India’s Renewable Energy Investors Suffer as REC Market Heads South

 

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.