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On 4th June 2021, India's Ministry of Power released a
discussion paper for redesigning the renewable energy certificates
(REC) mechanism. REC mechanism which was first introduced in 2010
to promote renewable energy sources (RES) in India through this
market-based mechanism. The mechanism allows obligated consumers of
electricity including distribution companies and open access
consumers to meet their policy driven renewable purchase
obligations (RPO) through purchase of the green attributes traded
through the power exchanges. While over the years, the REC prices
have been regulated within a floor and a ceiling price, however,
because of the excess supply than demand, the realized REC prices
have remained close to the floor price ranging between US$15 to
$28/MWh during 2011-20.
Since July 2020, no trading has happened for RECs after the
central regulator proposed removal of the floor price and bringing
the ceiling price to about $15/MWh. The issue is currently
sub-judice as the REC suppliers have contested the proposal.
Proposed changes in the REC mechanism in the discussion
paper
The discussion paper aims at restructuring the REC mechanism by
bringing it up to date. Besides, it proposes the following changes
to the current mechanism:
Promote new high-cost technologies - offshore wind, hydrogen,
and pumped storage hydro by including them into the fold of REC
mechanism.
Introduce concept of technology multipliers to promote new
technologies by assigning them more RECs per MWh of generation.
There will be a sunset clause for the technology multiplier based
on market maturity of the technology.
All new technologies which needs to be promoted are to be
identified 2 years in advance
Propose to increase the validity period of RECs issued to
perpetuity from the current validity of about 3 years, i.e. RECs to
remain valid until sold.
Floor and forbearance price for the RECs to be removed
All new REC projects will be eligible for issuance of RECs for
first 15 years from commissioning, while earlier the period was for
25 years.
Continue to incentivize RE procurement beyond the RPO by
issuing RECs to the distribution companies (DISCOMs). Besides, the
paper also discusses an option to extend this incentive to both the
DISCOMs and open access/ captive consumers.
No RECs to be issued to the projects which benefit from any
other support mechanism and concessions. These exemptions will be
defined by the forum of regulators (FOR).
Enhancing the role of traders and promote bilateral trades.
Currently the REC transaction take place on the power exchange and
cannot be traded bilaterally.
CERC to develop monitoring and the surveillance mechanism to
ensure that there is no hording of the RECs or any malpractices in
the REC trading
The paper brings up an important discussion around REC mechanism
which is an essential market instrument supporting renewables
growth in India. The proposal is welcoming and aims to widen the
scope of the current framework, however there are certain aspects
which need more deliberation and further clarification.
IHS Markit feedback
Following are a few comments, suggestions, and questions for the
consideration of the ministry of power:
1. Should not do away with the floor price until
stricter penalty mechanism for non-compliance of RPO is implemented
to create demand:
One of the key challenges with the current REC market has been
excess supply with limited demand owing to the concerns regarding
the non-compliance of RPO given lack of stricter implementation of
penalty mechanism. IHS Markit believes CERC should consider the
proposal further.
Removal of the floor price may disincentivize the generators as
it provides a minimum price guarantee. It may also impact the
market liquidity in RECs, as with very low-price discovery, the
suppliers may restrict to bring the capacity into this market.
The key challenge with REC market is the excess supply while
demand remains significantly lower. In terms of RPO compliance as
well, there is huge lag. Only four states Karnataka, Andhra
Pradesh, Rajasthan, and Gujarat achieve or overachieve their
targets, while other states lag. About 20 out of 31 states achieved
less than 50% of their respective RPO targets in FY2020 (Source:
Stand committee on energy, Lok Sabha). The model REC regulation by
FOR, recommended penalty mechanism on the inability of the
obligated entity to meet the RPOs. However, the RPO penalty
mechanism has not been implemented in practice, impacting the
overall REC demand. What measures will be taken to ensure that
there is enough demand for RECs and that penalties are implemented
for non-compliance of RPO targets? Implementing a penalty
equivalent of floor price may help in increasing compliance and
demand of RECs at the same time.
