Tuesday, October 29, 2013

PPP in Indian Parlance- Boom or Bust

“PPP projects take much time to complete and the government does not have to bear cost overruns. This will not only enable us to leverage our limited public resources but also improve efficiency of service delivery.”   - Prime Minister Dr. Manmohan Singh

Going by the words of Mr. Prime Minister Indian infrastructure requires a push for boosting of the sector. As these projects demands huge investments, higher skill of project management and long gestation period, it is of utmost importance to attract private investments. Roads and highways till now have the major share of PPP projects. It accounts for more than 50 percent of the total projects awarded on PPP mode.

Road sector is one of the major contributors for the economic development of India. The country is one of the fastest growing economies of the world and is next to US and China in terms of Road infrastructure. Present statistics of PPP in India shows that 758 projects costing INR 3, 833 billion has been awarded so far. Under this arrangement Concessionaire bears the risks for operation, construction, technical and maintenance and other vital risks related to traffic risk and toll collection threat are assigned to the sanctioned authority in the PPP mode.

Owing to the success of PPP at central level, many states namely Karnataka, Andhra Pradesh and Madhya Pradesh are repeating PPP experience in implementing projects at state level. Despite these positive moves the sector is not free from hassles. There are challenges involved in attracting bidders, financing projects, statutory clearances, and land acquisition and rehabilitation et al. Above all because of the delay in execution of projects approximately all projects face cost overrun of 20-25 percent which somehow hurts the private investors. The limited availability of sources of funding is one the bottleneck for the success of the PPP model. Recently major industrial conglomerates GMR and GVK refused to take up mega-highway projects on the issues of premium payment scheduling.

According to Twelfth Five Year Plan (2012-17), out of total planned investment of USD 1 Trillion in Indian infrastructure half of it is estimated to come from private sector.  Thus the road projects will account for around more than 60 percent of the total investment made under PPP mode. There is a huge untapped potential for investment in the sector, it just needs a spark to ignite it.

Few Recommendations:
·         For further boosting of domestic as well as foreign investors robust regulatory and policy
        framework is required
·         Technical and transaction advisor plays very important role in the development of PPP construction. Thus, it is essential that appointment of consultants is done with proper due diligence
·        At the Centre and state level the PPP nodal agencies are accountable for creating awareness about PPP program There should be proper training of employees in different departments working for PPP projects
·         There should be speedy clearances procedure for faster implementation of project for saving cost over runs
·         There should be independent PPP regulator for looking out project management issues
        Infraline Energy Roads Research Team

Thursday, October 24, 2013

Power Grid diluting stake to raise funds for expansion
Move surprises analysts as the company has enough cash already     
Fears of a July 2012-like grid failure prompt the PSU to plan strengthening measures
The government-owned power transmission utility Power Grid Corporation of India (PGCIL) is planning to sell 694 million new shares, or 15 per cent of the existing stock, to fund the strengthening of the transmission system and pre-empting blackouts in the country. Though the public sector unit is not facing any issues on cash front, it wants to trim its equity to generate the required cash for building a robust transmission system.
The Gurgaon-based company last month sold `3,970 crore of bonds and now it plans to offer new shares to finance the additional investment. The company had suffered lot of bad press last year after the network collapse that had left more than half the nation’s population without electricity. Power Grid will inject additional 10 per cent over and above the already earmarked $16.5 billion investment to set up a system which is fool-proof. About `10,000 crore will be spent in the five years till March 2017 to complete the projects, Chairman, PGCIL, R.N. Nayak told mediapersons recently.
The company’s move to reduce equity has surprised industry experts and analysts. It had earlier said that it was ready to change its 70:30 debt-equity mix to 75:25 and a share sale was not on cards in the year ending March 31. The company is sitting on cash and equivalents of about `2,870 crore and industry experts had expected it to use this cash to meet its funding requirement.
“Although there had always been an overhang of a possible equity dilution, we didn’t expect it to happen this year. They don’t have a cash crunch,” says Anubhav Gupta, an analyst at Kim Eng Securities Pvt. in Mumbai. The announcement of share sale has also surprised analysts as concerns to avoid a large-scale grid failure had to an extent been addressed by putting in place stringent restrictions. The public sector company has already prepared a roadmap to double its transmission capacity and invest in systems to avoid a similar blackout which had forced factories to shut, chocked transport and created havoc in the investor community both within and outside India. Penalties haven increased to discourage states from drawing power in excess of their allocations, a breach which was probably the reason behind the northern grid collapse last year.
However, outages continue to plague large swathes of the country. “That’s not going to change in a hurry. States that now risk heavier penalties for overdrawing power, are simply not buying enough,” says Debasish Mishra, partner and head of energy practice at Deloitte Touche Tohmatsu India Pvt. “At the same time, we have come a long way since last year’s blackouts… grid discipline has increased significantly and chances of a second such blackout are really thin,” adds Mishra.

