In Focus. India s Renewable Energy Certificate Market

Transcription

1 India s Renewable Energy Certificate Market In Focus India s Renewable Energy Certificate Market Carbon Credit Capital LLC 561 Broadway New York, NY Tel: (Main Office)

2 2 India s Renewable Energy Certificate Market India s Renewable Energy Certificate (REC) scheme is another feature of the country s renewable energy policy, which also includes incentives for energy efficiency and solar power, among others. This article provides a brief summary of India s REC market, which is likely to become a major growth segment in India s cleantech sector. The REC market has aroused interest of both investors as well as project developers. It has evolved from a Renewable Purchase Obligations (RPO) policy, introduced in the Electricity Act of By definition, an RPO mandates power distribution companies to purchase a fixed percentage of their total electricity supply from renewable resources. Typically, a nodal agency is made responsible for setting tariff levels at which distribution companies buy electricity from renewable power producers. Because the price of electricity generated from renewable resources is generally higher than that produced from fossil fuels such as coal and natural gas, this results in a higher cost of electricity procurement for the utility or the distribution company. However, as expensive zero emissions electricity forms only a fixed (and relatively small) percentage of total electricity distributed, utilities are able to distribute higher electricity costs over a large consumer base, without significantly affecting consumer prices. The main aim of such a policy is to eventually reduce the cost of renewable energy based electricity generation, through what economists call learning by doing. In the Indian REC regime, the two main stakeholders involved are Eligible Entities and Obligated Entities. Eligible Entities are the generators of renewable energy based electricity, who receive RECs from the government nodal agency after appropriate verification procedures. Obligated Entities are the distribution companies or utilities, which are mandated to either purchase a particular portion of their electricity from renewable sources or buy RECs from Eligible Entities in lieu of zero emissions electricity. In India, renewable energy power producers earn a REC for every MWh of electricity fed into the electricity grid. These RECs are tradable, over the counter or at one of India s two electricity exchanges Delhi-based Indian Energy Exchange and Mumbai-based Power Exchange India. The RECs are divided into two categories solar and non-solar. This is line with the recent amendment in the Electricity Act, which requires utilities to source at least 0.25% of their RPO exclusively from solar power, starting

3 3 India s Renewable Energy Certificate Market The REC framework seeks to resolve a structural problem in India s Renewable Energy Policy. The Electricity Act of 2003 assigns the responsibility of fixing percentages of renewable energy procurement by distribution companies to individual State Electricity Regulatory Commissions. Different states in India have different levels of RPO, varying from 1% (Punjab) to 10% (Tamil Nadu). States richly endowed with renewable energy resources the ones receiving adequate sunlight or wind have higher RPO levels than others. For example, the states of Tamil Nadu, Karnataka, Maharashtra, Gujarat and Rajasthan have higher RPO levels than states like Delhi, which have limited renewable resources. To resolve this problem, renewable energy producers in states with surplus clean energy can sell RECs to utilities that are unable to supply renewable energy resources, so as to allow consistency in state RPO levels. The Central Electricity Regulatory Commission set the national RPO level at 5% in 2010, and plans to increase it cumulatively by 1% every year for the next 10 years. To support this, Government of India has pledged to spend $1 billion over the next five years for rewarding the states actively promoting renewable energy based generation. By making its RPO a set, nation-wide requirement and allowing REC trading to meet that mandate, the Government of India plans to tap into surplus energy potential of states that have already achieved their RPO targets. To ensure stability of future cash flows for renewable project developers, the Central Electricity Authority of India has fixed a floor price and a forbearance price for RECs. For Solar RECs, the floor price and forbearance price are fixed at Rs. 12,000 and Rs 17,000 respectively. For non-solar projects, the floor price and forbearance price have been fixed at Rs 1,500 and Rs 3,900 respectively. The actual price of these RECs known as Market Equilibrium Price (MEP) is to be determined between these upper and lower bounds. RECs differ from carbon credits in several important ways. While the REC market is intra-country, origination of carbon credits happens through the Clean Development Mechanism, formed by an international climate treaty called Kyoto Protocol, or through similar international voluntary schemes, such as the Verified Carbon Standard. Also, while one carbon credit is equal to one tonne of carbon dioxide emission reduction, 1 REC equals 1 MWh of electricity production. In other words, while carbon credits focus on emission reductions, RECs focus on electricity production. Thus, projects such as fuel switch from coal to natural gas can earn carbon credits but are ineligible for RECs, which must come from electricity generated through renewable sources. RECs and carbon credits are similar, however, in that they both are important potential sources of financing for

4 4 India s Renewable Energy Certificate Market development of renewable energy based electricity generation resources. Also, the market for both RECs and carbon credits rely on public policy support for growth. Development of REC markets can further enhance incentive related cash flows for renewable energy project developers that already have access to financing capital requirements from carbon credits. Trading in India commenced on March 30 earlier this year, with the first day seeing 427 non-solar RECs changing hands. Solar RECs have not yet been traded, as solar power project development is at a stage of relative infancy in India, compared to wind power, which contributes about 80% of the total renewable energy based electricity generation in India. Trading of non-solar RECs in India India Energy Exchange Volume Market Equilibrium Price (Rs.) March April PXIL Volume Market Equilibrium Price (Rs.) March April 0 - RECs on the IEX traded at their forbearance price of Rs 3900, only to fall to Rs 1,500, their fixed (minimum) price in the next month. On the PXIL, trading remained low after the first 274 non-solar RECs traded at Rs 2,225, compared to IEX s Rs 3,900. Volumes have been low but are likely to increase as REC regulations get fine-tuned and renewable energy project development accelerates in India.

5 5 India s Renewable Energy Certificate Market Indian Energy Exchange ( Source: According to ABPS Infrastructure Advisory s report on the REC Mechanism in India, which was prepared for Government of India s Ministry of New and Renewable Energy, renewable energy in India can increase from billion units in to billion units in This falls slightly short of government s aim, and warrants an increase in renewable energy capacity amounting to roughly billion units per year. According to the report, this translates into the REC market potential of between 8-10 billion units per annum. While most market commentators believe the REC market will grow into an important stream of cash flows for renewable energy based electricity generation in India, clarity over issues relating to power generation costs and compliance will lend credibility and strength to developers. Nevertheless, RECs, combined with the existing carbon credit schemes, remain important sources of cash flows for clean energy project developers in India.