VALIDITY OF RECS WHICH WERE ABOUT TO GET EXPIRED BETWEEN OCTOBER ’17 AND MARCH ’18 GETS EXTENDED BY SIX MONTHS

The Central Electricity Regulatory Commission (CERC) has in its order dated 29/08/2017, declared that those Renewable Energy Certificates (RECs) which were expiring between 1st October 2017 and 31st March 2018 are now going to remain valid till 31st March 2018. In its order dated 30th March 2017, the commission had extended the validity of RECs which were going to expire between 1st April 2017 to 30th September 2017 till 31st March 2018.

 

The order  can be accessed here.

CERC DECLARES NEW REC FLOOR AND FORBEARANCE PRICE

CERC came up with draft regulations in which they have reduced the prices of their Renewable Energy Certificates to a historic low. The new floor and forbearance prices from the same have been covered in our previous blog which also contains a link of the draft regulation.

REConnect Energy’s co-founder and director, Vibhav Nuwal made the following observations about the scenario in Business Standard “This change rewards non-compliant companies, which can now comply at a much lower cost. It will exert further pressure on distressed projects”.

 

CERC DECLARES NEW REC FLOOR AND FORBEARANCE PRICE

Honorable Central Electricity Regulatory Commission has determined floor and forbearance prices for REC (solar and non-solar)  which will be valid from April 1, 2017 onwards. The prices have reduced significantly and the solar prices are set to reduce from Rs 3,500 to Rs 1,000 and the non-solar REC prices are set to reduce from Rs 1,500 to Rs 1,000.

 

No Vintage Multiplier has been proposed for any technology and existing vintage multiplier for Solar generating technologies registered in REC mechanism prior to 1st January 2015 and shall expire after 31st March 2017.

 

The proposed floor and forbearance prices are given below:

 

The following is the REC price trend:

 

The impact of this price reduction on different aspects is as follows:

Impact on existing REC projects:

  • Reduction in floor price will aggravate the financial duress of RECs based projects: Already the newly established REC projects are under distress. Reduction in the floor price will only aggravate the situation as the number of unsold RECs will increase.

  • No Vintage Multiplier: The draft does not clearly state the position on multiplier to be provided on existing inventory of RECs.

Impact on obligated entities:

  • Perverse gain for defaulting Obligated Entity: Obligated entities which are non-compliant will benefit from reduction in prices since they will have an option to purchase RECs and fulfill their RPO compliance at a lower rate. This has never been addressed by the CERC or the state ERC’s,

 

  • Potential higher demand going forward: Most captive and open access based customers will find it easier to buy RECs than to buy green power. Therefore, the low prices may lead to an increase in the REC demand.

 

Impact on the market:

  • Low Demand in March 2017: Since the new prices will be applicable from 1st April, 2017, March will see minimum demand as the Obligated entities will have an option to comply with RPO compliance in the next FY.

 

  • Higher Inventory and therefore lower clearing ratios: If the appropriate multiplier is provided to the existing inventory, the inventory of unsold RECs will jump to 3.6 crore RECS as compared to 1.7 crore RECs as present. Even lower clearing ratios will be experienced at exchanges if the demand does not increase in proportion.

Other issues:

  • Calculation of floor price

  • Validity of RECs

 

The previous analysis of CERCs floor and forbearance for financial year 2012 to 2017 can be found here.

REC Market demand & supply forecast for FY 16-17

Every year, around the mid-year mark we forecast the demand and supply in the RECs markets for the remain-der of the financial year. The second half of the FY is the busy period for the RECs markets as most transactions take place in this period. As an example, of the 43 lakh non-solar RECs sold last year, 9 lakh were sold between Apr – Sept 2015 and 34 lakh were sold from Oct 15 – March 2016 (21% and 79% split between the two halves of the year).
FY 16-17 is characterized by several changes in the RECs markets :-

  • Significantly higher demand compared to same pe-riod last year for Non-solar RECs (non-solar RECs de-mand is up by 51% compared to the same period last year, ie April to November)
  • Drastic reduction in RECs issuances due to impact of CERC’s 4th amendment to RECs regulations
  • Impeding price change in the short term (April 2017) particularly for solar RECs
  • Changing regulations in light of the national tariff policy (NTP). This will result in much higher RPO and removal of exemption for co-gen. However, due to inconsistencies in the NTP with the Electricity Act 2003 we expect the impact of these changes to be visible only in the next FY.