Planned investment
The transmission behemoth would pump in `2,220 crore in the current financial year ending March 31. The company had earlier planned to invest `2,000 crore in the current financial year. It has so far raised `8,000 crore of debt in the year started April 1, Nayak said. The proceeds of the share sale, which is estimated at `6,340 crore based on the current share price, would be used to fund the equity portion of its investment plan for the next three years, he said.
Power Grid plans to expand the network to 140,000 circuit- kilometers by March 2017, he said. The company is developing 11 high capacity transmission corridors to haul electricity from generation projects spread across more than eight states, as per official statement. The company is also building a transmission system for Tata Power, which has set up a 4,000 megawatt project at Mundra in Gujarat, and Reliance Power, which is building a similar sized plant at Sasan in Madhya Pradesh.
“Power Grid’s project executions are timely and growth is stable. A change in the negative sentiments about the power sector can trigger an upgrade for the stock,” Gupta of Kim Eng Securities said.

Transmission loss
More than a quarter of the electricity generated in the country is lost in transmission because of theft and dissipation through wires. Distribution utilities, unable to retrieve their costs from government-regulated tariffs, accumulate debt and cut purchases.
The country plans to spend 13.73 trillion rupees to expand and upgrade its power systems by March 2017, with much of the investment coming from generators including state-owned NTPC Ltd, Tata Power Ltd. and Reliance Power Ltd. India currently has a capacity to generate almost 226 gigawatts, plans to add 118 gigawatts of capacity during the period, including 30 gigawatts of renewable energy, according to the Planning Commission.
                  InfralinePlus Magazine (Editorial Team) 

