Renewable Energy Certificate Mechanism for India

• ABPS Infrastructure Advisory

Background

India is abundantly gifted with a variety of renewable energy (RE) sources. However, not all states are
endowed with the same level of renewable energy sources. While some states have very high renewable
energy potential, some have very little renewable energy potential. The Electricity Act 2003 (EA 2003)
stimulated the development of RE based power generation by mandating that State Electricity Regulatory
Commissions (SERCs) be responsible for promoting the harnessing of RE generation within the state.
Under the EA 2003, the SERCs set targets for distribution companies and obligated entities to purchase a
certain percentage (Renewable Purchase Obligation), of its total power requirement from renewable
energy sources.

The existing legal framework, under the EA 2003, puts the responsibility for promotion of renewable
energy on SERCs. As a result, the regulations developed by the SERCs differ from each other on many
counts. Further, the RPO regulations of one state do not recognize purchase of renewable energy
generated in another state as an eligible RE source, for the purpose of fulfillment of the RPO target by
Obligated Entities in that state. The RE rich states cannot sell their surplus RE based generation to the
states which do not have sufficient RE generation to fulfill their RPO. Consequently, the states with lower
RE sources have to keep their RPO target at lower levels. In addition, the unit cost of the RE based non-
firm power is higher than the conventional power sources. As a result, while RE rich states have no
motivation to produce RE based power more than that required to fulfill the RPO demand within the state,
RE scarce states are not able to procure RE generation from other states.

Initiatives for Development of the REC Mechanism

On June 30, 2008, the Hon’ble Prime Minister of India announced the National Action Plan for Climate
Change (NAPCC) which envisaged several measures to address climate change issues. The NAPCC
states that increasing the share of renewable energy in the total electricity consumption of the country is
one of the important measures that can combat climate change. The NAPCC has set the Dynamic
Minimum Renewable Purchase Standard (DMRPS) at 5% for FY 2009-10 − against the current level of
approx 3.5%. Further, the NAPCC envisages that such targets will increase by 1% over the next 10
years; which would translate to approximately 15% of the renewable energy generation in the total energy
mix of India by 2020. This would require a quantum jump in deployment of renewable energy across the
country. Strong policy measures and a proactive regulatory framework and innovative financing
instruments would be required, if the desired penetration level of renewable energy is to be achieved.
One such policy instrument prescribed in the NAPCC is the Renewable Energy Certificate (REC)
Mechanism, which would enable a large number of stakeholders to purchase renewable energy in a cost
effective manner.

In consideration of this recommendation of the NAPCC for the promotion of renewable energy, the
Ministry of New and Renewable Energy (MNRE) had initiated a study to develop a ‘Conceptual
Framework for the Proposed REC Mechanism in India.’ The Conceptual Framework Report has proposed
its recommendations on the Operational and Institutional Framework for the REC Mechanism in India.
Along with the MNRE, the Central Electricity Regulatory Commission (CERC) and the Forum of
Regulators (FOR) have also been engaged in evolving the Conceptual Framework for Development of
the REC Mechanism in India.

The Central Electricity Regulatory Commission (CERC) is currently seized with addressing further
implementation aspects. On January 18, 2010 it notified its regulations, outlining the terms and conditions
for recognition and issuance of renewable energy certificates. Implementation of these regulations will
enable obligated entities to meet their RPO target through RECs which may have been generated in
other states. In addition to this, an expert committee has also been formed to enable successful
implementation of the REC Mechanism in India.

For a nation-wide implementation of the REC framework, it is essential that uniform policies are adopted
at the state level, in consonance with the national level regulatory framework formulated by the CERC. In
this regard, the Model Regulations for State Commissions have already been evolved by the Forum of
Regulators (FOR). However, such Model Regulations need to be notified by respective state
commissions, after undertaking the due regulatory process.

Key Drivers for REC Mechanism in India

The Renewable Energy Certificate (REC) mechanism seeks to address the mismatch between availability
of RE sources and the requirement of the obligated entities to meet their renewable purchase obligation
across states. So far, inter-state exchanges of renewable energy was constrained due to the fact that
such transactions are governed by inter-state open access regulations and the regional energy
accounting framework, which necessitates scheduling of power. Some of the RE sources, such as
biomass power or bagasse based co-generation, can be scheduled and inter-state open access
transactions, based on such firm RE sources, have taken place in the past. However, inter-state
exchanges of power, based on non-firm RE sources, such as wind energy, solar power, small hydel
power, etc., was constrained. Besides, the cost of open access wheeling, under long term arrangements,
was prohibitive for such nonfirm RE sources, due to the inherently lower capacity utilization factors. The
REC mechanism addresses these constraining factors as the certificate is issued for the energy
generated at the point of injection into the grid. Thus, it is envisaged that the REC mechanism shall
facilitate the emergence of a large number of cross-border RE transactions, based on non-firm RE
sources, while at the same time, enhancing the volume of cross-border RE transactions based on firm RE
sources as well.

