India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh 

Indian Renewable Energy Markets

Background
14  50
The Indian economy is the fastest growing (8%) among its regional South and
45
South East Asian peers. The sustenance of this strong economic growth is 12 
40
virtually impossible without increased energy consumption. The energy
10  35
requirements are projected to grow over four-fold1 by 2032 for achieving the

Growth Rate (%)
30
targeted gross domestic product (GDP) growth rate of 8 to 9 percent. However, 8 

GW
25
given the current energy statistics, India faces a formidable task in meeting the 6 
20
growing needs. This is forcing India, which imports a majority of its oil, to reduce
its import dependency and scout for cleaner energy resources within its own 4  15

backyard. Renewable energy (RE) development therefore needs to be at the 2 

10

forefront to addresses the twin objectives of ensuring GHG emission reductions 5

on the one hand and energy security on the other. The initiative to develop RE ‐ 0
2002‐03 2003‐04 2004‐05 2005‐06 2006‐07 2007‐08 2008‐09 2009‐10 2010‐11
has taken a concrete shape and is well poised to give the necessary fillip to the
energy requirements. Biomass Small Hydro Wind Biomass ( R ) Small Hydro ( R ) Wind ( R )
 
Figure 2: Growth in Installed Capacity 
111
Waste to Energy  
2,700 The total RE potential for non-solar sources is approximately 88 GW (Figure 1)
while the most accepted estimate for Solar (100 GW) is higher than the
1,456
Cogeneration  
5,000 Installed (MW) Potential (MW) combined potential of the all RE sources put together. Taking cognizance of this,
solar power development has risen to prime focus and today one the world’s
Small Hydro  
2,735
15,000
most ambitious solar capacity addition programme2 is being pursued in India.
Although, all types of RE have developed but wind has seen the fastest growth
Biomass  
1,097
16,881
(5 year CAGR of 18%), contributing 75% of the RE installed capacity (Figure 2).
The RE value chain has been in a growing phase since last 5 to 6 years and the
12,129
Wind Power  
48,561 Regulatory Commissions have emerged as the main drivers of its development.
State level Renewable Portfolio Standard (RPO) initiated the earlier growth,
0 10,000 20,000 30,000 40,000 50,000
  which later on proliferated due to cash inflow through Clean Development
Figure 1: Current RE capacity vis‐à‐vis technical potential  Mechanism (CDM) market. Grid-connected renewable capacity currently stands

                                                            
2
                                                              20,000 MW installed capacity by 2020; Jawaharlal Nehru National Solar 
1
 Integrated Energy Policy (2007‐2032)  Mission 
India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh 

o Higher RE potential states such as Rajasthan, Karnataka, and Tamil

Capacity Mix Generation Mix Nadu had no incentives to look beyond their RPO targets.
2% 4%
3% o States such as Delhi, Punjab, and Haryana could not apply RPO due to
10% 14%
23% the non-availability of RE sources.
o Limited flexibility to market participants to buy and sell renewable
power.
o No financial liability or penalty for non-fulfillment of the RPO. Only
Maharashtra and Rajasthan have shortfall clause in place but it gets
64% 80% rendered ineffective since mandatory purchase of RE energy is
subjected to availability of RE based power

Hydro Thermal Nuclear Renewable Hence, there was a need for a mechanism that could facilitate inter-state
  exchange of power generated from RE sources

Figure 3: RE capacity mix and energy mix as of September 2010  Selling Entities
RE Generators
at 17 GW, representing 10 percent of the total installed capacity. However, RE
generation is less than 4 percent of the total generation (Figure 3). Tax holidays,
accelerated depreciation, and customs exemption given to the developers
Power + REC Power REC
resulted in capacity installation, but there was no additional monetary incentive to
generate from these plants. This led to little contribution of RE sources to the
total electricity mix.
Bilateral Price
Feed‐in‐tariffs Exchange Price Exchange Price
Under the RPO, states fixed a percentage of electricity that their power Average Power Cost
distribution companies (DISCOMS) need to buy from RE sources. The minimum
RPO level varied across the states with the available RE potential in the state.
Some states defined resource wise target common for all DISCOMS, whereas Obligated Entities: Obligated Entities:
others had different targets for different DISCOMS. However, the RPO has not DISCOMS
Any Customer
DISCOMS
Open Access  Customer Open Access  Customer
been able to achieve the level of capacity addition when compared to the vast
Captive User Captive User
technical potential available in the country. The main shortcomings in the state  
level RPO scheme were the following.
Figure 4: Modes for RE transactions under REC regulations
India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh 