Overall, we expect demand to remain robust for Non-solar RECs (but not for Solar RECs). Increased demand, combined with significantly lower issuances of RECs will result in much improved clearing ratio for projects that are holding RECs.
Demand Comparison
As mentioned above, demand for non-solar RECs has been robust compared to the same period last year. As of Novem-ber, demand is up by 51% compared to the same period last year.
We expect this trend to continue, driven by several factors –

  • Several regulatory commissions have given out orders for RPO compliance during the year – this is likely to result in significant demand in the coming months. Notable examples are Maharashtra and Kerala.
  • Private Discom’s, which are large buyers, have so far re-mained marginal participants in the market. This is expected to change in the coming months.
  • CPP and open access consumers will continue to be ma-jor buyers, with several new participants coming into the market in the coming months.

Demand for Solar RECs this year compared to the same pe-riod last year has been down by 1%, or essentially the same. However, we believe that by end of FY 16-17, there is a pos-sibility that the total demand totals less than that of the pre-vious year.

This is because the current floor prices are valid only till March 31, 2017. The general expectation is of a small correction in the price of Non-solar RECs and a signifi-cant correction in the price of solar RECs. Besides this, the vintage multiplier (of 2.66x) currently in place will also expire. This may result in

(a) Significant price reduc-tion of Solar RECs,

(b) a major jump in S-RECs inventory as existing S-RECs are adjusted to the new price, and

(c) drastic reduction in S-RECs issuance from April 2017 on-wards.
These changes in the near future make market forecast-ing for solar RECs a perilous task. Our approach assess demand in the same basis as mentioned above, but moderates it by a significant factor as closer to March obligated entities are expected to hold off purchases till new prices take effect.

RECs Supply
Two factors have resulted in reduced supply of RECs :-

 

  • Several projects have existed the RECs mechanism in favor of green power sale/ state tariff PPA or captives as RECs are no longer a viable mechanism
  • Impact of the 4th amendment to RECs regulations by CERC

As a result, Non-solar RECs issuance is down by 38%  compared to the same period last year, and Solar RECs issu-ances down by 41%. Going forward, we expect the non-solar RECs issuance to remain subdued compared to last year (as a big impact of the 4th amendment has been on sugar co-gen project which see issuances starting from November to April or May). For the full year FY16-17 we forecast Non-solar RECs issuance to be 35% below the last year number. The reduction in Solar RECs issuance is due to higher issu-ance last year as a result of solar vintage multipliers, and time-lag this year as the documentation related to 4th amendment is completed. Overall, we expect the year to end with roughly 30% lower issuance compared to last year.

Demand and supply
We have forecast demand under three scenarios –

(1) Base case – demand from states that have enforced RPO in the past or have current orders for RPO enforcement are in-cluded. Even for such states, a probably of demand material-izing is applied to the total RPO gap;

(2) Medium enforce-ment – expected demand from states that have on-going RPO assessment are added to the demand in scenario 1;

(3) High enforcement – this scenario envisages that most states will take some action towards RPO enforcement. Under this scenario, even those states that have not enforced RPO regulations till date are expected to initiate action, albeit the expected demand from such states is moderated by assign-ing a low probability (20-30%).

Conclusion:

Looking at the overall picture after the demand-supply forecasting exercise shows the following:

  • Non-solar RECs markets are showing a significant improvement. Demand is up by 51% compared to last year, and this year may become the first one in which demand exceeds issuance during the year. This is a major development towards the revival of the RECs markets.
  • Solar RECs market however is lagging behind. Demand has failed to increase this year, and may actually be lower than last year. This is driven primarily by expectation of drastic price decrease in April 2017. Only possibility of this scenario changing is if a large demand comes Discom’s.

 

REC Trade Result October 2016

Analysis of Trading:

 

Non Solar – The clearing ratio stood at 1.9% and 2.06% in both IEX and PXIL, with a significant increase of 46% in the no. of REC’s traded as compared to last month

Solar – Clearing ratio stood at 0.86 % and 1.16% in IEX and PXIL respectively, with an increase of 13% in total demand of Solar RECs as compared to last month.

