The global energy transition is gathering pace. Corporations around the globe are increasingly embracing renewables and ramping up efforts to reduce their carbon emissions.
A global exchange for high-quality carbon credits is expected to go live by the end of 2021 in Singapore. More than 300 influential corporations, many of which operate in India, have already committed to 100 percent renewable electricity. Reliance Industries Ltd (RIL) chairman Mukesh Ambani also recently said that going green was now “a prerequisite” for business survival.
Still, India Inc. must do more to reduce its carbon footprint. But how? One option is using market-linked instruments like renewable energy certificates (RECs), which have been instrumental in deepening renewable energy (RE) penetration in overseas markets like the US, the UK, and Australia. RECs are sold on power exchanges and represent the green attributes of power.
By purchasing them, entities with renewable purchase obligations (RPOs)—such as discoms—and voluntary buyers like corporates can meet RE targets without dealing with the uncertainty and transaction costs associated with actual green power procurement.
However, the performance of India’s REC mechanism has been far from satisfactory. Launched a decade ago, it is now saddled with both demand and supply-side challenges. On the demand side, as many as 7 percent have remained unsold.
On the supply side, the number of RECs issued since REC trading began falls short to meet the RPO requirement of under-compliant discoms for the single financial year 2020.
Also, REC trading on power exchanges has been suspended since July 2020 due to a legal tussle over the Central Electricity Regulatory Commission’s (CERC) decision to remove floor prices for solar and non-solar RECs. Despite these challenges, it is still possible for India to bring its REC market back on track by allowing trading to resume immediately and enacting few structural policy changes. Here are some ideas for the reboot.
Incentivise RPO compliance:
In India, demand for RECs is primarily RPO-driven. As many as 99 percent of all certificates sold to date have served to meet RPO targets. But RPO compliance by state entities has been consistently poor (only four states being RPO compliant in FY20). Around 20 states had compliance rates lower than 55 percent in FY20.
State electricity regulatory commissions have also accorded much leeway to discoms in the past by lowering down their RPO targets and penalties in cases of non-compliance.
We need a carrot-and-stick framework that incentivises compliance and penalises non-compliance in financial assistance schemes and bailout packages like the Ujwal DISCOM Assurance Yojana (UDAY) provided to discoms.
Look beyond RPO-driven demand: We must explore options for stimulating non-RPO sources of demand, including corporations and other organisations willing to show environmental leadership.
Regulatory expansion of the end-use of RECs as offsets for settling deviation settlement mechanism penalties which are levied on discoms and generators can also be explored. Doing so will add to the flexible nature of RECs and make the mechanism more robust.
Remove out-of-date conditionalities: On the supply side, some conditions linked to REC issuance make them exclusive and inflexible. For example, 1 REC is issued when 1 MWh of energy is injected into the grid. But this requirement prevents several small-capacity projects—especially in segments like rooftop solar and floating solar—from participating in the REC market.
Another example is the linking of REC issuances to the Average Power Purchase Cost (APPC), conceived to compensate developers when the APPC rate was lower than RE tariffs.
With utility-scale RE tariffs now below INR 2.0, signing power purchase agreements at APPC rates for RE projects puts undue stress on discoms. But delinking the two requires innovative auction designs that allow developers to retain the green attributes of power, potentially leading to lower RE tariffs.
In early June, the Ministry of New and Renewable Energy (MNRE) released a concept note on redesigning the REC mechanism. Its proposals are a step in the right direction, but fundamental challenges like the need to improve RPO compliance need to be addressed as well.
Tackling them is vital for achieving India’s ambitious RE capacity target: 450 GW by 2030. The pace and scale of this transition will depend on flexible market instruments like RECs, which offer additional avenues for selling RE and serve as a bridge between those generating RE and those unable to procure it physically.
—The autor, Saloni Jain is a research analyst at the Centre for Energy Finance at the Council on Energy Environment and Water (CEEW-CEF). Views expressed are personal
Source : CEEW
