The impact of decrease in solar REC prices

There has been a recent order to decrease solar REC prices . As a result, the market is totally flooded by solar RECs. Today, there are 6 lakh solar RECs waiting to be sold. Vishal Pandya, Founder of REConnect, expert in REC matters, has predicted that the solar REC inventory would shoot up to 15.50 lakh or more. The repercussions goes far beyond the immediate reduction in revenue for the solar power plants.

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The loss is value of assets and reduced cash flow from RECs generated in the past will likely result in the projects becoming Non-performing Assets, i.e. unable to service their debt. Further, for projects set up under the Accelerated Depreciation mechanism, the primary business of the investor may also be impacted. REC trading has remained suspended and trading has not happened as the band of prices of solar renewable energy certificates , within which they are traded at the power exchanges, have been lowered drastically by the Central Electricity Regulatory Commission (CERC) to be traded on the energy exchanges.

 

The CERC has now lowered the floor and forbearance prices of solar RECs issued to the solar power developers. The revision of prices by the CERC is significant in the context that the earlier price band did not yield desired goals. For example, even the floor price of Rs 9300 per solar REC was perceived as too high by the buyers, as the cost of per unit of power has come down to around Rs 6 to Rs 7. The obligated entities found it irrelevant to buy solar RECs at that rate. There was demand for revision of REC prices.

 

Another significant development by CERC has been increasing the allotment of certificates to the solar power developers who sell power to the power distribution companies. As per the news amendment, such projects will now be entitled for 2.66 RECs for each MWh of power that they produce. But this benefit of decrease in REC’’s prices is not applicable for IPPs as they target corporate customers under open axis .

This sharp reduction in the floor price of renewable energy certificates (REC) could increase demand and benefit sellers who have huge inventories of unsold credits.Overall, existing RECs projects will take a loss of Rs 2000 crore due to reduction in the value of existing REC inventory. This represents roughly 50% of the total value of RECs. With such a significant loss, it is likely that several projects will become NPAs.

This is likely to help cash-starved power distribution companies meet their renewable energy purchase obligation by buying the cheaper RECs.  It is also a fallout of declining tariffs in auctions for solar energy projects and sliding costs of wind energy. The lower solar REC costs are a reflection of record-low PV prices in India, which has fallen further, as there has been on a sharp downward trajectory for some time as global module prices continue to fall.

India’s National Solar Mission targets a cumulative solar capacity of 100 GW by 2022, with total renewable capacity targeted to be 170 GW by that date. The latest data published by the Ministry of New and Renewable Energy (MNRE) puts India’s renewable energy penetration at 16.1%, of which solar accounts for 18.2%. Overall, solar meets 2.9% of India’s energy needs, with wind at 9.2%. In terms of gigawatt capacity, renewables in India comprise 50.7 GW of the nation’s 315.4 GW of installed power capacity, as per the RE data . Cumulative solar capacity in India is 9.23 GW – a figure that is expected to almost double by the end of 2017.

SANJITH S. SHETTY

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