REC Revision

CERC proposes realistic prices to gain industry interest

The Central Electricity Regulatory Commission (CERC) is in the process of determining new forbearance and floor prices for renewable energy certificates (RECs), which will come into effect from April 1, 2017. The control period for the previously determined prices was from April 1, 2012 to March 31, 2017. While the prices of non-solar RECs were kept intact during this period, those of solar RECs were revised downwards in December 2014 in light of the steep decline in market-determined solar power tariffs.

Projected as an alternative to carbon credits, the REC mechanism captured the industry’s interest, with companies setting up projects based on this framework to generate returns. Wind energy companies were the first to jump in, followed by solar power producers and then other sectors including conventional energy, mining and steel. The initial months of trading were encouraging, but the model soon broke down with every successive trading session witnessing an increase in supply but a drop in demand. Over time, the trend has resulted in a significant inventory pile-up.

The pile-up has happened largely because of non-compliance with renewable purchase obligations (RPOs) by utilities. The question arises, why are utilities not buying these certificates? One of the biggest reasons is that they cannot afford to do so, given their poor financial condition. State discoms supply power at low rates to various categories of consumers, which has created a huge pile of debt on their balance sheets. Since renewable energy was the most expensive source of power till 2014-15, it was difficult for the utilities to meet their RPOs. For instance, when RECs from solar power were introduced in 2012, they were traded at as high as Rs 13,000 per certificate. However, this is not the only reason for the failure of the REC market. The launch of the Ujwal Discom Assurance Yojana, which has helped a number of state discoms to resolve their financial problems, and the downward revision of solar REC prices by the CERC to Rs 3,500-Rs 5,800 per REC, did not help much in pushing up demand for this instrument.

This points to a likely fundamental issue in the REC mechanism itself. The cost of renewable energy generation has fallen significantly in the past few years, especially for solar power. The latest bidding for solar power projects in Madhya Pradesh saw the levellised tariff come down to Rs 3.30 per kWh, which is lower than the current floor price of Rs 3.50 per kWh for solar RECs. Even in the case of wind power, the recently concluded competitive bidding process for 1,000 MW of projects saw the tariff decline to Rs 3.46 per kWh. Although it is much higher than the current price of Rs 1.50-Rs 3.3 per kWh for a non-solar REC, it must be noted that in the case of direct power purchase from a developer, the discom is sourcing actual power that can be sold at a certain price. REC, in contrast, is a mere certificate that has to be sourced to comply with the applicable RPO. So, the net cost of an REC to a discom is higher than that of sourcing wind or solar power directly from the developer.

The CERC, in its recently released draft document regarding the determination of REC prices, has tried to address the aforementioned issue by proposing more realistic floor and forbearance prices. The floor and forbearance prices have been set at Rs 1,000 per MWh and Rs 2,500 per MWh respectively for solar RECs and at Rs 1,000 per MWh and Rs 2,900 per MWh respectively for non-solar RECs.

These have been determined by the CERC considering various scenarios for solar and non-solar power tariffs. For instance, to determine the forbearance and floor prices of solar RECs, it followed a three-pronged approach – using the average power purchase cost (APPC) and bid-discovered tariffs for all states and union territories (UTs) in India; using APPC and bid-discovered tariffs for all states and UTs excluding Sikkim, Lakshadweep, and the Andaman & Nicobar Islands (considering the three states as outliers); and using APPC and bid-discovered tariffs for selected 17 renewable-rich states and UTs. This approach is considered appropriate as it reflects the current market dynamics and the actual cost of generation as submitted and won by project developers in various states.

In order to address concerns about constantly falling solar and wind power tariffs, the commission has sought industry opinion on the need for defining a floor price. The draft mentions that the current approach for determining the floor price is considered necessary at present given the current state of demand and supply in the REC market, but the commission is of the view that it is important to assess whether the floor price can be removed going forward. It is also important to note that the commission has not proposed a vintage multiplier for any technology. The existing vintage multiplier for solar generating technologies registered in the REC framework will expire in March 2017.

Overall, the price determined by the CERC seems to be in sync with the recently determined tariffs and the expectations of a further decline. However, it needs to be seen if the industry is in agreement with the proposal. The final regulations are expected to be released by end-March 2017.

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