We recommend, the floor and forbearance price should not be
done away till there is an alternate and stricter penalty mechanism
in place along with monitoring protocols for applying
penalties.
2. Requires more clarity on inclusion of
technology:
IHS Markit welcomes the ministry's initiative to include new
high-cost technologies within REC mechanism to support them with
additional revenue stream till its maturity. However, the following
points needs more clarification or procedural information.
The discussion paper proposes only offshore wind, hydrogen, and
pumped hydro as technologies to be promoted under the REC
mechanism. However, there is no mention of battery storage which is
expected to play an important role in integrating larger share of
renewables in the grid in the mid to long term.
Secondly, in the absence of any specific renewable purchase
obligations (RPO) for these technologies, it is not clear, how will
the demand be created for these technologies. Will the RPO target
be made technology agnostic or additional categories (in addition
to solar, non-solar) be created for RPOs to drive demand for the
new technologies?
Besides, another challenge with promoting new technologies
(which has high initial investment costs) through the REC mechanism
is the absence of long-term visibility of revenue streams through
this mechanism. We propose that REC issuance for these technologies
to be for a longer duration of 25 to 30 years of the project
life.
Storage technologies like - hydrogen, pumped hydro and battery
storage do not create additional generation, but may be used in
load shifting. Will the RECs be issued for the generation against
the renewable component of the co-located or remotely located
storage project?
How will the commercial settlement take place in case of
technology multipliers? Will the buyer of the RECs need to buy same
number of RECs in case of both mature and emerging technologies to
comply with its RPO?
3. REC validity should be limited to 3 years while
trading frequency to be increased to ensure more
activity:
Globally, RECs are valid for 1-2 years - Australia, an REC is
valid for 1 year, while in the United Kingdom validity period of
the equivalent certificates is for 2 years.
So, India should not be considering increasing the validity and
limit it to 3 years (as per current practice), which is also on a
higher end. The emphasis should be on ensuring demand in the
market
Increasing the validity of the RECs to perpetuity will result
in tightening of supply of RECs in market which may result in price
distortion instances. It is argued that CERC will monitor the
hoarding of RECs, but no clear structure is provided on penalties
or process to check hoarding.
Also, the trading frequency for RECs could be increased from
the current once in a month to bi-monthly or weekly to ensure more
activity.
4. Time-period for issuing RECs should be kept same else
it may impact the green-field projects:
Currently, RECs are issued for the lifetime of the project i.e.
25 years.
What is the rationale for limiting the time-period for issuing
of RECs to that of first 15 years of the project life? If a project
is built considering the REC revenues, and without other
concessions/incentives available to RES projects, limiting the REC
issuance to 15 years may affect new greenfield projects.
REC issuance is mentioned from the date of commissioning, will
the projects be eligible for REC issuance from the date of
registration or date of commissioning?
Besides, can the project re-register itself after completion of
15 years to be eligible for REC issuance?
5. What are the plans to bring synergies between
different international and local market-based mechanism including
I-RECs, Carbon market and ESCerts:
Are there any plans to synergize the local REC market with
international REC mechanism (I-RECs) and have transferable RECs? In
preparation for COP26, incorporate the REC mechanism into a
National Carbon offsets registry mechanism that can become
internationally tradeable as discussed under Article 6 at COP26
start a tradeable International market.
Are there any plans to synergize the REC mechanism with the
ESCerts (Energy saving certificates) mechanism and have conversion
between MWh (REC) and Mtoe (Escert)?
Are there any timelines being discussed to transition away from
RECs, as India develops a carbon price framework which enables the
market-based adoption of renewables on economic and clean energy
merits?
6. RPO for DISCOMs and open access consumers is
preferred:
In IHS Markit views it is preferable to allow both the DISCOMs
and the open access/ captive consumers to be eligible for issuance
of RECs in case of higher than RPO compliance. It will allow to
create an ecosystem for development of new technologies by
providing an incentive to set up such projects for commercial &
industrial consumption.
Ankita Chauhan is a senior renewable analyst on the
Climate and Sustainability team at IHS Markit, covering research
and analysis for Indian and South Asian markets.
