Changing Lanes – India’s renewed Interest in Renewable Energy

Pramod Kumar Singh & Yasir Altaf

“A thing long expected takes the form of the unexpected when at last it comes” – Mark
Twain.
When all the developing countries were squabbling for equitable distribution of emission
rights, India’s revelation of voluntary cut of 20-25 percent in emission intensity by 2020
compared to 2005 levels came as a surprise. India has always been persistent in not
accepting any emission reduction targets at the backdrop of not compromising with its
economic development. Even if the declaration is not binding, additional cost impacts to
achieve this cannot be sidelined. Announcement of National Action Plan on Climate
Change (NAPCC), having eight comprehensive missions, forms the basis of domestic
actions to deal with the climate change. Development of Renewable Energy (RE) is at the
forefront of this plan as it addresses the twin objectives of reducing emissions and
ensuring energy security.
RE growth steady yet inadequate compared to vast potential available
India’s renewable industry has been in the making since past 5 to 6 years (Figure 1).
Growth was initially fueled by state level Renewable Portfolio Standards (RPS) and later
on proliferated due to cash inflow through CDM market. Under RPS, states fixed a
percentage of electricity that their power distribution company (DISCOM) would need to
buy from renewable sources. The minimum RPS level varied across the states keeping in
view the availability of RE potential. Some states defined resource-wise target common
for all DISCOMS whereas some states had different targets for different DISCOMS.
However, RPS has not been able to achieve the level of capacity addition when compared
to the vast technical potential available in the country.

Figure 1: India’s renewable capacity addition vis-à-vis technical renewable potential

The main shortcomings in the state level RPS scheme were:

 No incentives for states having higher RE potential, such as Rajasthan, Karnataka,
Tamil Nadu, to look beyond their RPS targets
  Some states, such as Delhi, Punjab, Haryana etc., couldn’t apply RPS due to non-
availability of RE sources,
 Limited flexibility to market participants to buy and sell renewable power
 No financial liability or penalty for non-fulfillment of the RPS obligation.
Low contribution in generation mix resulted in less environmental dividends
The renewable capacity has increased from 4 GW in 2002-03 to 15 GW currently; yet,
the figures of renewable energy injection in kWh have been gloomy at less than 4% of
the total generation (Figure Figure 2: Capacity mix and Energy mix of India as of March’10
2). Tax holidays, accelerated Source: CEA, MNRE
depreciation, and customs
exemption given to the
developers resulted in
capacity installation but there
was no additional monetary
incentive to generate from
these plants. This has led to
little contribution of
renewable sources to the total
electricity mix. However,
bringing-up RE at a large
scale will prove to be the real
litmus test for policy makers.
REC mechanism will drive renewable industry to a faster lane
Things started gaining renewed interest when the intent of Renewable Energy Certificate
(REC) trading scheme was unveiled by CERC. Draft regulation to facilitate REC market
has been notified which mandates DISCOMS, captive users and open access customers
(obligated entities) across states to buy 15% power from renewable generation sources
(selling entities) by the year 2020. Out of 15 percent renewable generation, 2 percent
generation will have to come from solar power and it will be accounted separately 1
(Figure 3). REC scheme will create a national level market and ensure that every state
contributes to renewable development irrespective of renewable potential in the state. It
will encourage RE capacity addition in states where there is high potential as the
framework allows cost recovery at national level. Moreover, states with lower renewable
potential cannot escape on the pretext of resource unavailability. Penalty in case of non-
compliance is set equal to the forbearance price i.e. highest price at which REC can be
traded. This would ensure that renewable capacity additions take place even if more
expensive of these sources have to come online.

