Renewable Energy Certificate Mechanism for India. ABPS Infrastructure Advisory. Background

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1 Renewable Energy Certificate Mechanism for India Background ABPS Infrastructure Advisory India is abundantly gifted with a variety of renewable energy (RE) sources. However, not all states are endowed with the same level of renewable energy sources. While some states have very high renewable energy potential, some have very little renewable energy potential. The Electricity Act 2003 (EA 2003) stimulated the development of RE based power generation by mandating that State Electricity Regulatory Commissions (SERCs) be responsible for promoting the harnessing of RE generation within the state. Under the EA 2003, the SERCs set targets for distribution companies and obligated entities to purchase a certain percentage (Renewable Purchase Obligation), of its total power requirement from renewable energy sources. The existing legal framework, under the EA 2003, puts the responsibility for promotion of renewable energy on SERCs. As a result, the regulations developed by the SERCs differ from each other on many counts. Further, the RPO regulations of one state do not recognize purchase of renewable energy generated in another state as an eligible RE source, for the purpose of fulfillment of the RPO target by Obligated Entities in that state. The RE rich states cannot sell their surplus RE based generation to the states which do not have sufficient RE generation to fulfill their RPO. Consequently, the states with lower RE sources have to keep their RPO target at lower levels. In addition, the unit cost of the RE based nonfirm power is higher than the conventional power sources. As a result, while RE rich states have no motivation to produce RE based power more than that required to fulfill the RPO demand within the state, RE scarce states are not able to procure RE generation from other states. Initiatives for Development of the REC Mechanism On June 30, 2008, the Hon ble Prime Minister of India announced the National Action Plan for Climate Change (NAPCC) which envisaged several measures to address climate change issues. The NAPCC states that increasing the share of renewable energy in the total electricity consumption of the country is one of the important measures that can combat climate change. The NAPCC has set the Dynamic Minimum Renewable Purchase Standard (DMRPS) at 5% for FY against the current level of approx 3.5%. Further, the NAPCC envisages that such targets will increase by 1% over the next 10 years; which would translate to approximately 15% of the renewable energy generation in the total energy mix of India by This would require a quantum jump in deployment of renewable energy across the country. Strong policy measures and a proactive regulatory framework and innovative financing instruments would be required, if the desired penetration level of renewable energy is to be achieved. One such policy instrument prescribed in the NAPCC is the Renewable Energy Certificate (REC) Mechanism, which would enable a large number of stakeholders to purchase renewable energy in a cost effective manner. In consideration of this recommendation of the NAPCC for the promotion of renewable energy, the Ministry of New and Renewable Energy (MNRE) had initiated a study to develop a Conceptual Framework for the Proposed REC Mechanism in India. The Conceptual Framework Report has proposed its recommendations on the Operational and Institutional Framework for the REC Mechanism in India. Along with the MNRE, the Central Electricity Regulatory Commission (CERC) and the Forum of Regulators (FOR) have also been engaged in evolving the Conceptual Framework for Development of the REC Mechanism in India. The Central Electricity Regulatory Commission (CERC) is currently seized with addressing further implementation aspects. On January 18, 2010 it notified its regulations, outlining the terms and conditions for recognition and issuance of renewable energy certificates. Implementation of these regulations will enable obligated entities to meet their RPO target through RECs which may have been generated in

2 other states. In addition to this, an expert committee has also been formed to enable successful implementation of the REC Mechanism in India. For a nation-wide implementation of the REC framework, it is essential that uniform policies are adopted at the state level, in consonance with the national level regulatory framework formulated by the CERC. In this regard, the Model Regulations for State Commissions have already been evolved by the Forum of Regulators (FOR). However, such Model Regulations need to be notified by respective state commissions, after undertaking the due regulatory process. Key Drivers for REC Mechanism in India The Renewable Energy Certificate (REC) mechanism seeks to address the mismatch between availability of RE sources and the requirement of the obligated entities to meet their renewable purchase obligation across states. So far, inter-state exchanges of renewable energy was constrained due to the fact that such transactions are governed by inter-state open access regulations and the regional energy accounting framework, which necessitates scheduling of power. Some of the RE sources, such as biomass power or bagasse based co-generation, can be scheduled and inter-state open access transactions, based on such firm RE sources, have taken place in the past. However, inter-state exchanges of power, based on non-firm RE sources, such as wind energy, solar power, small hydel power, etc., was constrained. Besides, the cost of open access wheeling, under long term arrangements, was prohibitive for such nonfirm RE sources, due to the inherently lower capacity utilization factors. The REC mechanism addresses these constraining factors as the certificate is issued for the energy generated at the point of injection into the grid. Thus, it is envisaged that the REC mechanism shall facilitate the emergence of a large number of cross-border RE transactions, based on non-firm RE sources, while at the same time, enhancing the volume of cross-border RE transactions based on firm RE sources as well. While effective implementation of inter-state transactions would be the primary objective of the REC mechanism in India, some other objectives identified are: Reducing costs for RE transactions Increasing flexibility for participants to choose the participant in RE transactions Overcoming geographical constraints to harness available RE sources Effective implementing of RPO regulations in all Indian states Creating competition among different RE technologies Developing an all encompassing incentive mechanism Reducing risks for local distribution licensees Concept of the REC Mechanism While, conceptually, the operational framework is similar to REC mechanisms implemented in other parts of the world, it has been customized to comply with India s existing legal and regulatory framework. The REC Mechanism in India shall deem the purchase of an REC as the purchase of power generated from RE sources. In the proposed mechanism, the RE generator will be selling two independent and exclusive products from the same quantum of RE generation. These products will be electricity and its associated environmental attributes in the form of RE Certificates.

