Sydney. Identifying optimal legal frameworks for renewable energy in India APP Project REDG-06-09

Transcription

1 Sydney Identifying optimal legal frameworks for renewable energy in India APP Project REDG November 2008

2 This document has been prepared by Baker & McKenzie and the World Institute of Sustainable Energy (WISE) as part of a project with funding support from the Australian Government and the US Government under the Asia-Pacific Partnership on Clean Development and Climate. This is not a document of the Governments of India, Australia or the US, nor does it claim to represent the views of any these Governments. This publication has been prepared for general information only. You should not rely on the contents. It is not legal advice and should not be regarded as a substitute for legal advice. To the fullest extent allowed by law, Baker & McKenzie excludes all liability (whether arising in contract, for negligence or otherwise) in respect of this document and each part of it, including without limitation, any errors or omissions Baker & McKenzie. All rights reserved. SYDDMS

3 Contents 1. Introduction and summary Purpose of this paper Summary and recommendations 3 2. Background: India's legal system and energy market India's legal system National energy laws and regulating bodies Energy markets electricity, fossil fuels India's electricity grid Access to energy in India Introduction to renewable energy in India Existing RE laws and policies Electricity Act and guiding policies of the Central Government Other Central Government measures State-based Renewable Portfolio Standards summary Effectiveness of current RPS schemes RPS case study: Karnataka RPS case study: Maharashtra Other existing State support schemes Case study: Issues with wind power incentives in Maharashtra National renewable energy law National renewable energy law in development Background to WISE model law Outline of WISE model law Objectives of WISE model law Need for a separate national RE law Comparison to RE laws in other countries Implementing a national RE law what and how? Outline of two main types of renewable energy law Comparing quota and pricing systems: international studies How TREC schemes work Advantages of TREC schemes Design issues with TREC schemes Interaction of TREC schemes and other laws Conclusions on global experiences with TREC schemes 79 i

4 6. Undertaking RE projects in India broader issues Project approvals and implementation Issues with the electricity grid Obtaining information and other resources Protecting intellectual property patents Clean Development Mechanism 88 Appendix 1 Abbreviations and Glossary Appendix 2 Tables of State feed-in tariffs Appendix 3 Status of State RPS schemes Tables and figures Breakdown of Electrical Generation Capacity Ownership 9 Inter-regional power transfer in India 12 Annual Household Energy Consumption in India 14 All India Installed Generating Capacity 15 Projections for electricity demand at 8% annual growth rate 15 Scenario for future Electricity Generation at 8% annual growth rate 16 Cumulative Capacity of Grid Connected RE Generating Capacity 17 Potential Energy Generation from Renewable sources 17 Cumulative Capacity of Stand Alone RE Generating Capacity 18 Cumulative Capacity of Installed Decentralised RE Systems 18 Estimated Medium Term (2032) Potential and Cumulative Achievements 19 Proposal for 11 th Five-Year Plan for Renewable Power 20 Target Capacity for Rural RE in 11 th Five-Year Plan 21 Target capacity for Urban, Industrial and Commercial Aplications in 11th Five-Year Plan 22 Targets for Grid Interactive Renewable Power for Targets for Solar Thermal and Energy Efficient Buildings up to 2032 (in million m 2 )23 Proportion of Total Electricity Generated by RE (Karnataka) 32 Forecasted Annual Additions of Renewable Power Generating Capacity Between (Karnataka) 32 ii

5 Forecasted Changes in Proportion of Total Electricity Generated By Renewable Sources (Karnataka) 33 Sensitivity Analysis Impact of RE Targets on Power Purchase Cost (Karnataka) 33 Mandated RE percentages (Maharashtra) 34 Penalties for Non-Compliance (Maharashtra) 35 Forecasted Additions to RE Generation (Maharashtra) 37 Actual additions to RE generation (Maharashtra) 37 State feed-in tariffs for solar power 38 Minimum Prices for RE, 2004 Amendments (Germany) 52 Minimum Percentage of Electricity to be Sourced from Renewable Sources (UK) 57 Advantages and Disadvantages of Pricing & Quota Systems (Sawin) 60 Requirements for Successful RE Support Policy (Sawin) 61 Figure A: Model of TREC scheme 65 Figure B: Different ways to take account of existing capacity in a TREC scheme 74 Figure C: Model showing potential cumulative effect of concurrent incentives 76 Figure D: Model of concurrent State and national targets 77 Indian State Electricity Regulatory Commisions 87 Estimated Transaction Costs of CDM Projects 90 CER Registration Costs 91 CDM Benefits and Transactions Costs 91 Figures on wind power CDM projects in India 94 Registered CDM wind power projects 94 iii

6 1. Introduction and summary 1.1 Purpose of this paper Asia-Pacific Partnership The Asia-Pacific Partnership on Clean Development and Climate (APP) is a voluntary multi-national partnership between the Governments of seven nations in the Asia Pacific region Australia, Canada, China, India, Japan, Republic of Korea and the United States of America. It was launched on 12 January The APP aims to strengthen existing bilateral and multilateral arrangements and create an international framework within which the participant nations will cooperate to pursue development, energy, environment and climate change objectives. The APP's charter states that the purposes of the APP are to: courtesy: Create a voluntary, non-legally binding framework for international cooperation to facilitate the development, diffusion, deployment, and transfer of existing, emerging and longer term costeffective, cleaner, more efficient technologies and practices among the Partners through concrete and substantial cooperation so as to achieve practical results. Promote and create enabling environments to assist in such efforts. Facilitate attainment of our respective national pollution reduction, energy security and climate change objectives. Provide a forum for exploring the Partners respective policy approaches relevant to addressing interlinked development, energy, environment and climate change issues within the context of clean development goals, and for sharing experiences in developing and implementing respective national development and energy strategies. Renewable Energy and Distributed Generation Task Force APP established eight public-private sector task forces. The Renewable Energy and Distributed Generation Task Force (REDGTF) was formed to focus upon issues associated with renewable energy and distributed generation technologies. The REDGTF aims to: Facilitate the demonstration and deployment of renewable energy and distributed generation technologies in Partnership countries. Identify country development needs and the opportunities to deploy renewable energy and distributed generation technologies, systems and practices, and the enabling environments needed to support wide-spread deployment, including in rural, remote and peri-urban applications. Enumerate financial and engineering benefits of distributed energy systems that contribute to the economic development and climate goals of the Partnership. November

7 Promote further collaboration between Partnership members on research, development and implementation of renewable energy technologies including supporting measures such as renewable resource identification, wind forecasting and energy storage technologies. Support cooperative projects to deploy renewable and distributed generation technologies to support rural and peri-urban economic development and poverty alleviation. Identify potential projects that would enable Partners to assess the applicability of renewable energy and distributed generation to their specific requirements. Our project This paper forms a component of the REDGTF project: Identifying optimal legal frameworks for renewable energy in China and India (the Project), funded by the Australian Government and the US Government under the APP. The Project is undertaken by Baker & McKenzie and the Renewable Energy and International Law project (REIL). REIL is an international network of policymakers, investors, finance, business, thought leaders, lawyers, and technical experts, addressing the policy, financial and technical issues arising in the mainstreaming of clean energy and the development of the clean energy market. REIL is in association with the Renewable Energy and Energy Efficiency Partnership, Yale s Center for Environmental Law and Policy, the Center for Business and the Environment at Yale, the Yale Project on Climate Change at Yale, Baker and McKenzie s Global Clean Energy and Climate Change Practice, and Climate Change Capital. The World Institute for Sustainable Energy, India (WISE) has also provided considerable input into this paper. The Project will consider and assess the legal, regulatory, institutional and policy frameworks in China and India, and the barriers and opportunities facing the renewable energy sectors in those countries. The Project also involved hosting workshops in India and China to identify and promote best practice for laws and policies promoting renewable energy in developing countries. The final reports present results of the Project's investigations and make recommendations. The ultimate aim of the Project is to encourage and enhance the capacity for emission reduction efforts in India and China, by promoting legal and regulatory measures which create an environment within which renewable energy and distributed generation technologies are viable. The Project, while focused on India and China, is intended to provide policy options and recommendations that could be implemented in all APP partner countries. For more information on any issues discussed in this paper, please contact Paul Curnow, Partner, Baker & McKenzie, on paul.curnow@bakernet.com. Outline of this paper This paper provides a detailed overview of renewable energy law and policy in India. Chapter 2 sets out background information on India's legal system, laws relating to energy and the energy market. Chapter 3 addresses the approaches to renewable energy law adopted to date by Indian State and Central Governments. Chapter 4 notes that a national renewable energy law is being developed, considers the WISE model renewable energy law for India and compares the model law against national renewable energy laws in other countries. Chapter 5 raises the possibility of implementing a scheme for trading in renewable energy certificates and makes recommendations regarding such a scheme. Chapter 6 discusses the broader issues associated with implementing renewable energy projects in India, including the barriers and risks involved with such projects. A glossary of terms used in this paper is attached as Appendix 1. 2 Legal frameworks for renewable energy in India

8 1.2 Summary and recommendations Summary As the Indian government is currently preparing a national renewable energy law, it is timely to consider what form of renewable energy law will be best suited to increasing renewable energy in India. This report identifies the issues such a law will need to address and discusses best international practice in renewable energy incentives. The CleanTech Report notes that 95% of respondents to its survey agreed that there is a need for clear, consistent long-term government renewable energy policies to guarantee investment certainty and project viability for renewable energy. Almost 70% agreed that the legal/regulatory environment is weak or unclear, creating uncertainty for renewable energy investors and developers. These figures indicate the need to examine renewable energy laws in India, to make this information readily available, and to advocate best practice policies for increasing the uptake of renewable energy. Indeed, the CleanTech Report concluded that some solutions to assist in overcoming the barriers it identified would be to establish a resource detailing current renewable energy incentives in India and to develop a best practice renewable energy policy guide with case studies. This report aims to go some way towards addressing these needs. India desperately needs more energy as a substantial number of its people do not have access to sufficient reliable energy and energy needs are growing as the country develops. There are also some network and infrastructure challenges facing the energy industry in India that renewable energy projects will need to address. The summary of current Indian renewable energy policies, laws and other measures in Chapter 3 indicates that although the Central Government intends to promote renewable energy, its efforts are hampered by inconsistent implementation by the States and by lack of a central renewable energy law. Some States have set relatively high renewable portfolio standards (RPS renewable energy targets), some have set low targets, and some have not yet set any targets. Enforcement is also not as strong as would be desirable. The co-existence of RPS schemes and feed-in tariffs needs to be well-managed to avoid inefficiencies. The model national renewable energy law proposed by WISE would provide a comprehensive national program to promote renewable energy. It puts forward initiatives on several fronts including for gridconnected renewable energy plants, stand-alone renewable energy plants and renewable fuels, and it provides for market mechanisms including the use of tradeable renewable energy certificates (TRECs). Importantly, the model law also provides for a national renewable energy council (with its own annual budget) which will advise the Central Government on renewable energy policy and implementation issues and conduct periodic assessments of renewable energy resources in India. In June 2008 the Ministry of New and Renewable Energy (MNRE) informed WISE that it proposes to use the model law in developing a national TREC system. The discussion of TREC schemes in Chapter 5 concludes that if designed effectively, a TREC scheme can be an efficient way of encouraging renewable energy capacity to increase to the desired level. A TREC scheme also has specific advantages discussed below. Other issues such as delays in obtaining project approvals and the costs and benefits of having a renewable energy project registered as a Clean Development Mechanism (CDM) project play an important role in an investor's assessment of the viability of renewable energy projects in India. Chapter 6 provides information to help investors prepare for and address these issues. November

9 Recommendations In the course of conducting workshops and researching and writing this paper, we noted certain themes and specific issues which it would be useful to address in order to help increase renewable energy in India. Implement a national renewable energy law As noted above, to encourage investment in renewable energy it is crucial to have clear, stable, longterm support policies. Such policies would be most effectively embodied in a national law that specifically addresses renewable energy and sets out clear medium-term and long-term targets for the use of renewable energy together with a path to achieve them. A law has a more certain status than a collection of policies and is less likely to be changed with a change in government. A national law would largely overcome the issue of inconsistent State regimes (eg differences in renewable energy targets, enforcement regimes, definitions of renewable energy, taxation benefits). A national law would also be welcomed by foreign investors as it would make the regulatory environment clearer and more consistent. A specific renewable energy law allows for several support mechanisms to be addressed in the one document, providing a central reference for interested parties and making it simpler to identify any inconsistencies or inefficiencies between concurrent programs. For these reasons we consider it would be beneficial to enact a national renewable energy law, such as the model law put forward by WISE. Such a law is now being developed by the Central Government. Establish a market for tradeable renewable energy certificates What support mechanisms should the national law put in place? Different support mechanisms for renewable energy can be successful in different circumstances, if properly designed, and in many cases several mechanisms can be applied concurrently. There may be concerns with relying solely on one mechanism, as separate mechanisms may be needed to address the various barriers faced by different types of renewable energy. Nevertheless, it is generally accepted to be most effective to have one central or primary support measure, reinforced with other more specific measures to address particular issues. We consider that in India's circumstances there would be advantages in making a nation-wide TREC scheme the central market mechanism to encourage the renewable energy industry. If operating efficiently, it can be the cheapest way to achieve a specified renewable energy target. Cost is an important consideration in India where increased energy bills could impose hardship. A TREC scheme, where a market for certificates can operate separately from the electricity market, can accommodate both grid-connected and stand-alone power stations, and can operate across separate electricity grids and in either competitive or captive electricity markets. Unlike a feed-in tariff, under a TREC scheme companies can capitalise on geographic areas with good renewable energy sources, supported by liable entities across the country who might not be able to physically acquire renewable energy (if located in a resource-poor area) but who can buy the TRECs. TREC schemes can also be combined with other support schemes, as discussed in section 5.6. A TREC scheme must be carefully designed in order to realise these benefits. It must be mandatory and enforceable, administratively efficient, and in harmony with existing measures (as discussed below). Targets should be set after considering plans for increases in energy generation capacity generally. 4 Legal frameworks for renewable energy in India

10 Within India, the RPS orders in Maharashtra and Rajasthan provide good models. India can also draw on international experience with TREC schemes, which have been used in many countries. Align Central and State policies consistency If an effective national scheme is introduced, the differences between the existing State-based schemes will become less important. However, it is crucial to ensure that State-based schemes (or State implementation of national schemes) do not operate so as to make the national scheme less effective. For example, if enforcement of the national scheme is undertaken at a State level, the penalties must be consistent and consistently enforced across all States. Note that where a TREC scheme sets an absolute target that includes all existing renewable energy capacity, existing plants in States with high existing incentives would receive a double benefit (see section 5.6). These types of interactions should be taken into account when designing the national scheme. To assist in the process of ensuring consistency where it is required, it would be a helpful first step to establish a comprehensive, regularly updated online database of current State renewable energy measures, with data (where available) on the success and costs of each measure, to enable comparisons and knowledge-sharing between States and establish best practice, and to provide information to renewable energy developers. This paper sets out some details on State measures in Appendices 2 and 3, as a starting point. Feedback from industry should also be sought as to the practicality and commercial effect of the measures. In addition, the relevant State energy ministers may wish to meet regularly to discuss the effectiveness of their measures, any industry feedback, any issues arising from interaction with the national scheme, and any proposed changes. In time this is likely to lead to more consistency and greater effectiveness of State measures. Undertake renewable resource studies and forecasting Resource studies and resource forecasting (eg in relation to changes in availability of wind and water) are important tools in enabling the development of renewable energy. Without this data projects are more risky and investors are reluctant to provide capital. Existing resources studies upon which most States have based their RPS calculations are out of date and therefore underestimate the potential of renewable energy. There are particular issues in relation to lack of data for some forms of renewable energy. For example, the paucity of reliable hydrological data for small streams in India is a major impediment for development of small hydro power projects. Projects developed with such data have under-performed in comparison to their design generation expectations. As another example, there is currently no forecasting mechanism for wind power, so wind power does not find favour with the load dispatch centres. It would be in the interest of both the grid operators and the wind farm developers to implement forecasting systems as soon as possible to enable use of all generated wind power. To be most useful, resource and forecasting data needs to be: Collected in each State, using the same measurement standards to ensure comparability between States. Collected for each major form of renewable energy. November

11 Made freely available and easy to access. Updated regularly (eg annually). There may be a need to conduct training in resource assessment to ensure a sufficient number of trained personnel are available to conduct these studies. Other considerations Strengthen and develop transmission network to allow for renewable energy: The general problems with the weak electricity network in India also cause specific disadvantages for renewable energy, which can be intermittent. For example, transmission planning and grid extension for power evacuation of wind energy is one of the issues facing wind power development in India (see section 6.2). Provide training in maintaining renewable energy systems: As renewable energy technologies are relatively new (and quickly developing), there are a relatively limited number of trained personnel who can install, operate, maintain and repair renewable energy installations. This is particularly a concern for stand-alone systems (eg solar PV) in remote rural areas. It will assist if training courses are established and promoted, and if care is taken to ensure some people receive this training in each area in which a remote renewable energy system is situated. Change building standards: In some cases, market mechanisms such as a TREC scheme provide insufficient impetus for change and specific regulations are necessary. Building standards fall into this category. Nineteen States in India have issued Government Orders to change building by-laws to make the use of solar hot water systems (SHWS) compulsory. However only 21 municipal authorities/ State housing board authorities have actually amended their by-laws to make SHWS compulsory. Some State Governments have given additional benefits such as rebates in electricity bills and reductions in property tax for installing SHWS. There is huge potential for electricity saving by mandating (or otherwise providing specific incentives for) the use of SHWS in new and renovated buildings. Provide streamlined approvals processes for renewable energy projects: Currently, different approvals are required for renewable energy projects of different types and sizes, and in some cases approvals from both Central and State governments are required (see section 6.1). The project developer must obtain "no objection" certificates from several different government departments (seven, in the case of Maharashtra wind power projects) to accompany its application for approval of the project. This could be streamlined (from the developer's point of view), by requiring the relevant government department (in Maharashtra, the Energy Development Agency) to seek these certificates itself once the developer has provided sufficient project information. Enforce existing environmental laws: Since most renewable energy technologies are eco-friendly and low-carbon, it is in the interest of the renewable energy sector to argue for a stricter implementation of existing environmental protection Acts, as conventional energy generation contributes to many environmental and social externalities of the kind regulated in these Acts. Enforce intellectual property laws: The Patents Act 1970 provides a good foundation for protection of intellectual property if it is properly enforced. Foreign investors would take comfort from this and would be more confident in investing in cutting-edge renewable energy projects in India. 6 Legal frameworks for renewable energy in India

12 2. Background: India's legal system and energy market 2.1 India's legal system India has a bicameral parliamentary system akin to the Westminster model in which the supreme lawmaking powers reside with the two Houses of Parliament the Lok Sabha (Council of the People) and the Rajya Sabha (Council of States). This bicameral legislative structure is replicated at the level of every State and incorporated into a federal system of government. The division of powers between the Central or Union Government (as the federal Government is generally referred to in India) and the States is in accordance with the schema enshrined in the Constitution of India. These powers are explicitly categorized into three lists: The Union list contains subjects which lie within the exclusive purview of the Union Government, with jurisdiction over all of India. The States list contains subjects which lie within the exclusive purview of each State within its area of jurisdiction. The Concurrent list which contains subjects under the shared purview of the Union and State governments. Electricity is a concurrent subject (Entry 38 in concurrent list). The third level of governance/administration is the sub-state level, i.e. Municipal Corporations, Municipalities or Panchayats. These have no inherent law-making powers. However, they may require compliance with certain State laws. An example may be the levy of a local tax on the movement of goods into municipal areas, although this power is being phased out as Value Added Tax (VAT) is being rapidly implemented. The important point to note is that while Central legislation is uniformly applicable all over India, the relevant State legislations vary between States. Hence, for the implementation of specific projects, the laws of the State where the project is to be implemented would apply. There is a small but distinct class of territories, referred to as Union Territories, which are directly administered by the Central Government. The legal provisions applicable to renewable energy in these territories may vary locally. 2.2 National energy laws and regulating bodies The process of reform of the electricity sector was initiated in 1991 when the earlier Ministry of Energy (with Department of Power, Coal and Non-Conventional Sources of Energy) was trifurcated into separate ministries of the Government of India. With the passage of the Electricity Laws (Amendment) Act 1991, private sector participation in generation was permitted. The Electricity Regulatory Commissions Act 1998 saw the establishment of Regulatory Commissions at both Central and State levels and these were entrusted with the responsibility of tariff fixation as a principal function along with regulatory oversight in their areas of jurisdiction. The Electricity Act 2003 November

