BRIDGE TO INDIA's first INDIA SOLAR DECISION BRIEF on the REC Mechanism: Viability of solar projects in India

1. The REC
Mechanism
The REC
Mechanism of
Viability
solar projects in India
Viability of solar projects in
India
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© BRIDGE TO INDIA, 2012
Original illustration by Dwarka Nath Sinha

2. Contents
1. Overview 01
2. The Renewable Energy Certificate 02
(REC) Mechanism
2.1. Background 02
2.2. Solar RECs 02
2.3. Lessons from the non-solar REC market 03
2.4. Procedures and timelines 06
3. Is the solar RECs market viable? 09
4. Solar REC business models 12
4.1. Business Model 1: APPC + REC 12
4.2. Business Model 2: RESCO + REC 13
4.3. Business Model 3: Captive + REC 15
5. Regulations under discussion 17
6. Conclusions and recommendations 18
7. Annexure 19
7.1. State-wise RPO Quotas (2012-2013) 19
7.2. Status of non-solar RPO compliance across different states 19
(2012-2013)
7.3. Glossary of terms 20
8. Guest Article 21
Setting up large scale PV: Lessons from new markets by
Mr. Santosh KM, Managing Director, ENERPARC India
9. Interviews 24
Mr. Stefan Mueller, COO, Enerparc 24
Mr. Vinay Shetty, Country Manager – Indian Subcontinent, 26
Canadian Solar
Mr. Jens Burgtorf, CSO, Director, Indo-German Energy Program, 28
GIZ
Mr. Jan Marc-Raitz, Director, Commercial Department, PV 30
Projects, IBC Solar
© BRIDGE TO INDIA, 2012

3. List of
Figures Figure 2-1 RPO requirements of selected states in India 02
Figure 2-2-1 Floor and forbearance prices 02
Figure 2-2-2 Projects registered under the REC mechanism 03
Figure 2-3-1 Registered REC projects by renewable energy resource 03
Figure 2-3-2 Historical non-solar REC demand by consumer category 04
Figure 2-3-3 History of demand-supply of non-solar RECs 04
Figure 2-3-4 Historical price discovery of non-solar REC prices 05
Figure 2-4-1 Process for the issuance of solar RECs 06
Figure 2-4-2 Solar REC eligibility 06
Figure 2-4-3 Details of the accreditation fees payable to the SLDC 08
Figure 2-4-4 Details of the registration fees payable to the NLDC 08
Figure 2-4-5 Details of the issuance fees payable to the NLDC 08
Figure 3-1 Expected solar PV capacity based on the REC mechanism 09
Figure 3-2 Derivation of expected solar PV capacity based on the REC 10
mechanism (year-on-year)
Figure 3-3 India solar and grid price projections 11
Figure 3-4 Assumptions for the projection of solar and grid prices 11
Figure 3-5 Solar REC price projections 11
Figure 4-1-1 State-wise APPC prices (2012) 12
Figure 4-1-2 Assumptions for determining EIRR – APPC + REC 12
Figure 4-1-3 Financial viability of APPC+REC projects 13
Figure 4-2-1 Assumptions for determining EIRR – RESCO + REC 14
Figure 4-2-2 Financial viability of RESCO+REC projects 14
Figure 4-3-1 Assumptions for determining EIRR – Captive + REC 16
Figure 4-3-2 Financial viability of Captive + REC projects 16
© BRIDGE TO INDIA, 2012 3