3 In the proposed mechanism, one REC will be issued to the RE generator for every MWh of electrical energy fed into the grid. The RE generator may sell electricity to the distribution company, at the regulated price equivalent to the pooled cost of power purchased by the Utility from all sources, excluding RE sources and its RECs, to Obligated Entities at the market price through the exchange mechanism, in a transparent manner. The RE generator may sell his RE certificates, only through the power exchange, to such Obligated Entities who have to meet their RPO target. The purchase of RECs will be deemed as purchases of power generated from renewable sources and, accordingly, will be allowed for compliance with the RPO target. The REC mechanism will enable obligated entities in a state to procure RECs generated from any of the states in India and surrender the same to satisfy its RPO target. Operational Framework and Processes In January 2010, the CERC notified its Regulations outlining the Terms and Conditions for recognition and issuance of Renewable Energy Certificates. The salient features of the regulations are mentioned below: There will be a Central Level Agency, to be designated by the Central Commission, for registration of RE generators participating in the scheme. The RE generators will have two options either to sell the renewable energy, at preferential tariffs fixed by the concerned electricity regulatory commission, or to sell the electricity generation and environmental attributes associated with RE generation separately. On choosing the second option, the environmental attributes can be exchanged in the form of an REC. The price of electricity component would be equivalent to the weighted average of the power purchase cost of the distribution company, including short-term power purchases, but excluding renewable power purchase costs. There shall be two categories of certificates, viz., solar certificates issued to eligible entities for generation of electricity based on solar as renewable energy source; and non-solar certificates issued to eligible entities for generation of electricity based on renewable energy sources other than solar. The solar certificate shall be sold to the obligated entities to enable them to meet their renewable purchase obligation for solar, and non-solar certificate shall be sold to the obligated entities to enable them to meet their obligation for purchase from renewable energy sources other than solar. The Central Agency will issue the REC to RE generators.

4 The value of an REC will be equivalent to 1 MWh of electricity injected into the grid from renewable energy sources. The REC will be exchanged only in the Power Exchanges approved by the CERC within the band of a floor price and a forbearance (ceiling) price, to be determined by the CERC from time to time. The distribution companies, the open access consumer, and the Captive Power Plants (CPPs) will have the option of purchasing RECs to meet their Renewable Purchase Obligations (RPOs). Pertinently, renewable purchase obligation is the obligation mandated by the State Electricity Regulatory Commission (SERC), under the Act, to purchase a minimum level of renewable energy out of the total consumption in the area of a distribution licensee. There will also be compliance auditors to ensure compliance with the requirement of fulfilling the REC obligations by the participants of the scheme. The schematic depicted in the figure below represents a flow diagram for various processes involved in the operation of the REC mechanism. The numbers indicate the chronological sequence of seven identified key processes. The operational framework depicted above does not envisage any major modification to the existing arrangements for renewable energy procurements. The proposed framework entails the appointment of an agency, at the national level, to facilitate the registration of eligible RE generators, issuance of RECs, and maintenance of a record of the procurement of RECs by Obligated Entities. The identified seven key processes can be elaborated as under: Step 1: Electricity Generation and Feeding to the Grid

