REC could boost investment in renewable energy, says Fitch

Written by fe Bureau | New Delhi | Updated: Sep 16 2010, 04:05am hrs
Indias move to introduce renewable energy certificate (REC) scheme should help improve cost economics of renewable energy projects and attract investments to the sector. However, there are still many regulatory and institutional challenges to be tackled to make the scheme successful, says the international credit ratings agency Fitch Ratings.

The Central Electricity Regulatory Commission (CERC) has laid out REC norms in a bid to promote green energy. Under the scheme, an REC is issued to renewable power generators for each 1 mw of electricity generated. Generators can sell the certificate in the market and generate additional revenue. Discoms failing to meet their renewable energy target can buy RECs as an option.

The Indian government is promoting the addition of renewable energy capacity via the introduction of an REC scheme. The proposal should benefit the sector by improving cost economics and enhancing credit quality, which should, in turn, attract new capital, Fitch says in its special report on the Indian renewable energy released on Tuesday.

However, developing a successful REC scheme would be a challenge, given the constraints in the Indian power market like high commercial losses of state electricity boards and their weak financial health.

India has envisaged the target of meeting 15% of its electricity requirement from renewable sources by 2020 under the national action plan on climate change. But cost of generating electricity from renewable sources tends to be higher compared with fossil fuel-generated electricity.

In case, discoms are not all allowed to pass through high cost of renewable energy to consumers, their financial health might further weaken.

Further, there is risk that flexibility envisaged for current renewable generators to opt out of the scheme and instead sell power at a preferential rate may lead to inadequate supply of RECs, making the market volatile.