REC TRADE RESULTS JANUARY 2016

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.

REC TRADE RESULTS DECEMBER 2015

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.

 

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.

 

OERC Order on RPO Compliance

The Green Energy Association and Orissa Renewable Energy Development Agency had filed a petition in the matter of non-compliance of RPO by obligated entities in OERC. The respondents GRIDCO and NALCO quoted the same reason of non-availability of RECs in the market for failure in meeting the obligation, even though the RECs were available at floor prices.

Green Energy Association submitted that imposition of RPO should not be relaxed in any manner for any of the obligated entities. It has submitted that the provision in the Regulation like power to relax and power to remove difficulties should be exercised judiciously only on exceptional circumstances as per the law and should not be used routinely which would otherwise defeat the object and purpose of the Regulation. Non-availability of REC should be a pre-condition to carry forward the RPO of the OERC (Renewable Purchase Obligation and its compliance) Regulations, 2010. They requested the Commission, not to consider fossil fuel based Co-generation plant under the category of renewable energy and to consider non-fossil fuel based topping up cycle Co-gen plants under renewable energy category.

After reviewing the submitted documents from both the petitioner and the respondents the Commission gave the following order:

  • The reasons advanced by parties for non-fulfillment of RPO obligation are unjustified and Commission is not inclined to grant any exception on this matter.
  • The obligated entities are allowed to carryover their renewable and co-generation purchase obligation upto 31.03.2015 till 31.08.2016. If they do not purchase the obligated quantity of power, they can purchase REC at least 5% of the obligation per month upto 31.03.2015 from August, 2015 on wards and must comply the arrear obligation in full by 31.08.2016. No further extension of time shall be granted to carry forward the renewable purchase obligation in any circumstance.
  • All the obligated entities shall submit compliance report quarterly to OREDA within the above time frame. OREDA shall also submit the quarterly compliance report to the Commission after due scrutiny.
  • All obligated entities mentioned in the RPO Regulations, 2010 shall comply with the said Regulations henceforth.

This order superseded all other previous orders issued by the Commission in this regard.

The reason for non- compliance of RPO by the respondents is found inappropriate by the commission, because as per the REC inventory there are 2598847 Solar RECs available in the market as of now.

The table below gives the solar RPO targets for Orissa from year 2012-13 to 2015-16

It is expected that in line with the order, GRIDCO and other obligated entities will comply with the RPO targets, and thus we expect a surge in demand for Solar RECs in the coming months.

The Commission’s order can be accessed here.

The Commission’s order can be accessed here.

REC TRADE RESULTS AUGUST 2015

August trading session saw a stagnant response from the Non-Solar demand side. However the Solar RECs saw a huge recovery from rise in demand during trading session. A sum total of 149,209 RECs were redeemed in this session, compared to 173,223 in July. Demand took a fall of approx. 14 % w.r.t July.

Analysis of Trading:-

Non Solar – Clearing ratio in exchange were at 0.92% and 0.75% in IEX and PXIL respectively for Non Solar RECs. A total of 107,281 RECs were redeemed in this trading session. There was a fall of approx. 30 % in the current trading session w.r.t to July.

 Solar – Clearing ratio stood at 1.52% and 1.86% in IEX and PXIL respectively. Solar RECs rose staggeringly from 17,952 in July to 41,928 this trading session, a rise of 133%. This was good signs for solar, as it has recovered again from major fall last MONTH,

Over the longer term, increasing focus on RPO both from the courts and from regulators is expected to increase demand. Over the last several months many developments have taken place, including the draft Electricity Act, orders from the ApTel and from the Supreme Court. The most recent development was the release of the draft of Renewable Energy Act 2015. An analysis of the Act can here

REC Trade Results July 2015

July’s trading session saw a stagnant response from the demand side. Though, the current demand while comparing it to previous year’s session of July was 3 times higher in Solar and 5 times in Non Solar segment, it indicated a lower compliance when comparing it to trading sessions of 2015. A sum total of 173,223 Lakh RECs were redeemed in this session. Demand took a fall of approx. 5 % w.r.t June.  The demand in last two trading sessions was due to the judgment by Supreme Court.

 Analysis of Trading:-

 Non Solar – Clearing ratio in exchange were at 1.33% and 1.15% in IEX and PXIL respectively for Non Solar RECs. A total of 155,271 RECs were redeemed in this trading session. There was seen a fall of approx. 4 % in the current trading session w.r.t to June in Non Solar RECs.

 Solar – Clearing ratio stood at 0.84% and 0.29% in IEX and PXIL respectively. Solar RECs remained at 17,952, which is a show towards a downfall in the demand in the solar RECs segment; it shows a fall of 5640 RECs from June trading session.

Over the longer term, increasing focus on RPO both from the courts and from regulators is expected to increase demand. Over the last many months several developments have taken place including the draft Electricity Act, orders from the ApTel and from the Supreme Court. The most recent development was the release of the draft of Renewable Energy Act 2015. An analysis can be read here.

