REC – Eligibility & Advantages

Advantages of REC Mechanism

  1. Inter-state Operation: The electricity generated from renewable sources can be consumed locally and only RECs need to be sold to the obligated entities which can be located anywhere. This allows the State Commissions to set higher RPOs even in states with low RE potential and at the same time encourages companies to produce more RE power in high potential state, despite the high initial cost of generation.
  2. Promotion of stand-alone systems: Since transmission of electricity is independent from the REC, the additional revenue from sale of RECs could help improve viability of standalone systems. In usual scenario it may not be economical to transmit electricity from such regions.
  3. Increases Competitiveness of Renewable energy: Separating “RECs” from “electrical energy” and selling them separately eliminates the cost disadvantage of renewable energy technologies.
  4. Promoting green electricity: Environmentally conscious consumers may be willing to consume higher proportion of “green electricity” they can purchase RECs. Tradability of RECs allows wider participation by NGOs, development agencies as well as the corporate sector that may purchase RECs as a part of their social corporate responsibility.
  5. Promote Investment in Renewable Energy: The un-bundling of “RECs” from electricity and their competitive trading at power exchanges can allow investors in renewable energy technologies to use them to hedge electricity price risk. This should encourage investors to enter in the renewable energy generation.
RE producer can either enter preferential tariff agreement or opt for the REC route

REC Eligibility Criteria

Currently, only grid connected RE projects with 250 kW and higher are eligible to participate in the REC mechanism. Existing RE generators who have power purchase agreement (PPA) with the distribution licensees would not have the option of participating till the validity of their PPA.

Hence, renewable energy producers who have opted for the preferential tariff agreement with the distribution licensees are NOT eligible for the REC route. As per the CERC guidelines, a generating company is eligible to apply for registration and issuance of RECs if it meets the following criteria:

1. It has obtained accreditation from the State Agency;

2. It sells the generated electricity either

  1. To the distribution licensee of the area in which the eligible entity is located, at a price not exceeding the pooled cost of power purchase of such distribution licensee or;
  2. To any other licensee or to an open access consumer at a mutually agreed price, or
  3. Through power exchange at a market determined price;

3. All REC based captive power producers shall be eligible for their entire energy generation including self consumption.

Therefore, in the light of above discussion, a solar power producer really has two options for selling the produced power: Either through the preferential tariff agreement or through the REC mechanism that utilizes market forces and feeds the Renewable Purchase Obligations (RPOs).

How Obligated Entities (OE) can meet their Obligations

The Electricity Act (2003) has mandated the State Electricity Regulatory Commissions (SERCs) to promote renewable energy (RE) by fixing Renewable Purchase Obligations (RPOs) for “Obligated Entities.” These entities are obligated to purchase a minimum share of their electricity from renewable energy sources. State policies on RPOs vary in terms of targets and eligibility; therefore RE developers and companies with RPO targets looking to register for Renewable Energy Credits (RECs) should carefully consult their respective state policies.

“Obligated Entities” (OE) commonly include distribution licensees, captive power plant (CPP) owners, and open access consumers. They can meet their obligations in three ways:

  1. By generating RE power for self consumption
  2. Buying power from other RE generators
  3. Buying Renewable Energy Certificates (RECs)

While the first two options are explicit, it must be noted that all RE power is not qualified to meet RPO requirements. Most generally, it may be stated that if an RE generator is availing other RE incentives, such as feed-in-tariffs, concessional or preferential transmission and wheeling charges, such power would not be qualified to meet RPO requirement. Using option 3 requires buying REC from the designated Exchanges in India. However, to participate in trading, the buyer must be registered with the exchange; if not, REC can be purchased through other registered traders.

There are two types of RECs: solar and non-solar. They can only be traded within the price band set by the Central Electricity Regulatory Commission (CERC).

Forbearance and Floor Prices for RECs

Till 31st March 2012 Till 31st March 2012 April 1, 2012 Onwards (Valid till FY 2016-17 April 1, 2012 Onwards (Valid till FY 2016-17)
Non Solar
Solar
Non Solar
Solar
Forbearance Price (Rs / REC)
3,900
17,000
3,300
13,400
Floor Price (Rs / REC)
1,500
12,000
1,500
9,300

Forbearance Price: It is the highest difference between the CERC tariff and the APPC across states.

Floor Price: This is the price to keep the project viable in terms of meeting the O&M expenses, Interests on loan and working capital, principal repayment etc. It is taken as the highest difference between the minimum requirement for project viability and respective state APPC of pervious year.

The proposed downward revision is in line with the practices in other countries (say Germany) where the Feed-in-Tariff (FiT) is periodically reduced. It is known as digression and is done to ensure that the subsidy (offered as FiT) follows the falling market prices of the renewable energy systems.