According to reports, in a bid to promote the renewable energy market, the Indian government has framed policies under the Electricity Act, 2003 and the national action plan on climate change (NAPCC) to increase the total renewable power generation capacity in the country. REC is a policy instrument to promote the development of renewable energy. It is a market-based mechanism which will help the states meet their regulatory requirements such as renewable purchase obligations (RPOs) by overcoming the geographical constraints on existing renewable potential in different states.
In 2008, the NAPCC set renewable energy targets, called RPOs, which require that India produce 15 per cent of its electricity with renewable energy sources by 2020. Furthermore, under the Jawaharlal Nehru national solar mission (JNNSM), the Indian government has aimed to develop 20,000 mw of solar energy by 2022.
The Climate Policy Initiative (CPI), a policy effectiveness analysis and advisory organisation, recently released a report evaluating the effectiveness of the RECs and RPOs in India. According to CPI, in India, the availability of renewable energy sources is distributed with state-to-state variation in their ability to meet renewable energy targets. For example, in some states, the potential for renewable energy from wind, solar, and hydro is non-existent; whereas, some states have excess renewable energy sources (such as Karnataka and Tamil Nadu have wind energy potential; solar energy is concentrated in the northwest region of the country; and small-hydro potential is concentrated in Himachal Pradesh and Uttarakhand). As per CPI, in states with abundant renewable sources, local distribution licencees avoid paying excessive costs for renewable energy by sticking to the RPO level mandated by local state commissions, even though their additional renewable energy could be sold as relatively low cost renewable energy in other jurisdictions.
The Indian government requires the State Electricity Regulatory Commissions (SERCs) to fix a minimum percentage of RPOs from renewable sources taking into account availability of such resources in the region and its impact on retail tariffs, and procurement by distribution companies at preferential tariffs determined by the SERCs. As per government amendment in January, 2011, the solar-specific RPOs have been increased from a minimum of 0.25 per cent in 2012 to 3 per cent by 2022.
As a result, RECs have been widely touted as the solution to drive investment in renewable energy generation. According to CPI, the actual performance of REC market trading, however, shows that the number of certificates issued in the first year of operations is less than 4.0 per cent of the technical REC demand potential, indicating that the full potential of REC markets is far from being realised. Indicating sluggish demand, trading volumes of renewable energy certificates witnessed significant decline in January even as their prices remained stable at the Indian Energy Exchange. As many as 78,955 non-solar and 5,517 solar RECs were traded on the market last month. This is way lower than 2,50,722 non-solar and 6,893 solar certificates traded in December last year.
Furthermore, according to financial institutions, investors cannot rely upon revenues from the REC mechanism beyond the first few years of projects that have up to 20-year lives. As a result, the REC mechanism has had virtually no impact on bringing new renewable energy projects online.
At present, there are several other challenges which exist with the Indian REC market. First, there is a lack of long-term visibility. Most of the state RPO obligations have been fixed only for a short period of time. This leads to lack of visibility in terms of the future demand and growth trajectory of the REC market and questions their bankability. Second, there are problems with enforcement of the RPOs. There needs to be stricter enforcement of state RPOs. If states don’t fulfil their mandatory renewable energy requirements, then penalties must be strictly enforced. Thirdly, there needs to be greater awareness about the existence of RECs. Here, the state agencies need to create more awareness about RECs amongst the obligated entities and ensure the higher uptake of RECs. Increased awareness would provide a much-needed boost to this market.
Though the concept of RECs is plagued by some challenges, it holds great promise in promoting the growth of renewable energy and taking India on path of being a low carbon economy.
(The writer is on the faculty of Indian Institute of Technology, Mandi, India)