Will Renewable Energy Certificates(RECs) drive the growth of

Solar in India?

REC Mechanism 2

About RESolve

• Advisory firm with strong capabilities in Strategic, Regulatory , Commercial and Technical aspects of renewable energy projects

• Founded by professionals from India and Germany with strong global exposure

• Specific focus on Solar PV and Wind in India

• Offerings in – Market Entry strategy for solar firms into India– Market Intelligence on the Indian Solar PV sector– Concept-to-Commissioning of PV projects– Policy and Regulatory advice

• On-going projects – Advisory for a 5 MWp project under REC mechanism

REC Mechanism 3

Overview

1. What are RPOs and RECs?

2. Why are RECs important?

3. Do RECs make financial sense?

4. Aren’t RECs very challenging?

5. What are the takeaways?

REC Mechanism 4

RPOs – Key to JNNSM target achievement

• The Government of India plans 3,000 MW of solar power projects in phase 2 of the JNNSM • Additional 6,000 MW projects through solar-specific renewable purchase obligation (RPO)

scheme• Renewable Energy Certificate (REC) scheme is expected to “catch on from next year” Mr Tarun Kapoor, Joint Secretary, MNRE on June 14, 2012

Phase 1 (2010-13) Phase 2 (2013-2017) Phase 3 (2017-22)0

5000

10000

15000

20000

25000

1,0003,000

20,000

200 10002000

JNNSM solar target

Utility power including rooftops Off-grid solar applications

Capa

city

in M

W

“An additional 3000 MW by 2017 through the mandatory use of the RPO by utilities backed with a preferential tariff.”( JNNSM – Section 3)

REC Mechanism 5

What is RPO?

Renewable Purchase Obligation(RPO) – A mandate for obligated entities(OEs) to purchase a percentage of the total electricity consumption

Mandated by Electricity Act 2003

Section 86(1)(e) - “The State Electricity Regulatory Commission(SERC) should…. specify, for purchase of electricity from renewable energy sources, a percentage of the total consumption of electricity in the area of a distribution licensee”

Section 61(h) – The CERC shall…specify the terms and conditions for the determination of tariff, and ..shall be guided by … the promotion of co-generation and generation of electricity from renewable sources of energy

Section 66 - The CERC shall endeavour to promote the development of a market (including trading) in power in such manner as may be specified and shall be guided by the National Electricity Policy

REC Mechanism 6

Solar RPO targets set by SERCs

Andhra Pradesh

Assam

Bihar

Chhattisgarh

Gujarat

Haryana

Himachal Pradesh

Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Meghalaya

Nagaland

Orissa

Punjab

Rajasthan

Tamil Nadu

Tripura

Uttar Pradesh

Uttarakhand

0 0.5 1 1.5 2 2.5

2018-19 2017-18 2016-17 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11

% of RPO

REC Mechanism 7

Who and How?

• Obligated entities(OEs)– Distribution Companies– Open Access Consumers– Industries consuming captive power

• To meet the RPO, OEs can– Generate their own renewable energy – Purchase energy from RE sources that comply

with RPO regulations– Purchase Renewable Energy Certificates(RECs)

REC Mechanism 8

RECs – The green attribute

REC Vs CDM

Specific to India Global

Focus on Renewable Energy growth

Focus on CO2 abatement

RECs and CDM are independent of each other and both can be availed for the same project

REC Mechanism 9

Overview

1. What are RPOs and RECs?

2. Why are RECs important?

3. Do RECs make financial sense?

4. Aren’t RECs very challenging?

5. What are the takeaways?

REC Mechanism 10

Each state has a different RPO target..

