It’s high time the Indian government realises that Adam Smith’s “supply and demand” law also applies to the Renewable Energy Certificates (REC) trading

The Dollar Business Bureau

Adam Smith, the father of economics, used the phrase “supply and demand” in his 1776 book The Wealth of Nations. Smith concluded that “all else being equal, as the price of a product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases.” While that’s exactly what is happening at India’s power exchanges dealing in renewable energy certificates (REC), leaving the investors in renewable energy projects high and dry, the policymakers who enforced the REC concept upon them continue to watch from the sidelines, unperturbed and unmoved. Result: Millions of RECs have turned out be nothing more than a pile of waste lying in the drawers of several investors who thought putting money into green projects could be their way to prosperity.

A closer look at the numbers, and you get it right. For instance, in October 2014, oversupply of RECs on both the power exchanges in India – Indian Energy Exchange (IEX) and Power Exchange India (PXIL) – not only resulted in low sales volume, but also lowered the prices of RECs further. Interestingly, out of 10,12,660 non-solar RECs put up for sale, only 2,22,700 found a buyer (even lower than September’s 2,64,446), and that too, at the floor price of Rs.1,500 per certificate. Although the ‘solar RECs’ story was somewhat better, the segment too was plagued by the ‘oversupply’ virus. Only 1,971 RECs out of 2,964 solar RECs put up for sale found a buyer. While on PXIL 971 solar RECs were sold for Rs.12,500, 820 were sold for Rs.12,680 per unit at IEX. The only good thing about solar RECs was that they were sold much above the floor price of Rs.9,300.

For the uninitiated, a renewable energy certificate (REC) is a certificate issued by a nationalised REC issuing agency for every 1 megawatt-hour (MWh) of renewable energy produced by an electricity generation facility registered with that agency. RECs are transferable between market parties in different countries, and are used as an evidence of the consumption of renewable energy.

The need of the hour

Renewable energy is already playing an important role in the energy mix in many countries across the globe. Although India is amongst the world’s most active players in renewable energy utilisation (especially wind energy), a lot still needs to be done as there continues to be an overall energy deficit. In fact, the 12th Plan indicates that total domestic energy production of 669.6 million tonnes of oil equivalent (MTOE) will be reached by FY2016-17 and 844 MTOE by FY2021-22. However, this will meet only about 71% and 69% of expected energy consumption respectively, with the balance to be met by imports.

Although the National Action Plan on Climate Change (NAPCC) has recommended renewable purchase obligation (RPO) target of 10% by 2015 and 15% by 2020 at the national level, it seems non-achievable as of now as RPO targets set by all states across India still range between 0.25% and 1%. No doubt, to meet RPO targets, REC market was introduced and RECs started trading in September 2010, but then the mechanism has not adequately picked up yet. Moreover, a lack of policy or mechanism to ensure demand or compensate those who possess such certificates have only weakened the case for RECs further.

The way forward

It is high time policymakers considered to review the REC market. Industry estimate suggest that there are over 2.1 million RECs in the market that nobody wants to buy. “Several investors like us believed that government’s regulation on RPO would be honoured by distribution companies, but that never happened. We were under severe losses and had no options but to close down the project,” Rajesh Agarwal, a Pune-based entrepreneur who had invested in wind energy told The Dollar Business.

If the policymakers really want renewable energy to pick up in India, they will have to incentivise it further. Although there various incentives on setting up the renewable energy power project which includes exemption from customs and excise duties on specific goods required for setting up the renewable energy projects (for instance, specific EO in respect of export of green technology products is 75% of the normal EO as mentioned in the Para 5.1 or Para 5.2 of the FTP), policymakers need to come up with a mechanism that ensures that there is enough demand for RECs in the market at any given point in time.

One solution could be to make these certificates transferable as is the case with duty credit scrips. This, to a certain extent, can put life into almost dead REC market. Another way out of the quandary could be that government exchanges these RECs for duty credit scrips, which an investor or entrepreneur can use while procuring equipment and technology for renewable energy projects. This is the least the policymakers can do, if they cannot ensure a steady demand for RECs in the near future. If policymakers are really serious about the growth of green energy in India, they need to take the stakeholders seriously too. Else the renewable energy projects will fail to find any takers going forward!