5 The electricity generated in an RE project is injected into the grid. This electricity is consumed in real time by load prevalent in the system, which in turn is accounted against the consumption by entities which had a contract with that particular RE project. The metering of the quantum of electricity injected into the grid and energy accounting will be done by the State Load Despatch Centre (SLDC). Step 2: Application for issuance of REC The RE Generator will apply to the REC Issuance Registry (i.e. the Central Agency) to issue the RE certificates equivalent to the amount of electricity injected into the grid and as certified by the SLDC. Step 3A: Confirmation of Electricity Generation The Central Agency and SLDC shall establish a procedure for exchange of information about actual electricity generated by the registered RE projects on a regular basis. The SLDC shall submit the report of the energy accounts of RE projects to the Central Agency, as per established procedures, on a regular basis. Step 3B: RE Generator Accreditation and Registration The state agency shall provide its report to the Central Agency for accreditation and for recommending the RE project for registration. The RE projects will have to be accredited with the state agency and will also have to be registered with the Central Agency. Step 4: Creation and Issuance of RECs Referring to the generation report submitted by the SLDC and the state agency, the REC Registry will create and issue an appropriate number of RECs to the concerned RE Generator (Eligible Entity). Step 5: REC Sale by RE Generator (Eligible Entity) Once the RECs are issued to the RE Generator (Eligible Entity), sale/purchase of RECs amongst various RE generators and obligated entities will be undertaken only through the power exchange that is operational under the guidance of the CERC. Step 6: Surrender/Redeeming of RECs The obligated entities can procure the RECs over the exchange platform and need to surrender the RECs to the SERCs to meet their RPS obligation. This will facilitate a convenient and effective mechanism for ensuring RPO compliance by the obligated entities. The REC Registry shall maintain a record of RECs issued and RECs received for redemption, on a regular basis. Step 7: Compliance Reporting It is envisaged that the Central Commission, in consultation with the National level Registry (i.e. Central Agency), may appoint, from time to time, Compliance Auditors to inquire into and report on the compliance of REC Regulations by the person applying for registration, or on the compliance by the renewable energy generators in regard to the eligibility of the Certificates and all matters connected thereto. As depicted from the schematic in the figure above, the State Load Despatch Centres (SLDCs) and the proposed new institutions, such as the National Level REC Registry and Compliance Auditors, will play a pivotal role in the day-to-day operation of the REC mechanism. The success of the proposed REC mechanism will depend on adoption of the precise definition of the roles and responsibilities of these

6 institutions, adoption of the appropriate governance structures, and capacity building to undertake defined roles and responsibilities. Design Features of the REC Mechanism Eligible RE Sources and Technologies Renewable energy sources are: small hydro, wind, biomass, bio-fuel cogeneration, urban or municipal waste, solar including its integration with the combined cycle, and such other sources as recognized and approved by MNRE. Further, there shall be two categories of RECs, one for generation based on solar technology and another for all other (non-solar) RE technologies. Eligible RE Generator (Eligible Entities) Considering the current status of infrastructure availability, it will be appropriate to focus and give priority to grid-interactive RE technologies only and, based on the status after a few years, the off-grid RE technologies may be included. This will enable the development of grid-interactive RE technologies up to commercial maturity and then such mature technologies can easily be transferred to the off-grid RE projects. Therefore, it is proposed that grid connected RE projects, of 250 kw and above, shall be eligible. The FOR Task Force has also concurred with this suggestion and has recommended that grid connected renewable energy generators, of at least 250 kw, should be allowed to participate in the REC Mechanism. Existing RE projects have already been covered under the particular tariff and regulatory regime. Further, the long term contracts for the same are already put in place. Hence, it will not be appropriate to compel existing RE projects to be part of the REC mechanism at this stage. Therefore, it is suggested that existing projects may be allowed to participate in the REC scheme after the expiry of their existing PPA. Accordingly, all grid connected generating companies, which have obtained accreditation from state agencies and which do not have power purchase agreements to sell electricity at a preferential tariff, determined by the appropriate commission, to the distribution licensee of the area in which the generating company is located, at a price not exceeding the pooled cost of power purchase of such distribution licensees, or to any other licensee or open access consumer, at a mutually agreed price, or through the power exchange at market determined prices, shall be eligible for receiving renewable energy certificates. Obligated Entities Entities such as distribution licensees, captive and open access consumers, as may be mandated by State Electricity Regulatory Commission to fulfill the Renewable Purchase Obligation, shall be considered Obligated Entities. REC Issuing Authority A national level REC Registry has been proposed to be created and the CERC may formulate the rules for creation of such a national level entity in accordance with the harmonized policies, to be developed by FOR, for operation of the REC mechanism at the national level. The Central Agency, as directed by the Central Electricity Regulatory Commission, shall issue the REC upon ascertaining the corresponding generation/energy accounting for the accredited RE generating stations. Creation and redemption of RECs In the Indian context, it is proposed that RECs will be issued for the RE generation injected into the grid and duly accounted in the Energy Accounting System, as per the Indian Electricity Grid Code or the State

