Electrical Monitor

Enforcement of RPO regulations is critical to REC market growth

EM NEWS BUREAUFriday, December 09, 2011, 11:04 Hrs  [IST]

Vibhav Nuwal— Vibhav Nuwal, Director, REConnect Energy Solutions Pvt Ltd

REConnect Energy Solutions Pvt Ltd is a venture focused on renewable energy certificate (REC), energy efficiency and portfolio management. REConnect provides complete life cycle services starting from eligibility evaluation to trading of renewable energy certificates, and was the first company to trade RECs in India. Vibhav Nuwal takes us through the novel concepts of RPOs, RECs and explains how these are traded on energy exchanges. Nuwal also shares the growth plans of his company maintaining that the REC market has a huge growth potential.

Please explain in simple terms what is meant by Renewable Purchase Obligation (RPO) and the role of CERC and state electricity regulatory commissions in the RPO mechanism.
RPO refer to new regulations that require all electricity distribution companies and other large consumers of power (subject to certain conditions) to consume a certain minimum percentage of power from renewable sources. RPO is an important part of the Electricity Act, 2003 (which has heralded power reforms in the country), and is also an important element in India's commitments on reduction of greenhouse gas emissions in the international community. The RPO is a key initiative by which governments are encouraging investments in renewable energy capacity.

The national objective is to reach RPO of 15 per cent of total consumption form RE sources by 2020, up from 6 per cent this year.

What are Renewable Energy Certificates (REC) and how do they help in creating a nationwide balance of RPOs?
Along with the RPO regulations a tradable instrument, called the Renewable Energy Certificate (REC), was created. In its concept and design, the REC markets are not very different from the carbon credit markets. The key difference is that while carbon credits are traded internationally, RECs is an India focused market.

The key concept behind RECs is that the renewable energy potential across the country is very different. To develop that to full potential places a varied burden on consumers across the country. As an example, power consumption in Delhi is very large, but the RE potential is low. Similarly, the RE potential in coastal Gujarat is very high, but there are not enough consumers who can pay (as yet) the high prices of power. REC trading enables the burden to be shared, and thus spread the cost. This will enable involving the entire country's consumers to pay a little so that clean energy can be generated, rather than some consumers taking up all the burden. A tradable market, where for example RECs generated in Gujarat can be bought by companies in Delhi, enables this.

In simplistic terms, such a transaction will provide an additional return to the RE generator (revenue from sale of RECs) and add a cost to the person consuming conventional (coal based, etc) power. This additional return will encourage more investment in RE capacity.

Untitled - 31Please summarize REConnect's activities in the field of REC, encompassing the entire value chain from accreditation to trading of RECs.
REConnect is one of the largest companies in the REC/RPO space. In the REC sector, we provide complete life cycle services, starting from eligibility evaluation, contract structuring, state level accreditation, central level registration, regular issuance and tracking, and trading of RECs. We were the first company to trade RECs in India, on March 30, 2011. Recently, we are increasingly called upon by project developers for strategic advisory to help them choose between various power sale options like REC, PPA with state, etc. We are also helping projects achieve financial closure under the REC mechanism.

In the RPO space, we are working with some the largest companies and business houses in helping them assess their obligation, and develop a strategy to meet them in a cost-effectively manner. We are working with over 3,000 mw of conventional capacity in various capacities.

REConnect is a pioneer is developing a knowledge- and research-focused approach to the REC/ RPO market. Our monthly newsletter, which has now over 14 issues is a repository of knowledge and research in the REC space. We have also recently launched an online RPO calculator—a first of its kind in India (and possibly the world!).

Take us through your expansion plans, including spreading of your geographical footprint.
We currently have offices in six locations in the country. Through these, we are working on projects in 14 states. In seven of these, we have been the first applicants for REC.

We see significant growth opportunity in this market in the future. Initiatives include new products and services, more indepth research-we already do a lot of analytics and research that is accessible only to our clients at this point-and more work on decision support for RE projects.

Untitled - 32Of all sources of clean energy which holds maximum potential with respect to earning maximum REC value?
RECs are awarded on the basis of actual generation. Every 1.000 units, or 1 MWH is equal to 1 REC. Therefore, projects potential for REC generation depends on the technology. For example, the standard plant load factor (PLF; capacity utilization) for a wind turbine is 20 per cent of the installed capacity, while for a biomass project it can be up to 90 per cent or even higher.

Can you explain the difference between, and the need for having, solar and non-solar RECs?
The cost of building solar capacity is very different from other forms of renewable energy, say wind. As an example, 1 mw of installed capacity in solar project can cost between Rs10-13 crore, while it will cost between Rs5 - 6.5 crore in a wind project.

Since the costs are so different, it is necessary to develop two different RECs-solar and non-solar. The RPO in each state is also further sub-divided in solar and non-solar RPO. As an example, in Gujarat the RPO is 6 per cent. However, this is further divided as 0.5 per cent of solar and 5.5 per cent as nonsolar RPO.

Do you expect the 1 GW of solar capacity envisaged by the National Solar Mission by 2013 have a big impact on solar-RECs?
Almost all of the capacity under the National Solar Mission will be under the preferential tariff arrangement. Therefore, it will not be eligible for RECs.

What is the total value of RECs generated till date, and what is your reading of future trends?
The total RECs issued so far by NLDC is close to 324,000. At the floor price of RECs (Rs1,500/REC), this represents a total value of Rs48.5 crore.

We expect the number of RECs issuance in the market to increase dramatically. As an example, our analysis suggested that in October, only about 168 mw of projects got REC issuance, while the accredited capacity exceeded 1,600 mw.

What is your overall view on the robustness of the existing REC architecture and how successful has it been in promoting renewable energy generation? What are your suggestions for its further improvement?
The key question facing the REC market is the enforcement of RPO regulations. While states have done a very good job in creating the regulations, their enforcement remains a key question. Without strong enforcement, where defaulters are penalised, adequate demand for RECs will not materialize. We will only the answer after March 2012, when companies will be required to demonstrate compliance. Strong enforcement will be absolutely critical to make this novel market work.

  PXIL IEX Total
Mar-11 274 150 424
Apr-11 0 260 260
May-11 4,500 14,002 18,502
Jun-11 483 15,902 16,385
Jul-11 3,900 14,668 18,568
Aug-11 3,000 22,096 25,096
Sep-11 4,977 41,385 46,362
Oct-11 3,201 92,303 95,504
*Market-cleared volumes in number of RECs