RECs demand had been steadily rising in the past few months, but this month’s trading saw a signficant drop in trading volume as compared to last month. Non Solar REC’s and Solar REC’s traded this month were 61.6% lower and 6.79% lower respectively, compared to trading session of December 2015. The total transaction value of REC’s hit a sum total of Rs 71.77 crore, compared to Rs. 156 crore last month.

The reason in drop in trading volume are two fold – a) Previous month trading volumes were higher than normal driven by a specific order of RERC for compliance and b) the Republic Day holiday on Tuesday (also a banking holiday) presented a logistics hurdle for some obligated entities to trade.

Trading volumes are expected to increase significantly going forward, as most obligated entities are now gearing up to fulfill their obligation considering that only 2 trading sessions are remaining in the current FY. Last quarter of previous FY saw RECs trading volume of 20.85L. We should expect a significant increase over that this FY – this means we will see significant volumes in February and March.

Analysis of Trading:

Non Solar – Clearing ratio in exchange were at 2.16% and 3.12% in IEX and PXIL respectively for Non Solar REC’s. A total of 344,519 were traded as compared to 898,439 RECs were traded in DecemberClearing ratio at PXIL saw a jump, but IEX results showed huge dip in demand. Overall Non-Solar demand was below expectation

Solar – Clearing ratio stood good at 1.65% and 2.34% in IEX and PXIL respectively. However, the total clearing volume fell to 57,420, as compared to 61,602 last month. This was a marginal fall, but since we are approaching FY end, much better results were awaited.


Trading volumes are expected to increase significantly going forward, as most obligated entities are now gearing up to fulfill their obligation considering that only 2 trading sessions are remaining in the current FY . Further, this year we have seen regulatory action in the form of compliance orders and/ or proceedings in several states like Orissa, Kerala, UP, MP and Maharashtra, to name a few. This trading session result calls for stricter enforcement by states, since the next two months will be very crucial for the future of the REC Market.


The December’s trade result can be accessed here.

Analysis of Amendments in National Tariff Policy

The government recently amended the National Tariff Policy (NTP). Several reform measures have been announced in this change. NTP 2016 has increased focus on renewable energy, sourcing power through competitive bidding and the need for ‘reasonable rates’ (see box – Word Analysis of the NTP).

Executive Summary:

  • Co-generation from non-RE sources to attract RPO

  • Competitive bidding to be the norm for RE procurement (maximum 35% of installed capacity can be sourced from determined/preferential tariff)

  • Provisions for Renewable Generation Obligations (RGO) announced

  • Long term RPO to be announced by Ministry of Power

  • Vintage and technology multiplier allowed in REC

  • Inter-state transmission charges waived off for RE power

  • Solar RPO to be 8% by 2022 (excluding hydro power)

  • Calculation of Cross-subsidy methodology is suggested to be changed to make it less arbitrary

Detailed analysis:

Before delving into the nitty-gritties of the NTP, it is worthwhile to step back and understand the importance of this document. The NTP says that CERC and SERCs “shall be guided” by the tariff policy. Thus, the NTP is in no way binding. In fact, from previous NTP’s several provisions remain only on paper. For example the NTP 2011 required that tariffs be within +-20% of average cost of supply. States have certainly not followed that.

Renewable Purchase Obligations:

  1. The most significant change made is that the ambiguity on applicability of RPO on co-generation has been removed. The NTP 2016 says:

“Provided that cogeneration from sources other than renewable sources shall not be excluded from the applicability of RPOs.”

This change, once incorporated in the regulations of states, will have a significant impact on RPO applicability. Many CPPs are currently avoiding fulfilling renewable obligations due to the regulatory confusion resulting from orders from ApTel (Lloyds Metal) and Gujarat HC

  1. Solar RPO will increase to 8% by 2022. This is a substantial increase as current solar RPO is below 1% in most states.

    Another major change suggested in this clause is that solar RPO will not apply to power sourced from hydro power plants. The policy document states – “8% of total consumption of electricity, excluding hydro power, shall be from solar energy by March 2022”

    This is a significant deviation from the Electricity Act 2003 (EA2003) and current RPO regulations, which require that RPO be calculated on ‘total consumption’. This change will open up major issues in RPO implementation – for example, can this change be done when it is contrary to the requirement of the EA2003, and why should similar exemption not be extended to non-solar RPO.

  1. More clarity has been provided on Renewable Generation Obligation (RGO) provisions.

When RGO provisions were announced earlier, there were concerns of double-counting. However, the current provisions hint that RGO will not be incremental to RPO. The policy says:

  • “The renewable energy produced by each generator may be bundled with its thermal generation for the purpose of sale. In case an obligated entity procures this renewable power, then the SERCs will consider the obligated entity to have met the Renewable Purchase Obligation (RPO) to the extent of power bought from such renewable energy generating stations. 

