rec mechanism v1

8/2/2019 REC Mechanism v1

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REC Mechanism in Indiafor Solar Power Development

16th March 2012


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Background Renewable Energy being costlier than conventional energy, support

required from state and central government and state utilities in terms ofpreferential tariffs, capital subsidy and other fiscal benefits to facilitate RE

development

Renewable power potential in India limited to a few states. Challenges to

enforce Renewable Purchase Obligation to the states where there islimited or no RE potential

REC mechanism launched in Dec 2010 to address this anomaly and

provide a mechanism to facilitate imposition of uniform RPOs across

states

REC mechanism devised to enable uniform imposition ofRPOs across states


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REC Mechanism - Basics

Under REC mechanism, RE power generated from the plant has two

componentso Power (Black Component) To be sold to state Discom at non-

preferential tariff (not exceeding APPC) or through merchant route

o REC (Green Component) To be sold on power exchange (IEXand PXIL). Floor and Forbearance prices defined for trading to limit

risks of RE developers and lenders

Obligated Entities (State Discoms or Captive and Open AccessConsumers) can meet their RPOs through

o Direct purchase of RE (Green) power OR

o Purchase of RECs

o Setting-up their own RE Capacity


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REC Mechanism - Basics

National Load Dispatch Center (NLDC) is the nodal agency forregistration of projects and issuance of RECs

SERCs mandated to nominate a nodal agency for RECs in the state (20

states already nominated the nodal agency till date)

Project developer required to get the project accredited through the state

agency

The process for accreditation and registration made simple and web

enabled to facilitate fast development of projects under the mechanism

REC mechanism was an instant hit. Within 15 months oflaunch 418 RE projects with aggregate capacity of 2478 MW

got accredited under REC


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REC Pricing Framework As per CERCs REC regulation 2010, CERC would determine Floor and

Forbearance price for RECs within which the RECs would be traded inexchanges

CERC framed the methodology for calculation of Solar REC floor and

forbearance price :

o Solar REC Floor Price: Minimum Viable cost of solar power(covering O&M, interest and debt repayment) Minimum APPC

(Average Power Purchase Cost)

o Forbearance Price: Solar PV Tariff (As per CERC Regulations)

Minimum APPC

The price range for solar REC was determined as Rs 9.3 13.4/kwh for

the period FY 13-FY17

REC pricing methodology ensures commensurate returns todevelopers and protects lenders from market uncertainties


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RECs The Price Advantage

While preferential tariff PPA for a solar developer is possible only betweenRs 7 8/kwh as per the latest bidding trends, REC mechanism would fetch

anywhere between Rs 9 -11/kwh on a levelized basis for the 25 year project

life even if we assume that RECs clear at floor price

Returns under REC mechanism will be higher For next five

years window & thereafter too


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REC Price Advantage Key Drivers

REC price range is already set for next five years giving excess revenue to

developer for initial years

The power sale price at APPC is expected to increase every year due to

increasing cost of conventional power and high marginal cost of power in the

grid

REC Floor and forbearance Price are determined based on CERC norms. In adecreasing capital cost scenario, the capital cost used to determine the REC

price would lag and hence will be less than the actual costs at the time of

installation of plant.

The REC price window would be set for at least 5 years in advance. In a

decreasing capital cost scenario, this will cause REC price to be higher than

preferential tariff especially during later part of five year window (As is currently

the case)


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The Opportunity As per JNNSM, the National Tariff Policy would mandate SERCs to fix minimum

solar power purchase of 3% by year 2022. This translates into installed solarcapacity of over 34000 MW as per CEA estimates (18th EPS)

The capacities to be developed under JNNSM and state policies would not be

sufficient to satisfy RPO requirements

Captive power users and Open Access consumers would be another major

segment for solar REC purchase, as they would find it unviable to purchase

solar power

Attractive Solar REC price coupled with the escalating revenue from power sale

provide returns commensurate to risk for the investors. Lenders and project

developers would find themselves more and more comfortable with REC

mechanism in coming years

Significant solar capacity will be developed under RECmechanism in coming years


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Challenges & Risks

Though the mechanism looks very interesting and has witnessed highinterest from non-solar RE developers, the response of solar developers

has not been encouraging

The major reason for this lukewarm response is the challenge in achievingdebt funding for REC based projects.