13 (EA 2003) reconciled the various pieces of legislation and is currently the major legislation covering the generation, transmission and distribution of electricity in India. The powers and functions of the Electricity Regulatory Commissions are also covered under the EA Details of relevant provisions in the EA 2003 for renewable energy are presented in Chapter 2. Currently, there is no law providing separate coverage of the renewable energy sector in India. This is an anomalous situation since the administrative machinery for dealing with the activities of the renewable energy sector has been in place for a fairly long period of time. This consists of the nodal MNRE at the Central level and State Renewable Energy Development Agencies (also known as State Nodal Agencies) at the level of States. The State Nodal Agencies have been named the "designated agencies" for implementation of the Energy Conservation Act Moreover, there is a specialized financial agency, the Indian Renewable Energy Development Agency (IREDA) to cater to the financial requirements of the renewable energy sector in India. As there is a split between the electric power sector and other parts of the energy sector (coal, petroleum fuels, natural gas), the conventional power generation sector is subject to an array of rules and regulations emanating from various Central ministries. These do not necessarily apply to the renewable energy sector; nevertheless they underline the need to have a central renewable energy law for India in order to have a clear demarcation of the subject matter, activities, policies and regulations, particularly in the context of portfolio standards and obligations. Another set of Central laws that indirectly apply to the renewable energy sector in India include: Forest Conservation Act Water (Prevention and Control of Pollution) Act Air (Prevention and Control of Pollution) Act Environment Protection Act 1986 which incorporates the Solid Waste Management Rules, Energy markets electricity, fossil fuels Outline of markets There are multiple energy markets in existence in India: Power or electricity markets. Conventional fuel markets (coal, petroleum, gas, lignite etc). Renewable energy markets. Each of these markets interacts with the others. In this section, we cover electricity markets in some detail and touch only briefly on conventional fuels markets. Following sections cover the renewable energy markets. Electricity markets regulation and competition The core feature of the EA 2003 at the macro level requires unbundling of the vertically integrated power sector into generation, transmission and distribution while at the micro level the EA 2003 wishes to increase competition. Except for power dispatch and transmission, the EA 2003 has opened up all power sector operations to private investment. The generation sector (except for hydro power plants) has been de-licensed and open access provisions have also been provided under the EA State Electricity Regulatory Commissions regulate the electricity markets in the respective States, 8 Legal frameworks for renewable energy in India

14 while the Central Electricity Regulatory Commission looks into tariff issues of Central public sector enterprises and other inter-state electricity issues. Electricity markets in India are largely catered to by a variety of State owned enterprises or State Government agencies (Electricity Boards). Electricity markets generation After the initiation of electricity sector reforms in 1991, there has been a significant increase in power generation entities in the areas of conventional power generation as well as renewable energy generation. The table below indicates the relative sizes in the electricity markets, occupied by these various entities (in terms of ownership of megawatts of current generation capacities). BREAKDOWN OF ELECTRICAL GENERATION CAPACITY OWNERSHIP TYPE OF ENTITY GENERATION CAPACITY (MW) Central Public Sector utilities (total) 45, (a) Thermal coal (b) Thermal gas (c) Large Hydro 7562 (d) Nuclear 4120 State Electricity Boards (total) 70, (a) Thermal coal (b) Thermal gas (c) Thermal - Diesel (d) Large Hydro (e) Renewable energy Private Sector utilities (total) 18, (a) Thermal coal (b) Thermal gas 4183 (c) Thermal - Diesel (d) Large Hydro (e) Renewable energy TOTAL (Central + State + Private) Source: WISE. Data as at 31 June 2007 Additionally 14,636 megawatts of grid-connected captive power generating capacity has been established in the country. Almost all the capacity addition in the renewable energy generation segment has been through the private sector, predominantly though wind electricity generation. It may further be noted that the November

15 generation capacity by ownership does not adequately reflect the market situation since conventional sources (coal, thermal, gas thermal, large hydro, nuclear) have higher plant load factors as compared to most renewable energy sources, i.e. they generate more units of electricity per annum per megawatt of capacity as compared to renewable energy based capacity. In effect, the generation market would weigh in favour of the conventional sources as compared to renewable energy sources when the comparison is based on units generated per annum. An interesting aspect of the electricity markets is that, despite their size and presence in conventional generation, several of the State owned utilities may not be averse to ventures in the fields of renewable energy generation. Currently, the policy thrust seems to be missing and this may emerge in response to international uncertainties relating to availability of conventional fuel, commercial/ bilateral/ multilateral financial backing and presence of credible entities in the field. Electricity market transmission and distribution At present, the transmission market is entirely in the hands of State and Central agencies, although there are provisions for private investments in certain aspects of transmission, as reflected by the creation of "transmission licensee category" in the EA The distribution market has witnessed the entry of private sector distribution companies, yet the process is uneven and currently not very widespread, being mostly centred around distribution areas in some of the larger cities and a few States. The passage of the EA 2003 has consolidated the reforms process on a firm basis for the foreseeable future. In proportionate terms, there is a significant market share for captive generation of electricity. The EA 2003 has permitted wheeling of power through the public grid as well as banking of power for certain cases. Fuel market coal and lignite Coal and lignite have been the staple fossil fuel for thermal generation in India. Most of the coal and lignite is mined by State owned companies although, following reforms, some blocks of coal have opened for mining by private sector companies for captive use. For a long time, India s position with respect to coal reserves was considered comfortable. Recently, however, some doubts have been expressed about the reliability of previous estimates of reserves and the possibility that future estimates are likely to be revised downwards. In addition, concerns about contribution to GHG emissions are likely to create a pressure for reducing the reliance on coal based generation if adequate, cost effective alternatives are available. Moreover, coal prices have shown a steady upward trend in recent years. Fuel market petroleum and natural gas India does not have extensive petroleum reserves, being dependent to the extent of 70% or more of its needs on imported crude, mostly from West Asian sources. Consequently, petroleum based electricity generation was never a preferred option for India, both due to foreign exchange constraints and price volatility effects. Recent experience with naphtha based generation has proven the long term wisdom of this policy. A very large part of the refining and distribution of petroleum products is with a multiplicity of Stateowned corporations. However, following sector reforms, significant refinery capacity has recently been added in the private sector. The policy reforms have also permitted import and distribution of petroleum products by private companies although despite significant growth in the automobile sector in recent years the investment response has been tardy. As a consequence of reforms, petroleum exploration and oil field development has also been opened to private sector participation, through the 10 Legal frameworks for renewable energy in India

16 bidding process. In general, where petroleum products are concerned, product prices are determined by the Central Government with variations based on transportation costs and local taxes. The scenario with respect to gas is very similar to that of oil, with indigenous supply much below demand. Import of gas for power generation has been affected by both international availability and price volatility. The alternative fuel, naphtha, has suffered the same fate, currently putting enormous pressure on gas based electricity generation except where based on reliable domestic supplies. Gas transportation by pipeline has mostly been with the public sector though there have been recent initiatives by the private sector in this regard. Domestic gas pricing from private sector sources continues to be an issue as it is impacting the pricing of electricity based on thermal gas generation. Additional pressure on gas prices is being exerted by its alternative uses in urban transportation and fertilizer production. 2.4 India's electricity grid History During the 1940s and 1950s electricity supply in India consisted of supplying power to load centres in the vicinity of the generating stations. The highest transmission voltage at that time was 132 kv. These small systems grew into State grid systems over time with inter-connections between them to achieve reliability of power supply. In 1964 the country was demarcated into five regions, namely the Eastern, North-Eastern, Northern, Western and Southern to achieve coordinated power system planning and optimum utilization of resources on a much larger scale through the integration of the State grids. In 1975 two major electricity generating companies, NTPC and NHPC, were established to augment generation capacity addition in the country. The transmission systems built for these generating stations helped this power to be used by States in the region and focus shifted from State grids to regional grids. By 1980 strong regional networks were in place and in 1989 the Transmission sectors of the major central generating companies (NTPC and NHPC) were separated to form Power Grid Corporation (POWERGRID) to work towards a national grid. To facilitate interregional exchanges between asynchronously operating regional grids, HVDC back-to-back links were developed. Inter-regional power transfer Inter-regional power transfer is of great importance in India because energy resources are very unevenly distributed. The North-eastern and eastern regions is where most of the remaining hydro potential and coal reserves are located respectively. These power surplus regions should be able to export this surplus power to load centres in the Northern, Western and Southern regions, which are power deficit. Hence in order to optimally use the natural resources of the country, a reliable National Grid is needed and work towards this goal has already begun. As of August 2006 inter-regional transmission capacity of 11,450 megawatts had been established and approximately 34,800 million kilowatt hours of power was sent between regions in The growth in the inter-regional power transfer is shown in the following figure. November

17 INTER-REGIONAL POWER TRANSFER IN INDIA Source: WISE, 2007 The target is to achieve in a phased manner a National Power Grid in India with close to 37,150 megawatts of inter-regional transmission capacity by 2012 and roughly 65,000 megawatts by Transmission and distribution losses Transmission and distribution losses in India stand at roughly 33% and are among the highest in the world. A large fraction of this number is on account of theft/pilferage of electricity and un-metered use, in addition to technical losses. This is another major cause for concern in the Indian power systems and various initiatives have been taken to address this problem. Role of Central and State Transmission Utilities As per the EA 2003, both the Central Transmission Utility (CTU the Power Grid Corporation) and the various State Transmission Utilities (STUs) are responsible for planning and development of transmission facilities within the country. While the CTU mandate covers the national and regional transmission systems, the STU mandate covers intra-state transmission networks. The CTU and the various STUs have to work in coordination towards achieving an integrated development of the transmission system. The functions of the Central Transmission Utility are as follows: (a) (b) (c) (d) to undertake transmission of electricity through inter-state transmission system; to discharge all functions of planning and co-ordination relating to inter-state transmission system; to ensure development of an efficient, coordinated and economical system of inter-state transmission lines for smooth flow of electricity from generating stations to the load centres; and to provide non-discriminatory open access to its transmission system for use by any licensee or generating company or any consumer. The functions of the State Transmission Utility are the same as those for the CTU except that its mandate covers only the intra-state transmission network of the particular State. 12 Legal frameworks for renewable energy in India

18 Open access Another new feature of the EA 2003 is the "open access" provision which is defined under the Act as "the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission". It is hoped that through greater competition via open access, cost of power will come down. Open access can be availed by paying of what are called wheeling charges to the transmission company and charges of the load dispatch center. Load Dispatch Centres To ensure the smooth integrated operation of the power system there are presently five Regional Load Dispatch Centres (LDCs) and State LDCs in every State. The Regional LDCs and the State LDCs have the responsibility of scheduling and dispatch of electricity along with the monitoring of the grid operation in their respective areas. A National LDC to optimize scheduling and dispatch of electricity among Regional LDCs is to be established in This will be an important milestone towards the realization of a national power grid. 2.5 Access to energy in India Lack of access to energy In the last 60 years since independence, India has made great strides in electricity sector. However in spite of these successes, access to power and reliability of power are still major issues in India. Per capita electricity consumption in India at 533 kilowatt hours is a very small fraction of that in the industrialized world. The Integrated Energy Policy states that "Access to electricity is very uneven. Around 57% of the rural households and 12% of the urban households i.e. 84 million households (over 44.2% of total) in the country did not have electricity in Even those who have access to electricity suffer from shortages and poor quality of supply. Unscheduled outages, load shedding, fluctuating voltage and erratic frequency are common. Consumers and the economy bear a large burden of the consequences of this poor quality of supply." Policies to address energy poverty The National Electricity Policy and the Rural Electrification Policy make it clear that the key development objective of the power sector is supply of electricity to all areas including rural areas as mandated in section 6 of the EA Accordingly, in April 2005 the Central Government launched an ambitious scheme Rajiv Gandhi Grameen Vidhyutikaran Yojana' (RGGVY) with the goal of electrifying all villages or hamlets without electricity, and providing access to electricity to all households by According to the Integrated Energy Policy, "by the RGGVY aims to electrify the 1,25,000 villages, still without electricity; to connect all the estimated 23.4 million un-electrified households below the poverty line with a 90% subsidy on connecting costs; and finally, to augment the backbone network in all 462,000 electrified villages. The 54.6 million households above the poverty line which are currently un-electrified, are expected to get electricity connection on their own without any subsidy." Through involvement of the local community and through large financial assistance the Rural Electrification Policy aims to ensure: November

19 Provision of access to electricity to all households by year Quality and reliable power supply at reasonable rates. Minimum lifeline consumption of 1 unit per household per day as a merit good by year Of the remaining un-electrified villages, close to 20,000 are in remote areas which cannot be electrified through conventional grid extension. Since the MNRE has taken up a program to electrify all such villages through renewable energy sources. Close to 3000 villages have already been electrified through this scheme. 90% of the initial projects costs and maintenance costs for 10 years have been subsidized under this scheme. Traditional fuel sources 30% of primary energy consumption in India still comes from non-commercial energy sources like firewood, agricultural waste and dung cakes. In 2000, the primary source of cooking energy was firewood and woodchips or dung cakes for 86% of rural households. In urban areas as well, more than 20% of all households rely mainly on firewood and chips. Only 5% of the households in rural areas and 44% in urban areas used LPG. Kerosene is used by 22% of urban households and only 2.7% of rural households. ANNUAL HOUSEHOLD ENERGY CONSUMPTION IN INDIA FUEL TYPE PHYSICAL UNITS MTOE Rural Urban Total Rural Urban Total Firewood and chips (Mt) Electricity (billion kwh) Dung Cake (Mt) Kerosene (ML) Coal (Mt) LPG (Mt) Data derived from NSS 55th Round data (July June 2000), National Sample Survey Organisation, Ministry of Statistics and Program Implementation, Government of India India's current fuel usage India had an installed grid connected power generating capacity of 1,45, megawatts as at 30 July Coal, lignite, natural gas and diesel based thermal power generation, which are the mainstays of the electricity sector, comprise nearly 64.6% of the above total. Large hydro comes in second with a contribution of 24.7%. Renewable energy (wind, solar, small hydro, biomass etc) with over 10,000 megawatts (7.7%) and nuclear with 4120 megawatts (2.9%) make up the rest. 14 Legal frameworks for renewable energy in India

20 ALL INDIA INSTALLED GENERATING CAPACITY ENERGY SOURCE INSTALLED CAPACITY (MW) PERCENTAGE OF TOTAL MIX Coal 77, % Gas 14, % Diesel 1, % Hydro 36, % Nuclear % Renewable energy % Total 1,45, % Data as at 30 July Source: Ministry of Power, Government of India at In terms of power generated from conventional energy sources during , out of a total electricity generation of terawatt hours in the country, thermal power contributed terawatt hours (80%), hydro power contributed terawatt hours (17%) and nuclear power contributed 18.6 terawatt hours (3%). India's projected future demand for electricity There is huge shortage of electricity in India at the moment coupled with very limited access to electricity especially in the rural areas. Hence a huge growth in the electricity sector has been anticipated and planned for the coming years. The Planning Commission s Integrated Energy Policy report makes the following projection (assuming an annual national growth rate of 8%) for electricity demand in India for the coming years. PROJECTIONS FOR ELECTRICITY DEMAND AT 8% ANNUAL GROWTH RATE YEAR POWER (BILLION KWH) PEAK DEMAND (GW) INSTALLED CAPACITY (GW) Source: WISE, 2007 Various possible scenarios have been worked out for supplying the amount of electricity forecast to be required. Thermal power is still expected to supply the major bulk of the power, thereby greatly increasing fuel requirements. Fuel requirements for future electricity generation as per one scenario with 8% annual growth rate are shown in the following table. November

21 SCENARIO FOR FUTURE ELECTRICITY GENERATION AT 8% ANNUAL GROWTH RATE YEAR ELECTRICITY GENERATION (BILLION KWH) AMOUNT SUPPLIED BY THERMAL POWER (BASED ON COAL, NATURAL GAS AND OIL) IN B KWH FUEL REQUIREMENTS Coal (MT) Natural Gas (BCM) Oil (MT) Source: WISE, 2007 Going by the past record, these anticipated capacity additions may not materialize in their entirety. As against a target of 41,110 megawatts of conventional capacity addition in 10th five year plan ( ), India managed to add a mere 21,094.6 megawatts. Constraints such as lack of availability of indigenous coal and natural gas supplies and problems with importing coal and natural gas could be additional factors in under-realization of the above planned capacity. 2.6 Introduction to renewable energy in India India's current use of renewable energy The overall picture The following chart represents the distribution according to renewable energy type, in megawatts, generated in India as at 31 March It is clear that wind energy makes up the largest proportion of renewable energy. The total amount of power generated from renewable sources in India as at 31 March 2008 was 10, megawatts. 1 Includes secondary oil for coal based generation 16 Legal frameworks for renewable energy in India

22 Total Power from Renewables: 10, (MW) Bio Power Wind Power Small Hydro Power Cogeneration-bagasse Waste to Energy Solar Power Biomass / Cogen.(non-bagase) Biomass Gasifier Energy Recovery from Waste Data as at 31 March Source: MNRE, at Grid connected systems The table below shows the status of installed grid-connected renewable electricity generating capacity in India as at 31 March It also shows the resource potential of various renewable technologies. CUMULATIVE CAPACITY OF GRID CONNECTED RE GENERATING CAPACITY GRID-CONNECTED RE ESTIMATED POTENTIAL (MW) CUMULATIVE ACHIEVEMENTS (MW) PERCENTAGE OF RESOURCE POTENTIAL EXPLOITED Wind Power 45,000 8, % Small Hydro Power (up to 25 MW) 15,000 2, % Bagasse Cogeneration 5, % Biomass Power (Agro residues and Plantations) 61, % Waste to Energy 7, % Total (in MW) 133,000 12, % Data on cumulative achievements as at 31 March Source: MNRE at One of the data gaps presently in the renewable energy sector in India is the non-availability of consolidated electricity generation data. Based on the present installed capacity, assuming certain Plant Load Factors, the table below indicates roughly 25 billion kilowatt hours of likely generation from renewable sources on an annual basis in the future. This is just under 4% of conventional (thermal, large-hydro and nuclear) electricity generation in India. POTENTIAL ENERGY GENERATION FROM RENEWABLE SOURCES SOURCE CAPACITY (MW) ASSUMED PLF ENERGY GENERATION (BILLION KWH) Wind % Small hydro power % 6.06 November

