REC Mechanism in India - What is Wrong With It

I had attended a workshop on REC mechanism on June 17, 2011 in Delhi organized by the National Load Despatch Centre, which is supposed to be the nodal agency for this mechanism. Having started in 2010, it was indeed a unique learning experience to hear first hand from people involved in the process including people AB Power Infrastructure, Central Electricity Regulatory Commission and National Board of Irrigation and Power as well as the representatives of Indian Power Exchanges (yes, we have two of those as well!) talk about the policy, the teething issues and listening to people clear their doubts and give their suggestions, which were duly noted.

Any typical trade mechanism in the world is based on Coasian economics, about which I had discussed briefly here. In the case of the REC mechanism, the tradeable property or externality identified is the environmental credential associated with green energy, and it is a trade in this benefit which is surplus in some states while non-existent in others that is being encouraged to overcome issues of glut power, non-availability of resources in some states as well as meeting Renewable Purchase of distribution agencies and power generators. The difference that we have seen so far in this mechanism from those in the world, especially in UK, Australia and many states in USA are two-fold

1. There is no secondary trading allowed in the mechanism so far.
2. Solar energy certificated are treated differently from other renewable energy certificates in terms of price, but they are counted the same.

Among suggestions and loud thinking, two proposals seemed to be coming out very strongly - allow secondary trading on the lines of carbon credits and value certificates for solar energy on an equivalency basis (i.e. one solar REC > one non-solar REC). These voices were particularly strong from the end of power trading companies as well as power producing companies who as of now found both the floor and forbearance prices set for the two kinds of mechanism to be unfavourable. One thought that I had all along was the fact that this mechanism needs to account for the future as well, since India is aggressively trying to move towards Smart Grids where energy demands would be met through spot generation as well as rely on banked energy, and seeing the absence of that link is a bit worrisome, since the government has put in so much money into the Accelerated Power Reforms Development Program (APDRP), the second phase of power reforms that are subsequently seeing the third stage of evolution coming in as well, with Bengaluru (BESCOM) and Delhi (NDPL) shifting towards two way metering and greater grid visibility, right down to the household level (this visibility stands at 33 kV line only, and that too is present in very few places). Another thing that I wondered about was how there was not only no secondary trading but there was no power supply guarantee assured for REC in the light of what was happening in Tamil Nadu and Maharashtra (deliberate load shedding to avoid payments to power producers). Moreover, for solar power, there is not much incentive except for the price, especially if you look at the fact that it costs INR 10-12 crore/MW to establish plants, and that electricity generation is not throughout the day like wind resources.

All is not lost, as the mechanism is still being worked upon, and hopefully things will improve. But as of now, as it stands, based on my discussions with many people at a personal level at the conference, this mechanism may be reduced to just another white elephant of the government.


Manish said…
Interesting! Feasible trading mechanisms are a catalyst for proactive behavior to spur on renewable energy

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