Team REConnect

Analysis of the 5th Amendment to REC Regulations

Background:

Recently, CERC proposed the 5th amendment to REC regulations. The gist of proposed changes is:

  • Captive generators and portion of power for self-consumption will no longer be eligible for RECs
  • If an open access (OA) project avails concessional wheeling, banking or cross-subsidy benefits, it will not be eligible for RECs

These changes have been proposed in the context of an REC market that faces significant oversupply. As on June 30 2015, RECs worth 2,650 crore remain unsold, and clearing percentages in many months are well below 5%. In most months, more RECs have been issued than redeemed, further aggravating the problem of over-supply.

In the explanatory memorandum, CERC has elaborated on the thinking behind the proposed amendment. The memo states:

Lack of RPO enforcement has been one of the major reasons for the high level of unsold REC inventory. However, it is also important to analyze the supply side aspects and understand whether the right beneficiaries (as was envisaged while introducing REC framework) are participating and able to compete in the REC market. It remains a fact that a major portion of the REC inventory is contributed by the CGPs. Also, developers under third party model are able to leverage the concessional benefits while participating under 
REC framework.” (Emphasis added)

and,

“Around 51% of the projects under the CGP route were commissioned before the first notification (14 January 2010) of the REC Regulation. These projects must have computed their financial viability without the REC benefit.” 


The proposed changes will have far-reaching implications on the REC market structure. As per data provided in the Explanatory Memo approximately 41% of the capacity (under captive generation) will be completely excluded from RECs markets, and a significant portion of OA capacity (19% of total) will be impacted.

Analysis by REConnect Energy suggests that annual RECs generation may fall from 96.25 lakhs in FY 14-15 to 54.30 lakhs per year after the amendment.

Table: Annual RECs Issuance

 Sources: REC registry website; REConnect analysis

Note: Annualized redemption is assumed to be 2X times redemption is FY 14-15. Increase is expected due to SC order and Electricity Act amendment.

Impact on Open Access (OA) projects:

The proposed amendment is contrary to the provision in the draft Electricity Amendment bill (EA Bill) in the Parliament, and of many state policies.

The EA Bill says:

Sec 42(4):

“The open access consumers procuring electricity from renewable energy sources shall not be required to pay the surcharge for open access for such period as may be prescribed by the Central Government”

 Surcharge in the above context means cross-subsidy surcharge (CSS).

 If the EA Bill is to be passed by the Parliament, the impact of the 5th Amendment will be to make all RE projects in OA ineligible for RECs. This will discourage OA in renewable energy – something that goes against one of the principle objectives of the EA and of CERC (to encourage market development in the electricity sector).

Further, many states allow concessional cross-subsidy or exemption from cross-subsidy as a way to promote open access in RE projects. For example, Rajasthan’s solar policy exempts solar projects under open access from CSS. Similar provisions exist in many state policies.

Renewable Energy projects will not be viable under open access without concessional CSS provided by the states. States realize this – and therefore the concession exists in the first place. If RECs benefits were to be denied to such projects, it’s the equivalent of giving from one hand and taking from another. The net result of the amendment will be to completely finish-off the OA market for RE power – this is something that will be contrary to one of the fundamental pillars of the Electricity Act.

Further, in many existing OA transactions, prices are likely to have been negotiated knowing the fact that the RE project will get revenue from RECs. Such projects may suddenly become unviable. In many states with low tariffs, such projects will not remain competitive without RECs and therefore risk becoming NPAs.

Impact on Captive Generating (CGP) projects:

As mentioned above, the impact on CGPs of the amendment will be drastic. All CGP’s will be considered ineligible for RECs benefits. However, in proposing the amendment, CERC has failed to consider the case of two categories of projects–

(1)   CGPs set up specifically to meet RPO requirements, and

(2)   CGPs under the group captive mechanism

Since CERC amended the RECs regulation to allow self-retention of RECs by obligated entities, many companies have set up CGPs in one state and meet their obligation in other states through retention of RECs. This approach has multiple benefits – it has encouraged setting up of new RE capacity, and also helps the obligated entity manage its compliance costs.

The proposed amendment will take away this benefit to obligated entities. This is erroneous on three counts – (a) the CGP is likely to have been setup by the obligated entity to meet RPO across units. Such an investment, made in good faith keeping in mind existing regulations, may become redundant after the regulation, (b) it will discourage setting up of large new RE capacities as obligated entities will not be able to meet RPO in states that have low RE resources, and (c) it will take away a valid means for obligated entities to comply with RPO, leaving them with very limited options – buying of RECs.

Group captive projects, on the other hand, also face difficulties due to the amendment. In many group captive projects, the primary investment is made by an investor, and power prices are determined through negotiations. Further, such projects tend to be long term in nature as they involve an element of equity investment by the consumer. A sudden change in RECs eligibility is likely to make such projects unviable, and result in severe losses to investors who set up projects assuming a stable RECs regime.

Overall, we believe that while CERC’s intent to correct the supply imbalance in the RECs market is needed, the unintended consequence of the 5th amendment on open access and captive projects will be harmful to the growth of the renewable energy industry.

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