Ten years back, India came up with a landmark new legislative framework. It assigned electricity regulators in the States with powers to define a certain percentage of the energy supply mix to come from renewable sources.

The regulated electricity distribution companies were to follow such directions from their respective regulators, revised from time to time.

INITIAL STEPS

The efforts did not stop there. In 2008, recognising the importance of dealing with climate change issues associated with rapid economic growth, the Centre came up with the National Action Plan on Climate Change.

This entailed setting a target of 15 per cent of electricity production from renewable sources. Due to local availability and technical constraints in transfer of renewable energy-based power over long distances, the need was felt for a market-based mechanism which would help consume this locally.

This triggered the idea of establishing the Renewable Energy Certificates (RECs) mechanism for pushing renewable energy sales in the regulated market. A well-designed REC market came into being; the necessary model regulations were drawn up by the Central Electricity Regulatory Commission (CERC) in 2010 to govern the activity. Several State regulators came out with their own State-specific REC regulations. Though a little complicated in nature and process, the design and functioning of the REC mechanism was initially viewed by many experts as satisfactory.

However, of late, the efficacy of the REC mechanism, in the wake of declining REC sales in the two power exchanges, has been debated by experts. The last several trading sessions have witnessed a very poor response from REC buyers (mainly the obligated entities).

This is evident from the fact that in the January session, out of 1.74 million non-solar and 3,559 solar RECs offered for sale, only 0.19 million and 2,308 respectively, were bought. Many producers of renewable energy were left with huge backlogs of unsold RECs, a situation not anticipated at the start.

The evolving scenario also forced the CERC to extend the validity of the certificates from one year to two years. This had to be done because in case the certificates were not sold within 12 months (that is, if producers of RE power were unable to find buyers), producers could not bank on these for future trading sessions beyond the validity period and, therefore, were liable to suffer revenue losses.

REGULATORS’ PRIORITIES

Often, non-compliance with the Renewable Energy Purchase Obligation (RPO) quota by the distribution companies is cited as one of the major reasons for the failure of the REC mechanism.

The non-compliance by distribution companies raises a question mark on the seriousness of State electricity regulators in implementing environmentally-benign actions. The perception gains strength in the absence of effective penalties for not meeting the minimum targets.

The fact that there exists no serious penalty for under-achieving the renewable energy quota begs the question as to why one should hope to see a thriving renewable energy market in the country.

The moot point is that often electricity regulators like to act as economic regulators of the sector, more interested in consumer-centric issues. An area which is often overlooked by them is environmental sustainability.

With such concerns growing nationally and globally, the services of utilities have to be critically analysed from this perspective. It is desirable that the Commission’s staff be aware of local and global socio-environmental issues and problems.

They should be in a position to gauge the likely environmental impact arising out of any particular activity — both in the short and the long-term. Developing this sensitivity may help in instilling the seriousness that this aspect so desperately requires. Apart from the lack of demand for renewable energy through the mandated RPO, another area of concern for renewable energy investors is the pricing mechanism.

Investors cannot rely upon revenues from the REC mechanism beyond the initial few years. Then why would an investor want to invest in RE facilities that have a much longer project life as well as price uncertainty?

Such bottlenecks might affect the emergence of new RE projects in later years. Regarding RPO quota, a question that becomes pertinent is, “What should be the reasonable share of renewable energy in the portfolio of energy procurement?”

With the current approach, regulators are fixing these randomly, and often a very nominal share is assigned to renewable energy. In resource (renewable energy)-rich States, concerns are raised about the likely impact of a larger share of renewable energy on retail tariffs fixed by electricity regulators.

Given the State-wise disparities in renewable energy potential and the associated costs of developing RE resources, the issue of whether there should be uniform, national-level RPO targets could be considered.

How should electricity regulators balance their priorities between social and environmental concerns?

(The author is Associate Director, TERI. The views are personal.)

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