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Cover Story | January 2017

Clarity on longevity of RECs must to promote RPO mechanism

Amit Kumar, Partner - Energy & Utilities, PwC

It is said that REC policy has not been a success, so far. What are the measures do you propose to make the policy a success in the next few years?
Success of the RPO policy primarily depends on ensuring that obligated entities comply with this mechanism. This can be enforced through stricter compliance regulations and penalties for non-obligating entities. Possibly, if non-compliant entities can be mandated to purchase REC´s corresponding to their obligation for a calculated period of around 6 months - 1 year in the past, this may support clearing out of the current pending REC´s that are lying unredeemed. Also, provisions in state solar policies/regulations acting towards RPO compliance such as that mentioned in the solar policy of Delhi above will work towards the success of this initiative. The validity of RECs and the unpredictability regarding their future creates further doubt in the minds of both entities that are issued RECs and those that are mandated to purchase RECs. The Government should promote long term clarity on this aspect to promote that an increased number of entities operate keeping in mind benefits and conditions of RECs.

The utmost focus area at present has to be to clear the current closing balance of RECs that are lying unredeemed in India´s power exchanges and to ensure confidence in the minds of project developers towards this power sale mechanism. The Government was at a time considering clearing the backlog of all RECs, however, owing to the quantum of funds involved it dropped that idea.

An increase in the certainty associated with the sale RECs coupled with reductions in the costs of generation of energy from renewable energy sources will facilitate easier compliance to this mechanism by obligated entities and result in a self-sustaining cycle of growth.

How the failure to enforce RPOs in respective states is expected to impact demand for renewable energy sources? What are the reasons for the failure?
Failure to enforce RPOs in certain states will hamper the motivation of states that are actively engaged in generation of electricity from renewable sources as they may have problems in the sale of this relatively expensive generated power and in cases may even develop a thought process that would undermine being compliant to RPOs. This will result in decreased focus on both generation and procurement of electricity from renewable sources.

Another outcome of this will be the weakening of the REC mechanism as entities start becoming non-compliant and stop purchasing RECs. This results in losses to firms being issued RECs and their returns on investment suffer. This subsequently results in an increasing number of firms not implementing projects under the REC route, rather going for other terms of power sale that involve PPAs at tariffs higher than the APPC. This effect is particularly profound in solar energy, whilst has little effect on wind energy owing to the feed-in-tariffs for that sector.

The two reasons mentioned above are the main reasons that have resulted in the actual failure of the REC mechanism and have been accentuated by the drop in floor prices of RECs from around Rs 9.5 kWh to Rs 1.5/kWh for non-solar sources in the current scenario. This drop in prices along with the uncertainty involved in the sale of RECs further results in limited number of entities opting for developing plants under the REC mechanism route. States such as Himachal Pradesh, Karnataka, Tamil Nadu, Mizoram, Meghalaya and Arunachal Pradesh are leading in meeting their RPO targets, whereas states such as Odisha and Kerala lag behind their RPO targets.

The government has set a target of 175 GW of renewable capacity for 2022. What is the progress made over the last two years in the solar and wind segments, so far?
It has been almost 2 years since these scale up targets were put into place and the progress specifically in solar and wind energy segments has been commendable. Solar, owing to the ambitious targets, has gained immense attention from both the Government and investors alike which has resulted in a significant quantum of policy enablers and increased investments on a global level resulting in a 190 per cent increase in India´s cumulative commissioned capacity from 3,062 MW to 8,727 MW over a period of 22 months. This does not include the 19,276 MW of projects that have additionally been tendered of which 11,444 MW PPA´s have been signed. The concept of solar parks has particularly been very successful and witnessed India´s lowest solar tariff of Rs 4.34/kWh, which was bid out in this period. Amazingly, the World´s largest project of 648 MW was also commissioned in Tamil Nadu covering an area of 10 square kilo meters.

Wind energy in absolute terms has seen the maximum growth amongst all forms of renewable energy and has grown from a total of 22,465 MW before word spread out of the scale-up targets in December 2014 and had crossed a total commissioned capacity of 28,083 MW as of September 2016. The Nation has also progressed in terms of releasing a policy for offshore wind projects, 1000 MW Inter State Transmission System Guidelines and a repowering policy for turbines of sizes 1 MW and below.