23 SOURCE CAPACITY (MW) ASSUMED PLF ENERGY GENERATION (BILLION KWH) Bagasse % 3.24 Biomass % 3.45 WTE % 0.08 Total Conventional power (Thermal, Large Hydro and Nuclear) generation in Source: WISE, 2007 Stand Alone Systems In addition to the grid connected renewable energy capacity as at 31 March 2008, megawatts of stand alone renewable electricity generating capacity has also been established in India. Biomass based energy is leading the way in this sector. Additionally, as at 31 March 2008, close to 4000 remote villages have been electrified through renewable energy. Details are shown in the table below. CUMULATIVE CAPACITY OF STAND ALONE RE GENERATING CAPACITY DISTRIBUTED RENEWABLE POWER MW Solar PV Power Plants and Street Lights 7.72 Biomass / Co-generation (non-bagasse) Biomass Gasification Energy Recovery from Waste Total Remote Village Electrification (Villages/ Hamlets) 3985/1142/ systems Data as at 31 March Source: MNRE at A large number of decentralized renewable energy systems other than the ones mentioned above have also been established in India, details of which are given in the table below. Small solar PV lighting systems are being widely used in rural areas and solar water heaters are finding a big market in urban India. While the number of installed traditional biogas plants is very impressive, many of these plants are no longer in use. This is due to a variety of factors including lack of proper maintenance, construction defects, lack of availability of feed-stock and lack of awareness at times. Use of new compact high rate methanation biogas plants based on kitchen and wet waste (as opposed to the traditional ones based on cow dung) is picking up in urban India, especially in Maharashtra where more than 2000 systems have been successfully installed. CUMULATIVE CAPACITY OF INSTALLED DECENTRALISED RE SYSTEMS TYPE OF SYSTEM INSTALLED NUMBERS/ CAPACITY Family Type Biogas Plants 4.01 million plants Solar Photovoltaic Program (a) Solar Street Lighting System 61,321 systems 18 Legal frameworks for renewable energy in India

24 (b) Home Lighting System (c) Solar Lantern TYPE OF SYSTEM INSTALLED NUMBERS/ CAPACITY 4,02,938 systems 6,70,059 systems Solar Thermal Program (a) Solar Hot Water Systems 2.30 million sq. m. collector area (b) Solar Cookers 634,000 Wind pumps Aero-generator / Hybrid Systems Solar Photovoltaic Pumps 1342 units 720 kw 7148 units Data as at 31 March Source: MNRE at Potential for renewable energy The renewable energy markets compete with the fossil fuel markets discussed above, hence any legal and policy changes in those sectors have a ripple effect over time on renewable energy markets. As the following table indicates, the potential markets for renewable energy products/services in India are huge, yet their development is critically dependent on a variety of factors which will be touched upon below. Currently, only a small part of the potential in India is being tapped. ESTIMATED MEDIUM TERM (2032) POTENTIAL AND CUMULATIVE ACHIEVEMENTS SOURCES / SYSTEMS ESTIMATED POTENTIAL CUMULATIVE ACHIEVEMENTS A. Grid-interactive renewable power Bio Power (Agro residues and plantations) 61,000 MW MW Wind Power 45,000 MW MW Small Hydro Power (up to 25 MW) 15,000 MW MW Cogeneration bagasse 5,000 MW MW Solar Power 500, 003 MW 2.12 MW Waste to Energy 7,000 MW MW A. SUB TOTAL 633,003 MW 12, MW B. CHP / Distributed renewable power Solar PV Power Plants and Street Lights MW Biomass / Cogeneration (non-bagasse) MW Biomass Gasification MW Energy Recovery from Waste MW Aero- Generators / Hybrid Systems MW B. SUB TOTAL MW 2 Wind Power Potential could be much higher than 45,000 megawatts as this potential is based on a very old study. November

25 SOURCES / SYSTEMS ESTIMATED POTENTIAL CUMULATIVE ACHIEVEMENTS TOTAL (A and B) + 633,003 MW 12, MW C. Other decentralised energy systems Family type Biogas plants 12 million plants 4.01 million plants Solar Photovoltaic Program 20 MW/ Sq.km (a) Home Lighting System - 402,938 systems (b) Solar Lantern - 670,059 lanterns Solar Thermal Program - (a) Solar Hot Water Systems 140 million sq. m. collector area 2.30 million sq. m. collector area (b) Solar cookers - 634,000 cookers Wind Pumps pumps Solar Photovoltaic Pumps pumps Data as at 31 March Source: MNRE at As is evident from the above table, wind electricity generation is already making its presence felt, having overtaken the installed nuclear power capacity by nearly a factor of two and with a huge potential yet to be tapped. Solar power whether PV or thermal is yet to gather momentum and the solar power market has adequate space to accommodate many large players. There is also large potential for urban and rural bio-methanation technologies. In general, entry into Indian markets requires long-term commitment and initial staying power. India has a sufficiently widespread base of small and medium scale enterprises if core technologies can be brought into ventures. Indian partners can be of assistance in understanding and tackling the local business environment. Targets for future renewable energy development Short-term plan ( ) 15,000 megawatts of renewable power generating capacity addition has been planned for grid connected and stand alone systems for the 11 th five-year plan ( ). Wind power with 10,500 megawatts is expected to contribute the most to this plan. Details are shown below. PROPOSAL FOR 11 TH FIVE-YEAR PLAN FOR RENEWABLE POWER PROGRAM COMPONENT TARGET (MW) Wind Power 10,500 Small Hydro 1,400 Co-generation 1,200 Biomass Power 500 Urban waste to energy 200 Industrial waste to energy Legal frameworks for renewable energy in India

26 PROGRAM COMPONENT TARGET (MW) Sub-total grid-connected RE excluding solar (A) 14,000 Solar Power (Grid-Interactive/ stand-alone) 50 Stand-alone RE excluding Solar 950 Sub-total solar and stand-alone RE (B) 1,000 Total Renewable Power (A + B) 15,000 Source: XIth Plan Proposals for New and Renewable Energy, MNRE, Short-term plan rural electrification At the end of the 10 th plan, renewable energy systems met less than 1% of rural energy needs. In the 11 th plan two programs, namely the Remote Village Renewable Energy Program (RVREP) and Grid-Connected Village Renewable Energy Program (GVREP), have been proposed in order to address rural energy needs through renewable energy sources. The RVREP will have two sub-components, namely the Village Energy Security Program (VESP) and the Remote Village Solar Lighting Program. The VESP plans to go beyond mere electrification and tries to provide for all energy needs from renewable sources, especially from various forms of bioenergy. It is still in the pilot project stage. The GVREP is also subdivided into two sections, the solar thermal and biogas sections. Details of targets for the 11 th plan under all these programs are given in the table below. TARGET CAPACITY FOR RURAL RE IN 11 TH FIVE-YEAR PLAN PROGRAM COMPONENT TARGETS Remote Village Renewable Energy Program (RVREP) Village Energy Security Program (VESP): Distributed Renewable Power systems in remote villages / hamlets with subsidy of 90% of actual system cost or Rs.2.25 million per system per village of 100 households, whichever is less Remote Village Solar Lighting Program: Single light solar PV system for remote villages / 90% subsidy of actual system cost or Rs.7200/system/ household, whichever is less, per village of 100 households. Common component for cooking/ supplementary motive power for all remote villages / hamlets: RE systems / devices for remote villages/ 90% subsidy of actual cost or Rs.9,000/ household, whichever is less, per village of 100 households. Physical Target (in nos. of remote villages/ hamlets) ,000 Grid-Connected Village Renewable Energy Program (GVREP) Collector area Solar thermal systems Flat plate collectors for hot water 1 million m 2 Cooking & drying applications (box type cookers & flat plate solar collectors) 0.5 million m 2 November

27 PROGRAM COMPONENT TARGETS Concentrating type cooker applications 0.1 million m 2 Biogas Plants - Family type for cooking applications 2 million m³ Source: WISE, 2007 Short-term plan urban and commercial RE Apart from setting indicative targets for renewable power generating technologies and decentralized renewable energy applications for rural India, targets have also been set for renewable energy use in urban, industrial and commercial applications. These primarily include solar thermal and waste to energy applications. Details are given in the table below. TARGET CAPACITY FOR URBAN, INDUSTRIAL AND COMMERCIAL APLICATIONS IN 11TH FIVE-YEAR PLAN PROGRAM COMPONENT PHYSICAL TARGET Solar thermal systems/ devices Water heating 9.50 million m 2 Drying 0.25 million m 2 Other (steam generation) 0.25 million m 2 Total Area 10 million. m 2 collector area Energy-efficient buildings 5 million m 2 floor area Akshay Urja Shops Solar Cities 2000 nos. 100 nos. Energy from Urban Wastes - Municipal solid waste 100 MWe - Biogas 100 MWe Total from Urban Wastes Energy from Industrial Wastes 200 MWe 200 MWe Source: WISE, 2007 Medium-term plan ( , 2032) Power generating capacity addition of roughly 30,000 megawatts is targeted from It is anticipated that more than 50,000 megawatts of renewable power will be in place by The breakdown of this power generating capacity is given below. TARGETS FOR GRID INTERACTIVE RENEWABLE POWER FOR 2022 RESOURCE 11 TH PLAN (TO 2012) 12 TH & 13 TH PLAN (TO 2022) LIKELY TOTAL ADDITION LIKELY CUMULATIVE CAPACITY AT END 2022 Wind power ,500 33,000 40, Legal frameworks for renewable energy in India

28 RESOURCE LIKELY LIKELY TOTAL 11 TH PLAN (TO 12 TH & 13 TH PLAN CUMULATIVE ADDITION ) (TO 2022) CAPACITY AT END Small hydro power ,540 6,515.6 Bio power ,463 7,603.6 Total ,003 54,212 Source: WISE, 2007 Medium term targets for solar thermal energy use and energy efficient building have also been set out. TARGETS FOR SOLAR THERMAL AND ENERGY EFFICIENT BUILDINGS UP TO 2032 (IN MILLION M 2 ) SOLAR ENERGY PROGRAMS Solar thermal systems/ devices (Collector Area) Energy-efficient Buildings (Floor Areas) Source: WISE, 2007 In addition to the above targets, the Government has also set out medium term deployment aims (to 2032): Grid-interactive renewable power 10% share in grid power installed capacity by 2012 and 15% by Alternative fuels bio-fuels, synthetic fuels and hydrogen. Substitution of up to 10% of oil with alternate fuels in transport, portable and stationary applications by Alternative fuel systems for the same. Energy recovery from municipal waste 423 class-i cities including 107 municipal corporations, where suitable waste of requisite quantity is available by Energy recovery from industrial wastes where suitable waste is available by Solar water heating/pre-heating systems 50 million m2 by Cogeneration 5000 MWe by Cooking energy and motive power in electrified villages Complete supplementation by Lighting/ electricity in un-electrified census villages/hamlets 10,000 remote villages/hamlets by History of renewable energy measures in India India is one of the few countries in the developing world which pioneered the development of renewable energy. From the 1970s onwards India recognized the relevance of these natural sources of energy. Thereafter, the sector witnessed slow but steady growth over the next three decades. The subsequent Indian development milestones can be summarised as follows: Establishing the Commission for Additional Sources of Energy in 1981 for promoting research and development in renewable energy. November

29 Establishing the Department of Non-conventional Energy Sources in 1982 in the Ministry of Energy (a global first). Wind-resource assessment and publication of a data-book in the early 1980s. Research and development, capacity building and demonstration programs in the areas of biogas, cooking stoves and solar energy in the 1980s. Installation of the first grid-connected wind turbine in 1985 and beginning of the demonstration program by DNES in Establishing IREDA in 1987 to finance renewable energy projects. Upgrading the department into a full-fledged Ministry of Non-conventional Energy Sources in Recognition of renewable technologies for power generation in 1992, by their inclusion in the Eighth Five Year Plan ( ). Policy to encourage private sector investment in renewable energy and guidelines for renewable energy tariffs by MNES in Until , the primary approach for renewable energy in India was through subsidies, promoted by the MNRE. However, since then India has adopted the approach of promoting renewable energy through fixed tariffs and private investments. The ministry prescribed a price of Rs 2.25/kWh from with a 5% annual escalation based on prevalent avoided costs of conventional thermal power in India. Wheeling and banking of energy was also permitted under these guidelines which were a major factor in obtaining private investments. Based on these guidelines States brought out their own policies, some even giving additional incentives for renewable energy investments. Ad hoc policy changes under various State policies led to these policies being challenged by various State electricity boards and developers under the Electricity Regulatory Commissions Act 1998 and the EA Presently all renewable energy tariffs are set by the relevant SERCs and not through Government policies. Most renewable power generating technologies other than wind power have some form of subsidy support from the MNRE and/or State Governments. More detail on current Central and State Government policies is set out in the next chapter. 24 Legal frameworks for renewable energy in India

30 3. Existing RE laws and policies 3.1 Electricity Act and guiding policies of the Central Government Outline The Central Government s approach to renewable energy is quite clear from the short and medium term targets set out in the previous chapter. In particular, the target for at least 10% of grid-connected power to come from renewable sources by 2012 indicates an increasing push for clean energy. Energy security, sky-rocketing conventional energy prices and chronic shortages of electricity are slowly making the Government take more notice of renewable energy than it has done in the past. However, much more can be done. This section sets out the current overarching Central Government laws and policies relevant to renewable energy in India. The major measures are the provisions of the EA 2003 and associated policies relating to minimum percentages of renewable energy and preferential tariffs. There are also several other Central Government initiatives and policies which help promote renewable energy, discussed in the following sections. The proposed national renewable energy law is discussed in Chapter 4. Electricity Act 2003 (India) Requirement for States to set RE targets Section 86 of the EA 2003 promotes renewable energy by ensuring grid connectivity and sale of renewable electricity. The section creates a demand for renewable energy by requiring State Electricity Regulatory Commissions (SERCs) to specify percentages for renewable energy for purchased within the area of a distribution licensee. "The State Commission shall discharge the following functions, namely promote co-generation and generation of electricity from renewable sources of energy by providing suitable measures for connectivity with the grid and sale of electricity to any person, and also specify, for purchase of electricity from such sources, a percentage of the total consumption of electricity in the area of a distribution licence." In this paper these orders are referred to as SERC orders or RPS orders. Preferential tariffs Section 61 of the EA 2003 relates to tariff determination. "The Appropriate Commission shall, subject to the provisions of this Act, specify the terms and conditions for the determination of tariff, and in doing so, shall be guided by the following, namely the promotion of co-generation and generation of electricity from renewable sources of energy." November

31 National Electricity Policy Private sector participation Section of India's National Electricity Policy promotes private participation in renewable energy. "Feasible potential of non-conventional energy resources, mainly small hydro, and wind and bio-mass would also need to be exploited fully to create additional power generation capacity. With a view to increase the overall share of non-conventional energy sources in the electricity mix, efforts will be made to encourage private sector participation through suitable promotional measures." Reducing costs of renewable energy Section of the policy targets the reduction in capital costs of renewable energy technologies through competition. "Non-conventional sources of energy being the most environment friendly there is an urgent need to promote generation of electricity based on such sources of energy. For this purpose, efforts need to be made to reduce the capital cost of projects based on non-conventional and renewable sources of energy. Cost of energy can also be reduced by promoting competition within such projects. At the same time, adequate promotional measures would also have to be taken for development of technologies and a sustained growth of these sources." Preferential tariffs Section of the policy states that SERCs should specify appropriate tariffs in order to promote Renewable Energy (until non-conventional technologies can compete within the competitive bidding system), specifying percentages that progressively increase the share of electricity generated from renewable sources. "The Electricity Act 2003 provides that co-generation and generation of electricity from nonconventional sources would be promoted by the SERCs by providing suitable measures for connectivity with grid and sale of electricity to any person and also by specifying, for purchase of electricity from such sources, a percentage of the total consumption of electricity in the area of a distribution licensee. Such percentage for purchase of power from non-conventional sources should be made applicable for the tariffs to be determined by the SERCs at the earliest. Progressively the share of electricity from non-conventional sources would need to be increased as prescribed by State Electricity Regulatory Commissions. Such purchase by distribution companies shall be through competitive bidding process. Considering the fact that it will take some time before non-conventional technologies compete, in terms of cost, with conventional sources, the Commission may determine an appropriate differential in prices to promote these technologies." Cogeneration Section of the policy promotes the benefits of cogeneration. "Industries in which both process heat and electricity are needed are well suited for cogeneration of electricity. A significant potential for cogeneration exists in the country, particularly in the sugar industry. SERCs may promote arrangements between the co-generator and the concerned distribution licensee for purchase of surplus power from such plants. Cogeneration system also needs to be encouraged in the overall interest of energy efficiency and also grid stability." 26 Legal frameworks for renewable energy in India

32 National Tariff Policy Renewable energy percentages and pricing Section 6.4 of the National Tariff Policy requires all SERCs to specify minimum percentages for electricity to be purchased from renewable energy sources by 1 April (1) Pursuant to provisions of section 86(1)(e) of the Act [Electricity Act 2003], the Appropriate Commission shall fix a minimum percentage for purchase of energy from such sources taking into account availability of such resources in the region and its impact on retail tariffs. Such percentage for purchase of energy should be made applicable for the tariffs to be determined by the SERCs latest by April 1, It will take some time before non-conventional technologies can compete with conventional sources in terms of cost of electricity. Therefore, procurement by distribution companies shall be done at preferential tariffs determined by the Appropriate Commission. (2) Such procurement by Distribution Licensees for future requirements shall be done, as far as possible, through competitive bidding process under Section 63 of the Act within suppliers offering energy from same type of non-conventional sources. In the long-term, these technologies would need to compete with other sources in terms of full costs. (3) The Central Commission should lay down guidelines within three months for pricing non-firm power, especially from non conventional sources, to be followed in cases where such procurement is not through competitive bidding. 3.2 Other Central Government measures Outline In addition to the general Acts and policies outlined above, the Central Government has provided several specific renewable energy incentives. These are predominantly fiscal incentives, including direct and indirect tax benefits, renewable energy financing and guidelines for solar power and wind power feed-in tariffs. Direct tax benefits Accelerated Depreciation: The Central Government presently allows for accelerated depreciation at the rate of % on a Written Down Value basis for various renewable energy items under section 32 Rule 5 of the Income Tax Act. Tax Holiday: Under section 80 IA of the Income Tax Act, the Central Government offers a 10 year tax holiday for all infrastructure projects. Indirect tax benefits Specified renewable energy devices and equipment can obtain excise duty exemptions or concessions. Equipment for wind power, solar photovoltaic and solar thermal, renewable energy systems and power generation plant and machinery enjoy a reduction in customs duty. Finance for renewable energy: IREDA The Indian Renewable Energy Development Agency was incorporated as a Public Limited Government Company in 1987 and is under the administrative control of the MNRE. November

33 Its mission is as follows: "Be a pioneering, participant friendly and competitive institution for financing and promoting self sustaining investment in energy generation from Renewable Sources, Energy Efficiency and Environmental Technologies for sustainable development". The objectives of IREDA are: To operate a revolving fund for development and deployment of New and Renewable Sources of Energy. To give financial support to specific projects and schemes for generating energy through new and renewable sources and conserving energy through energy efficiency. Feed-in tariffs for solar power In March 2008, the MNRE released feed-in tariff guidelines to support generation of electricity from grid-connected solar power. The guidelines provide for IREDA to pay eligible solar photovoltaic power generators a maximum of Rs. 12 per kwh for eligible projects over a certain size that were commissioned prior to 31 December Photovoltaic projects commissioned after this date will receive a maximum of Rs per kwh. Solar thermal projects will receive a feed-in tariff of Rs. 10 per kwh. This incentive amount would be in addition to the power purchase rate negotiated with the purchaser of the power. The total amount paid to the generator (power tariff plus incentive payment) would be no more than Rs. 15 per kwh for solar photovoltaic plants or Rs. 13 per kwh for solar thermal plants (or slightly less for plants commissioned after 2009). Generators would not be able to obtain this benefit as well as the accelerated depreciation mentioned above, but would have to choose one or the other. For each eligible project the incentive payments would continue for 10 years from the date of commissioning. During the 11 th five-year plan ( ), the MNRE will support solar power projects (photovoltaic and solar thermal) in this way up to a maximum of 50 megawatts. Several SERCS have also announced their own feed-in tariffs for solar power, discussed in section 3.7 below. Furthermore, to assist the development of the solar power manufacturing industry, a Semiconductor Policy has been announced which provides incentives for semiconductor use and manufacturing, including tax exemptions and subsidies. Feed-in tariffs for grid-connected wind power On 23 July 2008, the MNRE introduced feed-in tariffs for grid-connected wind power in India. Highlights of this scheme are as follows: Through IREDA, the MNRE will provide a feed-in tariff of Rs 0.50 per kwh for a period of 10 years to eligible project investors. The scheme will be applicable to IPPs, registered companies, NGOs, trusts, academic and research institutions and state nodal agencies. The incentive is available for a minimum installed capacity of five megawatts, commissioned after the announcement of this scheme. 28 Legal frameworks for renewable energy in India