Tuesday, October 15, 2013

REC Market in India: Challenges and Road Ahead
The need to boost generation of power from renewable energy resources is no more a matter of choice. Growing need for energy security and environmental management commitments have forced countries to increase their policy thrust on power generation from renewable energy sources. As a result, many policies, frameworks and programmes have been designed and introduced to promote use of renewable energy. Use of Renewable Energy Certificates is one such instrument.
Renewable Purchase Obligation (RPO) of state obligates states to meet certain percentage of their power demand from power generated by renewable sources. The obligated entities are distribution companies, power suppliers and open access consumers. However, given the constraints of unequal distribution of renewable energy resources, an alternate mechanism to fulfil RPO is Renewable Energy Certificates (REC). It is a market based instrument which can be purchased by obligated entities to meet their RPO thereby promoting renewable energy.
Government in several countries, across the globe, have set up renewable power purchase obligation system for more systematic and larger exploitation of renewable energy sources in their respective regions. RECs are globally accepted practice to ensure the compliance of these obligations in a respective country. Tradable REC systems play a vital role in supporting renewable obligation systems in most of the countries including Australia, the U.S. and European Union. India is the first among the developing nations to introduce REC mechanism in the country. Here experience of few selected countries across the globe has been briefly presented.
Australia is among the first few countries to introduce renewable power purchase obligations. Mandatory Renewable Energy Target (MRET) was introduced in year 2001 in order to increase the contribution of renewable sources in the total electricity supply. The MRET required an additional 9,500 GWh of electricity to be produced from renewable sources by year 2010. However, this target was revised to 45,000 GWh of additional renewable energy between 2001 and 2020 in year 2011 by Gillard Government. From January 1, 2011, the Mandatory Renewable Energy Target (MRET) was split into two parts - the Large-scale Renewable Energy Target (LRET) and the Small-scale Renewable Energy Scheme (SRES).
LRET provides financial incentive for large-scale renewable power stations, such as wind, solar and hydro-electric by providing a mechanism for the creation of Large-scale Generation Certificates (LGCs – 1 MWh) by these power stations based on the amount of renewable energy electricity produced. The LRET places a legal liability on the electricity retailers to purchase certain amount of LGCs from these power stations to meet their annual target. The targets of LGCs for liable entities are set by the Renewable Power Percentage (RPP). The Government has also set a target of 41,850 GWh under LRET to be achieved by year 2020.
SRES provides a financial incentive for owners to install small-scale RE installations, such as solar water heaters, air sourced heat pumps and small generation units (small-scale solar panel, wind and hydro systems). These systems are eligible for certain number of Small-scale Technology Certificate (STC), for every MWh, renewable energy produced or displaced. These STCs can be sold either directly to the liable buyer or STC trader/broker in open STC market or through the STC clearing house at a guaranteed price of $40 (excluding Goods & Services Tax).
U.S. has the most extensive and diverse experience with renewable obligation systems. More than 30 of the 50 U.S. states have Renewable Portfolio Standards (RPS) in place as the regulations vary from state to state and there is no federal policy. In order to meet the RPS compliances, RECs are issued for every 1 MWh of electricity produced from the eligible renewable energy sources. These certificates can be traded in voluntary market and compliance market in the U.S.
Swedish government introduced a trading system called the Elcertifikat System in May 2003 for REC. The objective of the electricity certificate system is to increase the production of renewable electricity to 17 TWh by 2016. The system replaces all earlier public grants and subsidy systems. The electricity certificate system will run till the end of 2030. Moreover, quota obligation was created to generate demand for renewable electricity. .In this case, the suppliers were obligated to purchase certificates.
This system has helped the Government in replacing all public grants and subsidy system.  
Many other countries such as UK, Italy and Japan also have REC mechanism in place to meet RPO targets. Table 1 gives a brief overview of REC mechanism followed in these countries. Key takeaway for India from other countries with such certificate has been many. First being increase of validity of REC from 1 year to 2 years. Another takeaway for India could be from Australian REC model wherein, small scale renewable energy based applications are given Small-scale Technology Certificate (STC). India has been encouraging off-grid applications for rural areas. Such small-scale technology certificate can serve dual purpose of REC market improvement and boost adoption of off-grid applications.
Table 1: Features of REC Mechanism Globally
RPO Compliance
RE Target
15% by
17% by 2020
1.63% by 2014
Obligated Entity
Electricity Suppliers
Electricity Suppliers
Corporate Entities
RE Validity
2 years
3 years
2 years
1 year
1 year
1 year
1 MWh
Initially 100 MWh, then 50 MWh and now 1 MWh
1 MWh
Source: Infraline Research

REC in India

Growth of renewable energy sector in India is commendable. The sector has been performing remarkably well for past 5 years with cumulative growth rate of 18 percent (figure 1). Various factors such as availability of soft loans, subsidies by central and state Government and various fiscal incentives have been the driving factor for this growth. Primarily, announcement of National Tariff Policy in 2006 which set forth the objective of 3 percent of solar energy in the total energy mix for power generation by 2022 followed by National Action Plan for Climate Change (NAPCC) in 2008 which targets to achieve 15 percent share of renewable energy in total energy mix by 2020 provided a breakthrough to the growth of this sector. The current share of renewable in power mix is about 12.39 percent.  To achieve this, among other steps, GOI has introduced, Renewable Purchase Obligation (RPO) which specifies a minimum percentage of power from renewable sources for each of the states in India. In pursuit to meet this objective, a market based instrument, called Renewal energy Certificate ( REC) was  introduced in the country in year 2010.
Figure 1: Growth Trend of Renewable Energy based Installed Capacity in India

