Renewable Energy Certificates (REC) Trading Takes Off In India

(This post originally appeared on EAI Blog –http://www.eai.in/blog/2011/03/renewable-energy-certificates-rec-trading-takes-off-in-india.html. It was contributed by Madhavan Nampoothiri, Founder & Director of RESolve Energy Consultants on 31 March2011.)
The trading of Renewable Energy Certificates (REC), one of the key growth drivers for the Renewable energy industry, has successfully started in India. The RECs were traded in 2 of the major power exchanges – Indian Energy Exchange (IEX) and Power Exchange India Limited(PXIL).
For readers new to the subject, here are some basics. You can skip the basics and continue to the details about the trading at Price quoted and volumes.
What is an REC?
World over, Renewable energy is more expensive than traditional forms of energy and the growth of renewable energy has been supported mostly by governments through various policy initiatives like Feed-in-Tariffs, subsidies, tax concessions, among others. In order to make the renewable energy sector more sustainable, many countries like Australia, Japan, etc have put in place a mechanism to trade the renewable energy on platforms similar to stock exchanges. The trade of the energy will be purely based on demand and supply and the only role the government plays is to mandate utility companies to buy a certain part of their power from renewable energy sources.
Indian Electricity Act 2003 and Renewable Purchase Obligations(RPOs)
According to the Indian Electricity Act 2003, the State Electricity Regulatory Commission(SERC)s set targets for utility companies to purchase some percentage of their total power from renewable energy sources. These targets, called Renewable Purchase Obligations (RPOs), vary from state to state due to the potential of renewable energy. For example, Tamil Nadu has the most potential in Wind energy whereas Rajasthan has the most potential in Solar Energy. If the utility company is unable to buy its share of renewable energy, it can compensate that by buying the RECs from the market to make up for the shortfall.
REC Mechanism
Under the REC Mechanism, when Renewable Energy is generated (solar, wind, biomass, etc), the energy is divided into two components – the physical commodity electricity and a tradable certificate, which is the Renewable Energy Certificate(REC). The schematic is given below.

 
 
 
 
 
 
REC Mechanism
Source: MNRE(http://mnre.gov.in/pdf/MNRE_REC_Report.pdf )
The commodity electricity is sold to the distribution company/utility(or any user) at a mutually agreed tariff while the REC can be traded in the exchange. As mentioned earlier, the utility companies can make up for their shortfall in meeting the RPO targets by buying the RECs from the exchange.
Details of REC
Given below are some highlights of the RECs
– The denomination of each REC is 1 MWh( 1 REC = 1000 units(kWh) of electricity generated). In other words, the electricity producer can sell 1 REC for every 1000 units of electricity generated.
– The REC is divided into two types

  • Solar REC
  • Non-solar REC

– The RECs are valid for 365 days from the date of issuance of the certificate
– There is a range in which the RECs can be traded. This range is different for the Solar and Non-solar REC. The details are given below.

Solar REC Non-Solar REC
Forbearance(Maximum) price Rs. 17,000/REC Rs. 3,900/REC
Floor(Minimum) price Rs. 12,000/REC Rs. 1500/REC

More details can be found at http://www.iexindia.com/REC/REC_Brochure.pdf
Power exchanges
In India, the trading of RECs has started in two exchanges – Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL).
IEX, based in New Delhi, started the REC trading on 23rd February, 2011 and according to the portalcommodity online, IEX received a total buy bid of 125 Non-Solar REC and 11 Solar REC on the first trading session. However, since the first set of RECs were issued only in March 2001 and hence no bids for selling RECs were available, there was no trading on IEX at the time of the launch of operations in February 2011.
PXIL, based in Mumbai, started trading of RECs on 30th March 2011.
Price quoted and volumes
 
According to Bloomberg New Energy Finance and Climate Connect, a total of 532 RECs were issued in March 2011 by the central nodal agency NLDC(National Load Dispatch Centre). Out of this 532RECs, 424 were sold at the exchanges on 30th March 2011. The details are given in the table below.

Non-solar REC Solar REC
Total Buy Bids Total Sell Bids Trade Volume Purchase Price/REC Trade Volume Purchase Price
IEX 10,000+ 150 150 Rs.3900 0
PXIL 3600+ 274 Rs.2225 0
Total 424 0

 
More details on
i. IEX trading : http://www.iexindia.com/REC_March.pdf
ii. PXIL trading : http://www.powerexindia.com/PXIL/captcha.aspx?filename=20110331_104750_REC_launch_Muhurat_trading_30March2011.pdf
Please note that the Purchase Price/REC at IEX was the forbearance (Maximum) price offered.
This is a very significant event for the Indian Renewable Energy industry and many project developers were eagerly waiting for this moment. As Suzlon Energy Ltd. mentioned in November 2010, the REC trading mechanism should encourage banks to lend to renewable energy projects by reducing credit risk.
EAI will come back with more analysis on the impact of REC trading on the renewable energy sector in India. Do stay tuned!!