India’s REC Inventory Almost Exhausted, What’s Next?

The inventory of non-solar RECs issued before April 1, 2017, have also been wiped out

thumbnail

The month of June 2019 witnessed the near exhaustion of the entire renewable energy certificate (REC) inventory on both the energy exchanges, namely the Indian Energy Exchange (IEX) and the Power Exchange India Limited (PXIL).

In June, a total of 123,768 solar RECs were traded at the IEX and PXIL for ₹2,000 (~$28.78)/REC. The price at which solar RECs were traded remained constant compared to May 2019.

The number of solar RECs sold has deteriorated compared to May 2019 in which 187,179 solar RECs were traded, but this has happened due to reduced inventory. The number of buy bids in June exceeded the sale bids by a huge margin.

India’s REC Inventory Almost Exhausted, What’s Next?

As of June 26, 2019, only 48,396 solar RECs remain to be traded on IEX and PXIL together unless new additions are made to the existing inventory.

The urgency of the entities to buy the RECs is evident from the fact that 125,163 non-solar RECs issued before April 01, 2017, was traded at the IEX and PXIL combined for ₹1,500 (~$21.58)/REC. Now, only 10,886 non-solar RECs issued before April 01, 2017, remain in the inventory.

India’s REC Inventory Almost Exhausted, What’s Next?

In June 2019, a total of 449,367 non-solar RECs issued after April 01, 2017, were traded on the IEX and PXIL. On the IEX, non-solar RECs traded at ₹1,600 (~$23.02)/REC and on the PXIL at ₹1,555 (~$22.37)/REC. Compared to May 2019, there is a decrease in trading numbers; owed only to low inventory, but the price at which the RECs traded has increased.

The end of the current REC trading session poses a grave question for entities who are vying to fulfill their respective renewable purchase obligations and are on the growth trajectory of the renewable energy sector in India. Mercom has repeatedly pointed out that the inventories are tightening, and this is a matter of concern. More renewable energy projects need to be brought into the ambit of REC mechanism for the sector to flourish.

Market research has found that many entities in India are suffering as a result of low inventories. The REC prices have gone up, and there are not enough RECs to fulfill renewable purchase obligations (RPOs); consequently, they have to buy costly RECs yet incur penalties as their RPO remains unfulfilled.

Few executives at such entities have even raised questions on the REC mechanism. When contacted, a market source informed, “So far, the REC mechanism is the only mechanism that has been a driver of renewables in India. Yes, there are issues with it, but that doesn’t mean we need to scrap it completely.”

Further elaborating, the source added, “Policies haven’t been fine-tuned with market signals. So far, we have only taken the long-term PPA route seriously for the growth of renewable energy sources, and this has left very little to no scope for market intervention. There are evacuation issues, infrastructure is not available, and the cost increases even if the bid tariff actually is below ₹3 (~$0.04320)/kWh. In some case, thermal has to be curtailed adding to the variable cost, and in other cases, renewables itself must be curtailed.”

“We must add more projects to the REC mechanism at the time as it is the only active framework. It requires fine-tuning. Projects must be allowed to be set up without long-term PPAs to avail open access route, as this will bring more competition and better quality of projects. Withdrawing REC mechanism will not be correct, issues must be sorted out, and it must be more aligned with the market,” added the source.

Recently, the  Central Electricity Regulatory Commission (CERC) ordered the IEX to give wide publicity to GTAM contracts by uploading it on its website and invite comments from all stakeholders and the public.

When asked if a more cost-effective market mechanism can be developed where entities do not have to pay separately for certificates (RECs) and power (renewable energy), the source added, “Yes, the suggestion of Green Term Ahead Market (GTAM) is one such mechanism where both RPO and renewable energy needs can be met at competitive rates unlike now, where the entities are made to buy both RECs and energy to meet their RPO.”

When asked about the issues faced by the REC mechanism, another market expert stated, “For old RECs, the sellers may be provided with multipliers, and this will result in enough RECs for trade. There’s a real shortage in solar REC segment.”

Before 2017, the entities weren’t buying RECs even though the REC mechanism had been in existence for a few years. Since 2017, there has been a huge surge due to stricter norms regarding RPO compliance. As all the entities started buying late, the gap, which is evident now, took time to attain its current position and scale, and be noticed. If all the entities had been buying since the inception, this demand-supply gap would have been checked. Formation of RPO compliance cell has strengthened the REC mechanism, added the expert.

When asked if there’s any other mechanism that can be developed to provide entities a platform to attain RPO compliance, the expert said, “The IEX is trying to do such a thing. It is still under consideration, but apart from that, we do not have any other market platform through exchanges. Long-term PPA is the way most distribution companies go.”

Image credit: ReNew Power

RELATED POSTS

Get the most relevant India solar and clean energy news.

RECENT POSTS