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The Indian economy is the fastest growing (8%) among its regional South and South East Asian peers. The sustenance of this strong economic growth is virtually impossible without increased energy consumption. The energy requirements are projected to grow over four-fold1 by 2032 for achieving the targeted gross domestic product (GDP) growth rate of 8 to 9 percent. However, given the current energy statistics, India faces a formidable task in meeting the growing needs. This is forcing India, which imports a majority of its oil, to reduce its import dependency and scout for cleaner energy resources within its own backyard. Renewable energy (RE) development therefore needs to be at the forefront to addresses the twin objectives of ensuring GHG emission reductions on the one hand and energy security on the other. The initiative to develop RE has taken a concrete shape and is well poised to give the necessary fillip to the energy requirements.
Waste to Energy 111 2,700 1,456 5,000 2,735 15,000 1,097 16,881 12,129 48,561 0 10,000 20,000 30,000 40,000 50,000
Indian Renewable Energy Markets
14 12 10 8 50 45 40 35 30 25 6 4 2 ‐ 2002‐03 2003‐04 2004‐05 2005‐06 2006‐07 2007‐08 2008‐09 2009‐10 2010‐11 Biomass Small Hydro Wind Biomass ( R ) Small Hydro ( R ) Wind ( R ) 20 15 10 5 0
Growth Rate (%)
Figure 2: Growth in Installed Capacity
The total RE potential for non-solar sources is approximately 88 GW (Figure 1) while the most accepted estimate for Solar (100 GW) is higher than the combined potential of the all RE sources put together. Taking cognizance of this, solar power development has risen to prime focus and today one the world’s most ambitious solar capacity addition programme2 is being pursued in India. Although, all types of RE have developed but wind has seen the fastest growth (5 year CAGR of 18%), contributing 75% of the RE installed capacity (Figure 2). The RE value chain has been in a growing phase since last 5 to 6 years and the Regulatory Commissions have emerged as the main drivers of its development. State level Renewable Portfolio Standard (RPO) initiated the earlier growth, which later on proliferated due to cash inflow through Clean Development Mechanism (CDM) market. Grid-connected renewable capacity currently stands
Figure 1: Current RE capacity vis‐à‐vis technical potential
Integrated Energy Policy (2007‐2032)
20,000 MW installed capacity by 2020; Jawaharlal Nehru National Solar Mission
Only Maharashtra and Rajasthan have shortfall clause in place but it gets rendered ineffective since mandatory purchase of RE energy is subjected to availability of RE based power o o 64% 80% Hydro Thermal Nuclear Renewable Figure 3: RE capacity mix and energy mix as of September 2010 Hence. and Haryana could not apply RPO due to the non-availability of RE sources. representing 10 percent of the total installed capacity. The minimum RPO level varied across the states with the available RE potential in the state. but there was no additional monetary incentive to generate from these plants. Some states defined resource wise target common for all DISCOMS. and customs exemption given to the developers resulted in capacity installation. Karnataka. accelerated depreciation. RE generation is less than 4 percent of the total generation (Figure 3). States such as Delhi.India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh o o 23% 14% Capacity Mix 3% 10% Generation Mix 2% 4% Higher RE potential states such as Rajasthan. This led to little contribution of RE sources to the total electricity mix. No financial liability or penalty for non-fulfillment of the RPO. However. However. The main shortcomings in the state level RPO scheme were the following. there was a need for a mechanism that could facilitate inter-state exchange of power generated from RE sources Selling Entities RE Generators at 17 GW. whereas others had different targets for different DISCOMS. Punjab. and Tamil Nadu had no incentives to look beyond their RPO targets. Under the RPO. the RPO has not been able to achieve the level of capacity addition when compared to the vast technical potential available in the country. states fixed a percentage of electricity that their power distribution companies (DISCOMS) need to buy from RE sources. Power + REC Power REC Feed‐in‐tariffs Bilateral Price Exchange Price Average Power Cost Exchange Price Obligated Entities: DISCOMS Open Access Customer Captive User Any Customer Obligated Entities: DISCOMS Open Access Customer Captive User Figure 4: Modes for RE transactions under REC regulations . Limited flexibility to market participants to buy and sell renewable power. Tax holidays.