34 As with the feed-in tariff for solar power, generators would not be able to obtain this benefit as well as the accelerated depreciation mentioned above, but would have to choose one or the other. (The public policy advantage of a feed-in tariff over the accelerated depreciation benefit is that it provides an incentive for continuous efficient operation of the plant to generate electricity rather than just construction of the plant see section 3.8 for a case study on problems caused by incentives that target wind power capacity additions instead of actual power generation.) This incentive is over and above any feed-in tariffs declared by the SERCs. The scheme will be reviewed after 49 megawatts of capacity has been installed in India during the 11th five-year plan ( ). 3.3 State-based Renewable Portfolio Standards summary States which have implemented RPS orders At the State Government level, approaches to renewable energy vary widely across the country. While some Governments have announced quite progressive policies for renewable energy, others have less ambitious targets or are yet to announce any targets. A review of SERC orders issued in compliance with the statutory and policy requirements detailed above was conducted by the World Institute for Sustainable Energy in July 2007, at which time only 13 of India's 28 States had published Renewable Portfolio Standard (RPS) orders specifying renewable energy percentages: Andhra Pradesh, Maharashtra, Tamil Nadu, Rajasthan, West Bengal, Kerala, Karnataka, Gujarat, Haryana, Himachal Pradesh, Orissa, Uttar Pradesh and Madhya Pradesh. The remaining 14 States, 3 the Joint Electricity Regulatory Commission for all Union Territories and the National Capital Territory of Delhi are yet to specify percentages for purchase of renewable electricity within their territories. Appendix 3 sets out a brief summary of the RPS orders in place as at August Process of setting orders The general practice followed by SERCs complying with the National Tariff policy is as follows: Publication of a discussion paper laid open for public comment - detailing the present and anticipated situation of the State with regard to Renewable Energy. Receipt and consideration of comments and suggestions. Final RPS order released. Specified percentages The minimum percentages of renewable energy specified by SERCs range from 0.5% (Madhya Pradesh) to 10% (Haryana). Karnataka and Rajasthan are the only States which have placed an additional upper cap on the percentages specified for renewable energy. Some States have specified percentages for one year; most have done so for three years. Most States specify percentages applicable to all distribution licensees. West Bengal is a notable exception, setting out different percentages for its various distribution licensees (see case study below). All States except Rajasthan, Kerala and Madhya Pradesh have allowed distribution licensees to decide which source of renewable 3 States which have not yet issued RPS orders include all the North Eastern States, Bihar, Uttarakhand, Punjab, Goa, Chattisgarh and Jharkhand. November

35 energy they wish to use to meet their percentages, the exceptions stating percentages according to resource (eg wind, biomass, small hydro power etc). Orissa has not yet specified percentages for renewable energy but has published an RPS specification. So far it is the only State which will require renewable energy to be procured under competitive bidding, meaning that the declared percentage will only act as a ceiling reference. Relevant facilities All complying SERCs have restricted the facilities qualifying for procurement of renewable energy to grid-connected sources. There is some debate as to whether percentages for the procurement of renewable energy should only be limited to distribution companies or should be extended to include captive users and open access consumers. Most SERCs have decided in favour of including captive and open access consumers. Expert legal opinion on this matter requested by the Maharashtra Electricity Regulatory Commission (MERC) also concurs with the inclusion of Captive and Open Access consumers within the RPS mandate. Penalties, implementation and review As far as the implementation of these orders are concerned, Maharashtra is the only State whose State Nodal Agency details an operating framework for the implementation of its RPS order. Only Maharashtra and Rajasthan have specified explicit penalties for non-compliance with RPS orders, with funds collected from such penalties to be used for the promotion of renewable within the State. West Bengal and Andhra Pradesh stated that penalties will be levied for non-compliance but have not specified the rates. In Maharashtra, West Bengal and Andhra Pradesh if distribution companies are able to convince the SERCs of the non-availability of renewable energy as a reason of non-compliance, penalties are to be waived. Most orders specify future review dates for the renewable energy percentages. 3.4 Effectiveness of current RPS schemes Experience in the actual implementation of these RPS orders is fairly limited given that only 13 of India's 28 States have published orders to date, despite the National Tariff Policy requiring all SERCs to establish percentages for renewable energy by 1 April While it is too early to make general comments on the effectiveness of the schemes in place, some observations reveal minimum requirements for RPS schemes to be effective. For example: SERC orders setting out Renewable Portfolio Standards need to cover resource availability, present and future capacity addition (both conventional and renewable), eligible renewable energy sources, implementation, operating and settlement mechanisms and the impact of RPS on retail electricity tariff. In this respect the MERC and Rajasthan Renewable Energy Corporation Standards are good model orders for other SERCs. SERCs should specify aggressive short and medium term targets for renewable energy (keeping in mind climate change, shortage of electricity in the country and the environmental attributes of renewable energy) to establish policy and regulatory stability and to promote investment in renewable energy. 30 Legal frameworks for renewable energy in India

36 Heavy penalties such as those specified in the MERC order provide financial incentives for Distribution Companies, captive users and open access consumers to comply with minimum percentages. Resource studies detailing the potential for all sources of renewable energy within the State are required. Existing resource studies upon which most States have based their RPS calculations are out of date and therefore underestimate the potential of renewable energy. It appears that States which do not have RPS orders in place experience less renewable energy capacity addition than States with RPS orders. 3.5 RPS case study: Karnataka The southern State of Karnataka was one of the first States in India to comply with the section 86(1)(e) of the EA 2003, and issue an RPS order establishing a percentage requirement for the purchase of renewable energy. Its Order was issued in September 2004 and is applicable to distribution licensees. The order is entitled " Karnataka Electricity Regulatory Commission (KERC) (Power procurement from Renewable Sources by Distribution Licensee) Regulations, 2004". Minimum percentages and enforcement Distribution licensees must purchase a minimum of 5% and a maximum of 10% of their electricity from renewable sources, expressed as percentage of their total consumption during a year. Open access consumers and captive users have been exempted. Distribution licensees must state the percentage of electricity they propose to purchase from renewable sources for the coming year in their annual ERC filing, 4 indicating the proposed sources of purchase. No penalties are specified for failure to meet the target. Eligible renewable energy sources Mini hydro. Wind, solar. Biomass (including sugar mill co-generation). Urban/municipal waste. Any other sources approved by the MNRE, Government of India and Government of Karnataka. Effect on renewable energy to date According to the KERC discussion paper of 2007, renewable energy (in the form of wind, small hydro, biomass and co-generation) has seen significant growth in Karnataka since the beginning of this century. The total electricity from renewable energy purchased within the State and the percentage of renewable power in comparison to total power over the last seven financial years is shown in the table below. 4 All electricity distribution companies have to file their Annual Revenue Requirements with the SERC for approval November

37 PROPORTION OF TOTAL ELECTRICITY GENERATED BY RE (KARNATAKA) YEAR TOTAL ENERGY INPUT IN MU POWER FROM RE PROJECTS IN MU % OF ENERGY WHICH IS RENEWABLE Source: WISE, 2007 Three of the five distribution companies in Karnataka have already reached their maximum limit of 10% renewable energy purchase, while the remaining two are just above 6%. The average percentage for purchase of renewable energy for distribution companies in Karnataka for was 8.76%. Likely future development The following table, put together by Karnataka Renewable Energy Development Limited (KREDL), estimates the likely addition of renewable power generating capacity into the grid by FORECASTED ANNUAL ADDITIONS OF RENEWABLE POWER GENERATING CAPACITY BETWEEN (KARNATAKA) YEAR WIND BIO- MASS CO-GEN MINI- HYDRO TOTAL MW MU MW MU MW MU MW MU MW MU Projects commissioned as on FY addition FY addition FY addition FY addition FY addition Total addition during FY 07 FY Estimated capacity/energy as on Source: WISE, Figures given to nearest whole unit 32 Legal frameworks for renewable energy in India

38 The following table shows the likely mix of renewable power within Karnataka by 2011, considering the long term total power forecast as given by Karnataka Power Transmission Corporation Limited. The State could have as high as 23% renewable energy by the year 2011 if all likely capacity additions materialize. FORECASTED CHANGES IN PROPORTION OF TOTAL ELECTRICITY GENERATED BY RENEWABLE SOURCES (KARNATAKA) YEAR INPUT PROJECTED IN LONG TERM LOAD FORECAST REPORT (SCENARIO-3) RENEWABLE ENERGY PROJECTED BY KREDL % TOTAL POWER FROM RE FY FY FY FY FY Source: WISE, 2007 It should be noted that for financial year , out of the total renewable power of 6,477 million kilowatt hours in the State, only 2,587 million kilowatt hours (40%) was supplied to the distribution companies. The rest appears to have been consumed by captive users. Impact of higher priced renewable power on average cost of power The KERC approved a total of 3, million kilowatt hours of power purchase for all distribution companies at a cost of approximately Rs 10,053 million. This is an average renewable energy purchase cost of Rs 3.32/kWh. Excluding renewable energy, the average cost of conventional power is much less at Rs 1.58/kWh. 3, million kilowatt hours from renewable energy sources equals 8.76% of the total input energy of 34,538 million kilowatt hours for A sensitivity analysis (power purchase cost) was conducted by the KERC, raising the renewable energy percentage to 15%, 20% or 25% and keeping the input at 34,538 million kilowatt hours. The analysis set an average cost of renewable energy at Rs. 3.32/kWh and the average cost of Rs. 1.58/kWh for conventional sources. The results are shown below. SENSITIVITY ANALYSIS IMPACT OF RE TARGETS ON POWER PURCHASE COST (KARNATAKA) PERCENTAGE SHARE OF RE POWER PURCHASE COST- RS./UNIT FROM ALL SOURCES INCLUDING RE % INCREASE OVER BASE CASE IN POWER PURCHASE COST INCREASE IN POWER PURCHASE COST IN RS CENTS/KWH 8.76% [Base case] % % 11 20% % 20 25% % 29 Source: WISE, 2007 November

39 3.6 RPS case study: Maharashtra Current RPS order The current RPS order in Maharashtra, arguably the most advanced RPS scheme in India, is entitled the "Long term Development of Renewable Energy Sources and associated Regulatory (RPS) Framework". It took effect in August 2006, replacing a previous Renewable Purchase Obligation which commenced in 2004 (the first such order in India). The current RPS order applies to open access and captive consumers. It is due for review in Minimum percentages of power to come from renewable sources MANDATED RE PERCENTAGES (MAHARASHTRA) YEAR RENEWABLE PURCHASE SPECIFICATION (RPS) % % % % Source: WISE, 2007 Eligible sources of renewable energy Generation from all types of renewable energy sources approved by the MNRE will be considered. The MERC has issued orders that the following technologies and subsequent generation (if connected to the grid) would qualify under this RPS framework: Non-fossil fuel (including bagasse) based co-generation projects Wind energy Biomass Small hydro power Municipal solid waste Any new source will qualify as renewable only after approval of the MERC. In addition, only gridconnected renewable energy will be considered. Penalties The MERC may waive the minimum percentages for the year, subject to supply constraints or any other uncontrollable factors in the opinion of the MERC. 34 Legal frameworks for renewable energy in India

40 PENALTIES FOR NON-COMPLIANCE (MAHARASHTRA) YEAR PENALTY Nil Rs 5/kWh Rs 6/kWh Rs 7/kWh Source: WISE, 2007 Penalty payments are to be deposited in a separate account by the Maharashtra Energy Development Agency (MEDA) and will be used to support the research and development efforts, institutional capacity building, training and public awareness related to renewable energy. Additional notes For each Distribution Licensee, total consumption in its area of supply equals energy purchased from all sources for the purpose of supply within its area of supply, including quantum of energy supplied to open access and captive consumers. For every open access consumer and captive consumer, the percentage specification in this order applies on that part of the consumption which is being generated from conventional generation or procured from any source other than the local distribution licensee in whose area of supply the consumer is located. This order is applicable to the gross energy units handled by the Distribution Licensees for supplying power to the retail consumers, excluding any inter-se sale of electricity amongst the Licensees. Where a Distribution Licensee is unable to purchase its required percentage within its own area of supply, energy sourced from within the State but outside the Licensee's area of supply (self generated or purchased from a renewable energy developer or another eligible licensee) is acceptable. It is not mandatory for any person procuring renewable energy in excess of its RPS target to sell that energy. Pricing for any transaction of this nature is to be agreed between the parties. RPS Operational Framework In February 2007 MEDA issued the Maharashtra RPS Operational Framework "Eligible persons" subject to the order include existing and future electricity distribution licensees, open access consumers and captive consumers (only grid-synchronized), effective from the financial year to "Eligible Persons" can meet their RPS obligations in the following ways: renewable energy generation and procurement within the State of Maharashtra; and/ or procurement from renewable energy developers within the State of Maharashtra; and/ or purchase from other eligible persons including Licensee, where such other person or Licensee has surplus electricity from renewable energy sources available, in excess of its RPS Percentage. November

41 There are four components of the RPS order (discussed further below): 1. Calculation of Gross Electricity Consumption (GEC) for distribution licensees, captive consumers and open access consumers. 2. Units to be procured under RPS obligation by "Eligible Persons" from "Eligible Sources". 3. RPS settlement. 4. Alternative mechanism to fulfil RPS obligation: financial arrangement. Calculating Gross Electricity Consumption GEC for distribution licensees means the total electricity in millions of kilowatt hours generated by the licensee and any electricity purchased from generating companies, other licensees, intermediaries or traders, excluding any sale to licensees, intermediaries or traders. Each captive consumer shall submit a monthly report to the MEDA office within 21 working days from the end of the month. GEC for open access consumers shall be the electricity procured through open access and shall be expressed in million of kilowatt hours. Calculating RPS obligation The quantum of electricity to be procured for meeting the RPS obligation by eligible persons from eligible renewable energy sources is calculated by multiplying the GEC of the eligible person with RPS percentage for the corresponding financial year: Units to be procured for meeting RPS Obligation = (GEC of respective eligible person) x (% RPS for corresponding financial year) If an eligible person is unable to meet the RPS requirements they can alternatively fulfil the RPS requirements through a financial settlement with eligible persons holding more than the minimum RPS percentage requirements. Impact on utilities of buying renewable energy Considering that Maharashtra was previously buying much more costly power from traders, the Sardar Sarovar Project, Kiwis and some other sources, it was found that renewable energy with a weighted average cost of Rs 3.32/kWh would be cheaper than power purchased from expensive sources at the margin and hence would not have an adverse impact on consumer tariffs. Increase in renewable energy Renewable power procured by all distribution companies within the State for the year was only 640 million kilowatt hours or 0.78% of total energy procured by all licensees within the State. MEDA estimated total renewable power procured for to be 1,737 million kilowatt hours which is approximately 2% of the total energy consumption (85,207 million kilowatt hours) for all licensees within Maharashtra. Capacity additions projected by MEDA show a significant yearly renewable energy capacity addition, translating into an annual additional generation of 1,200-1,300 kilowatt hours. This means an incremental renewable energy generation of approximately 1.0%-1.5% of total energy in the State. Projected capacity additions for the next five years are shown in the table below. 36 Legal frameworks for renewable energy in India

42 FORECASTED ADDITIONS TO RE GENERATION (MAHARASHTRA) RE SOURCES FORECAST (MW) FORECAST (MW) FORECAST (MW) FORECAST (MW) FORECAST (MW) Wind Small Hydro Co-Gen Biomass MSW Liquid & Industrial Waste Solar PV TOTAL Source: WISE, 2007 Set out below are figures illustrating the actual achievements in renewable energy generation in Maharashtra up until 31 March ACTUAL ADDITIONS TO RE GENERATION (MAHARASHTRA) RE SOURCES CUMULATIVE ACHIEVEMENT UP TO 31 MARCH 2007 ACHIEVEMENT IN CUMULATIVE ACHIEVEMENT UP TO 31 MARCH 2008 Solar PV Systems SPV Lantern (No.s) 11, ,654 SPV Street Lights (No.s) SPV Domestic Lights (No.s) SPV Pumps (No.s) Total Solar PV Systems 15, ,685 Solar thermal systems (No.s) Biogas program (No.s of plants) Biomass program (No.s of improved crematoria and chulha) Wind (No.s of monitoring stations) 48, , , , Source: Maharashtra Electricity Regulatory Commission at November

43 3.7 Other existing State support schemes In addition to the State provisions discussed above, there are several other State Government initiatives and policies which help promote renewable energy. Most States have separate policies for the promotion and development of renewable energy sources. These policies may contain State/technology specific incentives and support mechanisms for renewable energy, such as feed-in tariffs, tax exemptions, capital subsidies, infrastructure support and low interest loans. A summary of feed-in tariffs for certain States is set out in Appendix 2. Example: Clean energy funds in Maharashtra The MEDA has created a Clean Energy Fund through a tax on conventional energy sources. A green cess of 4/100 of a rupee per kilowatt hour is levied on the sale of electricity to industrial and commercial establishments in the State. It is generating approximately Rs. 1,000 million annually. The green cess is being utilized as seed money to create a clean energy fund called the Urja Ankur Nidhi, of over Rs. 30,000 million. The Urja Ankur Nidhi is to be utilized for the promotion of renewable electricity generation from bagasse, small hydro, wind, solar, solid waste and tidal power as well as electricity conservation measures. One of the uses of the clean energy fund in Maharashtra is for infrastructure development (construction of access roads and power evacuation facilities) for wind power projects. There is a distinct possibility of some other States adopting this route. State feed-in tariffs for solar power Each SERC can decide the feed-in tariff it wishes to apply to promote grid connected solar projects. After the MNRE published its guidance on feed-in tariffs for solar power in March 2008 (see section 3.2), the SERCs of Rajasthan, Haryana, West Bengal and Tamil Nadu have declared feed-in tariffs for solar power projects in their respective States, while the Punjab State Electricity Regulatory Commission is following the tariff announced by Government of Punjab in The table below sets out the feed-in tariffs that these SERCS have set in relation to solar photovoltaic and solar thermal projects. STATE FEED-IN TARIFFS FOR SOLAR POWER SERC TARIFF FOR PHOTOVOLTAIC PROJECTS (RS / KWH) TARIFF FOR SOLAR THERMAL (RS / KWH) COMMENT Rajasthan Inclusive of MNRE incentive Haryana Not declared Inclusive of MNRE incentive Tamil Nadu Exclusive of MNRE incentive Punjab 7.00 Not declared Tariff declared by Government before MNRE incentive scheme West Bengal Equivalent to highest tariff offered from among the various RE sources in West Bengal ie Rs 5 / kwh for biogas project Not declared Exclusive of MNRE incentives. Capped price for plants not eligible for MNRE incentives, but can claim accelerated depreciation under Income Tax Act 1961 Source: WISE, September Legal frameworks for renewable energy in India

