Renewable certificate price revision may hurt fund flows

Move may create uncertainty among investors on projected returns

The proposed downward price revision for renewable energy certificates (REC), if accepted, will jeopardise investment flow in green projects.

The Central Electricity Regulatory Commission has suggested a six to 20 per cent price cut for RECs effective April 2012 for three years, intending to make trading attractive.

The industry feels that the market should be allowed to mature first before any changes in the benchmark price system is made. Project developers feel that the CERC's move to reduce floor and forbearance (ceiling) price would create uncertainty among investors on projected returns, which, in turn, could impact the investment flows.

REC trading

The REC mechanism is meant to provide an additional stream of revenue for green energy project proponents. Currently, REC trading is at a nascent stage with prices hovering around the floor price. Besides, the trading is confined to non-solar projects such as wind power, bio-mass and hydro-electric.

“The REC scheme was expected to catalyse investments. However, the proposal has created a negative sentiment among investors. This would also affect future investments and even see some investors backing off from projects,” said Mr Anmol Jaggi, Director, Gensol Consultants, a carbon advisory firm.

Projects in pipeline

There are about 600 non-solar projects in pipeline entailing an investment of Rs 1,800 crore.

Typically for green projects, an investor gives a weightage of around 30 per cent for the projected returns from RECs, and the rest for returns from preferential tariff. “With this uncertainty, I see the REC weightage going down to 15 per cent,” Mr Jaggi said.

Mr V. Subramanian, CEO and Secretary-General, Indian Wind Energy Association, said “The underlying principle of REC is renewable purchase obligations (RPO). The RPO enforcement mechanism across the States should be made very effective with severe penalties for failure or non-compliance.

The same price of RECs should be kept so that the mechanism stabilises.”

Solar projects

In the case of solar, the REC floor price on an average will be 300-400 per cent over the preferential tariff. “The challenge is how you make the RECs bankable for the tenure of debt for solar projects,” said Mr Inderpreet S. Wadhwa, CEO, Azure Power.

Assuming a preferential price of Rs 3/KWh, the RECs are approximately valued at Rs 12/KWh at the current floor price, he said, adding, “While the RECs can be traded, the lenders need assurance on the offtake pricing of the RECs for at least the tenure of the loan (10 years at least) as per the project debt service requirements.”

The large higher addition of the solar REC pricing needs to be backed by some sort of payment security/obligation by a credible buyer, Mr Wadhwa added.