Renewable energy certificate(REC) & low prices of renewable energy company stocks

Green energy needs market push


The bourses do not have an understanding of renewable energy certificates, as is reflected in the low stock prices of renewable energy firms. But as awareness increases, valuations will rise, enabling such companies to invest more.
Would you mind paying one-and-a-half paise more for electricity that comes from windmills or solar plants? Most likely, you would not. But that is the burden, according to Dr Pramod Deo, Chairman of the Central Electricity Regulatory Commission, the ‘renewable energy certificate' (REC) regime imposes on electricity consumers in India. What the extra one-and-a-half paise does (or is expected to do) is significant. It will give people who put up renewable energy capacities such as windmills, biomass and solar plants sufficiently attractive returns, justifying their investments.
However, for this to work, a key parallel activity is the development of a robust market for renewable energy certificates and here is where action is needed urgently now. Eight months after it came into existence, the REC green shoots are growing well. It is recognized the world over that the REC market is a key component for the renewable energy industry to develop at a healthy pace. The REC is basically a tradable unit given to a producer of renewable power, who opts not to sell the power for a preferential tariff.
Strengthening market
The producer — say, a company that owns a windmill farm — will get the REC even if it sells the power to a part-owner of the wind farm at a negotiated price, provided it does not get the benefit of any other incentives. The RECs, which are based on generation, are sold through the power exchanges, within a prescribed price band. Those who buy them are the ‘obligated entities', or the power distribution companies or bulk consumers of power, which are mandated by law to buy either green power at high prices in the market, or to buy the RECs instead.
In last month's trading — trading takes place on the last Wednesday of each month — as many as 46,362 RECs changed hands, which was more than twice as much as in the previous month. (RECs are traded on Indian Energy Exchange Limited and Power Exchange of India Limited. The former accounted for 89 per cent of the RECs traded last month.) The prices firmed up too. The average price worked out to Rs 2,300, against Rs 1,800 in the previous month. Now that the market for Renewable Energy Certificates is getting better by each passing trading session, the time has come for bringing measures to deepen it.
Urgent action is imperative if only because more and more RE power capacities are coming into the REC regime. Income from RECs can be substantial (see Table). The stock market does not as yet have either a sufficient understanding or awareness of the RECs, as is reflected in the low prices of renewable energy company stocks; but when the awareness builds up, valuations will rise, enabling companies to raise more funds for further investments in renewables. But fundamental to all these are measures to deepen the REC market. In a recent chat with Business Line , Dr Pramod Deo, underlined the importance of enforcement of obligations, a factor that may be the primary motive force behind the development of the REC regime.
Purchase obligation
Enforcement is largely in the hands of State electricity regulators and a lot depends on how strict they are in making the obligated entities discharge their Renewable Purchase Obligation (RPO). Industry watchers such as Mr Vineeth Vijayaraghavan, Editor of the online newsletter, Panchabhuta, have noted that obligated entities in some States still question the application of the RPO to them, in the hope of wriggling out of — or at least putting off — the burden by a few years. Obviously, the first step is to tell them that there is no wriggling out. An effective way of sending this signal is to ask for a ‘compliance undertaking' at the beginning of each financial year, stating that the OE must meet its obligations.
Compliance issues
A corollary of this is making compliance quarterly, against annual. Otherwise, the market will tend to get skewed, with most of the activity happening at the year-end. As the Table shows, the supply side of the market has been fairly well taken care of. But the demand side is still a niggling issue and the question ‘what if there are no takers for the RECs' is still weighing on the minds of many. Mr Vishal Pandya, REConnect Energy Solutions, a renewable energy consultancy, says that some sort of a ‘renewable regulatory fund' should be created to take care of the off-take of the RECs, perhaps at the mandatory minimum price, in case there are unsold RECs in the market. Mr T. Shivaraman, Vice Chairman of the renewable energy IPP, Orient Green Power, has a similar view. He wants the government to devise a mechanism for buying the unsold RECs, rather than wait for the defaulting OEs to pay a fine and then pay the REC sellers out of it. While these are but the basic imperatives, a lot more ought to be done. Today, the REC is sold once. The seller gets the money and the instrument changes hands, and is dead. Okay, for starters. But, obviously, a financial instrument should be allowed to be traded many times. And it is not too much to expect the regime to make way for forward trading in RECs, followed by other forms of derivatives. After all, what is a financial market without derivatives?
M. Ramesh ….from the pages of THE HINDU BUSINESS LINE newspaper.
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