Market Redesign

MoP realigns REC mechanism to give a fillip to renewable power

Renewable energy certificates (RECs) play a key role in promoting the sale and growth of renewable energy as they help designated consumers in meeting their renewable purchase obligations (RPOs) and, in turn, the country in achieving its national renewable energy goals. In order to align the REC mechanism with the emerging power sector scenario, the Ministry of Power (MoP) has issued a discussion paper on redesigning the REC market. The key objective of restructuring the REC mechanism is to promote newer renewable energy sources such as offshore wind and green hydrogen, and achieve the renewable energy targets. The key proposals of the restructured REC mechanism include perpetual validity of RECs and thus no floor and forbearance price for the certificates, 15-year eligibility of renewable energy generators to issue certificates, promotion of new renewable energy technologies, and provision of multipliers.

To recall, REC trading on the power exchanges has been suspended since July 2020 due to the stay order imposed by the Appellate Tribunal for Electricity in response to the petitions filed by several renewable energy associations regarding the revision of the floor and forbearance prices by the Central Electricity Regulatory Board (CERC). The commission had issued a suo motu order fixing the forbearance price at Rs 1,000 per MWh and the floor price at zero for solar and non-solar RECs.

Need for redesigning the REC mechanism

The key objective of redesigning the REC market is to increase the share of non-fossil fuel energy sources in the electricity energy basket to meet the international commitment under the Intended Nationally Determined Contributions  and to achieve the renewable energy target of 175 GW by 2022 and 450 GW by 2030. Furthermore, the redesigning of the REC market is aimed at promoting new renewable energy technologies such as offshore wind, hydrogen and pumped storage hydro.

By redesigning the REC mechanism, the MoP will be able to align it with the emerging power sector scenario. At the initial stage of renewable energy development, the focus was on compensating for the high cost of renewable energy technologies, but now the focus has shifted to increasing renewable energy generation. On the back of technological advancements, economies of scale and market competitiveness, renewable energy technologies such as solar and wind have matured significantly and the cost of solar and wind power has reduced to around Rs 2 per unit and Rs 3.50 per unit, respectively – even less than the variable charge of most coal-based stations. The power exchanges are supporting the sale and purchase of renewable power through various products such as day-ahead market, term-ahead market, green term-ahead market (GTAM), and real-time market. A green day-ahead market is also in the works.

Restructured REC framework

  • Validity period and floor and forbearance price of RECs: The MoP has proposed that the REC validity period be removed, and RECs be made perpetually valid until sold. The floor and forbearance prices are not required to be specified as REC holders will have complete freedom to decide when to sell. However, the CERC will be required to undertake monitoring and surveillance of the REC market to ensure that there is no hoarding or creation of an artificial price hike. At present, the validity period of RECs is 1,095 days (around three years) from the date of issuance. The validity period has been extended by the CERC from time to time to avoid the expiry of any RECs. The CERC determines the floor and forbearance price for control periods specifying the effective period which, till date, has been revised four to five times for non-solar and solar RECs respectively.
  • Eligibility period of renewable energy generators to issue RECs: The renewable energy generators that are eligible for RECs will be eligible for issuing RECs for 15 years from the date of project commissioning. However, the existing renewable energy projects that are eligible for RECs will continue to issue RECs for 25 years.
  • Promotion of new renewable energy technologies and provision of multipliers: The ministry has proposed the concept of multipliers for promoting less mature renewable energy technologies. A technology multiplier can be introduced for promoting new and high-priced renewable energy technologies, which can be allocated to various baskets specific to technologies depending on maturity. The multiplier will also take care of vintage, depending on the date of commissioning of the project. Depending on the type of technology being promoted and its maturity the number of RECs to be issued can be decided. For example, Technology A, which is at a nascent stage, can be issued three RECs for every 1 MWh of energy sale. As the adoption of the technology increases, the RECs issued can be gradually reduced. The existing renewable energy technologies that reach maturity can be given relative evaluation of a multiplier or included in the negative list or provided with a sunset clause. However, these conditions will be applicable only to the new renewable energy projects, and not the projects that have already been commissioned. Any renewable energy technology that needs to be promoted may be identified around two years in advance. For such technologies, at least 15 years of policy visibility will be provided for attracting investments and for promotions. Once a multiplier is given to a project, it will be effective for a period of 15 years.
  • Incentivising obligated entities for renewable energy procurement beyond RPO: The discoms are moving away from PPAs with renewable energy developers and are meeting their balance RPO compliance through energy purchase from GTAM as well as REC purchase. In order to incentivise the obligated entities to procure renewable energy beyond their RPO, the following options are under consideration:
  • Option 1: Only discoms will be issued RECs for a quantum beyond RPO compliance as per the prevalent practice. This is because discoms do not self-consume electricity, and buy electricity including renewable power for distribution to consumers, thus taking the entire risk of balancing and bearing the socialised cost of transmission charges. Apart from this, discoms take the risk of renewable power purchase, which may or may not be 100 per cent consumed as the actual consumption depends on consumer demand. In such cases, discoms have to pay the liability as per the PPA and also pay compensation in case of curtailment. Meanwhile, open access consumers and captive power plants self-consume electricity and buy renewable electricity for their own consumption. Such consumers buy renewable power beyond the RPO only if it is cost effective compared to other sources of energy. They do not bear any risk, and hence need not be given any additional benefit of RECs.
  • Option 2: RECs can be issued to obligated entities that purchase renewable energy beyond their RPO compliance, similar to the provisions for the existing discoms. This will incentivise the obligated entities to not only achieve their RPO, but also go beyond the RPO level and in turn facilitate and promote the REC market.
  • No REC to be issued to beneficiaries of concessional charges or waiver of other charges: The power ministry has proposed that as a general principle, an entity that gets any concession such as waiver of transmission charges and preferential banking charges will not be given the REC. The Forum of Regulators may define the concessional charges for denying an RECs.

Apart from this, the ministry has proposed to increase the role of traders in the REC market. This will give long-term visibility to buyers of RECs, allowing them to easily fulfil their RPOs. Further, small buyers can bank on traders for buying RECs given the ease of purchase. This will ensure that even the small buyers that find it difficult to trade in the REC market are able to fulfil their RPOs.

To conclude, the introduction of perpetual validity and removal of threshold prices for RECs is expected to result in market-determined prices of RECs, thereby creating equilibrium in the REC market and making these instruments self-reliant. Besides, multipliers for new renewable energy technologies such as offshore wind, pumped storage hydro power and hydrogen will pave the way for easy market entry of new and high-cost technologies. Furthermore, incentives for obligated entities to procure renewable energy beyond the RPO requirement will facilitate and promote the REC market. That said, unregulated pricing and huge build-up of REC inventory since July 2020 could lead to a sharp drop in REC prices once trading resumes.

Overall, for a robust functioning of the REC mechanism, market-determined pricing, and stringent monitoring and surveillance by the central regulatory authority are needed to prevent hoarding and price manipulations.

Priyanka Kwatra

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