REC Markets could bring a paradigm shift of RE resources. It will encourage RE capacity addition in states where there is
high potential for RE generation and allow cost recovery from the states having

RPO (%)
(TWh)

lower RE generation potential and higher electricity consumption. Penalty in case

Solar Energy
2,100 16 obligation

14
of non-compliance of RPOs is set equal to the forbearance price calculated as
1,800 Non-Solar
Renewable the highest difference between the Costs of Generation/ RE Tariff and the
1,500
12 Energy obligation
Average Power Purchase Cost (APPC). This would ensure that renewable
10
Conventional
Energy
capacity additions take place even if more expensive RE sources have to come
1,200 requirement online.
` 8
Renewable
900 obligation (%) Market based mechanism spells opportunities
6

600 Non-Solar
RE generators without Feed-in Tariffs (FITs) are eligible to participate in REC
4
Renewable
obligation (%)
scheme. The additional revenues from selling REC will provide comfort to
300 2 developers to look beyond PPAs. The freedom to choose buyers and greater
Solar obligation

0 0
(%) flexibility to decide price of their product (both electricity and renewable credits)
2010 2015 2020
  will encourage investors to set up more renewable capacity. Figure 5 shows the
renewable capacity addition that could take place in response to the national
Figure 5: Energy Requirement in response to National Level REC Market 
level RPO of NAPCC and the resulting REC market.
There has been a great deal of excitement in the industry with the launch of
80
market-based trading scheme; REC Mechanism. Globally, REC schemes have
70
been successful in bringing cost competitive renewable energy into the system
with limited assistance from the Government. Under this scheme, mandatory 60

Renewable Energy Obligations (RPOs) will be set for each state to achieve 15 50

percent generation at national level from RE sources by 2020. Out of these 40

targets, 3 percent will be reserved for solar which will be accounted separately as GW 30
Solar-RECs (SREC). There will be two separate renewable obligations set for 20
each state - solar and non-solar. These two obligations will be accounted 10
separately, and thus, there will be two categories of certificates. 0
2011 2014 2017 2020
The main objective of REC is to socialize the cost of green development by
Total RE capacity ‐ Baseline scenario Additional Non‐Solar RE capacity ‐ REC scenario
facilitating RPO compliance in those states too where there isn’t sufficient RE
potential/capacity. REC scheme will address the limitations of state specific  
Figure 6: Non‐Solar RE Capacity addition in response 
approach followed earlier by creating a national level RE Market and ensuring
that all the states contribute to renewable development irrespective of availability
India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh 

In the initial years of REC scheme, easier to implement and low cost RE sources are expected to lead capacity additions. However, less endowed and more costly
technologies would be taken up in the later years. In light of these possible developments, the REC prices would therefore increase in future as the scheme progresses not
only due to the increased renewable energy targets in the later years and but also due to the exhaustion of cheaper and easier to implement resources in the initial year.  
Figure 7: Key challenges facing the developers immediately and in the foreseeable future
India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh 

RECs provide an opportunity full in size factor for maximizing value (Figure 8). Although, the various sales options are
With an expected market value of approximately USD 2 billion by 2012 and now well recognized, but these don’t necessarily translate into value. The value
potential to reach USD 8 billion3 by 2020, RECs could be one of the largest arises from more than just options available but evaluating the forward
incentives to open up new investments in RE. The distinct gap in demand and performance of individual RE types under a multiplicity of factors such as REC
supply of RECs in the initial years could result in high returns. Captive RE demand variation, pricing, RE Technology change, transmission issues and
capacities could take the first mover benefit of the REC scheme. The REC regulatory stability. Identifying this warrants a systematic, integrated analytical
mechanism has the potential to eventually grow into a multi-billion industry. framework to understand market fundamentals (Figure 7)
Short-term value created by demand-supply imbalances, and
Longer-term value shaped by the evolution of the scheme
10
Option 2
Having RE in the generation portfolio can hedge against decrease in value due
9
to structural uncertainties. Power prices may remain high till 2015-16 as
8
7
Option 3
constraints in capacity addition, fuel supply and transmission availability are
Option 1
6 expected to persist. Investment in renewable could be a strategy to diversify risk
Rs/kWh