While effective implementation of inter-state transactions would be the primary objective of the REC
mechanism in India, some other objectives identified are:

• Reducing costs for RE transactions

• Increasing flexibility for participants to choose the participant in RE transactions
• Overcoming geographical constraints to harness available RE sources
• Effective implementing of RPO regulations in all Indian states
• Creating competition among different RE technologies
• Developing an all encompassing incentive mechanism
• Reducing risks for local distribution licensees

Concept of the REC Mechanism

While, conceptually, the operational framework is similar to REC mechanisms implemented in other parts
of the world, it has been customized to comply with India’s existing legal and regulatory framework. The
REC Mechanism in India shall deem the purchase of an REC as the purchase of power generated from
RE sources. In the proposed mechanism, the RE generator will be selling two independent and exclusive
products from the same quantum of RE generation. These products will be electricity and its associated
environmental attributes in the form of RE Certificates.
In the proposed mechanism, one REC will be issued to the RE generator for every MWh of electrical
energy fed into the grid. The RE generator may sell electricity to the distribution company, at the
regulated price equivalent to the pooled cost of power purchased by the Utility from all sources, excluding
RE sources and its RECs, to Obligated Entities at the market price through the exchange mechanism, in
a transparent manner. The RE generator may sell his RE certificates, only through the power exchange,
to such Obligated Entities who have to meet their RPO target. The purchase of RECs will be deemed as
purchases of power generated from renewable sources and, accordingly, will be allowed for compliance
with the RPO target. The REC mechanism will enable obligated entities in a state to procure RECs
generated from any of the states in India and surrender the same to satisfy its RPO target.

Operational Framework and Processes

In January 2010, the CERC notified its Regulations outlining the Terms and Conditions for recognition
and issuance of Renewable Energy Certificates. The salient features of the regulations are mentioned
below:

• There will be a Central Level Agency, to be designated by the Central Commission, for
registration of RE generators participating in the scheme.

• The RE generators will have two options – either to sell the renewable energy, at preferential
tariffs fixed by the concerned electricity regulatory commission, or to sell the electricity generation
and environmental attributes associated with RE generation separately.

• On choosing the second option, the environmental attributes can be exchanged in the form of an
REC. The price of electricity component would be equivalent to the weighted average of the
power purchase cost of the distribution company, including short-term power purchases, but
excluding renewable power purchase costs.

• There shall be two categories of certificates, viz., solar certificates − issued to eligible entities for
generation of electricity based on solar as renewable energy source; and non-solar certificates −
issued to eligible entities for generation of electricity based on renewable energy sources other
than solar. The solar certificate shall be sold to the obligated entities to enable them to meet their
renewable purchase obligation for solar, and non-solar certificate shall be sold to the obligated
entities to enable them to meet their obligation for purchase from renewable energy sources other
than solar.

• The Central Agency will issue the REC to RE generators.

 • The value of an REC will be equivalent to 1 MWh of electricity injected into the grid from
renewable energy sources.

• The REC will be exchanged only in the Power Exchanges approved by the CERC within the band
of a floor price and a forbearance (ceiling) price, to be determined by the CERC from time to time.

• The distribution companies, the open access consumer, and the Captive Power Plants (CPPs)
will have the option of purchasing RECs to meet their Renewable Purchase Obligations (RPOs).
Pertinently, renewable purchase obligation is the obligation mandated by the State Electricity
Regulatory Commission (SERC), under the Act, to purchase a minimum level of renewable
energy out of the total consumption in the area of a distribution licensee.

• There will also be compliance auditors to ensure compliance with the requirement of fulfilling the
REC obligations by the participants of the scheme.

The schematic depicted in the figure below represents a flow diagram for various processes involved in
the operation of the REC mechanism. The numbers indicate the chronological sequence of seven
identified key processes.

The operational framework depicted above does not envisage any major modification to the existing
arrangements for renewable energy procurements. The proposed framework entails the appointment of
an agency, at the national level, to facilitate the registration of eligible RE generators, issuance of RECs,
and maintenance of a record of the procurement of RECs by Obligated Entities.

The identified seven key processes can be elaborated as under:

Step 1: Electricity Generation and Feeding to the Grid

The electricity generated in an RE project is injected into the grid. This electricity is consumed in real time
by load prevalent in the system, which in turn is accounted against the consumption by entities which had
a contract with that particular RE project. The metering of the quantum of electricity injected into the grid
and energy accounting will be done by the State Load Despatch Centre (SLDC).

Step 2: Application for issuance of REC

The RE Generator will apply to the REC Issuance Registry (i.e. the Central Agency) to issue the RE
certificates equivalent to the amount of electricity injected into the grid and as certified by the SLDC.