CAGR=18 %
Source: Infraline Research

Regulatory and Policy Framework for REC Market

Renewable energy has been promoted in the country through various policies constituting fiscal incentives and subsidies. RPO has provided a significant impetus to the growth of renewable sector in India. Due to resource distribution and difference in the regulations and policies in different states, the pace of development of renewable energy is also varying. Due to this the RPO targets are different in different states set by respective State Electricity Regulatory Commission (SERC). Resource rich states have ability to set and achieve a higher target as compared to states moderate or low in resources. To overcome this diversification, RECs, the tradable market instruments play a primary role. The state which is deficit in generating renewable power can buy RECs to meet their RPO. Therefore, RECs play a vital role to:
·         Overcome geographical disparities in distribution of renewable sources
·         Decrease risk for local discom by limiting its liability to energy purchase
·         Reduction of RE transaction costs
·         Meet RPO
There are also various benefits of REC scheme like:
·         It provides a wider scope to comply with RPO i.e. the obligated entities have an option to purchase REC instead of procuring electricity directly from RE generator
·         The transmission of electricity is evaded due to which costs associated with transmission and any operational congestions are avoided
·         It can directly cater to the requirement of corporate and other entities interested in purchasing green power voluntarily
Various policies that have been launched by the Government covering development of renewable energy sources, market for purchase of energy from renewable sources and introduction of RECs are given in table 2.
Table 2: Policies, Acts and Missions promoting Renewable Energy and need for REC
Effect on Renewable Development
Electricity Act 2003
·         Section 61(h) emphasised on promotion of cogeneration and generation of electricity from renewable resources as explicit responsibility of SERC
·         It mandated the SERCs to formulate a percentage that would be purchased from renewable/cogeneration sources out of total consumption in section 86(1)e.
·         As per section 3 of act, National Electricity Policy to be formulated for proper use of resources including renewable
·         Also permitted the stand alone systems based on renewable for rural areas in section 4 of the act
National Electricity Policy 2005
·         According to section 5.12.2, it suggested promotion of renewable and non-conventional energy sources through prescribing a fixed percentage of power from such sources of energy by SERCs.
National Tariff Policy 2006
As per section 86 (1) e:
·         It mandates SERCs to purchase a minimum percentage of energy from renewable sources
·         It is advised to include solar power purchase obligation of 0.25percent in phase 1 and going up to 3 percent by 2022
·         RECs can be purchased for meeting obligations
·         As mandated in the acts, RPO was implemented to promote renewable energy demand in the country
NAPCC 2008
·         It sets the target of 5percent renewable energy purchase for FY 2009‐10 to be increased by 1percent for the next 10 years.
·         It has a target of achieving 20,000MW of solar power by 2022. Only after launch of JNNSM, solar RPO was announced as mentioned in the National Tariff Policy
Source: Council on Energy, Environment and Water
These policies established a framework for setting RPO targets and complying with them. The RPO targets set by SERCs for the financial year 2013-14 are given in table 3.
Table 3: RPO targets for states 2013-14 (in percentage)
Non-Solar RPO
Solar RPO
Andhra Pradesh
Arunachal Pradesh
JERC (Goa & UT)
Himachal Pradesh
Jammu and Kashmir
Madhya Pradesh
Tamil Nadu
Uttar Pradesh
West Bengal
Source: MNRE
 Salient features of the REC mechanism followed in India are as follows:
·         The RE generators will have two options - either to sell the renewable energy at preferential tariff fixed by the concerned Electricity Regulatory Commission or to sell the electricity component and environmental attributes separately.
·         On choosing the second option, the generator can sell the ‘electricity component’ to either the local distribution company at its average power purchase cost (APPC), the traders, open consumers or to the power exchanges at a mutually agreed/market determined price. In addition, the ‘environmental attributes’ can be exchanged in the form of the REC at power exchange.
·         One REC is equivalent to 1 MWh of electricity injected into the grid and is valid for 2 years.
·         The Central Agency (the National Load Dispatch Centre has been designated as Central Agency) will issue the REC to RE generators.
·         The REC is exchanged only in the power exchanges approved by Central Electricity Regulatory Commission (CERC) within the band of a minimum (floor price) and a maximum (forbearance price) value to be determined by CERC.
·         The floor and forbearance price for solar and non solar REC during control period of 2012-17 are given in table 4. The initially determined forbearance prices of solar and non-solar REC were INR 17,000 and INR 3,900 respectively while floor price for solar was INR 12,000 before CERC’s amendment in FY 2012. The amended prices are given in Table 4 below
Table 4. Floor and Forbearance Price of REC

Non Solar REC ( INR/MWh)
Solar REC ( INR/MWh)
Forbearance Price
Floor Price
Source: MNRE
·         The distribution companies, open access consumers and captive power plants (CPPs) are the obligated entities which are required to meet RPO. These entities will have the option of purchasing the REC to meet their RPOs.
Eligibility criteria for obtaining REC are as follows:
·         REC would be issued to grid connected RE generators only, SERC to recognise REC as valid instrument for RPO compliance
·         Purchase of REC would be deemed as purchase of RE for RPO compliance
·         Grid connected RE technologies with minimum capacity of 250 kW and approved by Ministry of New and Renewable Energy (MNRE) would be eligible under this scheme
·         RE generations with existing PPAs with preferential tariff are not eligible for REC mechanism
·         According to CERC, if any company terminates its PPA pre maturely, it is not eligible for participating in REC scheme for a period of three years from the date of termination of agreement or till scheduled date of expiry of PPA whichever is earlier.