5
associated with loss of anticipated revenues due to change in market conditions.
4
3 e.g. any conventional fuel based merchant power plants may not be able to sell
2 power at Rs 4-5 per unit if sufficient capacity addition takes place or transmission
1
0
congestion is removed. On the other hand, obligation to purchase renewable will
LRMC  Feed‐in‐Tariff Sale to open  Sale at Average  result in necessary dispatch of renewable plants.. A possible decrease in value
market Power Cost
of merchant conventional fuel based plants vis-à-vis renewable is illustrated in
Price band
Resource  Resource  Merchant +  State Average Figure 9
Type  Type  REC*  power cost + 
due to REC *
*CERC has determined  band  of price for trading  non‐solar 
REC – 1500 Rs/MWh to 3900 Rs/MWh
 
Figure 8: Selling power and REC separately can create higher value for 
renewable developers

REC presents an opportunity which could bring a transition in the way RE is

traded and bought. The greater flexibility in sales (FIT or Spot + REC or APPC
+REC) can result in significant upsides for developers and could be deciding
                                                            
3
 ICF Analysis using India‐Integrated Planning Model (I‐IPM®)  
India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh 

sharing of capital investment required for transmission infrastructure

required for exporting renewable power
1,600 
1,400  An integrated analysis provides robust assessment of
1,200 
the opportunities
In the existing state of affairs, application for an integrated power market analysis
NPV ($/kW)

1,000 
800 
that takes into account the stock of uncertainty around all the critical parameters
and facilitates a robust strategy seems limitless. The need of the market
600 
participants is a strong analytical frame work that can forecast future market
400 
conditions along with alternative scenarios to understand the strategic
200 
implications (Figure 10). Such an analysis would give developers a definite edge
‐ and help them take advantages of the market conditions. This would address the
Coal* Gas* Renewable*
concerns of most of the developers and utilities that could struggle in arriving at
Constrained (Business ‐ as ‐ Usual Baseline) an efficient price discovery. An integrated power market approach with a view on
Un‐constrained (Transmission Expansion and No Domestic Coal Limitations)
short- and long-term REC prices would help decision makers in formulating their
*Forecast using I‐IPM®. Value of plants in western region (illustrative)  
  strategies. Additionally, integrated power market tools could help developers
Figure 9: Valuation of generation portfolio under two scenarios  arrive at a comprehensive view on how the RE capacity additions and REC
prices could evolve from the today’s starting point. Different risks need to be
But would the RECs sold get paid for? weighed by adopting a scenario based analysis and impacts of these risks on the
If the tariffs are not increased adequately, the financial gap in the distribution financial returns of the project need to quantified.
sector is projected to reach INR 100,000 crores per annum by 2015. Additionally,
the impact on Annual Power Purchase Cost (APPC) of DISCOMS could be a net
rise of 10 percent (average rise 2010-2020) thereby resulting in 10-15 paisa/unit4
increase in the average electricity prices. There would be an additional impact on
average tariffs as a result of intermittent nature of RE and the resulting
integration and balancing costs. In addition to some increase in tariffs, successful
implementation of REC would also require addressing the issues relating to
equitable sharing of
additional burden incidental on the host state for absorbing large
quantum of intermittent power

                                                            
4
ICF Analysis using India‐Integrated Planning Model (I‐IPM®) 
India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh 

POWER WORLDTM
Transmission Transmission
capacity interf ace limits

GE-PSLFTM
Power
Markets
Entry and exit
IPM®
decisions,
Environment Fuel
Capacity builds
Markets Markets
Illustrative outputs:
™ REC price forecasts ™ Load Flow and Congestion Analysis
™ RE Capacity additions ™ Transmission Losses
™ Target off-taker states for power & RECs ™ Transmission flows, congestion

™ Capacity under short and long term ™ Grid impact on dispatch

contracts
™ Asset value
™ Plant dispatch analysis
 
Figure 10: ICFs customized suite of modeling tools and integrated analysis 
provides for robust industry assessment 

Although, the effectiveness of REC mechanism for mobilizing new investments

into the RE sector would be tested, but global experience suggests that REC can
be a facilitator in development of new renewable potential. Regulators will have a
greater role to play to ensure renewable development by proper implementation
and monitoring of the REC system, as envisaged. A larger role for RE with
supporting REC markets will definitely help India achieves the objectives of the
energy security and emission reductions in the longer term.