India’s Domestic Market for RECs Hinges on the Enforcement of State-level RPOs

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India Blog # 2 Pic archer10

India’s Solar Renewable Portfolio Obligations (RPOs) have not been enforced with non-compliance payments thus far, which has been the primary cause for a weak Renewable Energy Certificates (REC) market. However, the structure exists in India for Solar RECs to drive as much as 3GW of solar installations if Solar RPOs can be enforced. Yet, with non-compliance payment collection unlikely in the near future, the REC mechanism may not play any significant role in promoting the solar industry as developers turn to more established and reliable incentives for growth.

How RPOs and RECS are Meant to Work In India 

Solar Renewable Purchase Obligations (RPOs) and the Renewable Energy Certificate (REC) mechanism were introduced in 2011 as a pair of policy-based drivers aimed at promoting solar PV development in India. While RPOs provide each state and/or territory in India with a mandatory target for solar PV-generated electricity, a number of states may not be able to meet these targets within the given timeframes. This inability may be due to a number of factors such as a poor solar resource, capacity constraints, etc. In order to ensure adherence to the RPO targets, the federal government has introduced non-compliance fines for entities not meeting their solar RPOs. This is where the REC mechanism comes in. Through this system, states unable to meet their targets would be able to purchase RECs from the REC market and indirectly meet their goals.

Why RECs Have Been Ineffective in India

As it stands the much-indebted state distribution companies, captive consumers, and open access consumers are not being penalized with non-compliance payments for not meeting RPOs and hence there is no real incentive to purchase RECs. This has resulted in far more sellers than buyers on the REC market with RECs selling at the floor price of $167 USD/MWh. Most RECs offered are not sold at all.  The most critical question for the solar REC market is when, if ever, will solar RPOs be enforced through non-compliance payments?

Why RPOs and RECs May Never Play a Significant Role in India

With grid parity expected to occur in the majority of regions within six years and no real prospect for non-compliance payment enforcement, it is entirely possible that the REC mechanism may never play a major role in the Indian market. Once parity is reached, even solar RPOs would shift from being market drivers to glorified state-level market success indicators.

If non-compliance payments are enforced throughout India, which is unlikely, the impact on the market would be significant. If non-compliance payments begin being collected Q1 2014, the demand for RECs would explode, primarily from those states with limited installed solar capacity. The ensuing increase in demand for RECs would spur an additional development of 3GW of solar PV by 2016 purely through the REC market mechanism.

India Blog

As part of its ongoing research into emerging global solar PV markets, ClearSky Advisors has recently published an analysis of the policy and market fundamentals that form the basis of the Indian renewable energy sector, focusing primarily on solar PV. If you are interested in more information about our Global Emerging Solar PV Market and Policy Intelligence service, please contact us at info@clearskyadvisors.com or call +1-877-333-5821.

Photo Credit: Dennis Archer

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