REC Experience So Far

As of September 16, 2013, about 776 projects under REC mechanism have been registered with capacity 3,763.38 MW as given in Figure 2. The majority share of REC comes from 539 registered wind projects, followed by 65 biomass and 79 cogeneration projects. There are 87 solar projects and 26 small hydro projects registered under REC mechanism. From these projects India generates about 7,315,104 RECs of which 55 percent are traded as given in table 5. Currently, RECs are traded on every last Wednesday of the month.

Figure 2: Break-up of Projects Registered Under REC Mechanism (as of September 16, 2013)

Source: REC Registry

Table 5: REC Issues and Traded in India (as of September 16, 2013)
Non Solar
REC Issued
REC Traded
Source: REC Registry

RECs are currently traded in energy exchanges— India Energy Exchange (IEX) and Power Exchange India Limited (PXIL). Introduced with high anticipation with market hitting the forbearance prices in March 2011, REC market 2 years down the line has received a lukewarm response due to lack of enforcement of RPO mechanism and poor financial health of discoms.

In March 2011, REC supply was limited and buying bids were high due to which the clearing prices touched the forbearance price. But there was a difference between bids, supply, demand and clearing prices at both the exchanges. Demand to Supply ratio at IEX stood at staggering 469 against just 1.18 at PXIL. Demand for solar RECs was high whereas there was no selling volume for them.
High demand i.e. 70,701 buy volume for non solar and 33,026 buy volume for solar, showed the tremendous faith of buyers in the mechanism in the first trading session in March 2011. The participants were bullish about the trading and aggressive bidding took place. The demand for non-solar RECs has seen the trend of high demand during the period of February-April every year touching forbearance prices; and latent demand during the remaining part of the year. However, in the FY 2013, the non-solar REC market has collapsed with market clearing prices touching floor prices for over 6 months now as given in Figure 3.
Figure 3. Market Clearing Volume and Market Clearing Prices of Non-Solar RECs

Source: Infraline Research

The solar certificate trading started in May 2012. Market was gaining pace for solar certificates, at the same time as the new financial year began; meeting the RPO compliance became a long term objective of the obligated consumers due to which market for non solar trading saw a fall. Whereas, solar certificate market was comparatively stable as buying bids were high. Initially the ratio of buying to selling bids in June 2012 was 10.3 and clearance price was at forbearance price i.e. INR 13,400/REC. Though slowly the ratio of buying to selling bids decreased like in December 2012, the ratio stood at 1.5 but yet the price stood close to the forbearance price i.e. around INR 12,500/REC as shown in figure 4. As the financial year end approached, the demand and supply volumes increased in the market to fulfil the RPO requirements and prices again touched INR 13,400/REC in March 2013 although the buy to sell bid ratio was only 2. However, post April 2013, the market has collapsed witnessing very low demands.
Figure 4. Market Clearing Volume and Market Clearing Prices of Solar RECs

