Key APTEL Order Overturns CERC On REC Pricing

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In an order that will have a major impact on the return of REC trading and pricing, the Appellate Tribunal For Electricity (APTEL) has set aside the order of the Central Electricity Regulatory Commission (CERC) with regards to pricing of REC’s. The root of the issue was the decision by CERC to set the floor price and forbearance price at Rs 0 and Rs 1000 respectively in an order on June 17, 2020. By making these prices applicable with retrospective effect from 2017, the move effectively killed the market for trading in REC’s. The order, issued on November 9, was posted by APTEL today.

APTEL, in setting aside the CERC order, has found much to fault in the CERC’s approach and interpretation, a few of which are highlighted below from the judgement. The overriding issue was the failure of CERC to take the feedback of the Forum of Regulators (FOR), and using data selectively to arrive at its conclusions. The order also follows the recent changes in the REC mechanism announced by the Power Ministry

APTEL has also directed that the RECs which were still valid for trading at the power exchange under REC Regulations as on the date (17.06.2020) the impugned order was passed, and have remained unsold till date, shall continue to be valid and be good for sale or purchase for the then remainder period of their validity, computed with reference to the date of the impugned order, and that the purchase thereof, during the period of such extended validity, by the Obligated entities shall be treated as good compliance with RPO targets. For the largest power trading exchange, IEX, this is indeed good news too.

KEY HIGHLIGHTS FROM APTEL ORDER

1. The validity of the RECs is only for a period of 1,095 days. Therefore, the RE generators whose RECs are on the verge of lapse tend to sell the same at a price lower than the one prevailing on the exchange which, in turn, would further erode its market price. The total elimination of the floor price snatches away the benefit assured by REC Scheme from the hands of the RE generators enlisted thereunder.
2. There is not sufficient data shown to support the contention that there would be no loss to the REC project developer even when the Floor Price is set at ZERO. Reliance on statistics of bid-discovered tariff, treated as the cost of power, without comparing the same with the tariff actually received by the RE generators under the REC mechanism seems misleading. The RE generators under the REC Mechanism are obliged to sell their brown component at par with the conventional sources of energy without any concessional or promotional benefits and cannot be compared with the RE generators under the Preferential mechanism or under the competitive bidding mode which receive various concessions or promotional benefits.
3. The APPC data relied upon by CERC to compare with the ‘bid-discovered tariff’ for the conclusions reached by the impugned order is quite clearly incomplete and incorrect.
4. It is not a correct argument of the respondents that the challenge by these appeals cannot succeed because the appellants have not questioned the methodology. The appellants have challenged the underlying data relied upon by the Central Commission while determining the REC prices.
5. It does not make any sense to expect the RECs to be traded, sold or purchased at ZERO value, particularly when the impugned order applies such determination retrospectively to the RECs issued on or after 01.04.2017.
6. The Central Commission has applied the new dispensation by the impugned order retrospectively only to the non-solar RECs and not to the solar RECs. This makes the exercise even more arbitrary particularly as cogent rationale for such distinct treatment must be discernible. The revised Floor price of non-solar REC to Rs.0/MWh even for RECs issued between 01.04.2017 and 17.06.2020 is sought to be justified on the reasoning that the Interim Order dated 08.05.2017 passed by the Hon’ble Supreme Court is not applicable on RECs issued after 01.04.2017. This is also misconceived.
7. The REC framework, as envisaged, is based on the principle that both the components, the brown (electricity generated by the RE generators) and the green (RECs) would be sold contemporaneously. There seems merit in the plea that due to non-compliance of the RPO targets by the Obligated Entities, the recovery of green component (RECs) by the RE generators have been seen generally to lag behind, adding to the reasons for huge unsold inventory. Applying the lowered floor and forbearance prices retrospectively results in a scenario wherein the RECs issued towards a particular APPC tariff would have to be sold at reduced price, creating a viability gap. RE generators which have received RECs towards the electricity sold at much lower APPC tariff cannot be equated with the RE generators which have received RECs towards the electricity sold at much higher APPC tariff.
8. Revising the REC prices retrospectively is unreasonable. The price of RECs fixed earlier took into account their cost of generation under Regulation 9(2)(a) of the REC Regulations at the relevant time. However, applying the reduced price to prior RECs will result in a situation where the old projects in REC mechanism will never recover their cost of generation which is violative of Section 61(h) as well as 61(d) of the Electricity Act and the National Tariff Policy, 2016 which mandate recovery of cost of electricity in a reasonable manner.
9. With due deference, we must say that this line of argument of the appellants is not directed, not at least in the proceedings before us, against the legislation or the regulatory framework giving discretionary power to CERC to determine the floor and forbearance prices. The expectation that the RE generators would get their due (towards green component) by sale of RECs at or above the floor price legitimately arises from the decision of CERC to intervene, in terms of the discretion given by the proviso to Regulation 9(1), rather than let the market decide on basis of demand and supply principles. By such intervention, an assurance is held out that CERC intends to ensure, by its determination, that the RE generators would get due and reasonable returns of the cost of generation and the Obligated entities would not be burdened unduly because of the RPO targets.
10. Participation in REC scheme is voluntary. By participating therein, the RE generators expect due returns. The reduction of floor price to ZERO, even for the RECs issued prior to the date of proposal, is breach of the promise held out. This definitely attracts the doctrine of promissory estoppel.

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