500 10 1. These two obligations will be accounted separately. and thus. Globally. REC scheme will address the limitations of state specific approach followed earlier by creating a national level RE Market and ensuring that all the states contribute to renewable development irrespective of availability GW 30 20 10 0 2011 2014 2017 2020 Total RE capacity ‐ Baseline scenario Additional Non‐Solar RE capacity ‐ REC scenario Figure 6: Non‐Solar RE Capacity addition in response . 80 70 60 50 40 600 4 300 2 Non-Solar Renewable obligation (%) Solar obligation (%) 0 2010 2015 0 2020 Figure 5: Energy Requirement in response to National Level REC Market There has been a great deal of excitement in the industry with the launch of market-based trading scheme. Figure 5 shows the renewable capacity addition that could take place in response to the national level RPO of NAPCC and the resulting REC market. It will encourage RE capacity addition in states where there is high potential for RE generation and allow cost recovery from the states having lower RE generation potential and higher electricity consumption.200 ` Solar Energy obligation 1. The main objective of REC is to socialize the cost of green development by facilitating RPO compliance in those states too where there isn’t sufficient RE potential/capacity. Penalty in case of non-compliance of RPOs is set equal to the forbearance price calculated as the highest difference between the Costs of Generation/ RE Tariff and the Average Power Purchase Cost (APPC). REC Mechanism. there will be two categories of certificates. 8 6 900 Market based mechanism spells opportunities RE generators without Feed-in Tariffs (FITs) are eligible to participate in REC scheme. 3 percent will be reserved for solar which will be accounted separately as Solar-RECs (SREC). This would ensure that renewable capacity additions take place even if more expensive RE sources have to come online.India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh REC Markets could bring a paradigm shift RPO (%) (TWh) 2. Under this scheme. The additional revenues from selling REC will provide comfort to developers to look beyond PPAs. REC schemes have been successful in bringing cost competitive renewable energy into the system with limited assistance from the Government. Out of these targets. There will be two separate renewable obligations set for each state . mandatory Renewable Energy Obligations (RPOs) will be set for each state to achieve 15 percent generation at national level from RE sources by 2020.solar and non-solar.100 16 14 12 1.800 Non-Solar Renewable Energy obligation Conventional Energy requirement Renewable obligation (%) of RE resources. The freedom to choose buyers and greater flexibility to decide price of their product (both electricity and renewable credits) will encourage investors to set up more renewable capacity.
In light of these possible developments.India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh In the initial years of REC scheme. However. Figure 7: Key challenges facing the developers immediately and in the foreseeable future . the REC prices would therefore increase in future as the scheme progresses not only due to the increased renewable energy targets in the later years and but also due to the exhaustion of cheaper and easier to implement resources in the initial year. less endowed and more costly technologies would be taken up in the later years. easier to implement and low cost RE sources are expected to lead capacity additions.
Although. transmission issues and regulatory stability. Identifying this warrants a systematic. RECs could be one of the largest incentives to open up new investments in RE. any conventional fuel based merchant power plants may not be able to sell power at Rs 4-5 per unit if sufficient capacity addition takes place or transmission congestion is removed. factor for maximizing value (Figure 8). integrated analytical framework to understand market fundamentals (Figure 7) Short-term value created by demand-supply imbalances. A possible decrease in value of merchant conventional fuel based plants vis-à-vis renewable is illustrated in Figure 9 *CERC has determined band of price for trading non‐solar REC – 1500 Rs/MWh to 3900 Rs/MWh Figure 8: Selling power and REC separately can create higher value for renewable developers REC presents an opportunity which could bring a transition in the way RE is traded and bought.g. The distinct gap in demand and supply of RECs in the initial years could result in high returns. e. but these don’t necessarily translate into value. The value arises from more than just options available but evaluating the forward performance of individual RE types under a multiplicity of factors such as REC demand variation.. fuel supply and transmission availability are expected to persist. obligation to purchase renewable will result in necessary dispatch of renewable plants. the various sales options are now well recognized. RE Technology change.India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh RECs provide an opportunity full in size With an expected market value of approximately USD 2 billion by 2012 and potential to reach USD 8 billion3 by 2020. pricing. and Longer-term value shaped by the evolution of the scheme 10 9 8 7 Option 2 Option 3 Option 1 Rs/kWh 6 5 4 3 2 1 0 LRMC Feed‐in‐Tariff Sale to open Sale at Average market Power Cost Price band due to Resource Type Resource Type Merchant + REC* State Average power cost + REC * Having RE in the generation portfolio can hedge against decrease in value due to structural uncertainties. Power prices may remain high till 2015-16 as constraints in capacity addition. Investment in renewable could be a strategy to diversify risk associated with loss of anticipated revenues due to change in market conditions. Captive RE capacities could take the first mover benefit of the REC scheme. The greater flexibility in sales (FIT or Spot + REC or APPC +REC) can result in significant upsides for developers and could be deciding 3 ICF Analysis using India‐Integrated Planning Model (I‐IPM®) . On the other hand. The REC mechanism has the potential to eventually grow into a multi-billion industry.
