kicking themselves for having done so.

As a consequence of this, the renewable energy sector in the country feels short-changed. This is a pity, given that, the world over, the accent is on developing this very sector for producing energy through environment-friendly means.

India has 3,400 MW under the two-year-old REC mechanism. This means that the owners of these power plants have opted to sell the electricity at non-premium tariffs and get RECs that can be sold in the market. Who will buy these RECs? The ‘obligated entities’. The promise that the ‘obligated entities’ shall provide the demand for the RECs in the market is one made by law. These power plants are today suffering for having put trust into that promise.

Today, the market is awash with RECs, with about 20 lakh of them valued not less than Rs 300 crore, looking for buyers. There is just one more trading session (which will happen on March 27) for the current year, or just one more opportunity for the obligated entities to meet their obligations. Nobody is betting they will.

It is the job of the State electricity regulatory commissions to ensure that the obligated entities in their States fall in line. Tamil Nadu, Karnataka and Himachal Pradesh are fully compliant, but none of the other regulators has taken due action in terms of collecting the penalty. Some States such as Maharashtra, Gujarat and Punjab have allowed the obligated entities one more year’s time.

The regulators apparently take a view that the RECs have no value in the hands of the buyers — the electricity distribution companies. The discoms, they feel, are already not in good financial health, so why burden them further? This is a specious argument, because the RPO is a legal obligation, brought into force after sufficient legislative deliberations, and the discoms have to meet it.

The problem is taking its toll on the industry. Projects are not coming forward for REC registration. New projects are not able to raise funding on the strength of REC incomes.

Some argue that the grant of RECs to some green energy producers is unjust enrichment of the companies. The rationale behind the RECs is that the producers of green power would get these tradeable instruments if they do not opt to sell their power at a preferential tariff to the discoms.

However, in some States (such as Tamil Nadu, which is the bastion of wind power in the country), the power producers are allowed to sell their electricity in the market (‘open access’) at any price. Often, this price is sufficient to yield a profit. But still they get the RECs.

This sometimes results in ‘unjust enrichment’ of power producers at the cost of the ‘poor obligated entities’. But power producers will tell you that they take a ‘market risk’ and, hence, need to be rewarded. Still, the fact is that these power producers are responsible for the large amounts of RECs floating in the market. Whether the view taken by some State regulators is right or not, is besides the point. There is a law, and the regulator has to enforce it. The Central Electricity Regulatory Commission, on its part, has pleaded inability to enforce and has done its best by extending the life of the REC from one to two years.

If you distil it further, you will see that the problem is systemic. First, ‘electricity’ is a ‘concurrent’ subject and each State is free to legislate at its own will. That is why there is no commonality between the regulations, and the existence of a ‘Forum of Regulators’ does not seem to have helped bring in this essential commonality.

Second, it is difficult not to entertain a feeling that there is what is called ‘regulatory capture’ — state regulators are handpicked by the State governments and often the regulator is “our man”.

Third, at a larger level, there is no mechanism to make a wayward discom fall in line other than to go to the regulator and thence the Appellate Tribunal for Electricity. If the intent is to nurture the renewable energy sector, there should be a way by which the Centre could pay the industry first and deduct the amounts from the central devolutions to the States.

It is against the backdrop of such systemic lacunae that we have a situation where Pramod Deo’s policemen are not even attempting to catch the thieves.

One comment

  1. Hawkish business model / financial model through Policies (RECs etc) will never work and it is good that Poor DISCOM have refused to show the wrong business ethics of Open Access, which discounts the place for Poor people as the power shall be affordable to all sections of the society with a transparent business and financial model… you can’t allow Accelerated Depreciation (tax avoidance tool), Low cost funds (Friends from Tax heaven states with EXIM at times), Open Access (Leverage to large corporate companies or own Coterie of Industry and people) PLUS RECs to large corporate companies / Developers, who dislike the level playing field to make fortunes, instead, Government MUST create a level playing field and then ask all these stake holders to play by rule book…. Entrepreneurship is not to DWELL ON INEQUALITY or TAX AVOIDANCE OR getting back the money from Tax heaven places, but, to play a sustainable game to retain the Independence of the Country as many small / poor people helped in the war of Independence and we need to respect as the Greatest asset of any Nation is their PEOPLE at large.

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