7 Grid Code. It is envisaged that the RECs shall be issued only in electronic form to avoid issues in paperwork and also in view of the fact that the security/verification protocols, etc., can be easily implemented in cases where RECs are issued in such electronic forms. RECs shall be redeemed when they are presented to the common REC Registry for redemption by the owner of the RECs or when the shelf life of the RECs expires. Whether redeemed specifically or expired due to expiry of life, the owner of the RECs shall be allowed to account these RECs for compliance with the RPO. Sale/Purchase of REC Power exchanges are expected to provide a platform for sale and purchase of RECs. While any trading platform could be used for exchange of RECs, at this point of time there is no clarity about the volume and liquidity in the market. It is envisaged that the CERC, in consultation with the FOR, would undertake the assessment of the market, liquidity requirements, costs involved in setting up of the market, and the necessary fee structure. Accordingly, it is proposed that the sale and purchase of RECs will only be through a power exchange operating under the guidelines issued by the Central Electricity Regulatory Commission. Denomination of RE Certificates The RECs are proposed to be denominated in energy (MWh) terms in order to be consistent with RPO percentage obligations, to be specified in energy terms. With the proposed denomination in energy terms, SERCs can continue to specify the RPO target as a percentage of energy consumption, which can easily be converted into the equivalent number of RECs required for achieving the RPO target. Form of RE Certificate The proposed REC needs to contain all the information, such as: Unique Certificate Number; Name of the Issuing Body; Generator Identity; Type of Generation Technology; Installed Capacity of the Generator; Location of the Generator; and Signature of the Authorized person, in its electronic form. In addition, information about the date of issuance of certificate and validity of the certificate may also be provided on the proposed RE Certificate. Enforcement Mechanism In the event of default i.e. non-fulfillment of RPO, the obligated entity has to deposit an amount determined by the State Electricity Regulatory Commission into a separate fund maintained by the obligated entity itself. This fund will be partly utilized for purchase of the certificate and partly for development of the transmission Infrastructure, upon approval by the respective SERC. Issuance of RE Certificates The eligible entities shall apply to the Central Agency for issuance of certificates within three months after the corresponding generation from eligible renewable energy projects has been injected into the grid. The Certificates shall be issued by the Central Agency within fifteen days from the date of application by the eligible entities on the basis of units of electricity generated and injected into the grid. Pricing of Certificate The CERC shall determine the price band, i.e., the upper limit (forbearance price) and the lower limit (floor price) within which REC transactions can be undertaken over the Power Exchange. This price will be determined by the Central Electricity Regulatory Commission from time to time. The determination of floor price and forbearance price would be guided by several factors, such as variation in cost of generation for different RE sources across states, variation in the pooled power purchase cost of utilities

8 across states, expected renewable energy capacity addition, and renewable purchase obligation targets set by different state commissions. It is important to ensure a threshold level of revenue certainty through the floor price in order to instill confidence amongst investors, lenders, and project developers, at least during the initial stage of introduction. Whereas, the forbearance price is necessary to avoid price volatility, else it may defeat the very purpose of facilitating RPO compliance by Obligated Entities through the REC mechanism. The Regulations also envisage introduction of the floor price and forbearance (or ceiling) price, separately for solar RECs and non-solar RECs Shelf Life of Certificates The RECs shall remain valid for 365 days from the date of issue of such certificates. Timeline for implementation It is proposed to introduce the REC mechanism with effect from April 1, Summary The RE certificates issued to eligible entities shall be a valid instrument for fulfilling the renewable purchase obligation of obligated entities, i.e. distribution licensees, captive consumers, and open access consumers. With the introduction of the REC Mechanism, the RE generators will be eligible to sell their RE certificates, which have been issued to them as per the energy they have injected into the grid, within or outside the state. The REC Mechanism will provide the RE generator a wider platform to sell his certificates to suitable buyers. Similarly, it will also provide obligated entities with multiple options for meeting their RPO targets and complying with their obligations under the RPO regime. One of the important elements for success of the REC scheme would be the commitment, at the state level, to fix RPO targets by keeping in view the current national target of 5% with an increasing trajectory, as envisaged in the National Action Plan on Climate Change (NAPCC), so that there is a sufficient demand for RECs; which in turn would fuel growth of RE capacity addition, irrespective of location. The FOR has initiated a study to develop a framework for setting the RPO trajectory across states. Besides, limitations under the present RPO Regulations in many states, such as lack of an adequate enforcement mechanism, and the scope of Obligated Entities to include open access and captive consumption, also needs to be addressed.

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