Ind-Ra: Renewable Energy Certificates to Continue to Face Regulatory Challenges

The obligated entities may prefer to continue to buy renewable power directly rather than using renewable energy certificates (RECs), to comply with their renewable power obligations. India Ratings and Research (Ind-Ra) therefore believes uncertainties in trading RECs will stay. Solar REC trading was further affected following Central Electricity Regulatory Commission's (CERC) decision to reduce the floor and ceiling price of solar and non-solar RECs in March 2017. In April 2018, Appellate Tribunal of Electricity (APTEL) upheld CERC's decision. The floor and ceiling prices of RECs determined by CERC methodology usually reflect the price discovered through renewable power reverse bids.

Trading volume in solar RECs had declined over 70% yoy on account of the stay on solar REC trading in May 2017. The trading has been restarted from April 2018, only after APTEL upheld CERC's order.

The stay order on trading non-solar RECs was lifted in July 2017 on the appeal of Indian Wind Power Association. The non-trading of solar RECs during FY18 resulted in a positive complementary effect on the trading of non-solar RECs which grew 120% yoy in FY18. Solar RECs traded at floor prices during FY18 (for one month) and FY17. Non-solar RECs traded at an average clearing price of INR1,450 in FY18 compared to INR1,500 in FY17. Regulatory uncertainties coupled with higher supply of RECs and lower floor prices have further increased the revenue risks for those renewable projects which depend on RECs for part of the revenue.

The increasing renewable energy penetration (excluding large-scale hydro power) into the Indian grid system (12% in FY12 to 19% in FY18 of the all India installed power capacity) and lower non-compliance of renewable purchase obligations by state utilities have been the major reasons for lower/stagnant REC trading at power exchanges. During April-May 2018, both solar and non-solar RECs traded at the new floor prices. Ind-Ra expects the demand-supply mismatch for RECs to remain high and hence both the types of RECs would trade near or par floor prices.

Ind-Ra does not expect any impact on its rated entities as they are not primarily dependent on RECs for revenues.

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