India’s RPO Model

India’s energy industry is a royal mess in all respects be it mining, electricity generation or distribution. Large parts of the populance do not get electricity at all and those who do are faced with 8-10 hour long power cuts. I have written countless times about the problems of the electricity industry. The government is to blame for the whole mess given that bad governance is at the root of every problem. India’s useless leaders are loath to correct the situation and the industry remains in a morass. In such a situation the growth of India’s renewable energy industry is extremely difficult. The main tool used by the government in boosting green energy was the RPO model, in which electricity distributors and users were forced to buy a portion of their needs from clean energy sources. However despite the start of the policy with much fanfare and the trading of RECs in energy exchanges, the end result has been a complete failure.

Read Renewable Certificate Prices in India Volatile on GWI.

Government’s Failure to enforce RPO

Again the guilty party behind this mess is the Indian government and its regulators. They have devastated entire industries through delays and corruption. Telecom, Real Estate, Aviation etc. remain in an endless downturn as the government refuses to solve the regulatory issues. The RPO mechanism has been made a dodo by the CERC, as defaulting organizations are not being penalized for meeting their RPO obligations. The green energy producers who had set up their plants basing their entire business model on RPO are now royally screwed. Trading in the energy exchanges like IEX see a massive amount of RECs being put for sale at the floor price with no bids. The reason is that the distributors are not buying their mandanted RECs. Those buyers who had bought RECs earlier are kicking themselves in the ass. CERC and other states refuse to fine or force the distributors in buying the RECs. This means that no new green power plants will be set up and the whole RPO policy will fail. One fails to understand the convoluted logic of the Indian regulators and policy makers. Why did they make a policy which they did not want to enforce.

India has ambitious policies of generating 15% of its energy in 2020 from green energy sources. Given the current trends and stupidity, it will be a big feat if they mange to reach even 10%. India’s energy situation is getting bleaker by the day, as India is massively fuel deficient and imports most of its oil, natural gas and coal needs. Renewable Energy particulary solar energy is an answer to India’s power problem. But the “damn I care” attitude of the Indian leaders will keep the energy problem alive and kicking.

Problems of REC Market

REC policy in India which was unfurled with great fanfare in 2011 is suffering because of a lack of enforcement from states. According to the RPO, a certain percentage of a state’s electricity generation must come from clean energy sources. States and utilities which can’t meet their  renewable energy requirements can buy REC from Indian Energy Exchanges to meet their needs. Power Exchanges in India have already set the ball rolling in terms of trading in RECs. However, the REC policy which was meant to be the primary subsidy for green energy generation in India based on market rates is currently in a limbo. Though there is enough supply of RECs in the energy exchanges, there is not enough demand as states are not forcing their utilities and industries to meet their renewable power purchase obligations (RPO).  The trading has been lack-lustre as there is no urgency for states to buy REC until the end of the fiscal year in March when they have to meet their compliance numbers. This has led to low illiquid trading of Renewable Energy Certificate which has made price discovery difficult. Also it acts as a major problem for green energy producers as they can’t get remunerative prices as the market does not exist in a proper form.

1) REC Markets are notoriously difficult to set up and run – India has started a Renewable Energy Certificate (REC) Scheme recently to boost the share of Clean Energy Sources in India’s Electricity Mix. India’s Electricity Regulator (CERC) has come out with a notification making it mandatory for Electricity Utilities to buy 6% of their requirements from Green EnergySources. However the REC Scheme still faces teething problems in its implementation. It would take a couple of years for a well developed market in RECs to develop if everything goes to plan. Note REC are notoriously difficult to implement as Italy and Australia have found out. High Prices led to Booms while Low Prices lead to a Green Bust while it is impossible to set the Perfect Right Price.

2) Volatile REC Prices – However the market for REC remains volatile due to the fact there is a lot of uncertainty with RPO. The biggest source of this problem is the fact that RPO is not enforceable by the regulator. If the state slips in its RPO, it does not have to bear any penalty or punishment. Given the pathetic state of the electricity distributors in the state with billions of dollars in debt, it seems unlikely that they will buy expensive green energy to meet their RPO.

Hindu

About a year back, this writer asked the Chairman of the Central Electricity Regulatory Commission Promod Deo, whether the State electricity regulatory commissions would enforce the ‘renewable purchase obligation’. (Under this, specified ‘obligated entities’ are mandated, by law, to either purchase costlier green power, or buy ‘renewable energy certificates’ from the market.) He replied that it was like asking whether policemen would catch thieves.Some of the ‘obligated entities’ which were good boys in meeting their obligations, are now kicking themselves for having done so.As a consequence of this, the renewable energy sector in the country feels short-changed. This is a pity, given that, the world over, the accent is on developing this very sector for producing energy through environment-friendly means.

UNKEPT PROMISE

India has 3,400 MW under the two-year-old REC mechanism. This means that the owners of these power plants have opted to sell the electricity at non-premium tariffs and get RECs that can be sold in the market. Who will buy these RECs? The ‘obligated entities’. The promise that the ‘obligated entities’ shall provide the demand for the RECs in the market is one made by law. These power plants are today suffering for having put trust into that promise.Today, the market is awash with RECs, with about 20 lakh of them valued not less than Rs 300 crore, looking for buyers. There is just one more trading session (which will happen on March 27) for the current year, or just one more opportunity for the obligated entities to meet their obligations. Nobody is betting they will.

SPECIOUS ARGUMENT

It is the job of the State electricity regulatory commissions to ensure that the obligated entities in their States fall in line. Tamil Nadu, Karnataka and Himachal Pradesh are fully compliant, but none of the other regulators has taken due action in terms of collecting the penalty. Some States such as Maharashtra, Gujarat and Punjab have allowed the obligated entities one more year’s time.However, in some States (such as Tamil Nadu, which is the bastion of wind power in the country), the power producers are allowed to sell their electricity in the market (‘open access’) at any price. Often, this price is sufficient to yield a profit. But still they get the RECs.

SYSTEMIC PROBLEM

If you distil it further, you will see that the problem is systemic. First, ‘electricity’ is a ‘concurrent’ subject and each State is free to legislate at its own will. That is why there is no commonality between the regulations, and the existence of a ‘Forum of Regulators’ does not seem to have helped bring in this essential commonality.Second, it is difficult not to entertain a feeling that there is what is called ‘regulatory capture’ — state regulators are handpicked by the State governments and often the regulator is “our man”.Third, at a larger level, there is no mechanism to make a wayward discom fall in line other than to go to the regulator and thence the Appellate Tribunal for Electricity. If the intent is to nurture the renewable energy sector, there should be a way by which the Centre could pay the industry first and deduct the amounts from the central devolutions to the States.