Andhr

a Pra

desh

Assam

Bihar

Chhat

isgar

h

Harya

na

Himac

hal

Jark

hand

Karna

taka

Keral

a

Mad

hya

Prade

sh

Mah

aras

htra

Meg

hala

ya

Nagal

and

Orissa

Punja

b

Rajas

than

Tamil

Nadu

Tripur

a

Uttar P

rade

sh

Uttrak

hand

0

50

100

150

200

250

300

350

0

0.5

1

1.5

2

2.5

3

3.5

4

154

4

4828

137

622

103

35

127

214

3 1

87

8

162

251

319

2

Solar RPO Capacity Requirements (2011-12)

Capacity Required (MW) APPC Price (Rs/kWh)

Sola

r R

PO

Capaci

ty (

MW

)A

PP

C P

rice (R

s/kW

h)

More than 25GW required by 2020 to meet solar RPOs(Source: CERC)

REC Mechanism 11

..but not all have equal solar resource

• Uneven geographic distribution of solar resource

• Concentrated in certain pockets– Rajasthan has high solar resource– Mizoram has lower solar resource

• States achieving targets unwilling to buy more

• Interstate sale of power not possible

The solution - RECs

REC Mechanism 12

Parameters Details

Participation Voluntary

1 REC Certificate 1 MWh

Validity 365 Days after issuance

Trading Platform Power Exchanges only (IEX and PXIL)

Banking Not Allowed

Borrowing Not Allowed

Transfer Type Repeat trade of the same certificate is not possible

Floor price - Solar INR 9,300

Forbearance price -Solar

INR 13,400

Price Guarantee Through ‘Floor’ Price (Minimum Price)

Price Discovery Mechanism Closed Double-sided Auction*

Trading Mechanism Last Wednesday of the month (T day) for 2 Hours

Financial Settlement Buyers pay upfront (T day) and Sellers receive on (T+1 day)

Interstate Transaction Possible

Salient Features of RECs

(April 2012-March 2017)

REC Mechanism 13

Non-Solar REC trading well established....Solar REC trading taking off

May-12 Jun-12 Jul-120

100

200

300

400

12,600 12,700 12,800 12,900 13,000 13,100

10

342

179

13,000

12,775 12,800

Solar RECs

Number of RECs traded Weighted Average Price(Rs/REC)

Tra

ded V

olu

me

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-

12

Feb-1

2

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

20

50000

100000

150000

200000

250000

0500100015002000250030003500

424 26018502163851858825096

46362

95404105527111621

171524206188199737

71226

168675

236485

158220

Non-Solar RECs

Number of RECs traded Weighted Average Price(Rs/REC)

Tra

ded V

olu

me

Source: recregistry.in, IEX, PXIL

REC Mechanism 14

Solar REC market shaping up

• M&B Switchgear Ltd, owns and operates a 2 MW Solar Plant, traded 179 RECs @12,800 INR/REC in July 2012.

• Revenue forecast from RECs for M&B Switchgear

Solar REC (Rs/MWh) Revenue For 1,500 RECs/MWp/Year

@Forbearance price 13,400 Rs 2 Crore

@Floor price 9,300 Rs. 1.4 Crore

Status of Solar based REC projects (as of July 2012)

Total number of registered projects – 7 Total capacity of registered projects – 18.16 MW

REC Mechanism 15

Voluntary RECs also have a role to play

Starbucks• Purchases RECs generated through

wind farms• 2011 - Purchased RECs equivalent to

50% of total electricity consumption globally

• 2015 Target – To purchase RECs equivalent to 100% of total electricity consumption

Google • Purchases renewable energy through

PPAs• Sells renewable energy purchased to

the local grid after stripping out the REC component

• RECs generated are applied to the energy consumed at data centers making them carbon neutral

Voluntary RECs popular among several global companies(Yahoo, HSBC, Citi, etc)*

*Source: REConnect

Image credit - Starbucks

Image credit : Google

REC Mechanism 16

Voluntary RECs in India

Public Sector Undertakings(PSUs)

Purchase of Voluntary RECs encouraged by Department of Public Enterprises (DPE)• Indian Oil, SAIL, BHEL, etc

• POSOCO – First PSU to purchase Voluntary RECs

Private Sector Companies RECs offset carbon footprint and achieve Corporate Social Responsibility(CSR) goals

• MNC IT Companies

• Over 38% of total energy consumed in ITC is from renewable sources through their own wind farms, though not through REC purchase

