CEEW Centre for Energy Finance
The CEEW Centre for Energy Finance (CEEW-CEF) is an initiative of the Council on Energy, Environment and Water (CEEW), one of Asia’s leading think tanks. CEEW-CEF acts as a non-partisan market observer and driver that monitors, develops, tests, and deploys financial solutions to advance the energy transition. It aims to help deepen markets, increase transparency, and attract capital in clean energy sectors in emerging economies. It achieves this by comprehensively tracking, interpreting, and responding to developments in the energy markets while also bridging gaps between governments, industry, and financiers.

The need for enabling an efficient and timely energy transition is growing in emerging economies. In response, CEEWCEF focuses on developing fit-for-purpose market-responsive financial products. A robust energy transition requires deep markets, which need continuous monitoring, support, and course correction. By designing financial solutions and providing near-real-time analysis of current and emerging clean energy markets, CEEW-CEF builds confidence and coherence among key actors, reduces information asymmetry, and bridges the financial gap.

Financing the energy transition in emerging economies
The clean energy transition is gaining momentum across the world with cumulative renewable energy installation crossing 1000 GW in 2018. Several emerging markets see renewable energy markets of significant scale. However, these markets are young and prone to challenges that could inhibit or reverse the recent advances. Emerging economies lack well-functioning markets. That makes investment in clean technologies risky and prevents capital from flowing from where it is in surplus to regions where it is most needed. CEEW-CEF addresses the urgent need for increasing the flow and affordability of private capital into clean energy markets in emerging economies.

CEEW-CEF’s focus: analysis and solutions
CEEW-CEF has a twin focus on markets and solutions. CEEW-CEF’s market analysis covers energy transition–related sectors on both the supply side (solar, wind, energy storage) and demand-side (electric vehicles, distributed renewable energy applications). It creates open-source data sets, salient and timely analysis, and market trend studies. CEEW-CEF’s solution-focused work will enable the flow of new and more affordable capital into clean energy sectors. These solutions will be designed to address specific market risks that block capital flows. These will include designing, implementation support, and evaluation of policy instruments, insurance products, and incubation funds.

Renewable energy certificates (RECs) are market-based instruments that allow the unbundling of green power into two products – a green attribute that can be traded in the form of certificates and the commodity itself, i.e., electricity (CERC 2010). Since their launch a decade
ago, RECs worth an aggregate INR 9,266 crore (USD 1.24 billion1 ) have been sold on India’s two power exchanges.

RECs play an important supporting and balancing role in India’s energy markets, but insufficient demand has plagued them to varying degrees. Although down from a peak of 18.6 million in October 2017, the December 2020 closing balance of 5.1 million unutilised RECs still
points to a seven per cent shortfall in demand. Although 99 per cent of REC purchases on power exchanges are done to meet renewable purchase obligations (RPOs), organisations in India, including state discoms, are far from being RPO compliant. In addition, purchases for voluntary reasons are negligible.

The private sector responded enthusiastically. Tenders for new capacity were oversubscribed and record-setting low tariff levels were achieved both during the lockdown (Mint 2020a) as well as afterwards, when the economy gradually opened up (Mint 2020b). Investors also voted
with their wallets, driving up the share prices of RE developers (CEEW-CEF 2020), mirroring a trend seen globally. At the global level, 2020 also saw green bonds cross the USD 1 trillion “cumulative issuances since inception” milestone (BloombergNEF 2020).

floor price reduction (Prateek 2018), the current trading suspension has carried on for much longer. RECs faced other bumps on the road in 2020. Take the revocation of 3.6 million RECs in August, the first such instance since their launch a decade ago. It is important to note that these RECs were not revoked because they had expired, but rather because it was determined that they had been erroneously issued in the first place and the revocation was undertaken to rectify the error (APTEL 2020). More generally, and to allay fears of inventory loss, CERC exercises its power under clause 15 of the REC regulations and extended the validity of RECs
from time to time. For example, recently the validity of RECs which expired or were due to expire between April 01, 2020, and September 30, 2020, were extended up to October 31, 2020 (CERC 2020).