44 3.8 Case study: Issues with wind power incentives in Maharashtra There has been some concern over whether the wind power incentives currently available to investors are actually leading to increased wind generation in Maharashtra. 5 In data released by MEDA, as at August 2008, the installed wind power capacity in Maharashtra of 1,756 megawatts generated 1,804 kilowatt hours of electricity. This indicates a plant load factor of 11.7%, which is significantly below the average load factor in India of 20%. Commentators have claimed that wind generation in Maharashtra is much lower than it should be for the amount of installed capacity. The available figures also suggest that between 2002 and 2007, although capacity increased, generation of wind power actually decreased in Maharashtra. Tax incentives and government subsidies are currently given to wind power developers at the State and national level. At the State level, these include an electricity duty exemption for five years, infrastructure support and payment of evacuation-feeding power from windmills to transmission grids. From the Central Government, investors receive 80% accelerated depreciation on wind farm equipment, a 10 year tax break, custom duty exemption and excise duty exemption. These incentives largely operate to support installation of wind farms, rather than ongoing operation of them. The situation has reached a point where wind farms in Maharashtra have been found to exist only on paper. In one case a company, M.s Tuljhabhavani Wind Farms Pty Ltd, based in Satara, forged its noobjection certificate from the zoology department and the mining department. Proposals have been put forward to address the current gap between capacity and generation in Maharashtra. One is to move the tariff to a generation-based scheme, by increasing the feed-in tariffs. Whether this will act as a sufficient incentive for wind farm developers not currently generating power to start generating power is yet to be seen. Another proposal is to use the renewable portfolio standard to build an India-wide market for green energy. In the States that currently have an RPS there is generally no data collected on how much green power is bought by the utilities and at what price. In some States utilities are not penalised if they do not meet the compulsory green quota. Also, some States with high wind potential have set low quotas and are thus "capping" wind power. It is arguable that these quotas should be increased, as well as inter-state recognition of RPS systems being allowed, so that States such as Delhi, that have a low renewable capacity, could purchase wind power from other States such as Maharashtra. The advantages of such a scheme are discussed in section 5.4. Finally, there are also suggestions that the CDM rules should be revised to support a higher premium price for wind power. This is discussed further in section Jamwal N & Lakhanpal S, "Fanning an alternative", 6 August 2008, November

45 4. National renewable energy law 4.1 National renewable energy law in development The Central Government is in the process of developing a specific renewable energy law. In June 2008, the Prime Minister authorised the MNRE to: draft schemes and guidelines for the introduction of TRECs, to encourage States to promote and trade in renewable energy; prepare draft legislation for the promotion and accelerated growth of the renewable energy sector; and prepare a comprehensive action plan for the development of new and renewable energy, in consultation with the State Governments. The MNRE has stated it will base this new legislation on the model renewable energy law put forward by WISE, discussed below. The law is likely to make it mandatory for power generation companies to source a certain percentage of the power they sell from renewable sources. The newly-formed Renewable Energy Law Technical Committee of the MNRE (of which the Director General of WISE, Mr GM Pillai, is a member) has prepared a draft bill and presented it to the MNRE for consideration. The process of further developing the bill, consulting with relevant bodies (including the State Governments) and passing the law is expected to take between six to 12 months. Therefore the new renewable energy law may be in place at some point in Background to WISE model law In terms of conventional energy, India consumes roughly 3% of the world's total energy. Rapid industrialization over the last 10 years has increased the national energy demands, making India the fourth largest greenhouse gas emitter in the world. Although a signatory to the Kyoto Protocol, India does not currently have mandatory emissions reduction targets. WISE's draft model renewable energy law for India is one answer to mounting world pressure on India to reduce its GHG emissions. In practice, this poses difficulties given India's large energy shortages, meagre energy reserves, and dependence on imported energy. The Honourable former President of India, Shri APJ Abdul Kalam, recognized this problem in his Independence Day Address to the Nation in 2005: "We need to evolve a comprehensive renewable energy policy for energy independence within a year...also there is a need to formulate a comprehensive Bio-Fuel policy for research, development, production and marketing. Energy independence has to be our nation s first and highest priority. We must be determined to achieve this within the next 25 years" Honourable President of India, Shri. APJ Abdul Kalam Independence Day Address, 15 August Legal frameworks for renewable energy in India

46 It was with these objectives in mind that WISE drafted the model renewable energy law in 2005, with legal help from the National Law School, Bangalore. WISE subsequently constituted a Working Group of specialists (including from Baker & McKenzie) to develop and refine the model law and engage with Government and other stakeholders. The model law was presented to government officials at the WISE/ REIL/ Baker & McKenzie forum in Chennai (supported by the APP) on 24 August It has subsequently been adopted by the MNRE as the basis for the national renewable energy law currently being developed. The WISE model law aims to boost the renewable energy sector through implementing developmental and promotional measures for renewable energy and by enacting supporting legislation in the area. A stable regulatory framework with a long term vision is a must for the rapid and healthy growth of all renewable energy. 4.3 Outline of WISE model law "An Act to promote development and utilisation of renewable and sustainable sources of energy, stabilise emissions of greenhouse gases, diversify energy supplies, safeguard energy security, ensure that energy development is ecologically sustainable, protect environment and realise the goal of sustainable development." The WISE model renewable energy law has 10 chapters, outlined below. Chapter 1. Preliminary Chapter 1 provides definitions including: Market Based Instruments: "various financial or policy instruments introduced to promote development of renewable energy through the mechanism of the open market, and not involving direct government subsidies." Renewable Electricity Certificate: "tradable certificates issued by any authorized agency under this Act." Electricity from Renewable Sources: "electricity produced using renewable sources including such proportion of electricity produced using non-renewable fuels up to the permitted levels. However, for purposes of renewable obligations, or for computing any financial benefits provided under this Act or otherwise, the portion of such electricity produced from such non-renewable sources shall be deducted." Renewable Energy: wind; solar radiation; mini hydro; biomass; biofuels; landfill & Sewage gas; municipal solid waste; industrial waste; geothermal energy; ocean energy; hydrogen; and any other energy source, as may be notified by the Ministry. November

47 Chapter 2. National Renewable Energy Council and its Role Chapter 2 establishes the National Renewable Energy Council. Its role will be to advise and guide the Central Government on several specified renewable energy issues, including: Development of Renewable Energy Policy and Execution Plan. Development of standards for resource assessment (of various renewable and sustainable energy sources), technologies and products. Supporting research and development. Development of fiscal, financial, regulatory and institutional mechanisms for large-scale development, deployment and export of renewable and sustainable energy technologies. Policy to increase private sector and community participation in renewable and sustainable energy projects and services. Education and other policy initiatives. The Council is also required to undertake an assessment of renewable energy resources in India after the start of the Act and every five years after that. Chapter 2 also provides for the Council's constitution and budget. Chapter 3. Grid Connected renewable energy Chapter 3 requires the MNRE to evaluate the full potential for grid-connected renewable energy in India, with a goal of 50% of all electricity generation in India to come from renewable sources by Interactive resource maps should be developed and made publicly available. Chapter 3 also establishes guidelines for grid connected sources of renewable energy, including: Preferential access to the grid for renewable sources. SERCs to fix State based electricity tariffs (s 62 of EA 2003), bearing in mind the technology used by the generator and the costs of constructing and operating the plan. Grievance procedure for denial of access to the network. Chapter 4. Rural Energy and Renewable Microsystems The MNRE must prepare a policy on rural energy and renewable energy micro-plants within six months of commencement of the Act, with guidelines. The MNRE is to initiate the following programs: 1. Research and development programs relating to decentralised energy. 2. Solar power generation programs. Goal to install solar photovoltaic energy systems in all Central and State Government buildings by Within six months of commencement of the Act, the MNRE is to formulate a program to put solar water heating in all urban buildings (with defined floor area) and in public buildings. Within 12 months of commencement of the Act, the MNRE is to prepare and launch a program to promote biomass energy systems in India. 42 Legal frameworks for renewable energy in India

48 Chapter 5. Bio-fuels and Transportation Energy Mandate on Central Government to prepare Integrated Renewable Fuel Policy within six months of commencement of the Act. Mandate to bring in regulations to ensure gasoline and diesel to have certain percentage from renewable energy. Development of Hybrid Vehicles by way of memoranda of understanding with automobile manufacturers. Chapter 6. Hydrogen and Fuel Cells Obligation upon the MNRE to prepare a coordinated plan for the development of hydrogen and fuel cell technologies within six months of commencement of the Act. Hydrogen energy infrastructure to be in place by A technology mission relating to hydrogen and fuel cells is to be established within 120 days of commencement of the Act. Chapter 7. Renewable Obligations and Certificates Renewable electricity purchase obligation mandating electricity utilities to purchase of electricity from renewable sources. Section 46(1): Renewable Electricity Purchase Obligation "Whereas sub-clause (e) of sub section (1) of Section 86 of Electricity Act, 2003 (36 of 2003), provides for the State Electricity Regulatory Commissions to bring out an order mandating all electricity utilities to compulsorily purchase electricity from renewable generating sources, such percentage of their total purchase to be determined through notification from time to time." Section 47(1)-(3): Renewable Electricity Certificates "(1) Within six months from the commencement of this Act, the Ministry shall in consultation with the council issue guidelines for institution of a scheme of such tradable RECs in all states. (2) Any person who has to comply with the renewable purchase obligation shall generally acquire the certificates by purchasing them. (3) Provided that no producer or trader shall transmit or sell RECs in any form without authorization by the appropriate authority. Violation of this provision is punishable under the laws of the nation." There is also a renewable transport fuel obligation. Chapter 8. Other Promotional Measures and Instruments Central Government may reserve land and water for promoting the objectives of the Act. Technology missions: To begin with Solar energy, Bio-fuels and Hydrogen immediately. Other missions to be determined. November

49 Renewable Energy Funds to be established at Central and State Government levels to promote renewable energy and meet the expenses of implementing the Act (funds to come from imposition of tax on conventional power). Central Government may introduce Market Based Instruments (including Renewable Energy Certificates) to promote the use of various renewable energy resources, after considering international best practice on this issue and consulting stakeholders. Chapter 9. Penalties Penalty clause in the EA 2003 is applicable for a breach of this Act. Provision for a hearing prior to penalty. Appeal to Appellate Tribunal. Civil Court not to have jurisdiction. Chapter 10. Miscellaneous Sustainable Energy Report to be published by the Central Government every year, setting out progress made in the previous reporting period towards achieving the Act's objectives. Central Government may issue directions to the State Governments or any State Government instrumentality for implementation of the Act. Power of the Central and State Governments to make rules for carrying out the provisions of the Act State Government rules not to be inconsistent with Central Government rules. Application of other laws not barred. 4.4 Objectives of WISE model law The model renewable energy law put forward by WISE hopes to achieve a healthy and sustained growth of renewable energy in India to address the issues discussed below. Climate Change The need to mitigate climate change will undoubtedly be a central feature of energy planning for a long time to come. Climate change with its myriad and possibly catastrophic implications is hailed by leading world experts as being the most important challenge facing humankind today. Addressing global warming is possible only with the rapid reduction of greenhouse gas emissions, which in turn is possible through reduction in energy use and through the enhanced use of all forms of renewable energy. The conventional thermal power stations across the world are significant contributors of greenhouse gas emissions. Renewables, being the least greenhouse gas emitting power producing technologies today, will play an important role in addressing climate change. Being a signatory to the United Nations Framework Convention on Climate Change, India may have mandatory obligations to reduce emissions in the future. If it continues with the present energy-mix, then, with the predicted growth in the economy, India would greatly increase its emissions in the future and hence would find it very difficult to reduce emissions thereafter. 44 Legal frameworks for renewable energy in India

50 National energy/ financial security Today energy security is of great concern to every nation. Renewable energy sources are much more equitably distributed in the world in comparison to nuclear and fossil energy sources. Hence increasing the share of renewable energy decreases the need for importing energy from other countries. With all renewable resources under the nation s control, the effects of external influences on India's energy policy would decrease. Therefore renewable energy can play a pivotal role in increasing the country s energy security and offers a direct means of dealing with national security concerns. Large-scale development of renewable energy will greatly decrease the need for foreign exchange, currently a key requirement for the import of crude oil. Renewable energy is also likely to reduce cost fluctuations since running costs are negligible compared to initial capital costs. Externalities of conventional energy There is increasing global concern over environmental "externalities" of conventional power generation / energy. Conventional sources of power/energy based on coal, gas, hydro, nuclear and oil create serious and significant damage to the natural environment (land, water, forest, biodiversity, climatic systems) and also to human society (general health, occupational health, radiation hazard, accidents, displacement, property damage). By comparison, most renewable energy sources have much smaller externalities, both environmental and social. For example, thermal and nuclear power plants require huge quantities of fresh water for their operation. In light of the water crisis in India, renewable energy such as wind power (which has low water requirements), will also be able to assist in addressing water management problems. When the full costs of the environmental externalities are internalized, the cost of renewable energy will be much lower than the cost of conventional energy. Depletion and eventual exhaustion of finite fossil fuels India has very meagre reserves of oil and natural gas and the ever-growing use of these imported fossil fuels is putting increasing strain on the country s finances. While India does have large coal reserves, they too are expected to run out in 40 years, leading to large-scale import of coal. In coming years many countries will encounter a situation similar to the situation that India currently faces. It is highly likely that the world will eventually not have enough fossil fuel resources for all nations to import to satisfy their energy demands. Legal, policy and market based provisions for renewable energy Experience worldwide has shown that a transparent, stable and long term policy is the biggest driver of renewable energy. The law hopes to put in place the long term legal, regulatory and policy framework for renewable energy. Chronic energy shortages A significant fraction of India s population, especially in the rural areas, still does not have access to electricity. Those who have access have to face regular load shedding and unreliability in the power supply system. Close to 20,000 villages located in remote places that cannot be electrified through conventional grid extension are to be electrified through renewable energy. A renewable energy law will be able to address development of off-grid renewable energy and micro-grids based on renewable energy for electrification in such remote places. November

51 During , there was an average peaking power shortage of 13.5% and an average shortage in actual energy supply of 9.9%. Transmission and distribution losses in India stand at 33% and are among the highest in the world. Here too renewable energy (on the supply side) can significantly contribute in lessening the power shortages in the country. Shorter gestation periods for renewable capacity addition will also help in addressing this problem. Future energy use The predicted business-as-usual energy path for India, based on ever increasing use of polluting, costly and rapidly depleting fossil and nuclear fuels, is unsustainable and ecologically unsound. The model renewable energy law hopes to pave a path for future energy use that will have the least adverse impact on the environment and climate. Pave path for sustainable development Renewable energy is the bedrock of sustainable development. Hence the large-scale deployment of renewable energy is a starting point for the eventual goal of sustainable development. 4.5 Need for a separate national RE law Large scale development and deployment of renewable energy in the world today, with high hidden annual subsidies for conventional energy sources, is possible only with proactive Government intervention in the form of legislation, policies and initiatives. This intervention is critical for new technology development and market transition. The issues discussed below show that a national renewable energy law provides a powerful tool to address the various disadvantages faced by renewable energy. Particular issues with renewable energy Renewable energy projects, as compared to fossil fuel plants, face specific issues which are most effectively addressed in renewable energy-specific laws: Relatively high start-up costs; Difficulty in obtaining financing due to perceived higher risk of renewable energy projects; Intermittent nature of some forms of renewable energy; and Early stage of technical development of some forms of renewable energy. Although the CDM under the Kyoto Protocol provides an avenue to obtain project finance for renewable energy, again renewable energy projects face issues that other CDM projects do not, making renewable energy plants less attractive CDM projects: High cost for relatively low yield of Certified Emission Reductions (CERs) small carbon "kick" compared with other CDM project types (such as industrial gas projects). Long life span of the infrastructure, in relation to post-2012 market uncertainty. These CDM issues are discussed in more detail in the final chapter. Together with renewable energy's cost disadvantages as against conventional energy, these issues provide strong arguments for enacting a specific renewable energy law to help overcome these barriers. 46 Legal frameworks for renewable energy in India

52 Inadequacy of current laws India has enacted two necessary major laws, the Energy Conservation Act 2001 and the Electricity Act 2003, which are beginning to show some positive results. However, they are inadequate to address short and long term issues of sustainability. Sections 61(h) and 86(1)(e) of the EA 2003 are the only real renewable electricity-related developmental provisions. While national laws exist for electricity and energy conservation, there is no national level law for renewable energy. At a State level, regulatory and procedural orders and State and Central Government subsidy programs provide a framework for renewable energy development. However, at present solar thermal energy, biogas, bio-fuels and many other renewable energy sources are not under the purview of any law. Although India has had a ministry dedicated to renewable energy for many years, it still does not have a separate mandate to look at increasing renewable energy. Ad hoc policy changes in the past have also damaged the growth and health of the renewable sector. State variations Since no national law exists for renewable energy, there is large variation in policies and regulations across all States. Additionally the renewable energy potential and achievements vary widely in different States in India. Definitions of "renewable energy" are also varied. This is especially true in the case of hydro-power, biomass power and energy from waste. A dedicated renewable energy law would address such issues and increase synergy of renewable energy use across the States. Section 86(1)(e) of the EA 2003 which requires regulators to set targets for electricity from renewable energy has been used by 13 SERCs in India to date to set such targets. However this provision has been interpreted differently by different SERCs as is evident from the fact that minimum percentages for renewable energy vary from 0.5% to 10% across various States. A dedicated renewable energy law will help set a long term vision and national target for renewable energy. Electricity grid Historically the grid has been developed for large-scale centralized conventional power generating stations. However the future of electricity will almost certainly have a wider mix of renewable and distributed generation systems. Given their inherent differences as compared to centralized power stations (such as variability of wind for generation of power), there is a need to look at grid-connected renewable energy differently from older conventional electricity generating technologies. Again a dedicated renewable energy law can constructively address these issues. Importance of holistic legislation Naturally, renewable energy is valuable simply as a source of electricity, a point especially important for a country like India with a large fraction of the population without access to electricity. It is recognised however that the benefits of renewable energy go beyond the production of electricity, including wider benefits such as greater energy security, reduced greenhouse gases and reductions in other pollutants. Hence the proposed renewable energy law for India is not another Electricity Law but is intended to be a holistic law aimed at a gradual transition to sustainable energy. The objective is not only to address electricity related issues but also aim at integrated energy planning. The law will also clearly state the future vision for energy use that the country should have and the path needed to achieve that. November

53 International experience also points in the same direction. In spite of having established laws for electricity, many countries including Germany, Australia, China, Austria and the Czech Republic have come forward with laws and policy frameworks to specifically address renewable energy. A specific renewable energy law for India will help to ensure policy and regulatory stability and consistency, since clarity and predictability of future energy policy is a key to attract much needed large-scale investment in this sector. 4.6 Comparison to RE laws in other countries Introduction Various countries around the world have recognised the growing importance of renewable energy and have passed specific laws, directives, ordinances or provisions for renewable energy in order to ensure a healthy and robust growth of the sector. These directives usually specify some long term renewable energy target. European countries are leading the way in this regard and their laws are an important factor in driving growth, evident in the tremendous growth of renewable energy in Europe.. We summarise below some of the specific renewable energy laws from around the world. Australia: Renewable Energy (Electricity) Act 2000 Since January 2001 Australia has had a mandatory national renewable energy target. The target itself has been a modest one to date, intended to contribute an additional 9,500 gigawatt hours of renewable energy per year to Australia's generation mix by However, the framework implemented to impose this target, the Mandatory Renewable Energy Target Scheme (MRET), implemented by Australia's Federal Government in the Renewable Energy (Electricity) Act 2000 (Cth), has demonstrated that mandatory markets for renewable energy can operate successfully. MRET is a simple trading system based on the creation, trade and surrender of renewable energy certificates (RECs), each REC corresponding to one megawatt hour of electricity generated from renewable resources. Operation of MRET The scheme operates by requiring most wholesale purchasers of electricity and certain deemed wholesale electricity purchasers to surrender a number of RECs that correspond to their required contribution to the renewable energy target. Each entity's required contribution is calculated based on a percentage of their share of acquisitions of liable electricity in Australia. RECs are created by accredited entities, typically electricity generators that generate electricity using eligible renewable energy resources set out in the table below. RECs can also be generated from a series of solar hot water heaters and small-scale generating units. The administrator of the Scheme, the Office of the Renewable Energy Regulator, reported that by 31 December 2007 there were 253 accredited power stations. As RECs are tradeable, they can be sold to the liable entities to meet their targets. In theory, given the broad participation in the Scheme and the tradability of RECs, MRET is intended to promote renewable energy projects that meet the target at the lowest cost by allowing the market to decide which projects should be undertaken. 48 Legal frameworks for renewable energy in India