4. 1. Overview The Indian government has decided to the grid, generate these certificates.
to incentivize the installation of solar This offers a new type of project to
PV in order to increase the energy solar project developers. They can
supply of India, provide more energy find an off-take for their power under
security, offer de-central power market conditions and simultaneously
Indian solar policies solutions and create a future industry. generate RECs.
initially focussed on The policy initially focused on supply
supply side measures. side measures. It started with capital The REC mechanism comes with the
subsidies. Then, with the National risk of uncertainty of REC pricing.
Solar Mission (NSM) and the Gujarat While there is a fixed REC floor price
solar policy, solar PV was supported of `9,300 (€143)* per REC (equivalent
through preferential feed-in-tariffs to 1MWh), there is some uncertainty
(FiTs). Now, solar Renewable Purchase on the pricing post 2017. BRIDGE TO
Obligations (RPOs) for utilities as well INDIA estimates that REC prices will
as direct power customers (through be in the band of `2,200 (€34) per REC
“Open Access”) and large captive to `4,000 (€62) per REC between 2017
power consumers are supposed and 2022. The most significant risk,
to create a demand side “pull” to is of the lack of enforcement of RPOs.
complement the supply side “push”. This is allayed to a certain extent from
the market data for non-solar RECs.
So-called “obligated entities”, who Judging by the performance of the
have to fulfill RPO quotas have four non-solar REC market and indications
options. They can avoid fulfilling their from the regulatory bodies, BRIDGE
Now, solar RPOs are obligations, in which case they could TO INDIA predicts that there will be a
supposed to create a be penalized. Alternatively, they can strong move by states to fulfill their
purchase solar power from the market RPOs.
demand side pull. or generate their own solar power.
The fourth option is to buy Renewable
Energy Certificates (RECs) to meet the
quota. Solar plant owners, who sell
their power outside of preferential FiTs
* All € values are at €1 = `65 (long-term average rate)
© BRIDGE TO INDIA, 2012 01
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5. 2. The
Renewable 2.1 Background 2.2 Solar RECs
Energy RECs are a market mechanism to In line with RPOs, there are two
Certificate facilitate the compliance of RPOs. categories of RECs – solar and non-
Mechanism of power consumers – distribution
RPOs are enforced on three categories solar. Solar RECs include both PV and
CSP technologies. Non-solar RECs
licensees, Open Access consumers and include a basket of renewable energy
captive consumers. The obligations are technologies such as wind, biomass,
driven by the National Action Plan on biofuel cogeneration and small-
Climate Change (NAPCC) that aims at hydro. RECs are traded on the Indian
Every MWh of solar 15% renewable energy in the overall Energy Exchange (IEX) and the Power
energy produced energy mix of India by 20201. There Exchange of India Ltd. (PXIL). The IEX
are two categories of RPOs – solar currently has a leading market share
generates one REC. and non-solar. States in India are free of 91%.
to set their own RPOs in line with the
recommendations from their State 1 REC = 1MWh
Electricity Regulatory Commissions
(SERCs). The table below lists the Every MWh of solar energy produced
major states with solar-RPO quotas2. generates one REC. Solar RECs are
traded once, on the last Wednesday
Figure 2-1: RPO requirements of every month. The trade price is
of selected states in India discovered based on their demand
and supply. In addition, and in order
State Solar RPO
to provide a minimum of certainty on
(2012-2013)
REC prices, the Central Electricity
Andhra Pradesh 0.25%
Regulatory Commission (CERC) has
Gujarat 1.00%
fixed a floor and forbearance price for
RECs are traded on Haryana 0.50%
the period 2012 to 2017 between which
the Indian Energy Himachal Pradesh 0.25%
the RECs can be traded.
Karnataka 0.25%
Exchange (IEX) and Kerala 0.25%
Figure 2-2-1: Floor and
the Power Exchange of Madhya Pradesh 0.60%
forbearance prices3
India Ltd. (PXIL). Maharashtra 0.25%
Punjab 0.07% Floor Price `9,300 (€155)
Tamil Nadu 0.05%
Forbearance Price `13,400 (€223)
Uttar Pradesh 1.00% © BRIDGE TO INDIA, 2012
Uttarakhand 0.25% Source: BRIDGE TO INDIA
© BRIDGE TO INDIA, 2012
Source: BRIDGE TO INDIA
Although the REC market was
Renewable energy resources are
established on February 2011, the
distributed differently across each
solar REC market has been largely
state in India. The RECs are aimed at
inactive. The first trading of solar RECs
addressing this mismatch between
was in the session of May 2012. The
the availability of renewable energy
demand for solar RECs was 1,637, far
resources in states and their RPO
greater than a total of 149 available on
requirements. Obligated entities have
the supply side.
the option of purchasing RECs to fulfil
their RPOs.
1
Government of India, The Prime Minister’s Council on Climate Change, National Action Plan on Climate Change
2
State Electricity Regulatory Commission Orders. For a complete list, see Annexure 1
3
REC Registry
© BRIDGE TO INDIA, 2012 02
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6. None the less, there were only five
RECs traded at a price of `13,000
2.3 Lessons from
(€200), indicating that the selling the non-solar
price bid was far too high. The lack of REC market
activity on the solar REC market can
The lack of activity on be attributed to the lack of solar REC While the solar REC market has just
the solar REC market projects supplying the certificates. taken off, the non-solar REC market
India’s first solar REC project to
can be attributed to has been active since May 2011. On
start trading is a 2MW project in the supply side, the non-solar REC
the lack of solar REC Madhya Pradesh developed by M&B market is primarily driven by wind
projects supplying the Switchgears Limited. energy projects (50% at 1,332MW),
certificates. Going ahead, the supply of solar
followed by bio-fuel cogeneration (23%
at 622.5MW) and biomass (20% at
RECs is likely to be bolstered by six 542MW)7 .
additional projects that are currently
registered.
Figure 2-2-2: Projects registered under the REC Mechanism
(August 2012)4
Project State Capacity (MW)
Jaibalaji Business Corporation Pvt.Ltd. Maharashtra 1.0
Omega Renk Bearings Pvt.Ltd. Madhya Pradesh 0.15
© BRIDGE TO INDIA, 2012
M/S Gupta Sons Madhya Pradesh 0.5
Jain Irrigation Systems Ltd. Maharashtra 8.5
Kanoria Chemical & Industries Ltd. Rajasthan 5.0
Numeric Power Systems Ltd. Tamil Nadu 1.16
While the solar REC M&B Switchgears Ltd. Madhya Pradesh 2.0
market has just taken Source: BRIDGE TO INDIA
off, the non-solar REC Figure 2-3-1: Registered REC projects by renewable energy
market has been active resource8
since May 2011. 1%
23%
Wind
Small Hydro
50%
Biomass
Bio-fuel Cogeneration
Solar PV
20%
6%
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Source: BRIDGE TO INDIA
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4
5
REC Registry
105 KW
6
The REC Registry lists this project as 1.055MW
7
REC Registry
8
REC Registry
© BRIDGE TO INDIA, 2012 03
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