Thus, RGO merely appears to bring thermal generators into the mix and make it convenient to meet RPO. It will not result in expanding the requirement for RE overall.

  1. Long term RPO to be declared by ministry of power in consultation with MNRE.

  1. Provision for allowing vintage multiplier (to take care of cost changes for RE projects) and technology multiplier (to encourage specific technologies) has been incorporated.

Procurement of power:

The preferential tariff regime for RE power appears to be on its way out. The policy says:

“States shall endeavor to procure power from renewable energy sources through competitive bidding to keep the tariff low.

Further, an overall maximum of 35% of installed capacity only can be procured by the state from SERC determined tariff. This limit includes all generation, not just RE.

Transmission of power:

Inter-State transmission charges and losses for renewable power (solar/wind) have been exempted.

This is a welcome change, as it will encourage inter-state transaction of power. However, it seems that this exemption will apply only to wind and solar projects, and not other renewables like small hydro or biomass. The draft policy had suggested that such an exemption apply to power from all renewable energy sources.

Cross-subsidy and open access:

  1. In calculating the cross-subsidy surcharge (CSS) a change in the methodology is proposed. At present, cross subsidy is calculated by using the cost of marginal power (top 5% power at the margin). Instead, now the weighted average cost of power including transmission and wheeling losses will be used.

Further, it is mandated that CSS cannot be more than 20% of the applicable tariff to the category of consumer seeking open access.

As we have shown in earlier articles, CSS determination is often arbitrary and with a purpose to discourage open access. One hopes that with the revised provisions the subjective aspects of CSS calculations will reduce. However, the policy still gives a wide leeway to SERC on this topic:

“Above formula may not work for all distribution licensees, particularly for those having power deficit, the State Regulatory Commissions, while keeping the overall objectives of the Electricity Act in view, may review and vary the same taking into consideration the different circumstances prevailing in the area of distribution licensee.”

Levy of “additional surcharge” has also been made more difficult as it needs “conclusive demonstration” of stranded capacity.

  1. Most provisions regarding open access remain the same as in the 2011 policy document.

However, a relief has been provided by limiting temporary tariff to 125% of normal tariff category.

Other changes:

Some other important changes are:

  1. Differential duties have been discouraged, particularly when states impose differential duties on captive generation.

  1. Licensees have been given the option to charge lower tariffs than those determined by the SERC if competitive conditions so demand.

  1. Provisions regarding micro-grids and protecting the investments made by micro-grid operators have been incorporated.

  1. Smart meters have been mandated for consumers consuming 500 units by 2017 and 200 units by 2019.

  1. Procurement of power from waste-to-energy plants has been made compulsory.


The changes proposed in the policy are encouraging and can have far-reaching impact, particularly on the RE sector. Provisions regarding RPO on co-gen, higher solar RPO, RGO and competitive bidding can radically change the demand for RE and the way new capacities are set up.

Rational and transparent cross-subsidy calculations can also help in encouraging open access to a large extent.

However, we remain cautious on these changes. The RE related changes will require that states be willing to implement these, and the wide leeway available to SERC on cross-subsidy means that only those states that are anyways in favour of encouraging open access will adopt them. It is unlikely to expand the open access market significantly.

An analysis of the frequency of words used in the NTP 2016 amendment vs the 2011 amendment throws a light on the changing priorities of the government:

The Policy can be accessed here.

Our previous blog on National Tariff Policy can be accessed here.

MERC Determination of Generic Tariff for Renewable Energy for the remaining Tariff Review Period of FY 2015-16

The Maharashtra Electricity Regulatory Commission came up with its Draft order on determination of generic tariff for Renewable Energy for the remaining Tariff Review Period of FY 2015-16, on 1st December, 2015. This Tariff Order will be applicable for New RE Projects to be commissioned during the remaining Tariff Review Period of FY 2015-16 (1 January to 31 March, 2016).

The RE Tariff Regulations specify the Terms and Conditions and the Procedure for determination of Generic Tariff by the Commission. The graph below gives a comparison of the RE tariff determined in year 2014-15 to the RE tariff determined in 2015-16 for wind and mini & micro hydro generating stations.

The Commission has invited Comments, suggestions and objections from the public and stake-holders, including RE Developers, Distribution Licensees, MEDA, electricity consumers, etc. are on this draft Suo Moto Order.

The Order can be accessed here.



Karnataka Electricity Regulatory Commission Draft Smart Grid Regulations, 2015

KERC came up with its first draft Smart Grid Regulations on 22nd December, 2015. Smart grid through automation and controls system would deliver electricity more reliably, effectively and environment friendly, thus enabling much wider generation and consumer participation in power sector operations.