Voluntary RECs – Useful tool to meet Sustainable Development goals

Image credit - POSOCO

Image credit - ITC

REC Mechanism 17

Overview

1. What are RPOs and RECs?

2. Why are RECs important?

3. Do RECs make financial sense?

4. Aren’t RECs very challenging?

5. What are the takeaways?

REC Mechanism 18

Revenue streams – REC Vs Preferential Tariff

Assumptions1. APPC for base year 2011– Rajasthan2. Increase in APPC – 5% per year3. REC price drop every 5 years – 30%4. Total life time of the plant – 25 Years

  2012 2017 2022 2027 2032 2037Case 1 - Pessimistic Scenario            APPC(Rs/kWh) 2.57 3.28 4.19 5.34 6.82 8.70REC Price(Min)(Rs/kWh) 9.30 6.51 4.56 3.19 2.23 2.23Total(Rs/kWh) 11.87 9.79 8.74 8.53 9.05 10.94             Case 2 - Optimistic Scenario           APPC(Rs/kWh) 2.57 3.28 4.19 5.34 6.82 8.70REC Price(Max)(Rs/kWh) 12.00 8.40 5.88 4.12 2.88 2.88Total(Rs/kWh) 14.57 11.68 10.07 9.46 9.70 11.58             Case 3 - Realistic Scenario            APPC(Rs/kWh) 2.57 3.28 4.19 5.34 6.82 8.70REC Price(Average)(Rs/kWh) 10.65 7.46 5.22 3.65 2.56 2.56Total(Rs/kWh) 13.22 10.74 9.40 9.00 9.38 11.26             Preferntial FiT 9.00 9.00 9.00 9.00 9.00 9.00

REC Mechanism 19

Financial Analysis

Assumptions1. Capital Cost – Rs. 8.5 Crore/MWp2. D:E Ratio – 70:303. Interest rate – 10% per annum4. Energy generation – 1.6 Million kWh/Year/MWp5. Depreciation – Straight Line

Fixed PPA Pessimistic Realistic Optimistic0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

12.2%

22.1%

29.7%

38.1%

10.6%14.0%

16.1%18.2%

IRR Scenario Analysis(Based on revenue/kWh)

Equity IRR Project IRR

IRR

%

REC Mechanism 20

Alternate scenario

• RECs becoming irrelevant after 2017– Due to Grid parity– Due to Regulatory issues

• Possible solution• Vintage Based Multiplier(VBM) for RECs• CERC deemed vintage RECs out of scope

REC Mechanism 21

Overview

1. What are RPOs and RECs?

2. Why are RECs important?

3. Do RECs make financial sense?

4. Aren’t RECs very challenging?

5. What are the takeaways?

REC Mechanism 22

Financial Woes of Discoms

Shunglu Committee's report to the Planning Commission(Dec. 2011)

Bottom 5 states account for 80% of total debt1. Tamil Nadu (more than 50,000 Crore of accumulated debt)2. Rajasthan (about 8,500 Crore)3. Uttar Pradesh4. Haryana5. Madhya Pradesh

2009-10 2005-2010 -

20,000 40,000 60,000 80,000

100,000 120,000 140,000 160,000 180,000 200,000

57,000

179,000

27,000

82,000

Losses of all Discoms

Before subsidyAfter subsidy

Rs.

Cro

res

Image credit – Economic Times

REC Mechanism 23

RPO Enforcement and other challenges

• Lack of enough solar projects/RECs– Punjab SERC ruling - Carry forward to next year– Other possibility – Waiver of RPO for a year

• Control period– 5 years whereas loan tenures are about 10 years– Uncertainty of cash flows deter lenders

• APPC prices– Need for consistency in APPC determination for every state

Others• 3 Years required to switch Switch over to REC mechanism from

preferential PPA• 250 kWp minimum size(with exceptions) hindrance for growth of

REC based rooftop projects

REC Mechanism 24

Clouds clearing?

• Power tariffs hike - steps taken to improve financial health of Discoms

• Increase in coal prices and shortages – increase in APPC price

State Average Tariff Increase (%)

Gujarat <5

Bihar, Mizoram, Manipur, Haryana, Chhattisgarh, Maharashtra

>10-15

Andhra Pradesh, Orissa, Bihar, Jharkhand, J&K, Tripura

>15-25

Nagaland, Delhi, Rajasthan Upto 30%

Kerala, Tamil Nadu More than 30%

REC Mechanism 25

Overview

1. What are RPOs and RECs?

2. Why are RECs important?

3. Do RECs make financial sense?

4. Aren’t RECs very challenging?

5. What are the takeaways?

REC Mechanism 26

Takeaways..

