CERC’s Order Lowering REC Forbearance, Floor Price Removal Positive for Obligated Entities

With the significant reduction in wind and solar power tariffs during the last three years, the power sector regulator Central Electricity Regulatory Commission (CERC) has recently reduced the forbearance prices and also removed the floor price for the Renewable Energy Certificates (RECs).

This move is expected to negatively impact the REC projects, even as  it is positive for the obligated entities, as analysed by a leading credit rating agency, ICRA.

Recently, the commission has removed the REC floor price against its prevailing floor price of Rs 1,000 and has also reduced the forbearance price from Rs 2,400 for solar RECs and from Rs 3,000 per REC for non-solar RECs to Rs 1,000.

Now, the revised prices will be effective from July 1, 2020, and will be valid for 1 year i.e. till June 30, 2021. Prior to this, such price revision was undertaken during March 2017.

However, RECs will remain an important instrument to enable the distribution utilities (Discoms) and captive users without access to renewable sources to meet their renewable purchase obligation (RPO) targets.

On the CERC’s decision, Sabyasachi Majumdar, Group Head & Senior Vice President, ICRA Ltd, opined that “the removal of the floor price and revision of the forbearance prices of the RECs without extending the vintage multiplier would lead to inventory losses for existing REC based projects, with estimated inventory loss of Rs 400 crore. On the other hand, reduction in prices is positive for the obligated entities such as distribution utilities and captive industrial users, who meet their RPO targets through RECs. This, in turn, is likely to improve the RPO compliance by the obligated entities.”

Significantly, annual savings from the REC price revision for the obligated entities is estimated to be at least ~Rs 700 crore, based on the average traded price and volumes traded in FY2020 and considering that the RECs would trade at prices closer to the revised forbearance price.

However, the savings would be higher, if prices on the exchange remain lower than the forbearance price.

Commenting on the impact of energy demand, Girishkumar Kadam, Sector Head & Vice President, ICRA Ltd, said that “given the unprecedented impact on energy demand and hence, on the cash flows of the distribution utilities following lockdown due to COVID outbreak, there have been requests by the utilities to waive off and lower the RPO targets with the SERCs.”

Kadam further added that “the state regulatory in Haryana has issued an order in June 2020 waiving off the shortfall in RPO compliance till March 31, 2019, as a one-off measure, instead of levying any penalty or directing to fulfil the same in the subsequent period. This is negative from REC demand perspective, and such risk cannot be ruled out in other states in the near term. Further, RPO norms continue to vary across the states and do not remain in line with policy targets prescribed by the Ministry of Power, Government of India.” This has already proven true, with multiple states following the Haryana example already.

However, the demand for RECs has improved since November 2017, with the improved compliance of RPO norms by Discoms, given the Government focus on improving the share of renewables in the overall generation and increased regulatory focus on compliance towards RPO norms; as well as regular downward revision in floor and cap prices of RECs by CERC.

Moreover, the realisation for REC holders was higher than the floor price of Rs 1,000 per REC in FY2019 and FY2020, supported by the improved demand.

Recently, the Supreme Court dismissed the application of Green Energy Association (GEA) seeking a stay on price revision of REC by the CERC. The apex court bench headed by Justice Arun Mishra took cognizance of a matter on June 16, 2020, and dismissed the application of GEA for stopping REC price revision by CERC.

Earlier, the Appellate Tribunal of Electricity (APTEL) had also dismissed the petitions filed by GEA against the issue of new forbearance and floor prices for solar and non-solar RECs by CERC. Then the stakeholders decided to appeal in the Supreme Court.