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.



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.


The demand response for REC’s saw very good momentum in the December’s trading session. Non Solar REC’s and Solar REC’s traded this month were 288% higher and 29.8% lower respectively, compared to trading session of November. The total transaction value of REC’s hit a sum total of Rs 156 crores, compared to Rs. 65 crores last month.

Analysis of Trading:

Non Solar – Clearing ratio in exchange were at 8.31% and 2.22% in IEX and PXIL respectively for Non Solar REC’s. A total of 898,439 RECs were traded in this trading session (in November 231,545 RECs were traded). Clearing ratio at IEX saw a huge jump, whereas the effect was opposite on PXIL.

Solar – Clearing ratio stood at 2.62% and 0.37% in IEX and PXIL respectively, compared to 2.07% and 4.97% last month. The total clearing fell by 26,165, as compared to last month, with PXIL recording very low clearance this time.


Trading volumes are expected to increase significantly going forward, as most obligated entities are now gearing up to fulfill their obligation considering that only 3 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. Overall the market showed clear signs of recovery, especially Non-Solar, and is expected to grow further in the closing months of the FY.

The November’s result can be accessed here.


MPERC waives off past Solar RPO

In a recent order, MPERC has waived off past solar RPO for its Discom’s.


This comes despite ApTel’s judgment specifically disallowing waive-offs, and CAG’s remark about states not meeting RPO regulations.


Even more telling is the fact that India is playing a lead role at the ongoing international climate talks in Paris, and has been promoting its solar capacity additions as the most ambitious in the world.


However, MPERC’s decision goes contrary to all of the above. In its order, MPERC has said the following:


“The Commission also noted that respondents could not fulfill the Solar Renewable Purchase Obligations during the FY 2014-15 also. The Commission is monitoring the progress through the Suo-Motu petition no. 43/2015 regularly. The Commission also gone through the progress achieved by the respondents during the FY 2015-16 based on which, the Commission feels that the respondents may purchase more than the Solar Renewable Purchase Obligations fixed for the FY 2015-16. This may mitigate the default on the part of the respondents in fulfilling the statutory Solar Renewable Purchase Obligations in previous financial years. Under the above circumstances, the Commission is of the view that it would not be appropriate to impose any penalty at present on the respondents.” (emphasis supplied)


And further -


“The Commission is not in agreement with the views of the petitioner that the Solar Renewable Purchase Obligations during the FY 2015-16 should be cumulative as this will generate bad practices to accumulate the shortfall and to carry forward the targets.”


It is worthwhile to note that in its judgment on the same issue, dated 20/11/2013, MPERC had said the following:


“….Commission is constrained to express serious concern on the lack of effort on the part of the utilities in fulfilling their respective RPOs. More than four months of the current financial year still remain and the respondents are directed to pursue renewable energy procurement to the maximum so that the shortfall against the RPO is minimised. Continuous failure on the part of utilities in this regard cannot be allowed to go unpunished” (emphasis supplied)


In response the potential bad precedent, the Commission has instead decided to not impose past year obligations, and instead hopes that excess purchase of solar power in 2015 “may mitigate the default” of prior years.


REConnect Analysis:


This order sets a very bad precedent. Not only has MPERC clearly gone against the order of ApTel, it also goes against the government’s ambitious plans of developing solar energy and all the commitments that India is making at the international stage.


CAG highlights gaps in RPO compliance of states; Penalties of Rs 4,234 crore not levied

In a recent audit report covering the functioning of MNRE, the Comptroller and Auditor General (CAG) has highlighted various issues on RPO compliance by states.

The main issues highlighted by the CAG are:

  • Setting RPO well below the NAPPC target

  • States have been lax in discharging their obligations under RPO regulations in every aspect. Many states have not prescribed any penalties (Rajasthan, Karnataka, UP are mentioned in the report), most do not collect data on compliance

  • Further, no states (except Uttarakhand, which has imposed a ‘token’ penalty) have imposed penalties. The CAG has estimated that a penalty of Rs 4,234.8 crore was leviable by states, but has not been done

  • CAG further mentions that “RPO was further diluted by frequent deferring of RPO targets as seen in the cases of Gujarat, Madhya Pradesh, Maharashtra and Uttarakhand”


REConnect Analysis:

It is good to see the CAG stepping into an area which has seen very little enforcement of rules by state regulators, despite the Supreme Court and ApTel giving clear judgements for enforcement.