1. This would address the concerns of most of the developers and utilities that could struggle in arriving at an efficient price discovery.200 NPV ($/kW) An integrated analysis provides robust assessment of the opportunities In the existing state of affairs. An integrated power market approach with a view on short. Additionally. In addition to some increase in tariffs. Such an analysis would give developers a definite edge and help them take advantages of the market conditions.000 crores per annum by 2015. Different risks need to be weighed by adopting a scenario based analysis and impacts of these risks on the financial returns of the project need to quantified.600 1. application for an integrated power market analysis that takes into account the stock of uncertainty around all the critical parameters and facilitates a robust strategy seems limitless. integrated power market tools could help developers arrive at a comprehensive view on how the RE capacity additions and REC prices could evolve from the today’s starting point. Additionally. successful implementation of REC would also require addressing the issues relating to equitable sharing of additional burden incidental on the host state for absorbing large quantum of intermittent power 4 ICF Analysis using India‐Integrated Planning Model (I‐IPM®) .000 800 600 400 200 ‐ Coal* Gas* Renewable* Constrained (Business ‐ as ‐ Usual Baseline) Un‐constrained (Transmission Expansion and No Domestic Coal Limitations) *Forecast using I‐IPM®. the impact on Annual Power Purchase Cost (APPC) of DISCOMS could be a net rise of 10 percent (average rise 2010-2020) thereby resulting in 10-15 paisa/unit4 increase in the average electricity prices. Value of plants in western region (illustrative) Figure 9: Valuation of generation portfolio under two scenarios But would the RECs sold get paid for? If the tariffs are not increased adequately. the financial gap in the distribution sector is projected to reach INR 100.400 1. There would be an additional impact on average tariffs as a result of intermittent nature of RE and the resulting integration and balancing costs.India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh sharing of capital investment required for transmission infrastructure required for exporting renewable power 1. The need of the market participants is a strong analytical frame work that can forecast future market conditions along with alternative scenarios to understand the strategic implications (Figure 10).and long-term REC prices would help decision makers in formulating their strategies.
as envisaged. A larger role for RE with supporting REC markets will definitely help India achieves the objectives of the energy security and emission reductions in the longer term. Capacity builds Figure 10: ICFs customized suite of modeling tools and integrated analysis provides for robust industry assessment Although. . the effectiveness of REC mechanism for mobilizing new investments into the RE sector would be tested. Regulators will have a greater role to play to ensure renewable development by proper implementation and monitoring of the REC system.India Renewable Energy Markets and Impact of REC Mechanism – Yasir Altaf and Pramod K Singh POWER WORLDTM Transmission capacity Transmission interf ace limits GE-PSLFTM Power Markets IPM® Environment Fuel Markets Markets Illustrative outputs: REC price forecasts RE Capacity additions Target off-taker states for power & RECs Capacity under short and long term contracts Plant dispatch analysis Load Flow and Congestion Analysis Transmission Losses Transmission flows. congestion Grid impact on dispatch Asset value Entry and exit decisions. but global experience suggests that REC can be a facilitator in development of new renewable potential.