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.

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.

The authors

Executive summary
1 INR figures converted to USD in this document at an exchange rate of USD 1 = INR 75
2 From a generation source perspective, RE in India has been traditionally defined by regulators as encompassing solar, wind, biomass, small hydro, and co-generation, with large hydro (>25MW) only recently being included in the definition, but still accounted for separately for installed capacity. Generation sources other than solar & wind comprise a very small portion of installed RE capacity.
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.
Moreover, solar, which forms the centrepiece of India’s renewable energy (RE) ambitions, remains vastly underrepresented in terms of REC issuances. To date, only 16 per cent of RECs issued to power generators were against solar projects; wind and other renewable energy projects accounted for 84 per cent of REC issuances to power generators.

RECs play an important supporting and balancing role in India’s energy markets. RECs worth INR 9266 crore have been sold on India’s energy exchanges.

The disruption caused by COVID-19 and the resulting economic shutdowns in 2020 appear to have made RE a priority concern for policymakers, investors, and consumers alike. However, adapting RECs to fundamental changes in the RE ecosystem is more nuanced than merely boosting demand. Muted demand is certainly an issue, but there are challenges on the supply side as well: the current supply of RECs would be just a fraction of what would be required if the full demand potential of RECs was realised Incentivising RPO compliance and REC purchases, creating regulatory demand for RECs beyond RPO compliance, and promoting voluntary purchasing of RECs as a way for corporates to go green are some demand-side measures that may be considered. At the same time, on
the supply side, removing out-of-date conditionalities for REC issuance and a more flexible market design can make RECs more appealing to stakeholders.

Introduction
2020 will forever be remembered as the year of the pandemic. However, it was also the year that the energy transition came into its own. Clean energy managed to decouple itself from traditional fossil fuel-based generation sources in 2020. In the process, it became a mainstream energy option in the minds of investors. All this happened in the backdrop of severe economic disruption at a global level.

The trading of RECs in India’s two power exchanges, Indian Energy Exchange (IEX) and Power Exchange of India Limited (PXIL), was suspended in July 2020 because of a legal contestation against a Central Electricity Regulatory Commission (CERC) order that removed floor prices for both solar and non-solar RECs (CERC 2020). Although the Appellate Tribunal for Electricity (APTEL) initially envisaged a four-week suspension in trading, trading had not resumed as of February 2021 due to continuing arbitration. While solar REC trading was suspended in 2017 following a similarly contentious.

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).

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.

In the meanwhile, the working group constituted by the Forum of Regulators (FoR) in 2008, to evaluate
and address policy issues concerning renewables, reiterated the need to develop a facilitative framework
like the REC mechanism to address challenges related to connectivity and inter-state exchange of power. It observed that such a mechanism can go a long way in enabling states to meet their RPO obligations while also encouraging developers to set up generation facilities at optimal locations (FoR 2008). As a result, regulations specifically pertaining to RECs were eventually notified in January 2010. The instruments themselves were officially launched in November 2010. Their trading on power exchanges commenced a few months later in March 2011.

RECs today
Each REC issued corresponds to 1 MWh, or 1,000 kWh, of electricity injected into the grid. Depending on the

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 FigureThe 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 5 Value traded estimated by CEEW-CEF by multiplying the average monthly market clearing price for solar and non-solar RECs with the volume cleared in that month. 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.

Not enough demand or not enough supply?
RPO under-compliant states have a choice of achieving compliance by either paying a penalty or purchasing RECs. While a stricter penalty mechanism has been proposed to the draft Electricity (Amendment) Bill, 2020, the prevailing system has not been proven to be robust, as highlighted in Boxes 1 and 2.

Under the current regime, failure to meet the RPO target attracts a penalty as per the direction of the relevant state electricity regulatory commissions (SERC). Most state regulations link the penalty and payment of regulatory charges to the forbearance price7 of RECs. But they also grant discretionary powers to SERCs to specify what charges are to be levied for RPO non-compliance (Joshi and Agarwal 2018). These discretionary powers
have led to variations in penalty payments across states. In many times, these powers have also led to obligated entities being granted permission to carry forward RPOs despite the availability of RECs in the market (Chaturvedi 2015).

The consequences of the leeway accorded to discoms on REC demand comes across clearly in Figure 4. The aggregate shortfall for FY20 for the 27 RPO undercompliant states, if met through REC purchases alone, would have resulted in a demand for 72.5 million RECs, while the actual RECs purchased by discoms in FY20 is only 5.3 million. 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.

Bringing RECs back on track
RECs were launched a decade ago. Over the years, several amendments have been made to the regulations that govern them. These amendments have tended to focus on extending REC validity, lowering their floor price, and bringing more entities into the REC fold, such as discoms as issuers and RE generators as self-consumers. With this context in mind, we propose the following seven measures to reboot RECs.