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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?
Mitigation Justification:
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
Mitigation Justification:
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
Mitigation Justification:
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
Mitigation Justification:
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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thankyou
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