As a result, to date, there has never been a revocation of RECs due to lifespan expiry. However, this should not be misconstrued as an indication of robust demand for RECs. This is apparent from the 5.1 million RECs that remained unsold and unconsumed (closing balance) as of December 2020 as shown in Figure 1. Insufficient demand, as represented by the quantum of unconsumed RECs in the closing balance, has plagued this instrument to varying degrees ever since its inception. Although down from a peak of 18.6 million in October 2017, the December 2020 closing balance still points to a 7 per cent shortfall in demand.

Origin of RECs
RECs were conceived as instruments that would allow the separation of the green attributes of RE from the underlying electricity generated. They act as a bridge between those generating RE and those not in a position to procure sufficient amounts of RE even though they may wish to do so for either voluntary or compliance reasons. Their origin can be traced to regulatory evolution, which commenced a little over 15 years ago, and which had a wide-ranging impact on the Indian power sector.

Each REC issued corresponds to 1 MWh, or 1,000 kWh, of electricity injected into the grid. Depending on the generating source, there are two types of RECs –solar and non-solar. Power System Operation Corporation (POSOCO) is the REC issuing authority, and as depicted in Figure 2, RECs may be issued to two categories of eligible entities, discoms and RE generators, each with some qualifications. Once issued, sale on the exchange and self-consumption are the only two ways they may be put to use. Further, RECs sold on the exchange must be priced in between the specified floor and forbearance (ceiling) prices, both of which have undergone several downward revisions over the years.

The four key takeaways that follow from Figure 2 are summarised below

An INR 9,266 crore (USD 1.24 billion) market

An aggregate of 59.5 million RECs worth INR 9,266 crore5 (USD 1.24 billion) have been sold on the two power exchanges in the time since they were launched in 2010. Breaking the volume into respective financial years reveals a general upward trend as shown in Figure 3 The sharp peak in volumes recorded in FY18 was a result of buyers taking advantage of a reduction in the REC floor price. The decline in volumes post-FY18 was perhaps inevitable given the significant quantum that was cleared in FY18. However, reduced as they were, the FY19 and FY20 numbers remained consistent with the linear trend line for REC volume growth. The dismal volumes recorded till date in FY21 are of course an altogether different matter, being the result of the ongoing suspension of REC trading, which has carried on for more than six months now.

It is hoped that stricter penalties envisaged in the draft Electricity (Amendment) Bill, 2020, will push discoms towards RPO compliance. But to what extent is it possible for them to do so via REC purchase? The short answer is that there just is not enough supply in the market for that to happen. As Figure 4 demonstrates, bridging the FY20 RPO shortfall of 27 RPO undercompliant states alone would exceed all the RECs issued in the previous decade.

RECs and international relevance: CERs

Market based mechanisms and instruments are not unique to India, and 2021 is poised to be a pivotal year in charting the way forward for certain instruments that straddle the international arena. Specifically, a broad consensus exists on some key issues that need addressing at the 26th United Nations Climate Change Conference (COP26) which is slated to be held in Glasgow in November 2021. Among them is Article 6 of the Paris Agreement, which deals with voluntary
international cooperation in the implementation of nationally determined contributions (NDCs), including via market mechanisms that mitigate greenhouse gas emissions.

While RECs were never meant to be mainstays of the energy transition, they remain important supporting instruments that act as a balancing force in India’s energy transition. And with the aggregate value of RECs traded on power exchanges estimated to be INR 9,266 crore (USD 1.24 billion), their scale is not trivial. Moreover, India’s RE ambitions for the next decade far exceed anything seen or even thought of in the previous one. As such, the stakes are that much higher for even supporting instruments such as RECs. Under the circumstances, positioning them to reflect the fundamental changes that the RE ecosystem has undergone in the past decade, and preparing them for the even more dramatic changes that lie ahead, is not
just desirable, but imperative.

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