The document discusses Renewable Energy Certificates (RECs) and their role in driving solar growth in India. RECs are important because they allow obligated entities to meet renewable purchase obligations (RPOs) mandated by states, providing a financial incentive for solar projects. RECs can make financial sense for solar projects compared to preferential tariffs, with internal rates of return ranging from 10-38% depending on REC and power prices. However, RECs also face challenges related to lack of enforcement of RPOs, uncertainty around prices and policies, and financial issues facing distribution companies. Overall, RECs provide a promising mechanism to support solar growth in India if these challenges can be addressed.

1. Will Renewable Energy Certificates(RECs) drive the
growth of Solar in India?

2. About RESolve
• Advisory firm with strong capabilities in Strategic, Regulatory , Commercial and
Technical aspects of renewable energy projects
• Founded by professionals from India and Germany with strong global exposure
• Specific focus on Solar PV and Wind in India
• Offerings in
– Market Entry strategy for solar firms into India
– Market Intelligence on the Indian Solar PV sector
– Concept-to-Commissioning of PV projects
– Policy and Regulatory advice
• On-going projects – Advisory for a 5 MWp project under REC mechanism
REC Mechanism 2

3. Overview
1. What are RPOs and RECs?
2. Why are RECs important?
3. Do RECs make financial sense?
4. Aren‟t RECs very challenging?
5. What are the takeaways?
REC Mechanism 3

4. RPOs – Key to JNNSM target achievement
JNNSM solar target
25000
“An additional 3000 MW 20,000
20000 by 2017 through the
mandatory use of the
Capacity in MW
15000
RPO by utilities backed
with a preferential tariff.”
( JNNSM – Section 3)
10000
5000 3,000
2000
1000 1000
200
0
Phase 1 (2010-13) Phase 2 (2013-2017) Phase 3 (2017-22)
Utility power including rooftops Off-grid solar applications
• The Government of India plans 3,000 MW of solar power projects in phase 2 of the JNNSM
• Additional 6,000 MW projects through solar-specific renewable purchase obligation (RPO) scheme
• Renewable Energy Certificate (REC) scheme is expected to “catch on from next year”
Mr Tarun Kapoor, Joint Secretary, MNRE on June 14, 2012
REC Mechanism 4

5. What is RPO?
Renewable Purchase Obligation(RPO) – A mandate for obligated entities(OEs) to
purchase a percentage of the total electricity consumption
Mandated by Electricity Act 2003
Section 86(1)(e) - “The State Electricity Regulatory Commission(SERC) should…. specify, for
purchase of electricity from renewable energy sources, a percentage of the total
consumption of electricity in the area of a distribution licensee”
Section 61(h) – The CERC shall…specify the terms and conditions for the determination
of tariff, and ..shall be guided by … the promotion of co-generation and generation of
electricity from renewable sources of energy
Section 66 - The CERC shall endeavour to promote the development of a market
(including trading) in power in such manner as may be specified and shall be guided by the
National Electricity Policy
REC Mechanism 5

6. Solar RPO targets set by SERCs
Uttarakhand
Uttar Pradesh
Tripura
Tamil Nadu
Rajasthan
Punjab
Orissa
Nagaland
Meghalaya
Maharashtra
Madhya Pradesh
Kerala
Karnataka
Jharkhand
Himachal Pradesh
Haryana
Gujarat
Chhattisgarh
Bihar
Assam
Andhra Pradesh
0 0.5 1 % of RPO 1.5 2 2.5
2018-19 2017-18 2016-17 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11
REC Mechanism 6

7. Who and How?
• Obligated entities(OEs)
– Distribution Companies
– Open Access Consumers
– Industries consuming captive power
• To meet the RPO, OEs can
– Generate their own renewable energy
– Purchase energy from RE sources that comply with
RPO regulations
– Purchase Renewable Energy Certificates(RECs)
REC Mechanism 7

8. RECs – The green attribute
REC Vs CDM
Specific to India Global
Focus on Renewable Energy growth Focus on CO2 abatement
RECs and CDM are independent of each other and both can be availed for the
same project
REC Mechanism 8

9. Overview
1. What are RPOs and RECs?
2. Why are RECs important?
3. Do RECs make financial sense?
4. Aren‟t RECs very challenging?
5. What are the takeaways?
REC Mechanism 9

