This article was published on mylaw.net on April 18, 2011. The link is http://www.mylaw.net/Article/Trading_in_RECs/
For someone interested in the development and growth of renewable energy in India, March 30, 2011 was a significant date, since it saw the first trading sessions of Renewable Energy Certificates (“RECs”) – India’s latest policy incentive to promote renewable power – in the twin electricity exchanges, theIndian Electricity Exchange (“the IEX”) and the Power Exchange of India (“the PXIL”). It is expected that there will be regular trading of RECs in the last Wednesday of every month.
This first day of trading saw 424 non-solar certificates being traded at an average price of Rupees 3,062.50, which is comparable to international prices. What was encouraging, however, was that buy bids were received for 70,337 non-solar certificates and 30,001 solar certificates, which demonstrates that the demand for RECs is much higher than the present supply.
What are RECs?
RECs are tradable certificates or credits, somewhat similar to carbon credits. One REC represents the value of one megawatt hour (MWh) of renewable energy injected into the grid through renewable resources.
The basic principle behind an REC is that renewable energy generation has two distinct aspects – the electricity generation itself, and the social and economic benefits of generating renewable energy, as opposed to non-renewable energy. The idea is to unbundle the two aspects and provide for different markets where each can be sold separately. Therefore, the generator earns a tariff for selling the electricity, but also earns a separate amount by selling the benefit arising from the generation itself, which is represented as an REC.
RECs are intended to give an additional source of funds to the renewable generator and also to make it simpler for entities to meet Renewable Purchase Obligations (“RPOs”).
There are, of course, several ‘Certificate Trading Schemes’ in operation in different parts of the world in relation to renewable energy. The United States of America, several countries in Europe, and Australia have all adopted systems where renewable generators can earn and sell credits depending on the renewable energy that they had generated. India is, however, one of the first developing nations to have introduced such a scheme.
As I had mentioned In a previous post here, significant policy incentives are being put in place for encouraging renewable energy projects in India, including the National Action Plan on Climate Change, which provides a road map for increasing the share of renewables in the total power generation capacity in the country.
Consequent to this, several states have announced RPOs, essentially requiring that each state utility purchase a minimum percentage of its power requirement from renewable sources. The RPO varies from state to state but ranges from four to six per cent, with a mandate to reach fifteen per cent by 2015.
One of the constraints of the RPO mechanism is that all states, essentially as a result of geographical characteristics, are not equally gifted with renewable energy potential. Further, since it is difficult to transport renewable energy from generating stations in one state to utilities in another (although this is done fairly successfully for conventional energy), states had sought to define their RPO percentages depending on the renewable energy potential within the state itself. At the same time, even states which have immense renewable potential like Tamil Nadu and Rajasthan were also not inclined to encourage renewable energy beyond their RPO obligations, since purchasing renewable energy is obviously more expensive for the state utility.
Under the REC mechanism that has been put in place by the Central Electricity Regulatory Commission(“the CERC”), a renewable energy project is eligible to generate RECs, and these can be sold through an electricity exchange to any willing buyer. State utilities purchasing the RECs can use the credit against their RPOs. Since the RECs can be generated by any project in India and then sold through an electronic platform to any utility in India, it eliminates the requirement for developing RPOs based on the availability of renewable resources within a state, and seeks to address the mismatch between availability of renewable sources and the requirement of the obligated entities to meet the RPOs. It also does away with the hassle of obtaining open access through already overburdened transmission corridors
How it works
Under the present CERC mechanism, the renewable energy generators have the option to either sell the renewable energy at the preferential tariff that is available, or sell the electricity and the environmental attribute (crystallised as an REC) separately.
The process for issuance of RECs is as follows:
(i) Accreditation – A renewable energy plant that is eligible for RECs must get accredited with the central agency. A number of renewable energy technologies such as wind, small hydro, solar, biomass, bagasse-based cogeneration, and waste to energy are eligible for RECs. Accreditation is a one step process where a renewable energy plant is required to submit an application, which is processed, and the project verified. The process is carried out by accreditation agencies (similar to a designated operating entity under the Kyoto carbon credit system) to be appointed by the State Electricity Regulatory Commissions. The eligible entity is then registered with the Central Registry.
It is important to note that for a project to be eligible for RECs, it should not have a power purchase agreement to sell electricity at a preferential tariff, that is, the developer should not be receiving a tariff which is higher than what a developer or conventional energy would be receiving. This ensures that if a project is already entitled to a preferential tariff as a result of its renewable character, which takes into account the higher capital cost, it does not receive an additional source of revenue by way of sale of RECs.
(ii) Issuance – Once an eligible project achieves commercial operation, it would be entitled to receive a certificate for a specified quantity of electricity generated and injected into the grid. One REC will be issued for each MWh of electricity generated from renewable energy plants. RECs will essentially be electronic records with unique numbers and will be credited to the registered account of the plant owner.
(iii) Exchange and Sale – Owners of RECs are entitled to sell these RECs in power exchanges approved by the CERC. Entities that have RPO obligations can buy these RECs through the exchange. The price of the REC will be market driven, based on the demand and supply of the RECs, subject to a ‘forbearance price’ (ceiling price) to be set by the CERC. Other entities, such as corporates and non-government organisations may also purchase RECs in accordance with corporate social responsibility obligations. The forbearance price is to ensure that the purchasing entities do not pay an unreasonably high price for purchase of the RECs.
The REC mechanism envisages a central agency will act as a registry for REC transactions and facilitate inter-state transactions. The central agency shall register eligible projects, overview the trading mechanism, and monitor the trading. The CERC has designated the National Load Despatch Centre as the central agency under the REC mechanism.
Like all policies, the key to whether the REC policy succeeds will be its implementation. The RPOs will need to be strictly enforced. As a result, distribution utilities will be forced to buy the RECs to meet RPO shortfalls, or better still, develop a mechanism for phased purchase of RECs through a financial year.
Like all markets, the trading volume will be key, to ensure that there is sufficient liquidity and that prices are not unnecessarily volatile (a volatile market hurts both the developers and the consumers). The predictions are impressive enough. Given the projected targets for installed renewable energy, the REC market is expected to range between eight and twenty-four million units per annum till 2021-22. This, at present prices, is a U.S. Dollars Two billion market.
However, for this policy to be truly successful, it will have to convince solar (and other renewable generators) that they can forego the sanctuary of preferential tariffs and develop projects on the basis that they will earn sufficient returns from RECs. Indians were quick to forego long-term power purchase agreements and rely exclusively on merchant sale, so this may not be too far away.
A lot of concerns have been raised that the purchase cost of RECs would push consumer costs up. At present costs, availing power through RECs would indeed push incremental cost of power up by 1.50 paise per unit in the short-term, which would probably get passed on to the consumer. However, a CERC study estimates that, by 2015, the cost of conventional power would go up and the incremental cost will become negligible, and the country would have immensely benefited from the additional infusion of clean power.