Step 3A: Confirmation of Electricity Generation

The Central Agency and SLDC shall establish a procedure for exchange of information about actual
electricity generated by the registered RE projects on a regular basis. The SLDC shall submit the report
of the energy accounts of RE projects to the Central Agency, as per established procedures, on a regular
basis.

Step 3B: RE Generator Accreditation and Registration

The state agency shall provide its report to the Central Agency for accreditation and for recommending
the RE project for registration. The RE projects will have to be accredited with the state agency and will
also have to be registered with the Central Agency.

Step 4: Creation and Issuance of RECs

Referring to the generation report submitted by the SLDC and the state agency, the REC Registry will
create and issue an appropriate number of RECs to the concerned RE Generator (Eligible Entity).

Step 5: REC Sale by RE Generator (Eligible Entity)

Once the RECs are issued to the RE Generator (Eligible Entity), sale/purchase of RECs amongst various
RE generators and obligated entities will be undertaken only through the power exchange that is
operational under the guidance of the CERC.

Step 6: Surrender/Redeeming of RECs

The obligated entities can procure the RECs over the exchange platform and need to surrender the RECs
to the SERCs to meet their RPS obligation. This will facilitate a convenient and effective mechanism for
ensuring RPO compliance by the obligated entities. The REC Registry shall maintain a record of RECs
issued and RECs received for redemption, on a regular basis.

Step 7: Compliance Reporting

It is envisaged that the Central Commission, in consultation with the National level Registry (i.e. Central
Agency), may appoint, from time to time, Compliance Auditors to inquire into and report on the
compliance of REC Regulations by the person applying for registration, or on the compliance by the
renewable energy generators in regard to the eligibility of the Certificates and all matters connected
thereto.

As depicted from the schematic in the figure above, the State Load Despatch Centres (SLDCs) and the
proposed new institutions, such as the National Level REC Registry and Compliance Auditors, will play a
pivotal role in the day-to-day operation of the REC mechanism. The success of the proposed REC
mechanism will depend on adoption of the precise definition of the roles and responsibilities of these
institutions, adoption of the appropriate governance structures, and capacity building to undertake defined
roles and responsibilities.

Design Features of the REC Mechanism

Eligible RE Sources and Technologies

Renewable energy sources are: small hydro, wind, biomass, bio-fuel cogeneration, urban or municipal
waste, solar − including its integration with the combined cycle, and such other sources as recognized
and approved by MNRE. Further, there shall be two categories of RECs, one for generation based on
solar technology and another for all other (non-solar) RE technologies.

Eligible RE Generator (Eligible Entities)

Considering the current status of infrastructure availability, it will be appropriate to focus and give priority
to grid-interactive RE technologies only and, based on the status after a few years, the off-grid RE
technologies may be included. This will enable the development of grid-interactive RE technologies up to
commercial maturity and then such mature technologies can easily be transferred to the off-grid RE
projects. Therefore, it is proposed that grid connected RE projects, of 250 kW and above, shall be
eligible. The FOR Task Force has also concurred with this suggestion and has recommended that grid
connected renewable energy generators, of at least 250 kW, should be allowed to participate in the REC
Mechanism. Existing RE projects have already been covered under the particular tariff and regulatory
regime. Further, the long term contracts for the same are already put in place. Hence, it will not be
appropriate to compel existing RE projects to be part of the REC mechanism at this stage. Therefore, it is
suggested that existing projects may be allowed to participate in the REC scheme after the expiry of their
existing PPA.

Accordingly, all grid connected generating companies, which have obtained accreditation from state
agencies and which do not have power purchase agreements to sell electricity at a preferential tariff,
determined by the appropriate commission, to the distribution licensee of the area in which the generating
company is located, at a price not exceeding the pooled cost of power purchase of such distribution
licensees, or to any other licensee or open access consumer, at a mutually agreed price, or through the
power exchange at market determined prices, shall be eligible for receiving renewable energy certificates.

Obligated Entities

Entities such as distribution licensees, captive and open access consumers, as may be mandated by
State Electricity Regulatory Commission to fulfill the Renewable Purchase Obligation, shall be considered
Obligated Entities.

REC Issuing Authority

A national level REC Registry has been proposed to be created and the CERC may formulate the rules
for creation of such a national level entity in accordance with the harmonized policies, to be developed by
FOR, for operation of the REC mechanism at the national level.

The Central Agency, as directed by the Central Electricity Regulatory Commission, shall issue the REC
upon ascertaining the corresponding generation/energy accounting for the accredited RE generating
stations.

