By Rohit Bajaj
India, on the path to becoming a $5 trillion economy, is facing a soaring demand for electricity fueled by robust domestic demand, industrialisation, and urbanisation. To meet this surging demand and align with its commitment to achieve net-zero carbon emissions by 2070 and source 50% of its annual power from non-fossil fuels, significant decarbonisation efforts are underway. Presently, about 180 GW, constituting 42% of the country’s total installed power capacity, is derived from renewable energy sources. Further, to promote renewable energy sources, the Central and State Electricity Regulators have mandated the Obligated Consumers (distribution companies, open access consumers, and captive consumers) to fulfill a fixed percentage of their overall procurement through green energy sources, in the form of Renewable Purchase Obligations (RPOs).
To address these challenges, the Central Electricity Regulatory Commission (CERC) introduced Renewable Energy Certificates (RECs) in 2010, which is a robust and transparent ecosystem for trading green energy certificates. These market-based instruments facilitate trading between obligated entities and renewable energy generators through power exchanges. The REC market is aiming to bolster renewable capacity by creating a nationwide marketplace that supports producers in realising their green energy investments and obligated entities in fulfilling their obligations.
Initially, RECs were divided into two categories: solar and non-solar, based on the renewable source used for electricity generation. They were traded at the floor and forbearance prices on power exchanges wherein the prices were revised from time to time and most of the time the REC certificates were traded at the floor price due to surplus inventory.
New CERC regulations, effective from December 5, 2022, have eliminated the concept of a floor price. Following these changes, REC prices experienced a 62% fall from Rupees 1,000 per REC to Rupees 380 per REC.
Now, with the CERC Order dated October 8, 2023, the categorisation of REC: solar and non-solar based on the renewable source has been done away with. Consequently, REC categorisation no longer exists, making it simpler for obligated entities to fulfil their obligations with RECs regardless of their respective SERCs’ alignment.
The REC market has transformed with floor and forbearance price removal. The new regulations favour a market-driven approach with enhanced inventory and transparency. Despite trading also being allowed in Bilateral Mode, the market is witnessing major trades happening on power exchanges only. In July and August 2023, power exchanges saw 7.25 lakh and 3.33 lakh RECs trades, respectively, while bilateral trades were in the range of 10- 15% of total REC trades.
Power exchanges have now initiated fortnightly trades, instead of monthly trades, thereby providing more sessions to obligated entities to fulfill their obligations. Further, exchanges provide closed auction as price discovery mechanism wherein uniform price is discovered and applied to all participants. With its efficient and competitive price discovery process and transparency, power exchanges maintain their status as the most preferred platform for REC trading.
The ministry of power and regulatory authorities are enhancing efforts to ensure compliance with obligations by enforcing stricter penalties. In addition to the existing penalties outlined by regulatory authorities, the ministry of power, in accordance with Section 26(3) of the Energy Conservation Act, has introduced significant penalties, which may reach up to double the cost of each metric tonne of oil equivalent as applicable.
With the introduction of these path-breaking reforms, there will be a substantial increase in liquidity which will boost price discovery, aligning with India’s renewable energy and decarbonisation goals. Uniformity of prices and transparency in price discovery presents an opportune moment for obligated consumers, including state distribution companies, open-access and captive buyers, to actively participate in the trading platform and meet their RPOs at a much cheaper price. This proactive approach not only aids in environmental sustainability but also safeguards against potential penalties associated with non-compliance. Further, it is a great opportunity for voluntary consumers to procure green certificates at a lower price and achieve their decarbonisation and net-zero emissions targets.
(The author is Executive director business development, strategy and regulatory affairs, Indian Energy Exchange)