This month trading saw significant improvement in the demand for both Solar and Non-Solar RECs as compared to last month. The total transaction value stood at 50.66 Crores in comparison to 37.5 Crores last month.

In contradictory to the total demand, this month saw a dip in the total REC issuance, where the demand increased by 1 lakh in comparison to September. This could be attributed due to the impact of CERC’s 4th amendment to RECs regulations.

 

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 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

REC Trade Results – June 2015

The June trade session remained below expectations compared to May’15 month performance. However, if we compare the performance with Jun’14, the response was still far better. After the announcement of an important judgment by Supreme Court, the market looks upbeat and we can expect better demand in upcoming trade sessions.

Analysis of Trading:

Non-Solar – Total 161,845 RECs were cleared in this trading session. IEX and PXIL had a clearing ratio of 1.6% and 0.84% respectively. Total RECs redeemed this month was approx. 1 Lakh RECs lower w.r.t May’15.

Solar - RECs redeemed this month remained at 23,648 RECs. The clearing ratio was 1.4% and 0.17% in IEX and PXIL respectively. Solar REC traded this month were approximately 60 (sixty) thousand lower w.r.t to May trading session.

The REC trade results in the FY 2015-16 are summarized below for your reference.

REC Trade Results May 2015 – A Significant jump after Supreme Court judgment

We are pleased to share the Result of REC trading for the month of April-15.

In May’s trading session, 256,579 Non Solar and 83,189 Solar REC’s were traded through Power Exchange (a total of 339,768 REC’s), which was more than 4 times the traded volume in April.

The significant jump appears to a direct result of the Supreme Court judgment. The SC gave its judgment upholding the applicability of RPO on open access and captive consumers. The judgment is expected to have far-reaching impact as stay on RPO in many states will become redundant. It is also expected that SERC will take a more stringent approach to RPO enforcement.

 Analysis of Trading:-

 Non Solar - Total of 2.5 Lakh REC’s were cleared in this trading session. IEX and PXIL had a clearing ratio of 3.6% and 0.4%. Non Solar REC’s traded were approx.3.5 time’s higher w.r.t previous month.

Solar - REC’s redeemed this month were 83 Thousand, which were an 8-fold increase in number w.r.t. previous month. The clearing ratio was 5.51% and 0.89% in IEX and PXIL respectively. Demand for solar REC’s significantly improved this month.

The REC trade results in the FY 2014-15 is summarized below for your reference.

Non-Solar

Solar

Media Coverage – The Hindu Business Line

BY: Team REConnect

MPERC imposes penalty for non compliance of RPO

In an order dated 20th October 2014, Madhya Pradesh Electricity Regulatory Commission (MPERC) has imposed a token penalty of Rs. 25,000 for non compliance of RPO.  The order is the outcome of the petition filed by M/S Green Energy Association in the matter of non compliance of solar RPO by the obligated entities for the period of FY 2011-12 to FY 2013-14. The respondent Madhya Pradesh Power Management Co Ltd (MPPMCL) plea was that they could not fulfill the RPO in the past years through purchase of RECs due to poor financial condition of Discoms. On hearing both the parties the commission  found the plea of MPPMCL to be illogical at this stage as RECs are available in the market and the retail tariff order for FY 2014-15 includes the amount to procure energy from renewable sources to meet RPO.  Therefore, now non compliance of RPO cannot be neglected and go unpunished.

The order states that

“ The Commission, therefore, imposes a token penalty of Rs. 25,000.00 on the respondent towards non-compliance of the solar RPO target as per the provisions of MPERC (Co-generation and Generation of Electricity from Renewable Sources of Energy) Regulations, 2010, which is to be deposited with the Commission within 30 days of the issue of this order. It may be emphasized that the penalty is a token and does not redeem the failure of the respondent in the matter. The Commission would like to warn the respondent that future non-compliance in this regard would be dealt with severely. “

This order will be appreciated by the RE generators who have a large inventory of RECs lying with them. Similar orders from SERC of Uttarakhand and Union Territories were made in the past. This is a welcome step and we expect other SERCs to come up with similar orders and take strict action against non compliance of RPO.

The order can be accessed here.

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