Last February, the Indian Energy Exchange began trading renewable energy credits for the first time. At the time, Jayant Deo, chief executive of the exchange was quoted as saying that the renewable energy credit (REC) market should see liquidity roughly ten months down the track. Mr Deo’s forecast proved to be well-founded.

According to REConnect, an India-based REC consultancy, the volume of RECs traded in February was over 206,000 . This represents a 20% increase on the volume traded in January, with a market clearing price of Rs. 3066, (up 0.5% from January’s clearing price).

But by no means has it been plain sailing. Last year, around the time REC trading began, a report published by Ernst & Young suggested that the success of India’s REC initiative hinged on RPO enforcement mechanisms and adequate penalties imposed for non-compliance. It also stated that the initiative was subject to the interplay of many different factors including tariffs, power production costs, existing incentives, taxes and duties.

Loosely modelled on the US system, India’s Renewable Purchase Obligations allow states lacking the resources to produce their own clean energy, to purchase credits from energy abundant states in order to meet green energy quotas.  It was designed to support and galvanize India’s new low-carbon economy to achieve its ambitious 2022 target, which calls for the installation of 20GW of solar power.

One year on, according to Mohit Anand, Senior Consultant at Bridge to India, progress has been positive. India’s REC market is "viable" and potentially "lucrative for developers".

However, as of February 29 2012, there have been no solar RECs traded. This comes as little surprise in light of the reports in November 2011 of major project finance issues and missed deadlines. Penalities, too, had failed to materialise. In addition, as of December 2011 only one solar PV project of 8.5MW, registered by Jain Irrigation Systems in Maharashtra, (still under construction), was known to have been registered.

Market movement

Entering March 2012, the scene has changed dramatically. It appears that India is putting its solar affairs in order.

Prime Minister Manmohan Singh has appointed Anil Kakodkar (former head of India’s nuclear energy programme) as the new chair of the recently launched Solar Energy Corporation of India (SEIC), formed to oversee and accelerate the Solar Mission. The 14 projects that missed the deadline were penalised. The Central Electricity Regulatory Commission (CERC) has determined that the penalty for non-compliance on RPOs, is to be implemented by the State Nodal agency and measured in terms of the shortfall of solar electricity.

As Mr Anand observed, states faced “a lot of resistance” from power companies operating good balance sheets but being put under pressure to purchase expensive solar energy. It has been a “politically sensitive issue” that needed the government to create a clear market to boost confidence and kick start trading.

Financial challenge

The remaining challenge appears to be finance based. Although solar credit prices have been fixed at a minimum of INR9.3($0.23)/kWh for the period 2012 -2017, a typical bank loan is ten years. This causes problems for repayment assurances and cash flow visibility in the longer-term.

It does, however, mean that project IRR will be lucrative in the first few years of operation. As Mr Anand commented “there is no standard on financing in the market, everyone has had to think creatively and pull strings”.

Despite these challenges however, there is no doubt in the industry that the Renewable Energy Certificate Market in India, although at a nascent stage is gathering strength. The Bridge to India report, drawing on the opinions of market investment leaders to gauge their confidence pointed to the fact that “the solar REC mechanism can be understood by drawing conjecture from the non-solar REC market, which is showing early signs of promise”.

The enforcement of RPO obligations should allay the fears of solar developers concerned about not being able to sell certificates due to lack of regulation on the demand side.

2012 will be an interesting year for India’s burgeoning REC market. As for solar RECs and the NSM which, since its launch in 2009 has been praised for ambition but has fallen well short of targets, progress since November provides some comfort.

If regulations around enforcement are adhered to, the credit market will flourish and with it, the confidence of foreign capital investors. Mr Anand maintains his view that the NSM will achieve and even surpass it’s targets. Regarding the credit market he is now confident that the market will pick up. “The question is: how quickly and how strongly?”

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Image credit: REConnect