Source: Infraline Research

Voluntary REC market

The purchase of renewable energy beyond compliance market forms the voluntary market. The demand in voluntary market is not mandated. REC becomes a part of compliance market if its demand is due to necessity of meeting obligations. But if the demand of REC is in existence due to the corporate, PSUs and other consumers to maintain sustainability and achieve their Corporate Social Responsibility (CSR) targets, the demand is voluntary. CSR is the devoir of the company to work in a socially, economically and environmentally sustainable manner.
In India, the major REC market is for  compliance. To fulfil the RPO needs, RECs are purchased by state discoms and other high end energy consumers. Government considers RPO as a driver to generate renewable energy in the country energy mix. REC will help fulfil targets of the states which are resource deficient. Maximum trading generally occurs in the months of January to March as these are the last few months of the financial year for which RPO targets are set.
The amended directive of Department of Public Enterprises (DPE) for Central Public Sector Enterprises (CPSE) which came into force on 1st April 2013 has widened the scope of renewable market in India. The directive targets at the CSR and sustainability of the organizations. The focus of CSR and Sustainability is on capacity building, empowerment of communities, inclusive socio-economic growth, environment protection, promotion of green and energy efficient technologies, development of backward regions, and up-liftment of the marginalised and under-privileged sections of the society. In one of the clauses it is mentioned that priority for the project should be accorded to activities pertaining to:
·         Inclusive growth of society, with special attention to the development of weaker sections of society and the backward districts of the country
·         Environment sustainability
CPSEs will have to plan for environmental sustainability and take up projects for water, waste or energy management, promotion of renewable sources of energy and biodiversity conservation. Projects for reduction of carbon emissions through energy efficient and renewable energy technologies, greening the supply chain, and innovation in products and services which have a tangible impact on environmental sustainability are to be undertaken. These mandated project activities can have a positive impact on the otherwise presently weak REC market.
However, Company Act 2013 which came into force in August 2013, mandates every company having net worth of INR 500 crore or more, or turnover of INR 1,000 crore or more or a net profit of INR 5 crores or more during any financial year to ensure that the company spends, in every financial year, at least 2 percent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.
The purchase of voluntary REC to suffice the sustainable development goals was accepted with an amendment in the guidelines for sustainability development FY 2012-13 by Department of Public Enterprises. In the trading session of January 2012, Power System Operation and Corporation (POSOCO) became the first public sector enterprise to voluntarily buy RECs to offset their carbon footprint and meet sustainable development goals. The impact of these directives may not be very high on the REC market, but it has brought about an initiative to participate in voluntary market. In the financial year 2012-13, there has been participation from individual and private players also in the voluntary REC market as shown in table 7.
Table 7: Voluntary REC buyers in 2012-13
RECs purchased

Power System Operation Corporation Ltd.
Security Printing and Mining Corporation of India Ltd.
Andhra Pradesh
Rural Electrification Corporation Ltd.
Ennore Port Ltd.
Tamil Nadu
Rashtriya Ispat Nigam Ltd.
Andhra Pradesh
Other Voluntary Buyers

Sumit Kumar
Indian Energy Exchange Ltd.
EKI Energy Services Ltd.
Madhya Pradesh
EKI Energy Services
Madhya Pradesh