How did renewable energy certificates (REC) facilitate compliance of renewable purchase obligations (RPOs) at the national level, so far, and how they are expected to pan out in the next five years?
RECs have definitely contributed to compliance of RPOs at the National level. Although a significant percentage of obligated entities initially were non-compliant towards the mechanism of RECs, overall the stir created by this mechanism has been constant and was heightened by a Supreme Court order in May 2015 regarding upholding RPOs that led to an increased number of such entities becoming compliant.

(RECs Issued) As of December 2016, 5,373 MW projects were accredited under the REC mechanism and a total of 35.72 million REC certificates have so far been issued since the launch of this mechanism in 2011, of which 17.46 million have been redeemed.

Recent amendments by CERC have made the selection criteria for the issuance of RECs more stringent and have removed plants generating renewable power for captive consumption from the list of plants eligible for obtaining RECs. This is expected to reduce the number of RECs being issued in the future and will hence work in favour of clearing the backlog of RECs that exists currently.

The future of RECs is somewhat unclear as of now as their validity presently is only till March 2017. However, owing to the significant numbers of RECs in the market and to ensure that owners of such certificates are benefitted equally, market expectations are that this validity will get an extension and entities that are obligated to purchase such RECs may face stricter compliances.

What has been the target of RPOs over the last three years and to what extent these targets have been achieved? What are the specific measures taken to achieve this?
RPOs have broadly been divided into solar and non-solar RPOs with states declaring independent figures for both these. These figures vary from state to state with states such as Goa having RPO targets for the year 2015-16 of 3.55 per cent to states such as Gujarat having an RPO target of 9 per cent, Tamil Nadu 9.5 per cent, Rajasthan 10.2 per cent and Himachal Pradesh with an RPO target of 11.25 per cent. Further different distribution companies in Karnataka have separate RPOs ranging from 5.25per cent to 10.25 per cent. The achievement of RPOs also differs from state to state with states such as Himachal Pradesh and Tamil Nadu meeting almost double of their RPO targets, while states such as Odisha and Kerala lagging far behind, meeting less than one-fifth of their RPO targets.

The National Tariff Policy (NTP) released in 2016 specifies that 8% of electricity consumption should be from solar energy by March 2022. This provides a benchmark that the states should achieve and accordingly select states have made provisions in their policies, Delhi´s solar policy for instance mandates that private power distribution companies meet at least 75 per cent of their solar RPO within Delhi.

MNRE is also actively pursuing states to meet these targets. Additionally, the NTP also mandates new coal-/lignite-based thermal plants to procure renewable capacity. In order to meet these established targets, states have been promoting generation via renewable forms of energy by instituting various enablers in the form of incentives and facilitating easier compliances for such projects. SERC´s such as UERC and JERC (Goa and UT´s) have further imposed penalties for non-compliance of RPO targets involving fines on the non-compliant entities.

Are there any drawbacks in implementing RPOs in the wake of the poor health of discoms or cost differentiation between conventional and renewable sources? How narrowing of this gap will help expedite implementation of the policy?
Owing to higher costs of generation of renewable forms of energy as compared to conventional energy in most of the present cases, there may be adverse impact of implementing significant RPOs on the health of Discom´s, particularly those that are not financially very sound. In the present scenario, there may even be grid stability problems upon implementation of a significant percentage of renewable energy projects. However, both these aspects are unlikely, because Discoms currently have a say in the RPO targets being established and are not bound to sign all PPAs that come their way. Further, grid instability is something that may become an issue in the future, but expectations are that we will have a solution before it becomes a profound issue.

We may consider the examples of Rajasthan and Uttar Pradesh in the current scenario, the discoms of which are considered to be amongst the financially weaker ones in the Indian market. These states signed MoUs under the UDAY scheme and even though they have significantly increased their portfolio of renewable sources of generation, their overall performance and health has remarkably improved in the recent past.

A reduction in the cost gap between conventional and renewable energy sources with increasing fossil fuel costs and advancements in renewable energy generation technologies will further foster easier implementation and may very soon result in states generating electricity from renewable sources of generation at tariffs that are lower than the landed cost of power when they purchase from other states.

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