54 RECs can be traded separately from the electricity that enabled them to be created. In fact, the MRET model operates entirely independently from any electricity regulation in Australia, over which the State Governments exercise legislative power. Eligible renewable energy Eligible renewable energy sources have been defined under the Act to include: hydro tide wind geothermal aquifer energy crops agricultural waste food waste bagasse biomass based components of municipal solid waste sewage gas and biomass based components of sewage wave ocean solar hot dry rock wood waste landfill gas food processing waste black liquor waste from processing of agricultural products any other energy source prescribed by the regulations Penalties If the liable entity is not able to surrender the required number of RECs by the year end, then it is liable to pay penalties in the form of renewable energy shortfall charges $40.00 for each REC by which the liable entity is in shortfall of its target. No penalty is levied if the shortfall is within 10% of the required amount but the shortfall is carried forward to the next year for accounting purposes. The penalty amount has been set out in the Renewable Energy (Electricity) Charge Act Another provision in the Act allows for the refund of the shortfall penalty under certain conditions. If the liable entity is able to surrender the required amount of renewable energy certificates (equal to the shortfall amount in the year in which the penalty was paid) within 3 years of paying the penalty, then the entity is liable for a refund of the previously paid renewable energy shortfall charge penalty once administrative fees have been deducted. Impact on electricity costs The need to purchase and surrender RECs (and the resulting income stream for renewable energy project developers) has increased the cost of electricity in Australia. Virtually all businesses in Australia are paying suppliers or service providers for MRET-related costs that are passed through the supply chain in the cost of goods or services principally, to their electricity retailers in their electricity invoices. Electricity retailers in submissions to the Independent Pricing and Regulatory Tribunal in New South Wales have calculated the additional MRET compliance cost per megawatt hour for electricity retailers in New South Wales to be from AUD$1.10 to AUD$ This is a relatively small percentage of the average cost per megawatt hour in New South Wales of AUD$58.72 in the financial year Independent Pricing and Regulatory Tribunal of NSW, NSW Electricity Regulated Retail Tariffs 2004/05 to 2006/07, June 2004 p NEMMCO average annual price data from accessed 3 August November

55 Potential distortions to the ideal REC market Electricity retailers pass on to their customers the cost of complying with the MRET, and sometimes the cost that electricity users pay might not reflect the actual costs to the retailer of sourcing RECs. Unless a company is a large consumer of electricity that negotiates its electricity purchase arrangements with its electricity retailers, there is only limited opportunity for individual companies to take control of the required renewable energy or lower-emissions component of their electricity. Under MRET, large users of electricity do not ordinarily take control of meeting the renewable energy target for the electricity they purchase. However, such an arrangement could be negotiated contractually between the retailer and user, if the electricity user was able and willing to purchase RECs at a lower price than the cost that their retailer would otherwise pass on to them. Design improvements identified from the operation of MRET In the course of operation of the MRET, opportunities for improvement have arisen in relation to three design features of the Scheme. The legislation originally allowed accredited renewable energy generators to delay creating RECs for an indefinite period of time after the corresponding electricity was actually generated. This led to an amount of "latent generation" electricity generation from renewable resources that had not yet been used to create RECs and so which was not known to the market. Without any market signals as to the potential number of RECs available, liable entities had to guess the potential supply of RECs to meet their targets and this made pricing less transparent. Before the end of the last compliance period there was a spike in the price of RECs, potentially because liable entities had assumed that more RECs would be available from this "latent generation" than were actually made available. The legislation has now been amended so that RECs must be created within 12 months of the corresponding electricity generation. That round of legislative amendments also changed MRET so that RECs could be surrendered voluntarily, without being used to meet the mandatory target. Before this amendment, a number of companies who offered services for electricity consumers to voluntarily purchase renewable energy under the scheme could only promise that RECs would be purchased and transferred to an account in the registry where they would never be used again. Further, companies who created RECs and other environmental products under other voluntary or mandatory schemes could not voluntarily surrender RECs under MRET to demonstrate that they were not "double dipping" under the rules of those other schemes. MRET allows renewable energy generators to create RECs for additional generation above their electricity generation on 1 January 1997 (the "renewable energy baseline"). This baseline is set using factors that include historical generation. As a result, some generators have been able to generate RECs from existing generation capacity. Renewable energy project developers have broadly criticised this approach, suggesting that setting the baseline according to historical generation dilutes the market and reduces the reward available for new electricity generation capacity. MRET framework mirrored for additional targets in States of Australia Unsurprisingly, the limited additional generation capacity that is likely to be required to meet the small target under MRET has been very quickly achieved. 8 The previous Federal Government declined to 8 For example, Dr M Diesendorf of the University of New South Wales, quoted in ABC report by Jacquie van Santen, 20 April 2006; S Mascher, Right on Target? Australia's Mandatory Renewable Energy Target, 50 Legal frameworks for renewable energy in India

56 increase the target and extend the scheme, which has been an impetus for Australian State Governments to impose their own schemes mirroring MRET 9. Queensland and Victoria have each introduced schemes which operate using a similar trading mechanism to impose their own additional targets. Victoria's Renewable Energy Target Scheme (known as VRET) imposes a target of an additional 3,274 gigawatt hours of electricity to be purchased by retailers (and other wholesale purchasers) in that State from renewable energy sources by 2016, while Queensland's 13% Gas Scheme requires electricity retailers (and other liable entities) in that State to source 13% of their electricity from generators using certain lower-emissions fossil fuels (principally, natural gas or certain waste gases). New South Wales has also prepared draft legislation for its own MRET-style renewable energy target. South Australia has also announced a similar scheme. The new Federal Government proposes to increase the renewable energy targets under MRET substantially, to ensure that by 2020 approximately 20% of energy comes from renewable sources. This may mean that State-based target schemes discussed above will terminate. Germany: Renewable Energy Sources Act 2000 (amended 2004) The German renewable energy law is a prime example of what properly designed, stable energy policy can do to bolster the growth of renewable energy. It has created a booming internal and external market, for wind and solar technology in particular, and has simultaneously helped Germany towards meeting its greenhouse gas emissions reduction targets. The stated objective of the Act, introduced in 2000 and revised in 2004, is to: "facilitate a sustainable development of energy supply, particularly for the sake of protecting our climate, nature and the environment, to reduce the costs of energy supply to the national economy, also by incorporating long-term external effects, to protect nature and the environment, to contribute to avoiding conflicts over fossil fuels and to promote the further development of technologies for the generation of electricity from renewable energy sources." Additionally the Act helps implement EU directives on renewable energy and contributes to the increase in the percentage of renewable energy sources in the country s power supply to at least 12.5% by 2010 and to at least 20% by The Act regulates priority grid connection and transmission for renewable energy and also deals with the purchase and compensation paid for such electricity. Renewable energy sources are defined to include hydropower (including wave power, tidal power, salt gradient and flow energy), wind energy, solar radiation, geothermal energy, energy from biomass including biogas, landfill gas and sewage treatment plant gas as well as the biodegradable fraction of municipal and industrial waste. The core provision of the Act is to provide priority status for renewable energy, particularly in the compensation paid for such electricity through the mechanism of feed-in laws or minimum price standards. A feed-in law is a legal obligation on utilities to purchase electricity from a renewable source at a preferential purchase price. Producers of renewable energy are guaranteed the sales price and access to market through an obligation from utility companies to purchase the green electricity on an annual fixed-rate basis. The price paid is subject to periodic adjustments by regulators. The price and the duration of the contract are set at levels that maintain investor confidence, allowing healthy growth in the sector in a low-risk environment. conference proceedings International Workshop on Legal Issues for Clean Energy and Climate Change, October 2006 Beijing, China p.125 at pp A. Stafford, Credit where credit's due: A primer of trading schemes for renewable energy and carbon in Australia (2006) 27(1) Solar Progress 9 at 10. November

57 Minimum prices for renewable energy MINIMUM PRICES FOR RE, 2004 AMENDMENTS (GERMANY) RE SOURCE MINIMUM PRICE Hydropower Landfill Gas, Sewage Treatment Plant Gas and Mine Gas At least 9.67 cents/kwh for plants with a capacity up to and including 500 kilowatts and at least 6.65 cents/kwh for plants with a capacity up to and including 5 megawatts. At least 7.67 cents/kwh up to and including a capacity of 500 kilowatts and at least 6.65 cents/kwh up to and including a capacity of 5 megawatts. The fees paid for electricity from mine gas plants with a capacity of over 5 megawatts are 6.65 cents/kwh. All above the minimum prices shall be reduced annually by 1.5% Biomass At least 11.5 cents/kwh up to and including a capacity of 150 kilowatts, at least 9.9 cents/kwh up to and including a capacity of 500 kilowatts, at least 8.9 cents/kwh up to and including a capacity of 5 megawatts and at least 8.4 cents/kwh for a capacity of over 5 megawatts and up to 20 megawatts. All above the minimum prices shall be reduced annually by 1.5% Geothermal At least 15 cents/kwh up to and including a capacity of 5 megawatts, at least 14 cents/kwh up to and including a capacity of 10 megawatts, At least 8.95 cents/kwh up to and including a capacity of 20 megawatts and at least 7.16 cents/kwh for a capacity of 20 megawatts and over. All above the minimum prices shall be reduced annually by 1.0% Wind Solar 8.7 cents/kwh for first five years till plants achieve 150% of reference yield. After five years the minimum price will be 5.5 cents/kwh. 9.1 cents/kwh for offshore installation for first 12 years for installation before After 12 years the rate will be reduced to 6.19 cents/kwh. All above the minimum prices shall be reduced annually by 2.0% 45.7 cents/kwh for ground mounted installations. If the plant is attached to or integrated on top of a building or noise protection wall, the fees shall be at least 57.4 cents/kwh up to and including a capacity of 30 kilowatts, at least 54.6 cents/kwh for a capacity 30 kilowatts and over, and at least 54.0 cents/kwh for a capacity of 100 kilowatts and over. An addition of 5 cents/kwh will be allowed for BIPV systems. All above the minimum prices shall be reduced annually by 5.0% Source: WISE, 2007 All the above minimum prices are to be paid from the date of commissioning of the plant for a period of 20 calendar years, or 30 years for hydropower plants. A nation-wide equalization scheme has been implemented to reduce the cost differentials paid by grid operators in different parts of the country for the purchase of electricity from renewable sources. Under the law, energy from renewable sources commands premium prices. The additional costs are included in household electricity bills. The total additional costs are currently estimated to be only about 1 per month per household. Grid connection Plant operators are to bear the cost of grid connection and metering while costs associated with grid up-gradation are to be borne by the grid operators. Plant operators are defined as anyone who, notwithstanding the issue of ownership, uses the plant for the purpose of generating electricity from 52 Legal frameworks for renewable energy in India

58 renewable energy sources or from mine gas. Grid system operators are defined as the operators of all types of voltage systems for general electricity supply. Other issues Environmental verification organizations are required to issues certificates certifying guarantee of origin of electricity from renewable sources. The Act also requires the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety to prepare progress reports from time to time. Czech Republic: Act on the promotion of Use of Renewable Sources 2005 This Act came into effect in 2005 primarily for regulating the promotion of electricity generation from renewable energy sources in the Czech Republic in accordance to the existing EU laws and directives. The various objectives that this law wishes to achieve are as follows: Promote the use of renewable energy sources. Provide for a constant increase in the contribution of renewable sources to consumption of primary energy sources. Contribute to sound use of natural resources and sustainable development of society. Create preconditions for fulfilment of the indicative target for the contribution of electricity from renewable sources to the gross consumption of electricity in the Czech Republic equal to 8% by 2010 and create preconditions for further increase in this share after Renewable energy sources have been defined in the Act to include wind, solar, geothermal, hydro, biomass, landfill gas, sewage treatment plant gas and biogas. Pricing and grid connection The renewable energy producer has two choices with regard to renewable energy pricing: sell the electricity to the grid operator pursuant to the conditions and prices set under this Act; or obtain a green bonus for this electricity and sell it on the market. A green bonus is defined in this Act as a "financial amount increasing the market price of electricity that is paid by the operator of a regional grid system or transmission system to a producer of electricity from renewable sources, taking account of reduced damage to the environment resulting from use of a renewable sources compared to combustion of fossil fuels, of the type and size of the production plant and of the quality of supplied electricity". Captive users are also allowed the benefit of the green bonus under the Act. The Energy Regulatory Office is in charge of setting prices for renewable electricity purchase subject to certain conditions laid down in the law. These prices came into effect for the first time in The above body is also responsible for publishing an annual progress report on the status and progress of renewable energy. Heavy fines have been laid down for non-compliance both for the grid operator and the electricity producer. Preferential grid connection for renewable energy sources is guaranteed under section 4 of the Act and the costs are to be borne entirely by the grid operator. Special Condition: Wind power plants located over an area of 1 km 2 with a total installed capacity of 20 megawatts will be excluded from the purview of this Act. November

59 People s Republic of China: Renewable Energy Law 2006 China s Renewable Energy Law was endorsed by the Chinese Government on 28 February 2006 and came into effect at the start of The stated objective of the law is "to promote the development and utilization of renewable energy, improve the energy structure, diversify energy supplies, safeguard energy security, protect the environment, and realize the sustainable development of the economy and society". According to the law, renewable energy includes hydroelectricity, wind power, solar energy, geothermal energy and marine energy, all of which need to be taken into consideration in State and local development plans. Authorities of the State Council are entrusted with organizing and coordinating national surveys and management of renewable energy sources. The Council also has to set medium and long term targets for development and utilization of renewable energy. Based on these targets the council will develop a national renewable energy development and utilization plan. The Government has listed research and development and utilization of renewable energy as the preferential area for hi-tech industrial development in their national program. It further allocates funding for research and development to reduce costs of renewable energy plants, improve quality of renewable energy products and promote technical advancements in the development and use of renewable energy. The law requires power grid operators to enter into grid connection agreements and provide gridconnection to renewable energy power producers and also purchase power from registered renewable energy producers. The law also offers financial incentives, such as a national fund to foster renewable energy development, discounted lending and tax preferences for renewable energy projects. Other details in the law relate to the purchase and use of electricity from solar photovoltaics and solar water heating as well as renewable energy fuels. Finally, the law includes specific penalties for noncompliance with the law. The grid's buying price for renewable energy is set by the National Development and Reform Commission, a regulatory department of the State Council based on the principle of "being beneficial to the development and utilization of renewable energy and being economic and reasonable" with timely adjustment in the buying price as is necessary. The cost of purchasing this power will be spread across all customers on the grid. The law is expected to foster use of renewable energy up to 10% by the year Austria: Green Electricity Act 2003 (amended 2006) Austria s Green Electricity Act was established to enact new provisions related to renewable electricity generation and combined heat and power (CHP). This Act regulates various renewable electricity-related matters, including: the guarantees of origin of electricity produced from renewable energy sources; the obligations to purchase and pay for electricity; the preconditions for, and the promotion of, electricity produced from renewable energy sources; and the nation-wide equal sharing of costs associated with the promotion of electricity produced from renewable energy sources and from CHP plants. The objectives of the Act, aimed at protecting the climate and the environment, are as follows: 54 Legal frameworks for renewable energy in India

60 To achieve the target of 78.1% of electricity from renewable sources by To make good use of the means of promoting renewable energy and to try and achieve market maturity for new technologies. To support CHP plants used for public district heating supply. To have at least 9% of electricity from hydropower plants with capacity less than 10 megawatts by To promote renewable electricity and provide for a nation-wide burden-sharing scheme for electricity from renewable energy and CHP. "Renewable energy sources" are defined as renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydropower, biomass, waste containing a high percentage of biogenous materials, landfill gas, sewage treatment plant gas and biogases). The following two areas are eligible for support under this Act: Support for electricity produced from renewable energy sources through minimum price mechanism and the obligation to purchase such electricity. Hydropower plants with a maximum capacity of more than 10 megawatts and electricity from animal meal, spent lye, sewage sludge or waste, save waste containing a high percentage of biogenous materials are not entitled to the above support. Existing and modernized CHP plants used for public district heating are entitled for support in the form of reimbursements for part of the operating costs. Grid connection and feed-in tariffs Grid operators are required to treat all connection applications equally and in a transparent manner. They also require to issue "guarantee of origin" certificates for electricity generated from registered renewable projects. There is an obligation to purchase electricity from solar PV nationwide capacity of up to 15 megawatts and a certain percentage of electricity from hybrid and co-firing plants based on renewable energy. CHP plants are eligible for support only if used for public heating and if primary energy use and CO2 emissions are reduced in comparison to separate electricity and heat generation. The Act requires new feed-in tariffs to be set for all new renewable electricity plants. Customers are also required to pay a nation-wide uniform support fee (per kilowatt hour of energy supplied to final customers) to create a fund to cover the additional costs. United Kingdom The UK has several major Acts covering the use of renewable energy. These are briefly described below. Sustainable Energy Act 2003 This Act deals with the provisions for the development and promotion of a sustainable energy policy. The Act makes it mandatory for the Secretary of State to publish annually a "sustainable energy report" to indicate progress made towards: cutting the United Kingdom s carbon emissions; maintaining the reliability of the United Kingdom s energy supplies; promoting competitive energy markets in the United Kingdom; and reducing the number of people living in fuel poverty in the United Kingdom. November

61 The Act also requires the Secretary of State to specify targets for electricity production from CHP plants. Energy Act 2004 The Secretary of State is required to publish a strategy for promotion of micro-generation after considering its potential for: cutting emissions of greenhouse gases in Great Britain; reducing the number of people living in fuel poverty in Great Britain; reducing the demands on transmission systems and distribution systems situated in Great Britain; reducing the need for those systems to be modified; and enhancing the availability of electricity and heat for consumers in Great Britain. The sources of energy and technologies that are permitted under the micro-generation initiative are: biomass; biofuels; fuel cells; photovoltaics; water (including waves and tides); wind; solar power; geothermal sources; CHP systems; and other sources of energy and technologies for the generation of electricity or the production of heat, the use of which would, in the opinion of the Secretary of State, cut emissions of greenhouse gases in Great Britain. To qualify as micro-generation, the maximum capacity of the above sources are: in relation to the generation of electricity, 50 kilowatts; or in relation to the production of heat, 45 kilowatts thermal. The Act also lays down specific guidelines and regulations for the use of areas outside the territorial sea for exploration and exploitation of energy, especially from water and wind energy. There are regulations for the transmission, distribution and supply of electricity generated in such areas and for de-commissioning of such renewable energy projects. The Government has also reserved the right to declare such an area as a "Renewable Energy Zone" for the above purpose. RPS obligation relating to electricity, under s32(9) of Electricity Act 1989 The Renewables Obligation order was first introduced in 2002 and subsequently revised in Electricity distribution companies are required under this order to produce or source a minimum percentage of their electricity from renewable sources. The minimum yearly percentages are specified below. 56 Legal frameworks for renewable energy in India