Debt funding remains the biggest challenge for solardevelopment under REC


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REC Perceived Risks


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REC Price Variability

Argument: REC prices are determined only till FY 17. Considering the

decreasing cost of solar power, the prices may fall significantly post FY 17

Mitigation Justification:

True that solar REC price after 2017 would reduce substantially. Our analysis

predicts a floor price range of Rs 4-5/kwh for the solar REC during FY 18-22.

Post 2022, even if the grid parity is achieved, there would be some value (Rs 1

3/kwh) that a solar REC will fetch

Despite price variability, the financial viability for the project is not at risk as

both equity payback and the debt servicing can be achieved during the initial

10 years only

Upcoming amendment in REC regulations (CERC) will introducevintage multiplier concept. Under this, the developer setting up

solar project earlier will get a higher multiple of RECs/kwh ofgeneration. This would further mitigate REC price variability risks


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REC Marketability (1/3)Argument: Whether state regulatory commissions would specify increasingtrajectory of solar RPOs as per the JNNSM?


Most of the SERCs (31 states and UTs) have already specified the REC and

RPO regulations in their states and 21 states and UTs have specified solar

RPOs in excess of 0.25% for FY 2011-12

Cabinet has already approved amendment in National Tariff Policy mandating

SERCs to impose solar RPO starting from FY 13 and a target of 3% by FY 2022

Crisil Infrastructure Advisory conducted study on impact of RPOson utilities financial health. The study is now complete and is in

public domain. Impact not found significant


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Argument: Obligated entities would prefer buying solar power and not RECs. Anentity could buy solar power @ Rs 8/kwh or bundled solar power @ Rs 5/kwh.Buying solar RECs (@ min 9.3 Rs/kwh) would be the last resort for the obligatedentities


The upcoming solar generation capacity in the country is not sufficient to fulfill

RPOs of obligated entities. Most utilities would need to buy RECs to fulfill their

obligations

Open access and captive consumers would find it unviable to procure solar or

bundled solar power. It would be prudent for them to buy RECs, even if costlier

There will be a large demand for solar RECs even if solarpower remains a cheaper option

REC Marketability (2/3)


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Argument: Whether SERCs would be able to enforce the RPO compliance targets

on obligated entities?

Mitigation Justification:SERCs have specified following consequences in caseof default:

Obligated entity will deposit an amount based on RPO shortfall and REC

forbearance price with the state agency. The state agency will buy RECs onbehalf of defaulting entities

Noncompliance to RPO obligations will be considered as default of Electricity

Act and action would be taken u/s 142. Fining the head of the defaulting

company.. Panel provisions to be confirmed

Monetary penalties will not be allowed to pass through in ARR

The way non solar RECs are getting traded in the market and theprices are hovering near forbearance price, instills confidencethat obligated entities expect strong enforcement against non-

fulfillment of RPOs

REC Marketability (3/3)


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Long Term Tie up for Power SaleArgument:

Most of the states signing PPA under REC mechanism are not signing on long-

term

The solar developer may not be able to achieve expected escalation in the

power price for the project life


The state utilities always need day power and would not relinquish PPA at

Average Purchase Price

The power produced from solar project being day power, enjoys better

marketability and higher price in power markets. Also power can be predicted

and scheduled with greater accuracy and hence can compete in the Power

market with conventional power

Solar power is competitive in market. Dependence on statePPA is minimal


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REC Shelf life

Argument:

RECs are currently valid for only 1 year. This will increase selling pressure on REdevelopers


CERC is considering to increase the shelf life in the upcoming amendment of RECregulations


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Key investment drivers in REC

While it is not possible for an RE developer under a long term preferential tariff

PPA to migrate to REC mechanism; there is no such restriction on an REC

based power generator to migrate to preferential tariff mechanism at any point in

time. Hence, an REC based generator may optimize its risk return tradeoff at

any time after taking advantage of the initial five year tariff advantage

After FY16 , the project choose to move to PPA route or APPC & REC route

based on the pricing available

Higher REC prices in the initial years support a project pay-back in 5-6 years

only

Solar project under REC can anytime participate in biddingand migrate to preferential tariff PPA


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rec mechanism v1

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