10. Each state has a different RPO target..
Solar RPO Capacity Requirements (2011-12)
350 4
319
300 3.5
Solar RPO Capacity (MW)
3
214
APPC Price (Rs/kWh)
250
2.5
200
154 162 2
150 137
127
103 1.5
100 87
1
48
50 28 35
22 25 0.5
4 6 3 1 8 1 2
0 0
Capacity Required (MW) APPC Price (Rs/kWh)
More than 25GW required by 2020 to meet solar RPOs(Source: CERC)
REC Mechanism 10

11. ..but not all have equal solar resource
• Uneven geographic distribution of solar
resource
• Concentrated in certain pockets
– Rajasthan has high solar resource
– Mizoram has lower solar resource
• States achieving targets unwilling to buy
more
• Interstate sale of power not possible
The solution - RECs
REC Mechanism 11

12. Salient Features of RECs
Parameters Details
Participation Voluntary
1 REC Certificate 1 MWh
Validity 365 Days after issuance
Trading Platform Power Exchanges only (IEX and PXIL)
Banking Not Allowed
Borrowing Not Allowed
Transfer Type Repeat trade of the same certificate is not possible
Floor price - Solar INR 9,300
(April 2012-March 2017)
Forbearance price -Solar INR 13,400
Price Guarantee Through „Floor‟ Price (Minimum Price)
Price Discovery Mechanism Closed Double-sided Auction*
Trading Mechanism Last Wednesday of the month (T day) for 2 Hours
Financial Settlement Buyers pay upfront (T day) and Sellers receive on (T+1 day)
Interstate Transaction Possible
REC Mechanism 12

13. Non-Solar REC trading well established..
..Solar REC trading taking off
Non-Solar RECs
250000 236485 3500
206188 199737
3000
200000
Traded Volume
171524 168675 158220 2500
150000 111621 2000
95404 105527
100000 71226 1500
46362 1000
50000 18502 16385 18588 25096 500
424 260
0 0
Number of RECs traded Weighted Average Price(Rs/REC)
Solar RECs
400 342 13,100
Traded Volume
300 13,000 13,000
179 12,900
200
12,775 12,800 12,800
100 10 12,700
0 12,600
May-12 Jun-12 Jul-12
Number of RECs traded Weighted Average Price(Rs/REC)
Source: recregistry.in, IEX, PXIL
REC Mechanism 13

14. Solar REC market shaping up
• M&B Switchgear Ltd, owns and operates a 2 MW Solar Plant, traded 179 RECs
@12,800 INR/REC in July 2012.
• Revenue forecast from RECs for M&B Switchgear
Solar REC (Rs/MWh) Revenue For 1,500 RECs/MWp/Year
@Forbearance price 13,400 Rs 2 Crore
@Floor price 9,300 Rs. 1.4 Crore
Status of Solar based REC projects (as of July 2012)
Total number of registered projects – 7
Total capacity of registered projects – 18.16 MW
REC Mechanism 14

15. Voluntary RECs also have a role to play
Voluntary RECs popular among several global companies(Yahoo, HSBC, Citi, etc)*
Starbucks Google
• Purchases RECs generated through wind farms • Purchases renewable energy through PPAs
• 2011 - Purchased RECs equivalent to 50% of • Sells renewable energy purchased to the local grid
total electricity consumption globally after stripping out the REC component
• 2015 Target – To purchase RECs equivalent to • RECs generated are applied to the energy
100% of total electricity consumption consumed at data centers making them carbon
neutral
Image credit - Starbucks Image credit : Google
*Source: REConnect
REC Mechanism 15

16. Voluntary RECs in India
Voluntary RECs – Useful tool to meet Sustainable Development goals
Public Sector Undertakings(PSUs) Private Sector Companies
Purchase of Voluntary RECs encouraged RECs offset carbon footprint and achieve
by Department of Public Enterprises Corporate Social Responsibility(CSR) goals
(DPE)
• Indian Oil, SAIL, BHEL, etc • MNC IT Companies
• Over 38% of total energy consumed in ITC
is from renewable sources through their
• POSOCO – First PSU to purchase own wind farms, though not through REC
Voluntary RECs purchase
Image credit - POSOCO Image credit - ITC
REC Mechanism 16