62 MINIMUM PERCENTAGE OF ELECTRICITY TO BE SOURCED FROM RENEWABLE SOURCES (UK) YEAR RPS % Source: The electricity distribution companies can meet the above obligations by: presenting Renewable Obligation Certificates (ROCs); by paying a buy-out fund contribution equivalent to 34.30/MWh in 2007/08 and rising each year with the Retail Price Index; or a combination of the two. The Office of Gas and Electricity Markets is responsible for monitoring and enforcing compliance with the Renewables Obligation. Their functions include accrediting renewable generators and issuing of ROCs. Renewable transport fuel obligations The power to establish a Renewable Transport Fuel Obligation Program is provided under s 124 of the Energy Act From 2008 fuel suppliers must ensure that a certain minimum percentage of their fuel sales is made up of biofuels. The 2010 target has been set at 5% by volume and is likely to deliver a 1 million tonne carbon emission reduction. The operational and settlement mechanism for the program is similar to the renewable electricity obligation explained above. See: Climate Change and Sustainable Energy Act 2006 This Act complements the Sustainable Energy Act 2003 and the Energy Act It purpose is "to make provision about the reduction of emissions of greenhouse gases, the alleviation of fuel poverty, the promotion of micro generation and the use of heat produced from renewable sources, compliance with building regulations relating to emissions of greenhouse gases and the use of fuel and power, the renewables obligation relating to the generation and supply of electricity and the adjustment of transmission charges for electricity; and for connected purposes." November

63 Philippines: Biofuels Act 2006 The Philippines' Biofuels Act of 2006 was signed into law in January The Act makes the limited use of biofuels (biodiesel and bioethanol) mandatory. The rationale behind the Act is to substitute a fraction of the costly imported crude oil with indigenously made renewable liquid fuel. The official Government policy as per the law is: "to reduce dependence on imported fuels with due regard to the protection of public health, the environment, and natural ecosystems consistent with the country s sustainable economic growth that would expand opportunities for livelihood by mandating the use of biofuels as a measure to: develop and utilize indigenous renewable and sustainably-sourced clean energy sources to reduce dependence on imported oil; mitigate toxic and greenhouse gas emissions; increase rural employment and income; and ensure the availability of alternative and renewable clean energy without any detriment to the natural ecosystem, biodiversity and food reserves of the country." Compulsory use of biofuels All liquid fuels for motors and engines sold in the Philippines require locally-sourced biofuels components as follows. Bioethanol: Within two years from the effective date of the Act, the annual total volume of gasoline fuel actually sold and distributed by each oil company in the country must include at least 5% bioethanol. All bioethanol blended gasoline must also contain a minimum of 5% bioethanol fuel by volume, provided that the ethanol blend conforms to the Philippines National Standards (PNS). Within four years from the effective date of the Act, the National Biofuel Board (NBB) created under the Act is empowered to determine the feasibility and thereafter recommend to the Department of Energy (DOE) to mandate a minimum of 10% blend of bioethanol by volume into all gasoline fuel distributed and sold by each oil company in the country. Biodiesel: Within three months from the effective date of the Act, a minimum of 1% biodiesel by volume must be blended into all diesel engine fuels sold in the country, provided that the biodiesel blend conforms to the PNS for biodiesel. Within two years from the effective date of the Act, the NBB is empowered to determine the feasibility and thereafter recommend to DOE to mandate a minimum of 2% blend of biodiesel by volume. This may be increased taking into account considerations including domestic supply and availability of locally-sourced biodiesel components. The Act also lays down incentives for biofuel production in the Philippines. 58 Legal frameworks for renewable energy in India

64 5. Implementing a national RE law what and how? 5.1 Outline of two main types of renewable energy law Renewable energy polices can generally be classified into two groups: feed-in tariffs (i.e. pricing systems) these mandate the price to be paid for renewable energy, but not the amount generated; and RPS or quota systems these mandate the amount of renewable energy to be generated, but not the price paid for it. Feed-in laws offer investors access to the grid and a fixed minimum price for electricity generation that makes the investment viable. This price is mandated for a specified number of years from the date of commissioning of the plant and the price is usually higher than the prevailing price for conventional power. Prices are agreed upon in a consultative process between regulators, economists, engineers, industry representatives and non-government organizations and are reviewed (for new plants) every few years. Quota or RPS systems are mandated targets for renewable energy generation or capacity addition, set by regulators or Government. Targets may be set separately for each renewable energy source or for total renewable energy generated. Targets are usually specified as percentages of overall energy consumption and these increase with time. The mandated targets may be laid down for electricity generating companies, distribution companies or end-consumers. Specific time frames by which targets have to be met usually carry strict penalties for non-compliance. Funds from penalties are usually collected for further development and renewable energy related research. Quota systems can be further sub-divided into quota obligations involving tradable renewable energy certificates (TRECs) and tendering systems. In the USA, the certificate scheme is called the Renewable Portfolio Standards (RPS). Electricity producers are issued green certificates for the amount of energy generated. Certificates can be traded on the market to meet renewable energy percentage requirements or to generate further income. Under the tendering and bidding process, bids are called in for supplying a certain amount of electricity from renewable energy. The winning bid is guaranteed access to grid and a long-term price contract. There are similar systems in Canada, the UK and China. India has a unique combination of feed-in tariffs (such as SERC tariff orders for renewable energy) and quota systems (RPS orders). 5.2 Comparing quota and pricing systems: international studies This section summarises the discussions on quota and pricing systems in four influential studies on renewable energy incentive systems. November

65 Sawin J. (2004) "National Policy instruments: policy lessons from the advancement and diffusion of renewable energy technologies around the world, in Renewable Energy: global review of technologies, policies and markets" Ed. Assmann, Laumanns and Uh, London Earthscan Sawin provides the following comments on the pros and cons of pricing and quota systems: ADVANTAGES AND DISADVANTAGES OF PRICING & QUOTA SYSTEMS (SAWIN) ARGUMENTS IN FAVOUR ARGUMENTS AGAINST Pricing systems To date, they have been most successful at developing renewable markets and domestic industries, and achieving the associated social, economic, environmental, and security benefits. Flexible can be designed to account for changes in technology and the marketplace. If tariffs are not adjusted over time, consumers may pay unnecessarily high prices for renewable power. Can involve restraints on renewable energy trade due to domestic production requirements. Encourage steady growth of small- and medium-scale producers. Low transaction costs. Ease of financing. Ease of entry. Quota systems Promote least-cost projects - cheapest resources used first, which brings down costs early on. Provide certainty regarding future market share for renewable (often not true in practice). Perceived as being more compatible with open or traditional power markets. More likely to fully integrate renewable into electricity supply infrastructure. High risks and low rewards for equipment industry and project developers, which slows innovation. Price fluctuation in "thin" markets, creating instability and gaming. Tend to favour large, centralized merchant plants and not suited for small investors. Concentrate development in areas with best resources, causing possible opposition to projects and missing many of the benefits associated with renewable energy (jobs, economic development in rural areas, reductions in local pollution). Targets can set upper limits for development there are no high profits to serve as incentives to install more than the mandated level because profitability exists only within the quota. Tends to create cycles of stop-and-go development. 60 Legal frameworks for renewable energy in India

66 ARGUMENTS IN FAVOUR ARGUMENTS AGAINST Complex in design, administration and enforcement. High transaction costs. Lack flexibility difficult to fine-tune or adjust in short-term if situations change. Under the feed-in tariff system, technological enhancements directly increase profitability, while the quota systems provide little incentive for investors and manufacturers to invest in research and development since surplus profits go directly to end-consumers (however it may be seen as a benefit that quota systems may tend to produce lower consumer energy prices than feed-in tariffs). Having to deliver lowest cost energy under quota systems might cause manufacturers to set up manufacturing bases in overseas countries with lower costs (unless rules require local manufacture). If targets under a quota system are short-term, there may be a cyclic effect on the market, with peaks when a new target is introduced and troughs when it is reached (as has been apparent in the American renewable energy market). This prevents smooth market growth and limits investment in production facilities, thereby capping job growth. Growth in all types of renewable sources is promoted under the pricing system (if minimum prices have been set for each resource). Quota systems may favour the most profitable technology, unless separate quotas are set for each type of renewable energy. Sawin notes the following requirements for renewable energy laws: REQUIREMENTS FOR SUCCESSFUL RE SUPPORT POLICY (SAWIN) PRICING SYSTEM Ensure regular adjustments of tariffs incremental adjustments built into law. Establish tariffs according to technology (and location) with input from research institutes and renewable industries. Provide tariffs for all potential developers, including utilities. Ensure that tariffs are high enough to cover costs and encourage development. Guarantee tariffs for long enough time period to ensure high enough rate of return. Ensure that costs are shared equally across country or region. Eliminate barriers to grid connection. QUOTA SYSTEM Apply to large segment of market. Include specific purchase obligations and end-dates. Establish adequate penalties for non-compliance, and enforcement. Set different bands by technology type. Require long-term contracts to reduce uncertainty for project developers. Establish minimum and maximum certificate prices. Do not allow time gap between one quota and next. What is most important for both systems is political stability, and long-term, credible, enforceable and consistent policies. Problems with both systems can be overcome with proper design and implementation of policies. November

67 Feed-in tariffs have been successful in maximising renewable energy capacity addition in Germany, Spain and Denmark. European Renewable Energies Federation (2006) Prices for Renewable Energies in Europe: Feed in tariff versus Quota Systems A comparison, Report 2006/07, ed Doerte Bouquet The conclusion drawn from this analysis of renewable power in the European Union is that, to date, feed-in tariffs have worked better than quota systems in terms of delivering cheaper power. The analysis shows that, under a quota scheme with TRECs, investors are at the mercy of volatile and uncertain future electricity and TREC prices. This reduces investor confidence leading to lesser capacity addition. For example, in Sweden in 2006, total price variations for wind power ranged from 54 to 96 Euros per megawatt hour, and for other renewable power between 48 and 90 Euros per megawatt hour. As at the date of the report, the breakdown of countries with different renewable support schemes was as follows: Feed-in tariffs: Austria, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Ireland, Italy (only PV plants not eligible for Green Certificates), Lithuania, Luxembourg, Malta (PV only), Netherlands, Portugal, Slovak republic, Slovenia and Spain. Green Certificates: Belgium, Bulgaria, Great Britain, Italy, Poland, Romania and Sweden. Tax subsidies: Finland, Malta. Solely quota obligation: Latvia. German Wind Energy Association (2005) "Minimum price system compared with the quota model which system is more efficient?" Updated June The German Wind Energy Association states that, by comparison to quota systems, minimum price systems perform better and are also more efficient. "The minimum price system has enhanced the development of renewable energies most successfully. These systems are flexible in design and changes in technology and the market can be taken into consideration. Small and medium-sized businesses are not disadvantaged. These companies compete among themselves and therefore are interested in improving their efficiency. Furthermore, making legal adjustments can increase efficiency. The transaction costs are low and the financing mechanisms are easily implemented. In contrast quota systems involve huge insecurities for producers of regenerative electricity; for the most part, small and medium-sized companies cannot bear the high investment risk because of the long-term framework conditions. Up until now such models to promote renewable energies have been implemented in various designs and in a host of countries. One noticeable fact is that up until now no large independent industrial sector has emerged in these countries for the manufacture of renewable energies and to ensure their professional application. "However, in the long term this is indispensable if further development of technology and tapping the full cost reduction potential by increasing efficiency and performance are to be achieved. The costs for 62 Legal frameworks for renewable energy in India

68 wind power in the countries using a quota system are currently higher than those in countries that use the minimum price system. "Moreover, considerable transaction costs for organising, implementing and monitoring need to be taken into consideration where quota models are concerned. It is fundamental that when applying the minimum price system, this must also be supported by creating additional positive framework conditions. Among other things, this pertains to additional grid capacity expansion, adjustments in building laws and encouraging acceptance through broad participation models and controlled land usage. Under these circumstances minimum price systems can achieve their ideal effect: a rapid development of renewable energies that is profitable for both the medium and long term and creates jobs at the local level. As a result, renewable energies make a continually increasing contribution to the local energy supply and are a central pillar for protecting the global climate." ECN, Netherlands (2005) "Review of international experience with renewable energy obligation support mechanisms" The ECN (the Energy Research Centre of the Netherlands) notes that experience with quota/trec systems is mixed. This study concludes that quota systems are more complex in comparison to feed-in tariff systems and work effectively only if the system is well-designed and appropriately tailored to the particular needs of each context. Based on the experience gained with the quota/trec systems in the USA and Europe, ECN makes the following recommendations regarding the main design elements of a successful quota policy. Market liquidity Introduction of a TREC system should only be considered if a sufficiently liquid TREC market can be created in which a large number of market actors exist, none of whom can individually influence the TREC price. Long term targets Renewable energy targets must be set at least 10 years ahead (preferably 15 or more years), in order to provide the certainty necessary for renewable energy generators to conclude long term TREC sales contracts. Long term targets are perhaps the most important element for a well functioning obligation system and are imperative for attracting substantial amounts of new investments in renewable energy capacity. Balanced targets Renewable energy targets must be set taking into account current and future supply-demand conditions. This means that, on the one hand, targets must exceed existing supply and, on the other hand, must be achievable at reasonable cost. Differentiated technology support With ambitious targets or limited resource potentials, TREC prices can achieve high levels and thus decrease the cost effectiveness of the system. This can be prevented by either introducing technology or vintage tiers, or by providing additional subsidies to the more expensive technologies. November

69 Entity with TREC obligations If the TREC system is the main renewable energy policy instrument, the obligation to acquire and surrender TRECs should be placed with the electricity suppliers/utilities, thereby preventing additional administrative costs. Flexibility The stochastic nature of renewable energy supply requires that some flexibility should be built into the system to be able to deal with stochastic supply of TRECs. The obligation system can be made flexible by allowing banking and borrowing of TRECs and including the option to buy out (part of) the obligation by paying a penalty. However, to prevent strategic behaviour, these options must be introduced in a balanced manner; it is recommended to limit borrowing to three months and banking to a maximum of 25% of the obligation. Penalty revenues The penalties collected from non-compliance should not be directly recycled back to the TREC market because this can add to the already existing uncertainty about future TREC prices and can seriously hamper the establishment of long term TREC sales contracts. However, the use of these revenues for general purposes could jeopardize the credibility of the obligation system and it is therefore recommended that these revenues be used for further research and development on the least competitive renewable energy technologies, or for investment or production subsidies for new renewable energy generation. Government commitment Strong and long-term political commitment is essential for ensuring a well functioning TREC system. This commitment can be expressed by applying clearly defined monitoring and verification rules for eligible resources and by defining adequate enforcement rules in case of non-compliance. 5.3 How TREC schemes work Different models There are a number of different possible incentives to promote renewable energy. Of the quota-based models, some set a target, a quota or a portfolio standard subject to available capacity or resources. Other models set an enforceable target for the direct purchase of renewable energy. Where the portfolio standard or target is met with some form of certified renewable energy, the scheme is often known as a "tradeable renewable energy certificate" or TREC scheme. Operation of TREC schemes Figure A (below) shows the typical model for a TREC scheme. In this example, a liable entity (such as an electricity retailer) has a prescribed renewable energy component for the electricity it is required to sell or purchase. An electricity generator that generates electricity above a specified baseline (so the electricity is additional) can create TRECs from that generation. Those renewable energy certificates can be sold to the liable entity for the purpose of meeting its liability under the TREC scheme. The physical electricity can be sold separately from the TRECs, to a third party, but it need not be depending on the operation of the local electricity market. Typically, the additional cost of electricity generated from renewable sources would be passed through to the customer. 64 Legal frameworks for renewable energy in India

70 FIGURE A: MODEL OF TREC SCHEME 1. Liable entity obligation and generator that is able to provide additional renewable energy capacity. 2. Generator is entitled to create renewable energy certificates from additional generation. 3. Generator contracts to sell renewable energy certificates to liable entities (or on secondary market if that is possible). 4. Generator trades renewable energy certificates to liable entities (or on secondary market if that is possible). November

71 5. Liable entity meets required renewable energy component from renewable energy certificates. 6. Cost to the liable entity of complying with the scheme is passed on to end users. 7. Penalty or other consequences if the liable entity is unable to procure and bring to account sufficient renewable energy certificates. Compliance and penalties If the TREC scheme is enforceable, there will be a penalty associated with failure to meet the required renewable energy component (as represented in the last part of Figure A above). Often this will take the form of a financial penalty per megawatt hour of electricity by which the liable entity is in default of its target component. In theory, mandatory TREC schemes could require a liable entity to make up any shortfall in renewable energy certificates in a subsequent compliance period. Further, the scheme might attach criminal or other consequences to a failure to comply with the scheme. For example, the renewable energy component could be a condition of the electricity retailer's licence. Alternatively, the penalty 66 Legal frameworks for renewable energy in India

72 under any such scheme might represent a mere fee under which there are no consequences for the liable entity other than their obligation to pay it. In this respect the fee could represent a "buy out" of the obligation to satisfy a required renewable energy component. The latter model would tend towards setting a price cap rather than encouraging the generation of the target amount of renewable energy. Degree of regulation varies Some TREC schemes set a contained legal framework for the creation and surrender of renewable energy certificates, while others establish a legal framework which imposes liability to surrender TRECs but allows those TRECs to be recognized through a flexible, almost voluntary, framework in which the TRECs need not be formally accredited provided that they meet prescribed criteria. The Australian mandatory renewable energy target adopts the former approach of a contained legal framework, whereas some of the United States' renewable portfolio standards adopted the latter, more informal, approach. Under the Australian model, the electricity generator requires regulator accreditation to be eligible to gain accreditation under the mandatory scheme. The electricity that the generator produces from renewable energy sources must then also be recognized in accordance with the scheme rules, so that the TRECs can be registered for each megawatt hour of electricity that is generated by the generator. Under the model used in some States of the United States of America, TRECs might not be registered under the State law. Instead, it could be the responsibility of the retailer to ensure that the benefit of the renewable energy purchased comprises electricity that meets scheme requirements. The scheme might set minimum requirements for electricity that is entitled to be included in the renewable energy portfolio. 5.4 Advantages of TREC schemes In theory, there are a number of advantages to using TREC schemes as market-based instruments for renewable energy promotion. Lowest-cost renewable energy Different renewable energy sources will involve different costs either in the initial capital investment or in the ongoing operation of the corresponding generating system. By mandating a required percentage of renewable energy generation and establishing a TREC scheme, the market is able to "decide" between the renewable energy sources recognized by the scheme. Liable entities will choose the renewable energy sources that are cheapest to exploit and, as a consequence, the TREC scheme should achieve its target at least cost. In theory, this means that the costs that are ultimately passed down to consumers are minimised. A number of commentators (whose views were discussed above) question whether this is the case given that the transaction costs of administering the accreditation, registration and trading components of the scheme can be high. However, if these costs can be minimised a TREC scheme will in effect enable the market to choose between the recognized renewable energy sources offered. On the other hand, if the Government wishes to promote a particular source of renewable energy, a separate target can be set for that source. Thus TREC schemes can be designed either to encourage specific types of renewable energy, or to encourage least-cost renewable energy. November

