Redesigning REC Mechanism – A review on discussion paper by MoP

Recently the Ministry of Power came up with a Discussion Paper on redesigning the “Renewable Energy Certificate (REC) Mechanism”, which is open for public consultation till 25th June 2021. There are some sweeping changes proposed to the existing REC mechanism.
The major highlights of the proposed REC mechanism are discussed underneath.

• Removal of validity period of RECs; and removal of the Floor & Forbearance Price.
• Limiting REC issuance to a new project to 15 Years from the date of commissioning (while old projects can continue to 25 years).
• Promotion of new and high cost technologies in RE through Technology Multipliers for issuance of RECs. Every technology will be assigned with a REC multiplier depending on the market maturity of the technology.

• Incentivising Obligated Entities for procurement of RE Power beyond RPO requirement where two options are proposed.
  • Option 1:Only DISCOMs to be issued RECs for quantum beyond RPO compliance, as per the prevalent practice, 

  Or, 

  • Option 2:RECs can be issued to  all the obligated entities which purchase RE Power beyond their RPO compliance, similar to the provisions for the existing DISCOMs. 
• The role of trader can be enhanced in the REC trading to facilitate ease of fulfilling RPO including the small buyers.

In our opinion the proposed mechanism, subject to clear drafting of procedures, will help in the development of the RE Industry.

• The removal of threshold prices from the REC mechanism will rationalize and stabilize the REC prices of mature technology like Solar PV by moving market-determined prices towards equilibrium and making these instruments self-reliant.
• The multiplier for new RE Technology will incentivise and pave the way for easy “market entry” of other new and high cost RE technologies like Off-shore wind, Pumped Storage Hydro power Station, Hydrogen, etc.
• Incentive for obligated entities to procure RE power beyond RPO requirement will facilitate and promote the REC market.

However, these amendments to the REC mechanism may lead to significant price drop and unrealized REC volumes because of two prime reasons – (i) abrupt shift to unregulated pricing and (ii) huge build-up of REC inventory since July 2020. Besides, MoP has alluded to the adjustment of multiplier to address the vintage of the project based on the commissioning date. However, the paper does not elaborate on the approach for such adjustment. Similarly, it also refers to a ‘negative list’ or ‘sunset clause’ which is also not explained in sufficient detail.
Last but not the least, to ensure the robust functioning of the proposed mechanism, two bodies will play an important role: 

1. CERC: CERC, being the governing body, needs to implement infallible monitoring and surveillance systems to ensure no hoarding or price manipulation   
2. REC Traders: Roles and responsibilities of Traders need to be well defined to understand how they can contribute to the success of the proposed mechanism. 

Reference – Redesigning (REC) Mechanism