Some of the Key points of the regulation are as follows:

  • These regulations shall be applicable to all Generation companies, Distribution Licensees, Transmission Licensees and consumers in the state and connected to the state grid.
  • The objective of the regulation is to enable integration of various smart grid technologies, enhance network accessibility and measures to bring about efficiency improvement in generation and integrate renewable energy into grid and micro grids.
  • The Commission may from time to time issue guidelines for generating company, transmission licenses and distribution licensee in execution of activities like formulation and implementation of smart grid programmes.
  • The Commission directs every transmission and distribution licensee to constitute smart grid cells within three months of notification of the regulation which shall be responsible for:
    • Baseline study & Development of data
    • Formulation of smart grid plans, programmes and projects
    • Design and development of smart grid projects including cost benefit analysis and plans for implementation, monitoring and reporting.
    • Assist licensees in getting necessary approvals to smart grid plans.
    • Implementation of smart grid programmes
    • The transmission licensee and distribution licensee may combine activities related to energy efficiency, DSM and smart grid implementation within the same cell.


The Regulation can be accessed here.

UDAY Scheme’s Impact on Renewable Energy Sector

The UDAY scheme was launched by the government in November 2015, and so far as met with a good response from the states (16 states representing more than 90% of DISCOM losses has joined) and from industry observers. These cover most of the large consumption states, but also most of the large RE rich states (see map). Notable exception from the RE rich category are Tamil Nadu and Karnataka.  The problem that the UDAY scheme aims to solve is a huge one.

CLSA (an equity analysis firm), points out that the collective outstanding of DISCOMs to financial institutions is in excess of Rs 5.5 lakh crore. This equivalent to two-and-a-half times the defence budget; roughly six times the amount that will be spent this financial year on building roads; and enough to wipe out India’s fiscal deficit.

The UDAY scheme aims to revive DISCOMs by working on three pillars – achieve operational efficiency (this will primarily be achieved by reducing AT&C losses and smart metering), reducing the cost of power (by reducing the interest cost and coal costs) and financial discipline (tariff increases and constraints on banking). These approaches have several sub-steps like smart metering, billing efficiency, etc.

A major area of reform is financial. The scheme requires that 75% of the existing debt of the DISCOM be taken over by the state. States have some moratorium before the debt is included in their overall fiscal limits. However, this step has two major impacts:

  1. It transfers the problem of DISCOM finances into the hands of its creators – States (and their politicians) are largely responsible for the current situation. Political patronage has kept AT&C losses high due to un metered supply and theft, and tariff increases have lagged costs
  2. It ‘bails out’ the banks – in RBI’s own words – “…UDAY, will essentially be shifting the stress from financial institutions to the state governments, though the initiative would instil financial discipline at the sub-sovereign level, especially in ensuring recovery of user charges.”


Impact on RE Sector

We believe that over the longer term, improvement in DISCOM finances will have a significant positive impact on the RE sector. In many DISCOMs step-motherly treatment to RE continues due to its perception of being costly and infirm power. Easing financial situation will create more openness to RE power.

The immediate impacts are likely to be felt strongly also.

The first one is likely on the REC markets – the scheme document says – “DISCOMs opting for the scheme will comply with RPO outstanding since April 1, 2012 within a period to be decided in consultation with MoP”. The participating states have many large power consuming states, and many have large outstanding RPO obligations (eg. UP, MP). This condition is likely to push RECs trading significantly.

The second impact is likely to be on the mode of power procurement in the near future. Increasingly, fixed preferential tariffs for RE look out of place. The scheme document says – “To reduce power costs, States shall take steps for: prospective power purchase through transparent competitive bidding by DISCOMs.”

The third impact is likely to be the worsening of the payment cycle to RE generators in the immediate term. This is because bank funding will dry up immediately and be severely constrained for working capital requirements. The document says – “Henceforth, Banks/ FIs shall not advance short term debt to DISCOMs for financing losses” and “for working capital, Banks/FIs shall lend to DISCOMs only up to 25% of previous year’s annual revenue, or as per prudential norms”

Improved financial situation of the DISCOMs will help in the long run, but in immediate term, payment cycles to RE producers are likely to get worse.

The fourth impact is likely to be on the off take side. With potential for faster and steeper tariff rise, RE projects are likely to get competitive in more states. It would have been helpful if the scheme document had also required mandatory open access in participating states.



Like any previous DISCOM package, the key risk of failure is political. In the past, while DISCOMs have enjoyed the funding that such packages bring, state politicians have not allowed for tariff increases or long-term changes.

Even the current scheme has political overtones – a look at the map above suggests that mostly BJP ruled states have signed up. RBI has also recognized this, stating the issue is now in the hands of the “sub-sovereign level”.

However, compared to DISCOM packages of the past, this one appears to have more checks and balances through the state being the bond-issuer.



With DISCOMs being shut out of bank financing, the key question is – if they don’t sign up, what alternative do states have? No option sounds less bitter than the UDAY pill.

Therefore, overall, there is ample reason to hope the scheme will bring genuine and lasting changes at DISCOM level. This will be great news for the RE sector.

The Hindu article can be accessed  here.

The RBI report can be accessed  here.

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