Source: NLDC
There is a need to improve involvement of individual buyers in the voluntary market. This can be done by taking certain measures like:
·         Decreasing the value of one REC from 1 MWh to some smaller value to encourage small players to increase their basket of green energy
·         The transaction cost of trading in power exchanges should be lowered
·         Procurement through power exchanges should be made simpler
·         Some initiatives through policies
·         Creating awareness among people
Addressing Challenges for REC
There are various hindrances in the development of REC mechanism in India. These need to be resolved for the market to eveolve and mature with time. Some issues and the recommendations are as following:
·         RPO enforcement: There has been no audit so far on the compliance of RPO by various agencies. The mixed level of response is somehow not prompting the designated agencies or Government to take any action against the defaulters. This is further encouraging the neglect on the part of obligated consumers.
There is also insecurity with the market participants to make sell bids in the earlier months of new financial year as there is risk associated of low price sale. Whereas the expected buyers are more towards financial year end and are willing to meet the obligation and there is a fair chance of market prices to move upwards. But at the same time the market sentiment can be hurt as higher sales bid hampers the prices. So it becomes important on the part of Government to intervene and reduce the compliance period from one year to half yearly or quarterly to stabilize the market to some extent.
·         Pricing of REC: Considering the current scenario, there is a respectable choice to fulfil the RPO. The obligated entity can purchase power directly from generator as well as buy REC. The large profit making private firms that are obligated can establish captive power plants based on renewable energy. Under these scenarios it becomes crucial to determine the floor and forbearance price of REC keeping the competition in view.
For example, for current financial year i.e. 2013-14, the tariff determined for solar PV by CERC is INR 7.87/unit and for solar thermal it stands out to be INR 10.69/unit considering accelerated depreciation benefit for both. Whereas, the floor price of REC is INR 9.3/unit which is higher than solar PV tariff. Any obligated entity going through a route of REC will have to shell out more money as compared to purchase of power directly from the generator if considered only on floor prices for meeting its target. The price of solar REC almost reaches forbearance prices during the times when market sentiments are positive. Buying REC can thus be a pricey option. The price revision of REC can also be done on short term basis so as to encourage the sellers to trade their REC before price revision instead of holding them back for five years and wait for REC to touch forbearance price.
·         Voluntary market: As discussed, the voluntary market has yet not gained the required momentum in India. There are very few private entities taking part in REC market. With Company Act, 2013 the voluntary REC market is expected to pick up as it mandates companies with turnover of  above INR 500 crore, or turnover above INR 1,000 crore or more or a net profit above INR 5 crores or more to spend minimum 2 percent of their PAT in CSR.
·         Minimum capacity eligibility: As the unit of one REC equals 1 MWh, it becomes challenging for the small industry and individual consumers to participate in the market. Also there is no order to permit decentralized and off-grid generation to be a part of market. The rooftop solar PV, stand alone systems can be given an entry into REC market, opening a door of opportunity for small industry and voluntary players to add green energy to their basket.
·         RPO incentive: Incentive is required by states to fulfil the RPO because there are costs associated with it which needs to be recognized. Some of the costs include the procurement of balancing power required to conceal the intermittent nature of renewable, higher cost of renewable and cost of transmission infrastructure. It is important to understand the costs and then devise an incentive mechanism for different states.
·         Vintage based Multiplier: CERC has proposed this mechanism for solar plants. The concern was to cover the solar plant developer from fall in REC prices in future. The capital cost of solar power plants has fallen considerably in the span of 4 years as shown in figure 5. The plant developer makes upfront capital investments and return is received in future. To mask this effect of decrease in prices, a multiplicative factor is applied in order to receive more RECs in future. This factor will be in line with fall in CAPEX.

Figure 5: Capital Cost Trend for Solar PV Power Plant in India (INR/MW)

Source: Infraline Research

·         Compliance and Penalty: The biggest challenge towards success of REC mechanism, and thereby the growth of renewable power sctor, is non-compliance of RPO targets by obligated entities. Unless the RPO compliance is implemented in absolute manner their power to drive renewable will remain in jeopardy. Recently taking a strict stance against non compliance, MERC has issued an order which requires obligated entities to meet their RPO compliance by March 2014 or else face heavy penalties. Though several SERC’s have underlined provision of penalties only couple of them seems serious to enforce the provision. Penalty above forbearance prices must be imposed. Once the RPO implementation is strictly enforced by regulators, this will drive REC market as well as renewable market in general.
Infraline Viewpoint
The market is unpredictable as it is at early stages of evolution however general some elements of a bullish trend are observed in the closing months of financial year. As show in table 8, a project of 1 MW solar PV plant can be profitable under REC mechanism. Current price of solar PV power is approximately INR 8/kwh via PPA mode. Whereas, via REC mechanism a developer is eligible to get minimum revenue at floor prices is INR 9.3/kwh just by sale of REC. In addition to it, on sale of power at APPC, a developer will get approximately INR 2/kwh. Therefore, REC mechanism at present, provides a profitable option for power plant developer since cost of solar power is decreasing rapidly where as benchmark upper and lower limit of REC prices are fixed for the control period from 2012 to 2017.

Table 8: Possible profit from 1 MW solar PV plant in India under REC mechanism
Cost (INR)
Application processing fee
Accreditation Charges (for 5years)
Annual Charges
Re-validation (after 5years)
Application processing fee

Registration Charges (for 5years)

Annual Charges

Re-validation (after 5years)

Application processing fee
Issuance fees (Rs10/certificate-1500 Mwh/year)#

REC trading-One time charge for opening of portfolio
Total Cost of REC Issuance (A)
Worst case
REC at 9,300
REC at 11,350
Best Case
REC at 13,400
Revenue via REC (B)
Additional Revenue only by Sale of REC (B-A)
Source: Infraline Research
#1MW solar PV plant will produce on an average 5000 units a day. In 300 sunny days, energy produced will be 1500MWh which will correspond to 1500REC.
# Taxes applicable
* Trading cost per REC is extra
       Infraline Energy Renewable Energy Research Team