1
JNNSM aims to achieve 3% generation from solar by 2022
 Figure 3: Energy requirement during 2010 – 2020 in REC scheme

2,100 16
Conventional Energy requirement Non-Solar Renewable Energy obligation
Solar Energy obligation Renewable obligation (%)
1,800 Non-Solar Renewable obligation (%) Solar obligation (%) 14

12
1,500

` 10

Percent
1,200
TWh

8
900
6

600
4

300 2

0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Market price signals will underpin RE growth

During RPS regime, targets have been small and DISCOMS have had minimal problems
in buying renewable power and bundling it with less expensive power from conventional
sources. Actually, RPS has been helping them by ensuring electricity at lower cost as the
short term power prices (exchange/trading) were higher than the feed-in tariff as
illustrated in Figure 4. From a developer’s perspective, this was a loss of huge
opportunity which could not be leveraged because of involvement in Power Purchase
Agreements (PPA). It Figure 4: Feed-in-Tariff vs. Market Power Price for 2009-10
was highly risk loaded Source: MNRE, CERC, SERC
for developers to look
beyond PPA and
finding another market
because of intermittent
nature of renewable
generation. However,
this scenario is likely
to change now in the
wake of development
of REC market. RE
developers are likely
to be more aggressive
in their power sale
strategy because any shortfall in their return through power sale will get compensated by
selling RECs in the market.
Commercial autonomy to developers will help in managing investment risk
RE generators which have not entered into PPA at feed-in-tariff are eligible to participate
in REC scheme. The additional revenues from selling RECs will provide some cushion to
developers thereby increasing their risk appetite. The freedom to choose buyers and
greater flexibility to decide the price of their product (both electricity and renewable
credits) will encourage investors to set up renewable capacity. Figure 5 below shows that
non solar renewable capacity could reach 75 GW by 2020 to meet renewable obligations.
Figure 5: Non-Solar Renewable capacity addition in response to REC

Additional Non-Solar RE capacity - REC scenario

80 Total RE capacity - Baseline scenario 3000
Non-Solar REC Price
70
2500
60
2000
50

Rs/MWh
GW

40 1500

30
1000
20
500
10

0 0
2010 2012 2014 2016 2018 2020

Marginal rise in power prices after “low hanging fruits” are plucked
In the initial years of REC scheme, easier to implement and low cost RE sources are
expected to be added in the system. Less endowed regions and more costly technologies
would be taken up in the later years. The REC prices would therefore increase as the
scheme progresses not only due to the increased renewable energy targets, but also due to
the exhaustion of cheaper and easier to implement resources in the initial years. The non-
solar REC market size will be around USD 8-9 billion by 2020. The impact of this
scheme could be a net rise of 10 percent (average of price rise between 2010 and 2020)
on annual power purchase cost of DISCOMS. This implies a 15-20 paisa/unit increase in
the average electricity prices. There could also be a further impact on average tariffs due
to additional maintenance required for power system reliability.
Assorted schemes could help renewable to achieve grid parity sooner
The recent union budget imposed a cess of 5 paisa/kg on coal production. This will
increase the cost of coal generation thereby reducing the gap between RE and
conventional energy cost. Likely liberalization of coal sector and increased penetration of
imported coal will further push the pooled power prices upwards. Concessional custom
duty and exemption of central excise on certain renewable plant equipments are already
in vogue. Such schemes and policies will automatically increase the price of conventional
electricity basket and thus lesser additional support would be required to renewable
resulting in lower REC prices than projected in future.
Sustaining RE growth hinges on proactive role by regulators
Global experience suggests that REC can be a facilitator in development of renewable
capacity. However, regulators will have a greater role to play to ensure renewable
development by proper monitoring and implementation of the REC system as envisaged.
Astute response to market dynamics will be required to handle the teething problems in
the initial years of the REC scheme. This would occur because 1) CERC will calibrate the
band of price at which REC can be traded creating uncertainty in the expected return that
a developer will be eyeing at; 2) Vagueness in banking of certificates will affect trend of
capacity additions.
Toying too much and too frequently with the financial incentives of the scheme will
jeopardize renewable industry growth and dwarf the bigger objective of the country to
manage volatility in energy price and concerns of climate change. Greater emphasis of
regulators should be to bring more harmony among participants of the scheme by
providing long term visibility on the scheme.
To paraphrase Mark Twain once again “Climate is what we expect, weather is what we
get”. We are keeping our fingers crossed.

Yasir Altaf (yaltaf@icfi.com) is a Senior Consultant and Pramod Kumar Singh

(pramodsingh@icfi.com) is an Energy Analyst with ICF International (www.icfi.com) in
New Delhi.