Renewable energy: The undoing of RECs and ESCerts

Renewable energy certificates and energy saving certificates were meant to incentivise use of renewable power, but the lack of enforcement of targets for RECs and easy-to-meet targets for ESCerts defeated the vision

This will now be replaced by ‘multipliers’. RECs have been facing a number of operational issues, and some matters are being litigated.
This will now be replaced by ‘multipliers’. RECs have been facing a number of operational issues, and some matters are being litigated.

By Somit Dasgupta

In May, the Central Electricity Regulatory Commission (CERC) announced fresh regulations for renewable energy certificates (RECs), including doing away with the ceiling and floor price of RECs, making the certificates valid till redemption (as against 1,095 days earlier), allowing traders also to deal in RECs at mutually agreed prices (as against only electricity exchanges earlier), introducing the concept of ‘multiplier’ to deal with technologies that are at a rudimentary stages and/or are expensive, and allowing obligated entities to hold RECs beyond their Renewable Purchase Obligation (RPO).

RECs were introduced in 2011 to help resource-deficit states to meet their RPO. States having less renewable resource potential can buy RECs to the extent they fall short of their RPO. Each generator is issued one REC after generating 1Mwh of renewable power and, till now, there were separate RECs for solar and non-solar power. This will now be replaced by ‘multipliers’. RECs have been facing a number of operational issues, and some matters are being litigated.

We are examining only solar RECs in this piece. The accompanying graphic indicates that RECs have been a buyers’ market, and, year after year, ‘sell’ bids outnumber the ‘buy’ bids. Some parity between ‘sell’ and ‘buy’ bids seems to have set in from 2020, though it is too early to say whether this will continue.

This has led to very low REC price; from a high of Rs 12.2 per unit (2013) it fell to Rs 1 per unit (2017). The primary reason is RPO targets are not enforced by the regulatory commissions. The report of the Standing Committee for the ministry of new and renewable energy (2020-21) mentions that in 2019-20, about 19 states met less than 50% of their RPO and only four achieved more than 100%. Given the low price of RECs vis-à-vis the lowest solar auction price for the year, some of the obligated entities may actually prefer to buy RECs instead of renewable power. This, in a way, hampers the setting up of more renewable generating capacity. The government is contemplating amending the Act to impose stringent penalties if RPOs are not complied with, to the extent of a fine of `1 for every unit not fulfilled. As of now, the Act does not mention anything about penalty.

This brings us to the energy saving certificates (ESCerts), arising from the Perform, Achieve and Trade (PAT) scheme implemented by the Bureau of Energy Efficiency. Under PAT, large, energy-intensive industries are given targets for reduction of specific energy consumption, based on a three-year cycle. Targets have been laid down for seven PAT cycles beginning 2012. Any unit which saves more than its target is issued a certificate, and each certificate represents 1 million tonne of oil equivalent (mtoe). All units which fall short of the target have to buy the ESCerts from the exchange. Data is available for PAT 1 and PAT 2, and the targets have been over-achieved by about 29% in the first and about 16% in the second cycles.

Critics say that the targets were not ambitious. Consequently, there were more sellers than buyers of ESCerts, giving rise to a buyers’ market. The price of an ESCert fell from Rs 1,200 to Rs 200. The divergence between the sellers and buyers of ESCerts, however, varied across sectors. Per PAT 1 data, this was the highest for paper & pulp (only sellers), but was more balanced for chlor-alkali and thermal power, meaning more realistic targets in these two industries. Proponents believe the difference between the number of buyers and sellers has come down in PAT 2 vis-à-vis PAT 1, implying low-hanging fruits of PAT 1 have been consumed and that things are going to get tougher in the subsequent cycles. In PAT 1, for every buyer, there were 2.7 sellers; in PAT 2, this fell to 1.5 sellers for every buyer. The cost of the certificates has to be linked with the marginal cost the industry must pay to move to a more energy-efficient technology. If the price of ESCerts is low, units not meeting their targets will be happy to keep buying ESCerts, defeating the entire purpose.

In conclusion, the two well-intentioned schemes could not really achieve their potential. While the REC lost out because RPO were not enforced, ESCerts became ineffective due to the fact that the targets laid down were not challenging enough.

(The author is Senior Visiting Fellow, ICRIER, and former member (Economic & Commercial), CEA)

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