ICRA feels that reduction in REC prices will negatively impact REC-registered projects while it is a positive for obligated entities like discoms.
Central Electricity Regulatory Commission (CERC) vide its order dated June 17, 2020 reduced the forbearance prices and removed the floor price for the Renewable Energy Certificates (RECs), citing the significant reduction in wind and solar power tariffs over the past three years.
CERC has removed the floor price (hitherto Rs.1,000) for RECs. It has also reduced the forbearance price to Rs.1,000 per REC from Rs.2,400 per REC for solar RECs and from Rs 3,000 per REC for non-solar RECs.
As per an ICRA note, this will negatively impact the REC projects while it is a positive for obligated entities. The commission has removed the floor price for the RECs against the prevailing floor price of Rs.1,000 and reduced the forbearance price to Rs.1,000 per REC from Rs.2,400 per REC for solar RECs and from Rs 3,000 per REC for non-solar RECs. The revised prices are effective from July 1, 2020 and valid till June 30, 2021. The last such price revision was undertaken in March 2017. The RECs remain an important instrument to enable the distribution utilities and captive users without access to renewable sources to meet their renewable purchase obligation (RPO) targets.
The annual savings from the REC price revision for the obligated entities is estimated to be at least Rs.700 crore.
Commenting on the development, Sabyasachi Majumdar, Group Head & Senior Vice President, ICRA Ltd says, “The removal of the floor price and revision of the forbearance prices of the RECs without extending the vintage multiplier would lead to inventory losses for existing REC based projects, with estimated inventory loss of Rs.400 crore. On the other hand, the reduction in prices is a positive for the obligated entities such as distribution utilities and captive industrial users, who meet their RPO targets through RECs. This in turn is likely to improve the RPO compliance by the obligated entities.”
The annual savings from the REC price revision for the obligated entities is estimated to be at least Rs.700 crore, based on the average traded price and volumes traded in FY20 and considering that the RECs would trade at prices closer to the revised forbearance price. The savings would be higher, if the prices on the exchange remain lower than the forbearance price.
The floor price and the forbearance price of an REC are respectively, the minimum and maximum value at which an REC can be traded. These prices are calculated on the basis of average renewable energy tariffs across various technologies and over a period of time.
“Given the unprecedented impact on energy demand and hence, on the cash flows of the distribution utilities following lockdown due to COVID outbreak, there has been requests by the utilities to waive off or lower the RPO targets with the SERCs. The state regulatory in Haryana has issued an order in June 2020 waiving off the shortfall in RPO compliance till March 31, 2019 as one-off measure, instead of levying any penalty or directing to fulfill the same in subsequent period. This is negative from REC demand perspective, and such risk cannot be ruled out in other states in the near term. Further, RPO norms continue to vary across the states and do not remain in line with policy targets prescribed by the Ministry of Power, Government of India.” says Girishkumar Kadam, Sector Head & Vice President, ICRA Ltd.
Demand for RECs has improved following improved compliance of RPO norms by discoms, feels ICRA.
The demand for RECs has however improved since November 2017, with the improved compliance of RPO norms by the discoms, given the government’s focus on improving the share of renewables in overall generation and increased regulatory focus on compliance towards RPO norms; as well as regular downward revision in floor and cap prices of RECs by the CERC. Also, the realisation for the REC holders was higher than the floor price of Rs.1,000 per REC in FY19 and FY20, supported by the improved demand.
(Featured photograph for illustration only)