Creation and redemption of RECs

In the Indian context, it is proposed that RECs will be issued for the RE generation injected into the grid
and duly accounted in the Energy Accounting System, as per the Indian Electricity Grid Code or the State
Grid Code. It is envisaged that the RECs shall be issued only in ‘electronic form’ to avoid issues in
paperwork and also in view of the fact that the security/verification protocols, etc., can be easily
implemented in cases where RECs are issued in such ‘electronic forms.’ RECs shall be redeemed when
they are presented to the common REC Registry for redemption by the owner of the RECs or when the
shelf life of the RECs expires. Whether redeemed specifically or expired due to expiry of life, the owner of
the RECs shall be allowed to account these RECs for compliance with the RPO.

Sale/Purchase of REC

Power exchanges are expected to provide a platform for sale and purchase of RECs. While any trading
platform could be used for exchange of RECs, at this point of time there is no clarity about the volume
and liquidity in the market. It is envisaged that the CERC, in consultation with the FOR, would undertake
the assessment of the market, liquidity requirements, costs involved in setting up of the market, and the
necessary fee structure.

Accordingly, it is proposed that the sale and purchase of RECs will only be through a power exchange
operating under the guidelines issued by the Central Electricity Regulatory Commission.

Denomination of RE Certificates

The RECs are proposed to be denominated in energy (MWh) terms in order to be consistent with RPO
percentage obligations, to be specified in energy terms. With the proposed denomination in energy terms,
SERCs can continue to specify the RPO target as a percentage of energy consumption, which can easily
be converted into the equivalent number of RECs required for achieving the RPO target.

Form of RE Certificate

The proposed REC needs to contain all the information, such as: Unique Certificate Number; Name of the
Issuing Body; Generator Identity; Type of Generation Technology; Installed Capacity of the Generator;
Location of the Generator; and Signature of the Authorized person, in its electronic form. In addition,
information about the date of issuance of certificate and validity of the certificate may also be provided on
the proposed RE Certificate.

Enforcement Mechanism

In the event of default i.e. non-fulfillment of RPO, the obligated entity has to deposit an amount
determined by the State Electricity Regulatory Commission into a separate fund maintained by the
obligated entity itself. This fund will be partly utilized for purchase of the certificate and partly for
development of the transmission Infrastructure, upon approval by the respective SERC.

Issuance of RE Certificates

The eligible entities shall apply to the Central Agency for issuance of certificates within three months after
the corresponding generation from eligible renewable energy projects has been injected into the grid. The
Certificates shall be issued by the Central Agency within fifteen days from the date of application by the
eligible entities on the basis of units of electricity generated and injected into the grid.

Pricing of Certificate

The CERC shall determine the price band, i.e., the upper limit (forbearance price) and the lower limit
(floor price) within which REC transactions can be undertaken over the Power Exchange. This price will
be determined by the Central Electricity Regulatory Commission from time to time. The determination of
floor price and forbearance price would be guided by several factors, such as variation in cost of
generation for different RE sources across states, variation in the pooled power purchase cost of utilities
across states, expected renewable energy capacity addition, and renewable purchase obligation targets
set by different state commissions.

It is important to ensure a threshold level of revenue certainty through the floor price in order to instill
confidence amongst investors, lenders, and project developers, at least during the initial stage of
introduction. Whereas, the forbearance price is necessary to avoid price volatility, else it may defeat the
very purpose of facilitating RPO compliance by Obligated Entities through the REC mechanism. The
Regulations also envisage introduction of the floor price and forbearance (or ceiling) price, separately for
solar RECs and non-Solar RECs

Shelf Life of Certificates

The RECs shall remain valid for 365 days from the date of issue of such certificates.

Timeline for implementation

It is proposed to introduce the REC mechanism with effect from April 1, 2010.

Summary

The RE certificates issued to eligible entities shall be a valid instrument for fulfilling the renewable
purchase obligation of obligated entities, i.e. distribution licensees, captive consumers, and open access
consumers. With the introduction of the REC Mechanism, the RE generators will be eligible to sell their
RE certificates, which have been issued to them as per the energy they have injected into the grid, within
or outside the state. The REC Mechanism will provide the RE generator a wider platform to sell his
certificates to suitable buyers. Similarly, it will also provide obligated entities with multiple options for
meeting their RPO targets and complying with their obligations under the RPO regime.

One of the important elements for success of the REC scheme would be the commitment, at the state
level, to fix RPO targets by keeping in view the current national target of 5% with an increasing trajectory,
as envisaged in the National Action Plan on Climate Change (NAPCC), so that there is a sufficient
demand for RECs; which in turn would fuel growth of RE capacity addition, irrespective of location. The
FOR has initiated a study to develop a framework for setting the RPO trajectory across states. Besides,
limitations under the present RPO Regulations in many states, such as lack of an adequate enforcement
mechanism, and the scope of Obligated Entities to include open access and captive consumption, also
needs to be addressed.
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