The REC Mechanism

The article is based on the Article in India Solar Compass, a quarterly report of BRIDGE TO INDIA ( www.bridgetoindia.com)

In India power consumers are required to buy a certain part of their consumption from renewable energy generators. This is known as Renewable Purchase Obligation (RPO). The State Electricity Regulatory Commission (SERCs) of each state has notified minimum percentage of RPO for every financial year and also the obligated entities. Obligated entities includes DISCOMS, open-access consumer, captive generators and any other consumer as specified. The renewable energy sector in India has been segregated into two types namely non-solar and solar for defining percentages of RPO.

An obligated entity can meet their obligation by purchasing the required quantum of solar power directly from the producers. Alternatively, they can buy solar Renewable Energy Certificates (RECs) to fulfill their RPOs. The REC mechanism was launched on November 16, 2010 by the Government of India (GOI). Under the REC mechanism any grid connected solar power generator can register their project for RECs given that it fulfills certain eligibility criteria. Each REC is equivalent to one MWh of generated power. The RECs are issued by the nodal agency and can be traded in the power markets. Initially the floor price of INR 12000 per REC and the forbearance price of INR 17000 per REC were fixed only for FY-2010-11 and FY-2011-12. The consumers who buy the RECs are entitled to reflect the same as buying of solar power to fulfill their RPO requirement.

With total installed capacity of less than 50MW of solar power until 31^st August 2011 no project has been registered for Renewable Energy Certificate (REC) in India. The REC project market hasn’t started until now due to uncertainty of REC pricing over the plant life. They are not expected to see any new projects in near future even now due to lowering in the REC price band. The August 24^th, Suo-Moto order of the CERC has slashed the REC floor price by 28% and the forbearance price by 22% for post April 2012. The floor price of INR 9300 per REC is declared taking INR 11.05 per kWh as the minimum required tariff for a viable solar project. The floor price is the maximum difference between the minimum required tariff and the Average Pooled Purchase Cost (APPC) of different states. The forbearance price of INR 13400 per REC is the maximum difference between CERC tariff of INR 15.39 per kWh and APPC of various states.[1] One of the major flaws in deciding this price band is taking APPC in consideration. Method of calculating APPC differs from state to state and even from utility to utility, thus taking APPC as a reference point to calculate price band does not make any sense. Moreover most of the state does not declare their APPC, leaving a question mark on credibility of data. Also, there is no explanation given that how minimum required tariff of INR 11.05 for a viable project is calculated. Solar potential in not evenly distributed all over the country. Projects in states with lower solar irradiation require higher returns to be profitable, but REC mechanism set common pan India prices making it an unviable proposition.

The CERC has declared current REC price band for 5 year to reduce the uncertainties about returns but it is still less than loan repayment period of 10-12 years. The CERC is abided by Electricity Act 2003, to provide power at the cheapest available price to the consumers so it cannot fix REC price for longer term due to southward trends in solar power generation cost. The developers will even now face the problem in raising debt from the banks due to the mismatch. Apart from this even for these five years returns are not certain and will be fluctuating between price band according to the market conditions of demand and supply. The banks which are already reaching their sectorial cap for power sector will unlikely to invest in high risk REC projects when other better and safe opportunities are available.

The government of India (GOI) had introduced the REC for two main reasons first to provide support to the developer to get a viable tariff. Secondly to make solar power available to the states which don’t have the potential, as transmission of solar power over long distance is not possible due to its un-firm nature and grid complexities. The GOI tried to protect the developer and in the process failed to foresee the fact that REC mechanism has the problem of duplication of solar energy. This can be explained by a simple example let’s say a solar power generator sell 1MWh power to state DISCOM at APPC, this power will be counted as RE power which will fulfill RPO requirement of that DISCOM. Now, this generator sells the one REC obtained by generating 1MWh power which he sold to DISCOM, to an open access consumer in some other state which will fulfill the RPO requirement of that open access consumer in its state. So, in this way this 1MWh power is counted twice as RE power. Thus REC actually curtail the growth of RE power and also result in misleading figures about the RE generation in the country.

Thus on the one hand where REC projects lacks interest of developers due to lesser and uncertain returns it also adversely affect the basic principal of REC mechanism that is increase the solar power consumption due to this double count mechanism.

Let us keep the double count mechanism aside and look REC from a developer’s perspective. In the current scenario investors will look to get FIT based projects offered under various national and state policies as they offer better fixed returns. The developers will like to wait until solar tariff get stabilized under open market conditions to enter REC market. Most of the experts believe that this will happen once solar tariff reaches grid parity in next 5-7 years, as at that time return on REC will become equivalent to FIT based project. My assessment is that grid parity is still a distant phenomenon. With highest APPC of INR 3.38 per kWh and falling prices of power in short term and bi-lateral market[2] due to large scale capacity addition and increased efficiency of grid solar power will take 10-12 years to reach the grid parity, even though the price of conventional fuels are rising.

