Will REC’s be the solution for grid based renewable projects in India

The REC (Renewable Energy Certificate) mechanism was introduced last year with the intent to subsidize the market for renewable energy power though these certificates have only started trading in the month of March 2011. There have been numerous conferences on REC’s to create awareness and to influence the market over the last year but there are still a number of questions raised by the developer, investor and financing community with only a few structuring their future projects based on the REC mechanism.

For this post, we leave the actual application and trading mechanism to official channels and will focus on the viability of RECs today. You can read more about the REC mechanism at
https://www.recregistryindia.in/
RECs can be availed for the following power plants
1. Non-fossil fuel (including bagasse) based co-generation projects
2. Wind Energy
3. Biomass Power
4. Small Hydro, Mini Hydro, Micro Hydro Power
5. Municipal Waste based Power
6. Solar Power

Fig 1.1 RECs traded till date

The first sale (all non-solar) for a total of Rs. 11,94,650 equivalent to 424 RECs, traded at Rs.3900 (150 nos.) and Rs. 2225 (274 nos.) went through in March almost 7 months later than the expected launch date. Each REC certificate is equivalent to 1 MWh (1000KWh) generation of energy and can be traded only once in its life of one year.
Post the initial trade, all certificates were then traded at the floor price which effectively reduced the margin expectations of the highly capital intensive renewable industry.
To identify the difficultly the government faces in nurturing renewable markets, a simple comparison to coal is necessary.
A 1 MW power plant generating approx. 7 million KWh units / 70 lakh KWh units costs approximately Rs. 5 Crores whereas a similar MW in Solar (PV/CSP) costs approx. Rs. 11 Crores and generates between 1.5-1.8 million KWh units and similarly a Rs. 6 Crore per MW installation in Wind generates approx. 1.8-2.5 million KWh units of energy in most cases. The average cost of generation for each KWh unit of energy is Rs. 1.7, 3, 10** (all approximations based on PLF, Technology, etc) for coal, wind and solar respectively.

Biomass power is quite similar to coal power generation while suffering from tremendous feedstock issues which make it a difficult proposition for large grid connected plants hence the potential is limited to small scale plants of 1 KW – 10MW only.
Biomass and Hydro are currently the most viable renewable energy plants with reasonable returns.
Standard debt payoff times for renewable energy with RECs at forebearance / floor prices are
1. Solar – 7-10 years
2. Wind – 6-9 years
3. Biomass – 4-7 years
4. Hydro – 5-8 years

Wind and Solar still aren’t mainstream replacements for conventional energy as they can’t operate as a consistent source making it difficult to mainstream especially in the case of wind where most of the power is generated in 7-8 months of the year. Currently Solar is good as a peak power (read summer months as peak power otherwise is evening onwards) replacement with wind forecasting now becoming more compelling with forecasting possibilities.
As you can see from the above comparisons, renewable energy power other than hydro still has some way to go in achieving grid parity.
The REC is meant to enable developers of power plants to obtain subsidies for their power directly from the discoms, private distributors and captive power plant users. In order for that to happen the CERC has passed a regulation that all discoms need to generate 6% of their total power from renewables with a minor requirement of 0.3% for Solar, for the current year and increasing every year.
Most of the discoms in India are state owned and are providing subsidized energy to politically sensitive populations. In many cases they are either bankrupt or are on the verge of it. Their ability to nurture renewables is suspect as many consider it an unnecessary burden.
There is a mechanism to enforce but no real enforcement is really possible. The CERC acknowledges this and the future of renewable energy will depend on its seriousness. The industry waits with baited breath for a precedence.
A clearer picture emerges by weighing the intent against the current shortcomings below.

The intent of the REC mechanism is:
1. Replacement for government subsidies
2. REC to be freely traded and result in better cashflows
3. Renewable energy adherence targets given to all discoms and captive power consumers
4. Foster more renewable energy power projects
5. Create a healthier environment*

The current shortcomings:
1. RECs aren’t bankable
2. Most renewable projects other than Wind are unviable with REC floor prices
3. Discoms aren’t buying, they prefer power outages rather than buy expensive power. Refer to figure 1.1
4. Average Pooled Purchase Cost of power for discoms is low due to the surfeit of dirty power
(coal).
5. The mechanism is proven in only a few countries and has suffered many issues / changes
6. Prone to market uncertainty
7. Investors aren’t yet comfortable with the risks
8. Cashflows aren’t guaranteed nor predictable
9. No clarity on what happens if REC’s remain unsold esp. as they are valid only for 1 year

The preferential rates for biomass and hydro preclude their success in REC’s and it’s too early to gauge for Solar. REC’s will create viability for wind projects as investment without availing accelerated depreciation, the prime reason till date for sale of wind farms. E.g. The average pooled power cost for Tamil Nadu, the state with the largest potential for wind as well as installation base is just Rs. 2.37 per KWh, so the actual payout is Rs. 2.37 + Rs. 1.5 = Rs. 3.85 whereas the preferential tariff for TN is currently Rs. 3.39. Both these mechanisms can avail of GBI (Generation based incentives) which make the plant load factor the deciding factor.
A drawback of wind is that prices for turbines, land, project development etc have constantly increased without a corresponding increase in efficiency. The equity IRR’s for Solar and Wind are in the sub 20% levels excluding Accelerated Depreciation and are further spiraling downwards due to the high interest rates & the spiraling input costs (only solar panel prices are reducing) currently.
Though there are a few brave entrepreneurs out there willing to risk the uncertainty with discoms now taking a closer step to purchasing REC’s through a convoluted mechanism, a large part aren’t comfortable. Unless the government is serious enough this mechanism may not be the answer to all RE’s woes.

The author leads an Advisory organization focused on Renewable Energy Projects and also runs two of the largest renewable energy forums on linkedin.com dedicated to the Indian subcontinent.
You can reach him at ritesh [at] natgrp.net and the forums at Renewable Energy and Cleantech Forum – India as well as Solar Energy Professional – India

About Ritesh Pothan

Natural Group is a Solar and Renewable Energy Focused Advisory / Consulting Organization with an extensive network enabling it to drive tremendous value into Renewable Energy Projects. Natural Group also runs 2 of the largest India focused renewable energy groups on LinkedIn - Solar Energy Professionals - India and Renewable Energy and Cleantech Forum - India
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