1. Are RPOs important?Yes. RPOs can lead to more than 25 GW of Solar installations by 2020

2. Do RECs make financial sense?Yes, if RPOs strictly enforced and modifications made to the control period

3. Aren’t RECs very challenging?Yes, but the challenges are not insurmountable

Thank you

Please write your comments, suggestions or corrections if any, to

Madhavan NampoothiriFounder and Directormadhavan@re-solve.in

www.re-solve.in

REC Mechanism 28

Annexures

REC Mechanism 29

REC PPA projects

Open access Entry through competitive bidding

High but variable returns Average but fixed returns

Any capacity above 250kWp (with some exemptions – eg:100kWp)

No restriction

Allotment is assured Depends on competition

Variable tariff (REC floor+APPC) Fixed tariff

No cap on capacity Limited allotment

Can avail CDM benefits along with REC certificates.

Can avail CDM benefits alone with the FiT

Voluntary entities can buy REC’s for reducing their carbon footprint.

Not applicable here. (sold only to Utilities)

Captive Power Producer (CPP) by Renewable energy power generation are eligible for REC’s*

CPP cannot avail FiT, by PPA mechanism.

REC Vs. Preferential PPA

REC Mechanism 30

State wise capacity details in MW(July 2012)

S.No. Type/State WindSmall Hydro

Biomass

Bio-fuel cogeneratio

nSolar PV

Waste to Energy

Total

1Gujarat 317 0 1 3 0 0 321

2Karnataka 69 0 0 0 0 0 69

3Madhya Pradesh 2 14 23 0 3 0 40

4Maharashtra 482 28 47 107 10 2 676

5Rajasthan 58 0 10 0 5 0 73

6Tamil Nadu 648 0 129 0 1 0 778

7Himachal Pradesh 0 48 0 0 0 0 48

8Jammu and Kashmir(JKSPDCL) 0 18 0 0 0 0 18

9Kerala 0 21 0 0 0 0 21

10Uttarakhand 0 24 0 0 0 0 24

11Chhattisgarh 0 0 101 3 0 0 104

12Haryana 0 0 9 0 0 0 9

13Uttar Pradesh 0 0 201 470 0 0 671

14Punjab 0 0 0 46 0 0 46

  Total 1576 152 520 629 18 2 2896

REC Mechanism 31

REC Pricing

Determination of floor price

• Reference APPC price is set to the lowest APPC price offered nationally

• Lowest APPC price in 2011– Kerala with Rs. 1.99 per kWh

• Minimum reference price is then calculated based on assumed O&M expenses, interest on loan and interest on capital

• The difference between the reference price and APPC price gives the floor price– i.e. Rs. 11.22 – Rs. 1.99 = Rs. 9.23

per kWh– Rounded to Rs. 9300 per MWh (1

REC)

Determination of forbearance price

• Reference APPC price is set to the lowest APPC price offered nationally

• Lowest APPC price in 2011 – Kerala with Rs. 1.99 per kWh

• CERC Solar tariff used as reference price, which under current regulation is Rs. 15.39 per kWh

• The difference between the reference price and APPC price gives the forbearance price– i.e. Rs. 15.39 – Rs. 1.99 = Rs.

13.40 per kWh– Which translates to Rs. 13,400

per MWh (1 REC)

REC Mechanism 32

Factors Affecting REC Price – Status Post Present Control Period

• Capital cost of power plant• Prevalent interest rates• These factors affect the interest rates on loans, interest on

working capital and loan repayment used in floor price calculations

• Would have a higher impact on floor price rather than forbearance price

• APPC price does not escalate very quickly (assumption of 5% escalation or less is reasonable)

• For Solar REC price to become irrelevant i.e. have 0 worth, the LCOE of solar would have to be equal to the APPC price. This is not very likely to happen by 2017

REC Mechanism 33

The REC trading process

Source: CERC