I suggest some changes in REC mechanism so to boost solar REC market and to make it viable to attract investments. To attract initial investment in REC projects the DISCOMS of states which are dependent on REC market should be allowed to enter into pre-agreement of buying REC from developers at certain fixed price in between the REC price band and allowing DISCOMS to sell excess REC in the market. This will give developers fixed returns at least for the given period and make their projects more bankable. Implementation of penalty in case of non-fulfilling the RPO should be more stringent policy wise and higher than forbearance price in monetary terms to make DISCOMS to enter into such pre-agreement. The problem of double count of solar energy can be solved by dividing the green attribute of solar power to fulfill RPO of the consumer in ratio of REC price and APPC paid by consumers.

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[1] http://www.cercind.gov.in/2011/August/Order_on_Forbearnace_&_Floor_Price_23-8-2011.pdf

[2] CERC report on short term market prices

Factors which will determine the success of the solar industry in India in coming years

Indian solar industry is boosted by the government initiative of JNNSM, according to which it is proposed to ramp the current solar capacity to 1000 MW by 2013. Also it provides for the subsidy both in capital and tariff to the solar energy producers.

Another key driver for promoting solar power would be through a Renewable Purchase Obligation (RPO) mandated for power utilities, with a specific solar component. For this government introduced REC mechanism which already had two sessions of bidding. The RPO and REC will boost the solar power sector in coming years.

Indian solar industry depends on imports of solar PV cells but now companies are increasing their capacity indigenously to provide low cost equipments. The big market players like Lanco, NTPC, Moser Baer investing more in the sector will definitely increase the trade volume.

The recent investment opportunities like 8,000 Cr solar park in Gujarat with an aggregate capacity of 1000 MW and 80 investors will be a boom for solar industry. Investment opportunity in off-grid application is also coming up. In DIREC-2010 conference around 100 companies are present with their innovative off grid application of solar power for lighting, heating and cooking and government backing will also play an important role in determining the growth and success of Solar industry .

Awareness of people and BEE norms for green buildings will also boost the solar industry, with lots of energy service companies entering the sector will give rise to new business opportunity in untapped disbursed sector of energy consumption.

All these factors will have a short term impact on industry and will increase the profitability of sector in coming year.

Issue with Indian power sector and its impact on central / state sector projects, private sector, general forms of funding and cost.

The high growth momentum of the Indian economy offers exciting opportunities in the Indian Power Sector. Moreover, these excellent prospects have become the catch-phrase of the investor as this sector holds immense potential in the coming years. According to a recent report of Infraline there is an estimated investment requirement of $390 billion in the next 10 years.

Power sector liberalization, which opens up the sector for private sector to enhance the competition and to improve degrading financial situation of the State utilities has shown good signs of success. New regulatory reforms like Act of 2003, Electricity and tariff policy helped to make the sector more transparent. On the other hand latest technologies and better financing mechanism attract the private players. But there is large scope of improvement and also certain grey areas which should be given due consideration, to achieve the “Power for All” ambition of the Government and the people.

The first and foremost issue which Indian power sector faced is that the power is not treated as an economic commodity but it is treated as a social commodity. This results in conflict of interests between utilities and government. Though with reforms government tried to handle these conflicts and tried to strike equilibrium between economics and sociology.

Indian power sector has three main components with their own characteristics; they are Generation, Transmission and Distribution. Each has its own issue and impacts on whole industry. Starting with Generation pre-reform it is a licensed domain with around 80% of the total generation was in the hands of state owned utilities. It was liberalized to fill the gap of demand and supply and also to use the resources in the best possible way. The impact of this change was that in last 8 years the 70% capacity addition is through private sector. Government created SPVs to accelerate the growth by removing all the red tapes. There is also a push in renewable energy generation, as thermal power is a scarce resource, the introduction of REC mechanism and subsidies on renewable energy are some of the steps taken. The introduction of power exchange market and concept of merchant power plants are the factors which made generation more lucrative. But there are certain grey areas in generation too, 56% of generation depends on coal and all the new UMPP which are developed to increase the capacity are thermal based, thus availability of coal becomes an issue for any generation company. Apart from this BTG/ BoP equipment availability is also a concern. Raising funds of the tune of 20000 Cr is also not easy. Paying capacity of distribution sector where AT&C losses are around 27-30% is also a concern. With all the pros and cons of generation sector we move to the transmission sector.

By nature transmission is a monopoly of state. With installed generation capacity set to raise to 300 GW by 2017 the inter-regional transmission requirement will be around 75000 MW. This will require strengthening of transmission system. Introduction of new technologies in transmission like HVDC and IT enabled transmission centre improves the operating efficiency of the system. Also as generation addition is given largely to the private sector so government can now invest in this sector with its limited funds. This sector still require better forecasting according to the needs and with concentrated power generation centers and dispersed consumers network planning is also important. The inter-region transmission gain momentum with creation of N-E-W grid and southern grid which provide a synchronized capacity in long distances help in managing the load more proficiently.