It is also good to see the extent of penalties not collected being quantified for the first time. By any account, Rs 4,234 crore is a huge number. However, we believe that is is a significant understatement as the assessment by CAG covered Discom’s only – not CPPs and open access consumers who constitute a significant portion of obligated entities in the country.


News coverage of the CAG report can be accessed here.

REC Trade Results November 2015

RECs demand has been steadily rising, and this month results have been very encouraging. Non Solar REC’s and Solar REC’s traded this month were 9.5% and 533% higher compared to trading session of October. The total transaction value of REC’s hit a sum total of Rs 65.5 crores, compared to Rs. 36.5 crores last month.

Analysis of Trading:

Non Solar – Clearing ratio in exchange were at 1.44% and 1.90% in IEX and PXIL respectively for Non Solar REC’s. A total of 2, 31,545 RECs were traded in this trading session (in October 2, 11,442 RECs were traded)Clearing ratio at PXIL reduced marginally but picked up on IEX, as compared to last month.

Solar – Clearing ratio stood at 2.07% and 4.97% in IEX and PXIL respectively, compared to 0.54% and 0.33% last month. A total of 87,767 REC’s were sold in this session, 6.33 times compared to October.

Trading volumes are expected to increase significantly going forward, as most obligated entities are now gearing up to fulfill their obligation considering that only 4 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. Overall the market showed clear signs of recovery, and is expected to grow further in the closing months of the FY.

The October’s trade results can be accessed here.

OERC (Procurement of Energy Renewable Sources and its Compliance) Regulations, 2015

Orissa Electricity Regulatory Commission released the notification on Procurement of energy from Renewable Sources on 10th October, 2015. This regulation set the basic principle for promoting the sale of power from renewable sources to any person within the state of Orissa. Below mentioned are the key points of the regulation:

  • These regulation shall be applicable to all Obligated entities in the state of Orissa, the obligated entities include :
    • Distribution Licensee or any other entity procuring power on their behalf and;
    • Any person consuming electricity

a)      Generated from Conventional Captive Generating plant having capacity of 1MW and above for his own use and or

b)      Procured from conventional generation through open access and third party sale.

  • Every Obligated Entity shall meet its RPO target from its own Renewable Sources or by purchase of REC’s or procurement of power from other developer of Renewable Energy Sources.
  • The minimum quantity of energy to be procured from Renewable Sources by obligated entity is mentioned in the table below :

  • The Cross Subsidy Surcharge is exempted for procurement of power through third party sale from Renewable Energy Sources.
  • No Banking facility is provided for supply (Third Party sale) from Renewable Energy Sources through open access.
  • The energy generation from Third Party sale in each 15 min time block shall be set off against the captive/open access users’ consumption in the same 15 min time block.

In closure we would like to say that this regulation would help the state of Orissa to comply with its solar and non solar RPO targets and promote the procurement of renewable energy.

The detailed document can be accessed here.

REC Trade Results September 2015

Demand for both Solar and Non Solar REC’s remained lackluster in this trading session. A sum total of 1, 93,619 Solar and Non Solar RECs were sold in the current trading session. The total transaction value of REC’s was a paltry Rs.35.1 crores.

Analysis of Trading:-

Non Solar – Clearing ratio in exchange were at 1.68% and 0.77% on IEX and PXIL respectively for Non Solar RECs. A total of 1, 83,599Non Solar RECs were redeemed in this trading session. However the demand improved by 72% with respect to the August trading session.

Solar – Clearing ratio stood at 0.45% and 0.18% on IEX and PXIL respectively. Demand for Solar REC’s dipped to a low figure of 10,020 REC’s, 75% lower thanthe trade during August trading session.

The responses seen in the Solar REC’s segment were lower than expected. In August, total 41,928 RECs were sold.

Over the longer term, increasing focus on RPO both from the courts and from regulators is expected to increase demand. For instance OERC in its recent order on 11th August, 2015 stated that the reasons quoted by the obligated entities for non-compliance were found inappropriate and it is expected that in line with the order, the obligated entities will comply with the RPO targets, and thus we expect a surge in demand for Solar RECs in the coming months. More about the order can be read here.


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