Viability of the REC mechanism for solar projects in India

Viability of the REC mechanism for solar projects in India

Akhilesh Magal heads the Project Development team as a Senior Consultant at BRIDGE TO INDIA. He will be speaking on ‘Viability of REC projects in India’ at REaction2012 on 26th July 2012 at the Chennai Trade Centre. This blog looks at the growing relevance of REC mechanisms in India.

India is facing an acute energy deficit of 10-13%[1]. Industrial and commercial electricity prices have risen by nearly 11% p.a. from 2000 to 2010 while agricultural electricity prices have remained more or less constant as a result of cross-subsidies[2]. Rising grid electricity prices, frequent power interruption, costly diesel backup electricity, falling costs of solar energy and abundance of solar resource have made solar PV an attractive technological choice for industrial and commercial consumers.

  • Solar PV is becoming an attractive choice for industrial and commercial consumers due to high prices of conventional power
  • State regulators issue mandatory consumption quotas (Renewable Purchase Obligations) for solar energy which can be met by buying Renewable Energy Certificates (RECs)
  • Currently, the demand for RECs is much greater than the supply and our analysis suggests that therein lies an innovative market opportunity for industrial and commercial consumers looking to reduce their expenditure on power

The electricity prices in India vary significantly across different consumer groups. The electricity price paid by industrial and commercial consumers is much higher than that paid by residential and agricultural consumers. There is a fundamental upward movement in power prices as such, driven by the energy deficit and globally rising costs for fossil fuels. In addition, there are two specific factors that increase the power prices for commercial and industrial consumers. Rising grid electricity prices, frequent power interruption, costly diesel backup electricity, falling costs of solar energy and abundance of solar resource have made solar PV an attractive technological choice for industrial and commercial consumers. However, profitability continues to be a concern in smaller systems.

Our analysis suggests that the REC mechanism can provide a significant upswing to new and innovative business models.  Apart from the sale of electricity, a solar energy producer’s revenues are bolstered by the sale of solar RECs on the Indian Energy Exchange (IEX). The trading of REC in India has commenced in February 2011 and has shown early signs of promise. The total number of REC traded as of April 2012 was 105,844[3]. Meanwhile, the supply deficit for REC stood at 55% during the trading session for the month of April 2012, emphasizing that many obligated entities consider REC as a viable option to meet their renewable purchase obligations (RPO) and are participating in the trading. This demand significantly exceeds supply. There was no solar REC traded during this period, due to non-availability of solar REC generating projects. This is expected to change with many solar projects in India adopting the REC generation mechanism in the next six to eight months.

 


[1] CERC. Annual Report. 2011

[2] Government of India – Power Finance Corporation Ltd. Annual Report. 2011

[3] Indian Energy Exchange. REC Data. 2011

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EAI is organising REaction2012, a summit focussing on future technologies, business models and business opportunities in renewable energy. Senior Consultant, Akhilesh Magal will be speaking on ‘Viability of REC projects in India’ for his presentation on July 26th 2012 at 4:45 pm in order to provide an account on the development of REC trading in the Indian market and its future prospects.

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