17. Overview
1. What are RPOs and RECs?
2. Why are RECs important?
3. Do RECs make financial sense?
4. Aren‟t RECs very challenging?
5. What are the takeaways?
REC Mechanism 17

18. Revenue streams – REC Vs Preferential Tariff
2012 2017 2022 2027 2032 2037
Case 1 - Pessimistic Scenario
APPC(Rs/kWh) 2.57 3.28 4.19 5.34 6.82 8.70
REC Price(Min)(Rs/kWh) 9.30 6.51 4.56 3.19 2.23 2.23
Total(Rs/kWh) 11.87 9.79 8.74 8.53 9.05 10.94
Case 2 - Optimistic Scenario
APPC(Rs/kWh) 2.57 3.28 4.19 5.34 6.82 8.70
REC Price(Max)(Rs/kWh) 12.00 8.40 5.88 4.12 2.88 2.88
Total(Rs/kWh) 14.57 11.68 10.07 9.46 9.70 11.58
Case 3 - Realistic Scenario
APPC(Rs/kWh) 2.57 3.28 4.19 5.34 6.82 8.70
REC Price(Average)(Rs/kWh) 10.65 7.46 5.22 3.65 2.56 2.56
Total(Rs/kWh) 13.22 10.74 9.40 9.00 9.38 11.26
Preferntial FiT 9.00 9.00 9.00 9.00 9.00 9.00
Assumptions
1. APPC for base year 2011– Rajasthan
2. Increase in APPC – 5% per year
3. REC price drop every 5 years – 30%
4. Total life time of the plant – 25 Years
REC Mechanism 18

19. Financial Analysis
IRR Scenario Analysis(Based on revenue/kWh)
45.0%
40.0%
35.0% 38.1%
30.0%
29.7%
IRR %
25.0%
20.0% 22.1%
15.0% 18.2%
16.1%
10.0% 14.0%
12.2%
10.6%
5.0%
0.0%
Fixed PPA Pessimistic Realistic Optimistic
Equity IRR Project IRR
Assumptions
1. Capital Cost – Rs. 8.5 Crore/MWp
2. D:E Ratio – 70:30
3. Interest rate – 10% per annum
4. Energy generation – 1.6 Million kWh/Year/MWp
5. Depreciation – Straight Line
REC Mechanism 19

20. Alternate scenario
• RECs becoming irrelevant after 2017
– Due to Grid parity
– Due to Regulatory issues
• Possible solution
• Vintage Based Multiplier(VBM) for RECs
• CERC deemed vintage RECs out of scope
REC Mechanism 20

21. Overview
1. What are RPOs and RECs?
2. Why are RECs important?
3. Do RECs make financial sense?
4. Aren’t RECs very challenging?
5. What are the takeaways?
REC Mechanism 21

22. Financial Woes of Discoms
Shunglu Committee's report to the Planning Commission(Dec. 2011)
Losses of all Discoms
200,000 179,000
180,000
160,000
140,000
Rs. Crores
120,000
100,000 82,000 Before subsidy
80,000 57,000 After subsidy
60,000
40,000 27,000
20,000
-
2009-10 2005-2010
Bottom 5 states account for 80% of total debt
1. Tamil Nadu (more than 50,000 Crore of accumulated debt)
2. Rajasthan (about 8,500 Crore)
3. Uttar Pradesh
Image credit – Economic Times
4. Haryana
5. Madhya Pradesh
REC Mechanism 22

23. RPO Enforcement and other challenges
• Lack of enough solar projects/RECs
– Punjab SERC ruling - Carry forward to next year
– Other possibility – Waiver of RPO for a year
• Control period
– 5 years whereas loan tenures are about 10 years
– Uncertainty of cash flows deter lenders
• APPC prices
– Need for consistency in APPC determination for every state
Others
• 3 Years required to switch Switch over to REC mechanism from preferential PPA
• 250 kWp minimum size(with exceptions) hindrance for growth of REC based rooftop
projects
REC Mechanism 23

24. Clouds clearing?
• Power tariffs hike - steps taken to improve financial health of
Discoms
State Average Tariff Increase (%)
Gujarat <5
Bihar, Mizoram, Manipur, Haryana, Chhattisgarh, >10-15
Maharashtra
Andhra Pradesh, Orissa, Bihar, Jharkhand, J&K, >15-25
Tripura
Nagaland, Delhi, Rajasthan Upto 30%
Kerala, Tamil Nadu More than 30%
• Increase in coal prices and shortages – increase in APPC price
REC Mechanism 24

