Basics of RPOs and RECs

 

INTRODUCTION

India’s renewable energy journey that began with focus on small scale rural domestic applications such as biogas and solar lanterns in the 1980s (click here) widened to large scale utility scale addition in the early 2000s. This shift can largely be attributed to:

  • Global warming
  • Highly fluctuating nature of oil prices in the international markets
  • Quest for energy security

The Electricity Act, 2003 (click here) took the first steps to creating a large-scale demand-supply mechanism for renewable energy in the country. It proposed to do this by directing State Electricity Regulatory Commissions (SERCs) to ensure a fixed percentage of renewable energy in the state’s electricity mix. 

The SERCs, uniformly, in turn compulsorily obligated three groups, encompassing the country’s entire consumer base, to achieve each state’s specified targets:

  • Power distribution companies (DISCOMs)
  • Open Access buyers of conventional power: those procuring power from outside through power exchanges (IEX/PXIL), traders, or bilateral agreements
  • Captive consumers generating conventional power for self-consumption

 These mandates are called Renewable Purchase Obligations (RPO).

The National Tariff Policy mandates that each SERC specify a renewable purchase obligation (RPO) for distribution companies in a time-bound manner. The Ministry of Power and Ministry of New & Renewable Energy have notified the long term RPO trajectory (click here) for 2019-20 to be 17.50% (Solar 7.25% and non-solar 10.25%)

Block Diagram of the RPO Concept

PITFALLS

In theory then, the RPO framework would create the demand for renewable energy installations across technologies. States issued preferential tariff (higher rates for renewable power purchase) orders and policies that provided incentives for investors. However, this framework was far from optimal for maximum renewable energy penetration for the following reasons:

  • Not every state has similar availability of natural resources – some like Tamil Nadu and Rajasthan are better endowed than others like Meghalaya or Nagaland. Therefore, in the low-resource states, the SERCs were restricted from specifying a higher RPO.
  • Production of electricity from renewable sources was expensive, translating to a higher power purchase outlay. So the states which could would not want to generate any more than their respective RPOs.
  • Since the RPO mechanism concentrated mainly on the intra-state use, a state devoid of any potential did not have any mechanism for inter-state purchase of renewable energy.

 

THE NATIONAL ACTION PLAN FOR CLIMATE CHANGE (NAPCC)

There was a bigger thrust on renewable energy with the NAPCC announced by the Prime Minister in 2008. It targeted a minimum of 5% RE in the supply mix of the entire country by 2010 and 15% by 2020. The existing RPO mechanism was not enough to achieve the vision of NAPCC. Hence, a new framework was created to address the kinks.

 

THE REC MECHANISM

In January 2010, CERC announced the terms of a tradable Renewable Energy Certificate (REC). Under this mechanism, renewable generators could choose between

  1. Selling the power at a preferential tariff, and 
  2. Selling the power, at a conventional purchase rate (average power purchase cost or APPC), and the environmental attributes separately. The environmental attributes could be exchanged in the form of RECs, which would be issued by the National Load Dispatch Centre (NLDC).

 

This incentive mechanism would address the geographical impediments and facilitate interstate RE transactions. The framework of REC was expected to give a renewed push to RE capacity addition in the country. 

One REC is treated as equivalent to 1 MWh energy injected into the grid. While RECs were valid up to 365 days from the date of issuance initially, CERC extended the validity to 1095 days (click here). There are two categories of RECs:

  • Solar certificates, issued to eligible entities for generation of electricity from the sun, and
  • Non-solar certificates for electricity generated from renewable energy sources other than solar

To ensure sufficient returns for investors and prevent inhibitive purchase costs, a ‘floor price’ and the ‘forbearance price’ is specified for both kinds of RECs. They are traded through CERC approved Power Exchanges on the last Wednesday of every month. The floor and forbearance Price of Non-solar and Solar REC w.e.f. 01.04.2017 (click here) are listed as below:

Forbearance Price Floor Price
Non-solar REC INR 3,000/MWh INR 1,000/MWh
Solar REC INR 2,400/MWh INR 1,000/MWh

 

ADDITIONAL BENEFITS OF REC

REC as a market instrument has some other advantages over direct purchases of Renewable Energy for RPO compliance:

  • RECs are technology agnostic so competition among different RE technologies is possible
  • It has low transaction costs as compared to direct RE that requires technical and commercial effort
  • RECs offer freedom and convenience to purchase in terms of volume and timing whereas in a direct RE purchase transactions, an exit load exists for the buyer

 

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