Distribution is the sinking basket of the power sector, with losses of around 80000 Cr per year which are expected to grow to 100000 Cr by 2014. If not handled carefully will de-rail whole growth process. This makes distribution the most important in the value supply chain. It is largely around 90% owned by the state utilities, while private sector utilities are active in handful of areas. It is divided into rural and urban areas. Rural distribution is characterized by wide dispersal of network, high cost of supply, low paying capacity of consumers and un-metered/flat rate agriculture connections. On the other hand, urban distribution is characterized by heavy industrial load, high consumer density and higher load growth rate. The need to reform and develop was due to heavy losses. Most important schemes, such as R-APDRP for urban areas and RGGVY for rural areas, were initiated in tenth plan which aimed at bringing in investment and creating an efficient distribution infra throughout the country. Both these schemes emphasized the need of base data collection, metering of every connection, reducing theft and improve collection network so as to reduce the losses and make distribution a profitable venture. Introduction of franchisee model in many distribution areas and also the products made available in it is step further. Distribution franchisee is mostly successful e.g, NDPL , BSES etc, as they bring with them the efficiency of private sector joined with the regulation of government to protect the consumer thus maintain the required equilibrium between interest of private player and the consumer. Like transmission and generation load forecasting and network planning is also an important issue apart from this the open access provision in EA 2003 made distribution more competitive. But it also introduced certain factor of concern like distribution utility does not like the concept of open access in distribution as it loses its customer due to it thus sometimes they use wrong methods to stop it.

Up to recent times domestic banks have played a dominant role in power project financing, with very little participation from foreign banks. PFC and REC are the two nodal agencies which provide financing to the major power sector investments. Though power sector is a lucrative sector but the pay-back period and risk involved is very high in it, thus banks and financial institutes keep a very tight vigil on each and every project. Scarcity of thermal fuel and premature stage of other technology also make raising fund a hard nut to crack. But now the private as well as state player are looking overseas for funds available at lower rate of interest and with government and RBI removing barriers from overseas ECB the sector see a new ray of hope. Private players like Reliance Energy, Adani group and Tata power and many others are borrowing funds from foreign institutions; this reduces the load of domestic banks which can now lend money to other sectors and to the state government. Also with lots of option available the cost of capital is also set to decrease which in turn reduces the cost of project and thus the tariff.

The issues are many but mostly they are interrelated, the sector is woven in a close net the impact on any player will show its affect on every other player. Thus it is the requirement of time that public-private partnership should be evolved and power should be treated as the commodity of national interest.

Mahatma Gandhi followed the path ahimsa , to get freedom for citizen of India. we all know this very fact the how his methods of fasting, non-cooperation and Dandi march make freedom possible for India.

But after 62 years of so called freedom we are standing at a juncture where me might need one more Gandhi but can he win against his own people i doubt. Gandhi ji was able to bend Britisher but failed to convince all his followers to keep India united. Well thats all is past and we can't change it but we can learn from it.

The past decade is known for the growth of India as the emerging powers of world. but also be remembered for the corruption that reached to its helm. Lakhs and Lakhs crore money of Indians was gone and nobody is bothered about it.The list of scam is like our growing population, which instead showed a decline but corruption is exponential.And what is worse common Indian man is so ignorant they take all these things as a news only will talk about it for a day or two then they had a new news to talk on.

The corruption has got so deep in our culture that we have learned to live with it, a disastrous symptom of falling nation. We ranked 84th in 2009 and 87th in 2010 in corruption list, and if we dont wake up now will go further down in the list to achieve the goal of most corrupt country.

We can talk or write volumes about the problem of corruption but as somebody said "THE REAL TALK WAS THAT HOW TO REMOVE IT". Is it really difficult some says no its not and we can remove it easily. But it really is very difficult to remove corruption in our country because it has reached a level where people are corrupt from heart and they not only do wrongs deeds which they are not supposed to do they not even do their work, they take bribe even for the work they are serviced for.

Another biggest hurdle is our might Political system , the servant of common man have become uncommon , most powerful and un-answerable to all. They have become in short our Masters.It took corruption to reach this level several decades, so remove it might take a whole century which is most likely in present scenario.

Don;t know why common man is so helpless and ignorant about its own wealth and nation. Its the time to rise before we got stuck much deep in mud of corruption.

I was inspired to write all this which everyone knows by seeing the movement by Anna Hazzre, frankly before this I have heard his name twice or thrice and even don't know what his thinking and I don't know whether I support him or not.

What I think what he is doing is not social work but he is doing all this for himself and for his mother land. And with same feeling we all Indians should do the same. its time to bring the change, we are capable of achieving what we want. It should be the goal of every Indian to uproot the cactus of corruption.

And the simplest way to do it is.....

STOP BEING CORRUPT.

Then we need no Lokpal bill or any master to rule us. try to break the shackles . Try to be free. because freedom is what our country needs again.