25. Overview
1. What are RPOs and RECs?
2. Why are RECs important?
3. Do RECs make financial sense?
4. Aren‟t RECs very challenging?
5. What are the takeaways?
REC Mechanism 25

26. Takeaways..
1. Are RPOs important?
Yes. RPOs can lead to more than 25 GW of Solar
installations by 2020
2. Do RECs make financial sense?
Yes, if RPOs strictly enforced and modifications made to
the control period
3. Aren‟t RECs very challenging?
Yes, but the challenges are not insurmountable
REC Mechanism 26

27. Thank you
Please write your comments, suggestions or corrections if any, to
Madhavan Nampoothiri
Founder and Director
madhavan@re-solve.in
www.re-solve.in

28. Annexures
REC Mechanism 28

29. REC Vs. Preferential PPA
REC PPA projects
Open access Entry through competitive bidding
High but variable returns Average but fixed returns
Any capacity above 250kWp (with some exemptions – No restriction
eg:100kWp)
Allotment is assured Depends on competition
Variable tariff (REC floor+APPC) Fixed tariff
No cap on capacity Limited allotment
Can avail CDM benefits along with REC certificates. Can avail CDM benefits alone with the FiT
Voluntary entities can buy REC‟s for reducing their Not applicable here. (sold only to Utilities)
carbon footprint.
Captive Power Producer (CPP) by Renewable energy CPP cannot avail FiT, by PPA mechanism.
power generation are eligible for REC‟s*
REC Mechanism 29

30. State wise capacity details in MW(July 2012)
Bio-fuel Waste to
S.No. Type/State Wind Small Hydro Biomass Solar PV Total
cogeneration Energy
1 Gujarat 317 0 1 3 0 0 321
2 Karnataka 69 0 0 0 0 0 69
3 Madhya Pradesh 2 14 23 0 3 0 40
4 Maharashtra 482 28 47 107 10 2 676
5 Rajasthan 58 0 10 0 5 0 73
6 Tamil Nadu 648 0 129 0 1 0 778
7 Himachal Pradesh 0 48 0 0 0 0 48
8 Jammu and Kashmir(JKSPDCL) 0 18 0 0 0 0 18
9 Kerala 0 21 0 0 0 0 21
10 Uttarakhand 0 24 0 0 0 0 24
11 Chhattisgarh 0 0 101 3 0 0 104
12 Haryana 0 0 9 0 0 0 9
13 Uttar Pradesh 0 0 201 470 0 0 671
14 Punjab 0 0 0 46 0 0 46
Total 1576 152 520 629 18 2 2896
REC Mechanism 30

31. REC Pricing
Determination of floor price Determination of forbearance
price
• Reference APPC price is set to the • Reference APPC price is set to the
lowest APPC price offered nationally lowest APPC price offered nationally
• Lowest APPC price in 2011– Kerala • Lowest APPC price in 2011 – Kerala
with Rs. 1.99 per kWh with Rs. 1.99 per kWh
• Minimum reference price is then • CERC Solar tariff used as reference
calculated based on assumed O&M price, which under current regulation is
expenses, interest on loan and interest Rs. 15.39 per kWh
on capital • The difference between the reference
• The difference between the reference price and APPC price gives the
price and APPC price gives the floor forbearance price
price – i.e. Rs. 15.39 – Rs. 1.99 = Rs.
– i.e. Rs. 11.22 – Rs. 1.99 = Rs. 9.23 per 13.40 per kWh
kWh – Which translates to Rs. 13,400 per
– Rounded to Rs. 9300 per MWh (1 MWh (1 REC)
REC)
REC Mechanism 31

32. Factors Affecting REC Price – Status Post Present Control Period
• Capital cost of power plant
• Prevalent interest rates
• These factors affect the interest rates on loans, interest on working capital and loan
repayment used in floor price calculations
• Would have a higher impact on floor price rather than forbearance price
• APPC price does not escalate very quickly (assumption of 5% escalation or less is
reasonable)
• For Solar REC price to become irrelevant i.e. have 0 worth, the LCOE of solar would
have to be equal to the APPC price. This is not very likely to happen by 2017
REC Mechanism 32

33. The REC trading process
Source: CERC
REC Mechanism 33