A Key Development

CERC reduces floor prices of solar and non-solar RECs to zero

In a key milestone in the trading of renewable energy certificates (RECs), the Central Electricity Regulatory Commission (CERC) has reduced the floor price of solar and non-solar RECs to zero. The commission has observed that the market for RECs has matured significantly over the years and there is no need for a floor price to encourage the sale of these certificates. The revision of the floor price and forbearance price was necessary in light of the significant drop in renewable energy tariffs owing to competitive bidding of solar and wind energy projects as well as a decline in the overall project cost.

Vide an order dated June 17, 2020, the CERC determined forbearance prices for solar and non-solar RECs at Rs 1,000 per MWh while their floor prices were reduced to zero. The new prices will be effective from July 1, 2020 to June 30, 2021 or until further orders, and will be applicable to RECs issued after April 2017. For solar RECs issued before April 2017, eligible entities will have an option to adopt the forbearance price and floor price determined in the current order or to continue with those determined earlier in the order dated March 30, 2017. Meanwhile, for non-solar RECs issued prior to April 1, 2017, trading will take place in accordance with the commission’s letter dated May 28, 2018 (which will be subject to the final decision of the Supreme Court in Civil Appeal No. 4801/2018). The CERC also directed its staff to review the REC mechanism in light of market developments, including review of the need for floor and forbearance prices and of vintage or technology multiplier.

Rationale behind the revision

Between April 2017 and March 2020, the renewable energy landscape in the country underwent a sea change. Solar and wind energy tariffs declined substantially owing to competitive bidding; besides, the demand and supply of renewable energy witnessed significant changes. The average solar tariff discovered in auctions during January 2019 to March 2020 was Rs 2.74 per kWh, while the average bid tariff discovered for wind projects was Rs 2.51 per kWh during 2018-19 and Rs 2.85 per kWh during 2019-20. Under these market conditions, the commission found it necessary to review the floor and forbearance prices of RECs to balance the interests of eligible and obligated entities. The forbearance and floor prices currently applicable were determined by the commission vide order dated March 30, 2017. For non-solar RECs, these were based on generic tariff orders issued by state electricity regulatory commissions (SERCs) for 2016-17 or tariff orders prevalent at the time of notification of the order. Meanwhile, for solar RECs, the prices were based on solar photovoltaic tariffs discovered through competitive bidding up to February 2017, as published by the Ministry of New and Renewable Energy.

Methodology

The forbearance price is based on the highest difference between the cost of generation of renewable energy/ renewable energy tariff and the average power purchase cost (APPC). Meanwhile, the floor price is determined based on the minimum requirements for ensuring the viability of renewable energy projects. This viability requirement has been observed as 70 per cent of the levellised tariff for non-solar renewable energy technology or 70 per cent of the average bid-discovered tariff for solar projects.

Non-solar RECs: For non-solar RECs, the technology-specific forbearance/floor price is mapped with the capacity share of each technology in the REC framework and the weighted average technology specific forbearance/floor price for each technology is determined. The sum of the weighted average technology-specific forbearance/floor price for all non-solar renewable energy technologies is considered as the forbearance/floor price of non-solar RECs.

In the latest order on the forbearance and floor prices of non-solar RECs, the commission has considered the APPC and SERC-notified tariffs for all non-solar renewable energy technologies including the bid-discovered tariff for wind projects during the period 2018-20. The sum of the weighted average technology-specific forbearance price for all non-solar renewable energy technologies has been rounded off to arrive at the forbearance price of Rs 1,000 per MWh. Meanwhile, the sum of the weighted average floor price based on the highest difference between minimum project viability and APPC and the relative share of technologies in the projects registered in the REC framework is Re -0.22 per kWh. Based on this, the commission has observed that the market for RECs has matured and a floor price is no longer required.

Solar RECs: For the determination of floor and forbearance prices for solar RECs, the commission has considered three different scenarios.

  • Under scenario one, the APPC for all states and union territories (UTs) during 2018-19 and the bid-discovered tariff for the year 2017 is considered. Based on this, the forbearance and floor prices have been determined at Re 0.90 per kWh and Re -0.05 per kWh respectively.
  • Under scenario two, the APPC for all states and UTs during 2018-19 and the bid-discovered tariff for the year 2018 is considered, and based on this the forbearance and floor prices have been determined at Re 0.61 per kWh and Re -0.26 per kWh respectively.
  • Under scenario three, the APPC for all states and UTs during 2018-19 and the bid-discovered tariff for the year 2019 up to March 2020 is considered, and based on this the forbearance and floor prices have been determined at Re 0.46 per kWh and Re -0.36 per kWh respectively.

Based on the three scenarios, the forbearance price ranges from Re 0.46 per kWh to Re 0.90 per kWh. Hence, the commission has determined the forbearance price as Rs 1,000 per MWh. Meanwhile, since the floor price ranges between Re -0.05 per kWh and Re -0.36 per kWh, the commission has fixed the floor price at zero.

Conclusion

With regards to the financial impact of removal of REC floor prices, ICRA Limited estimates that the existing REC holders are likely to face inventory losses of at least Rs 4 billion, while the obligated entities are likely to accrue annual savings of at least Rs 7 billion. Net-net, the obligated entities, including distribution utilities and industries availing of open access, are likely to find RECs a lucrative option. There is expected to be increased participation from obligated entities with unmet RPOs. Meanwhile, the removal of REC floor prices would negatively impact existing REC based projects.

Priyanka Kwatra

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