73 Efficiency of incentive being set by market TREC schemes enable the value of the incentive to be set by the market rather than arbitrarily set by Government departments or regulators. The incentive that the renewable energy generator receives will be equal to the additional revenue that they are able to obtain by selling certificates. This is the case whether the generator creates the certificate itself or if the generator passes on the cost of the potential to generate renewable energy certificates to electricity retailers in power purchase agreements or in agreements to sell the entitlement to take the benefit of the renewable energy generation. In an ideal market, the price of certificates will be influenced by the lowest available cost of supplying renewable energy certificates (and so the cost of generating electricity from different renewable energy sources) and the demand for those certificates set by the target. In this sense, a TREC scheme does not "pick winners" because the certificate price and the technology that benefits most from the incentive will depend entirely on market forces and achieving least-cost generation from the technology available up to the target. Flexibility of having separate tradeable instruments TREC schemes are more flexible than many other incentives because the electricity is separated from the renewable energy certificate. Electricity markets that operate within a central national electricity market or another competitive framework for the sale of electricity can continue to operate, while the renewable energy markets operate separately. This means it is possible to have a secondary market for the trade in renewable energy certificates and also makes it easier for participants in the market to engage in hedging to develop other financial products using the separate renewable energy certificates as the underlying commodity. Power purchase agreements can, on some occasions, involve long-term contracts for the sale of electricity that mean the parties involved might not easily be able to acquire electricity directly from a renewable energy generator. For example, a particular electricity retailer may have already fully contracted for its electricity purchase requirements. A TREC scheme (unlike a feed-in tariff system) would still allow that retailer to purchase renewable energy credits. Coverage of grid-connected and off-grid plants In theory, renewable energy generators need not be grid connected at all. This can be the case either for the liable party, which for example might operate a large fossil fuel generator and attract liability under the scheme despite not being connected to the grid. As the TRECs are separated from the electricity, there is no barrier to such a liable party purchasing TRECs from another party, even though the liable party is not in a position to generate electricity easily or viably from renewable energy. Likewise, an off-grid renewable energy generator could have its renewable energy recognized (assuming its renewable energy is not "business as usual") and sell the resulting TRECs to liable entities on the grid. Overcomes issue of uneven distribution of RE resources A liable party that produces, purchases, sells or uses (depending on the scheme) only fossil fuels because of its physical location or other factors can "green" that electricity by purchasing TRECs from elsewhere, provided that the other electricity has been genuinely generated and used. As TREC schemes of this type are not constrained by location or whether the generator is grid connected, TREC schemes are able to capitalise on geographic generation advantages and spread the cost of complying with the scheme across a series of liable entities who might not otherwise be able to physically acquire electricity from renewable energy resources. This is a particularly important 68 Legal frameworks for renewable energy in India

74 advantage in the case of India, with its large area and varied renewable energy capacity. Invariably some States or areas will have geographical advantages or disadvantages in the resources that are available. Wind energy expert Rakesh Kacker, former head of the Indian Wind Energy Association, notes this as an important advantage of TREC schemes, and one which will promote growth of renewable energy. 10 States or isolated grids that benefit from bountiful renewable energy resources are able to sell TRECs to States that rely on fossil fuels and so the additional cost of generating electricity from renewable energy resources across the whole of the jurisdiction covered by the TREC scheme can be spread between the two networks. Under this example, if one isolated grid already uses a higher proportion of renewable energy resources it would likely already have a higher cost per unit of electricity, while the grid that relies on fossil fuels would have a relatively lower cost per unit of electricity. As the liability to surrender TRECs would apply across the whole of the jurisdiction and both of the isolated grids, the cost of generating electricity in the isolated grid reliant on fossil fuels would increase, whereas the renewable energy rich area would receive an effective subsidy from its renewable energy generation from the former grid. Overcomes cost/skill differentials and different market types Some States or regions may have higher capacity to absorb costs than other States or areas. Likewise some areas will have a higher capacity to support development than other areas, whether in terms of financial capacity or in available skills, infrastructure or materials. Some regions may be closer to transmission and distribution networks, so as to enable easy interconnection with the existing grid. TREC schemes, by virtue of the benefit of the TREC being separated from the physical electricity, enables the one incentive to operate across jurisdictions that have either a competitive liquid market in electricity or have captive generator, distributor or customer arrangements, or jurisdictions that have a combination of the two. If this scheme is well-designed, the intention is that the renewable energy generating capacity will move to the most appropriate area because the price of certificates will adjust to provide an incentive to meet the target at lowest cost. In this sense TREC schemes are able to meet a number of variables that arise in the domestic context without adopting an interventionist approach where regulators are forced to guess the appropriate level at which to set an incentive so as to achieve a particular environmental outcome. TREC schemes may be combined with other measures Given that there may be existing different State and Central Government measures, TREC schemes are often able to be imposed separately at a State or central level over existing mechanisms. Again, this is made possible because the commodity is separated from the electricity and from other commodities that can be taken from the electricity. We discuss this further below. 10 Noted in Jamwal N & Lakhanpal S, "Fanning an alternative", 6 August 2008, November

75 5.5 Design issues with TREC schemes TREC schemes have operated in a sufficient number of jurisdictions that it is possible to identify the more and less desirable design features of these schemes. Setting duration of scheme and target levels TREC schemes need to be of sufficient duration to provide investment certainty. Given that many renewable energy projects have a payback time frame of between 15 and 25 years, investors will be disinclined to finance these projects unless there is certainty that there will be some market for the TREC commodity in the long term. Therefore the target for the scheme or the trajectory of that target must ensure the market for TRECs will provide an adequate return on investment for a sufficient period of time. For example, if the target is too small and is obviously able to be met in the near term, developers may be unable to contract to sell TRECs at a sufficient rate of return to make an investment viable. Even if the target is small, in some cases a developer may be able to enter into long-term forward contracts for the sale of TRECs, but if the market for TRECs collapses the counterparty could be more inclined to default on the contract with a view to obtaining cheaper certificates elsewhere. To this end, if this scheme is of insufficient duration and the target is insufficiently robust developers could perceive exposure to market for renewable energy certificates to be too risky. In the ordinary course the "commercial" risks can be met with long-term offtake agreements. However, this has the effect of shifting the risk to the counterparty (which will often be a liable entities such as an electricity retailer). Penalties for non-compliance A number of renewable portfolio schemes that involve the trade in TRECs have been unsuccessful because there is no means of enforcing the target. Even though elaborate mechanisms have been established to audit the required renewable energy component, this is of limited utility if there are no consequences for a liable party that does not comply with the scheme. In this sense, TREC schemes of this type are merely aspirational. Of course, if liable entities can avoid compliance with the scheme then the target will not be reached and it is likely there will be insufficient demand in the market to create confidence in the value of the TREC commodity. If the penalty for non-compliance is insufficient, it will represent a cap on the cost of complying with the scheme unless there are some other incentives for complying with the scheme, whether these be under criminal law or issues of reputation damage. Liquid and competitive market For a TREC scheme to operate properly, experience has shown that the market needs to be big enough to be liquid and competitive. If the market is not liquid, the lack of price discovery leads to opportunities for generators or electricity retailers to take windfall profits from the market. If electricity retailers are the liable entities, for example, they might be able to pass on the presumed "full cost" of complying with the scheme, while they purchase low-cost TRECs from a particular project. Likewise, some generators may take a lesser incentive from the TREC scheme than others and they put themselves at a greater risk of failure. A liquid market with effective exchange of information is essential if the TREC scheme is to perform its role of achieving renewable energy generation at least practical cost. 70 Legal frameworks for renewable energy in India

76 Coverage of small generation plants Depending on the local context, it could be desirable or undesirable to encourage small generating plants. Distributed generation could be viable and desirable in some areas that have limited grid infrastructure, and there may be some benefit in encouraging end-users to take a role in supplying their own electricity. For example, small-scale wind turbines, small-scale photovoltaic cells, or even solar hot water systems might all be encouraged by a renewable energy trading scheme. However, the cost of enabling small-scale generation within the context of a TREC scheme can be high given that the transaction costs are greater to generate and trade in TRECs from the number of small generators. Higher transaction costs can, however, be overcome in a number of ways. One such example is by using an "aggregator" to undertake a simplified application and accreditation process for small-scale generators and to negotiate collectively TREC sale contracts with liable parties. Alternatively, small-scale generators can be given a separate "track" by which to have their applications for accreditation approved through a simplified process and the resulting TRECs can be sold to a single Central or other Government agency that can then on-sell the TRECs to third parties. Grid connection and distribution costs The market for TRECs can be distorted if there are differences across jurisdictions covered by the scheme in the way that grid connection and transmission or distribution costs are supported. If an incentive is provided in one jurisdiction for grid connection, or for ongoing transmission or distribution charges, that jurisdiction may be more appealing than others. Likewise, if there are no forms of support for grid connection in areas that may be resource-rich it may lead to the exploitation of renewable energy resources that are not as efficient merely because they are closer to the existing grid or are entitled to lower transmission or distribution charges. It is the nature of electricity generators that use sources such as wind and solar (and sometimes biomass) that projects must be located at the resource. For this reason, the ability to interconnect with the grid or with a suitable local distribution network may be a determining factor for investors. To this end, it is important that regulators consider implementing workable mechanisms for the allocation and recovery of the costs of transmission (or distribution) infrastructure to accommodate the generation of electricity from renewable energy resources. Availability of data on renewable energy resources Some areas may lack the data availability that is necessary to provide the certainty necessary to stimulate investment in renewable energy projects. In these cases, it may be desirable to have some other form of Government support to promote resource investigation. If such measures are not undertaken the most efficient renewable energy resources may not be exploited. Information exchange Information exchange is important in a TREC scheme given that it is a market-based mechanism. The integrity of the scheme relies on the market exchanging clear information about the total amount of electricity that has been generated and the component of electricity that has been generated from renewable resources. In Australia, where it was initially not necessary for electricity generators to create TRECs from their electricity generation within any required timeframe, a problem arose with "latent generation" that was presumed to have been generated but from which TRECs had not been created. The market price of TRECs crashed when the market assumed that a sufficient amount of renewable energy had been November

77 generated to meet demand. In fact, not enough renewable energy had been generated to meet the target. As it was not necessary for the generators to create TRECs from their electricity generation within any fixed period of time (initially), the market did not recognize the shortfall until it became apparent that there were not sufficient TRECs to meet demand. At this point the price rose suddenly. The legislature rectified the problem by placing a time limit on generators to create TRECs from their electricity generation. From this experience we see that a successful TREC scheme must capture latent generation by ensuring that TRECs are created from corresponding electricity generation, within a reasonable time, so that the market is always well-informed. Verification and other transaction costs If a TREC scheme is to be effective the transaction costs must be limited and reasonable. Experience has shown that simple centralised accreditation of generators and TREC creation is simpler than renewable portfolio schemes which rely on consultants to audit generation on an ad hoc basis and in which liable parties must be able to demonstrate compliance from a variety of collected evidence. Where TREC creation is not centralised, projects often involve complex documentation to effect the transfer of TRECs and so the external project costs can be high. Renewable energy verification standards If the verification of electricity from renewable resources is not sufficiently controlled, there is a risk that varying methodologies or viewpoints on what constitutes genuine generation from renewable energy could compromise the integrity of a TREC scheme. Renewable energy generation is only "real" if the electricity is actually generated and if it is actually being used to meet demand (and so being consumed by end-users). 5.6 Interaction of TREC schemes and other laws Compatibility with existing general laws A TREC scheme may or may not be compatible with existing general domestic laws. It is important to consider how a TREC scheme should be designed to integrate with existing domestic laws, including taxation and financial services laws, corporate structuring and foreign ownership laws, property or land law, land use rights and construction approvals, and environmental law. In particular, laws on ownership of land and resources may have an impact on the ownership of energy produced by the project or the TRECs generated by the project. Likewise, the capacity of Central or State Governments to legislate to implement the scheme is an important consideration when considering how the scheme will be implemented. We discuss the interaction of TREC schemes with existing laws promoting renewable energy or greenhouse gas reductions below. TREC schemes and existing renewable energy capacity When designing TREC schemes, the way in which the scheme should interact with existing renewable energy capacity should be considered. Policymakers may ask whether the renewable energy generating target should be additional to other measures or whether the target is intended to be in total or absolute. 72 Legal frameworks for renewable energy in India

78 Absolute target An absolute target that covers all States and includes existing measures and incentives might be desirable if a regulator wishes to make the scheme driven by an overall total target end and does not wish to reward only new renewable energy generators. In theory, the TREC scheme would drive the total renewable energy capacity (including existing renewable energy capacity) towards the total target. This is because TRECs could be created from all renewable energy generation, including existing and future generation and the market would only be concerned with reaching a total target. The drawback with this approach is that generators or developers in some States may already be receiving incentives and additional revenue from renewable energy certificates could represent a windfall for those projects that were already viable under existing incentives. Additional target If the renewable energy generating capacity is to be additional to other capacity, regulators might set a date and establish the historical baseline of generation. That date would then be the baseline for additional generation that is entitled to generate TRECs under the scheme (Test 1 the historical baseline test). Alternatively, regulators might set a test that considers whether the renewable energy project would have been viable solely by virtue of other existing renewable energy incentives. If so, it would be "business as usual", and should not earn TRECs (Test 2 the additionality test). Test 1 is simpler, but it could exclude renewable energy generating capacity that would not have been viable under existing incentives but did form part of the existing historical baseline. Alternatively Test 1 could also enable renewable energy generating capacity that was already installed but was not being utilised to be recognised as "additional" renewable energy capacity. This has been criticised in Australia in the case of hydroelectric generating capacity that was already in place but was not being used. Test 2 might be more scientifically and economically accurate, but as Test 2 is more complicated to apply and requires expert input it can increase the transaction costs associated with operating the TREC scheme. In one sense, incentives that are additional to existing capacity can be a relatively blunt instrument because there might be no control over the total capacity encouraged across the jurisdictions to which scheme applies. If there is latent generation that was not included in the total presumed capacity at the time the scheme commenced, the additional capacity created by the scheme will be added on to this existing capacity. Also, if generating capacity is added during the operation of the TREC scheme but is incentivised by other means and does not rely on the TREC scheme, it will expand the total generating capacity across the network but will be separate from and additional to the TREC target. The outcome in both of these examples is that the total renewable energy capacity across the jurisdictions to which the TREC scheme applies may be greater than the estimated total capacity at the outset of the TREC scheme. Diagrams showing different target scenarios Figure B shows three different scenarios that might be chosen when considering how the target will operate around existing renewable energy capacity. Diagram I illustrates a target that includes the existing capacity, so that the total capacity rises to correspond to the TREC target. Diagram II shows a model based on Test 2 where the renewable energy certificate target is imposed in addition to the existing business as usual renewable energy capacity. November

79 Diagram III shows a simple model based on Test 1, where the TREC target is in addition to the existing renewable energy capacity calculated as a historical baseline at a specified commencement date. FIGURE B: DIFFERENT WAYS TO TAKE ACCOUNT OF EXISTING CAPACITY IN A TREC SCHEME Diagram I 1. Renewable energy target is absolute and comprises existing capacity. Diagram II 2. Renewable energy target is additional to renewable energy capacity in the "business as usual" scenario. Diagram III 3. Renewable energy target is additional to a historical baseline measured at a specified date. 74 Legal frameworks for renewable energy in India

80 TREC schemes and other renewable energy support schemes It is important for policymakers to consider the interaction between TREC schemes and existing policies. Competing or concurrent incentives for renewable energy may include: Feed in tariff (competitive). Feed in tariff (fixed). Grid connection subsidies (including connection infrastructure). Capital tax incentive or subsidy. Sales tax incentive or subsidy. Other tax incentives (e.g. depreciation, exemptions or concessions). Greenhouse gas emissions trading schemes that recognise reductions in greenhouse gas emissions compared with average grid intensity. Effect of having concurrent schemes In many cases there may in fact be no overlap between the schemes, or there may be design features that can be implemented to overcome any overlap. Existing voluntary renewable energy schemes or the introduction of a mandatory scheme, depending on the domestic context, could also either complement or detract from a TREC scheme. If the mandatory scheme is to provide an additional incentive for renewable energy, policymakers may consider providing that renewable energy certificates can only be generated from electricity that is additional to that incentivised by the existing scheme. We discuss this above in the context of taking account of existing renewable energy capacity. A series of concurrent renewable energy incentives may hasten the rate at which a renewable energy target is met, or may distort the natural hierarchy of technologies by making some renewable energy technologies more viable than they would have been if the TREC scheme was operating alone. However, in theory the incentive generated by a TREC scheme can coexist with other incentives. If the other incentives are sufficient to promote the required renewable energy generating capacity, then introducing a target and TREC scheme will of course not promote any additional renewable energy generating capacity and the theoretical renewable energy certificates would be worthless. However, if this were the case a TREC scheme would not be necessary anyway. Likewise, if a feed-in tariff is sufficient in a particular State to make a particular renewable energy technology viable, any renewable energy certificates that can be created by generators using that technology will only add to the return on investment for the generator (if the scheme allows TRECs to be created by those generators at all). If the target of the TREC scheme is sufficiently high so that it will not be met only by the capacity encouraged by that "other" incentive, the TREC scheme will still generate demand for other renewable energy generating capacity either from other technologies or in other jurisdictions covered by the scheme that are not subject to the same "other" incentive. Depending on how the TREC scheme is designed, generating capacity that is already incentivised by other measures can be made ineligible to create renewable energy certificates so as to avoid such generators being counted towards the "target". Ultimately, how a TREC scheme will interact with existing mandatory schemes in concurrent jurisdictions like States will depend on the individual incentive and the design of the TREC scheme November

81 that is proposed to be implemented. It is, however, very possible that a TREC scheme will be consistent with existing incentives in concurrent jurisdictions. TREC schemes concurrent with other types of schemes Figure C sets out a simple commercial model that shows how concurrent incentives are possible. Diagram I shows two electricity generators, one that uses renewable fuels and the other using fossil fuels. In the absence of incentives, the two generators obtain the same market price for their electricity sales, but the renewable energy generator has higher costs. Diagrams II, III and IV respectively show the impact of a theoretical feed-in tariff, tax incentive, and TREC scheme, each of which are not sufficient of themselves to make that technology viable. FIGURE C: MODEL SHOWING POTENTIAL CUMULATIVE EFFECT OF CONCURRENT INCENTIVES Diagram I 1. The renewable energy electricity generator competes with a fossil fuel electricity generator, receiving the same market price for electricity (in the absence of incentives) but with higher costs. Diagram II 2. If a feed-in tariff is available, the renewable energy generator can receive a premium for its electricity. 76 Legal frameworks for renewable energy in India

82 Diagram III 3. If a tax incentive is available, the renewable energy generator might be able to reduce its costs. Diagram IV 4. If the renewable energy generator would not yet be viable even with the tariff price and the tax incentive, the renewable energy generator might be able to obtain additional revenue if a TREC scheme is also operating concurrently. Concurrent State and national targets Different concurrent State targets can be consistent with a national mandatory target. Figure D illustrates this. In this example, the targets set separately in State A and State B can be separately achieved while also meeting the national target. The target is indicated by the dotted red line and the actual capacity is represented by the capacity bars. FIGURE D: MODEL OF CONCURRENT STATE AND NATIONAL TARGETS November

83 If a national mandatory target is high enough it might promote a higher level of renewable energy electricity generation in a particular State than was required by the State target. Concurrent targets have been successful in Australia, where Victoria and Queensland have had their own mandatory renewable energy or lower-emissions electricity targets that have operated concurrently with the Federal mandatory renewable energy target. In fact, all three of these schemes operate using a form of tradeable energy certificate. Of course, constitutional law considerations in each of the concurrent jurisdictions could limit the ability to have concurrent incentives for renewable energy and this would need to be considered on a case-by-case basis. TREC schemes and greenhouse gas reduction incentives In theory there is no reason why a mandatory renewable energy certificate scheme cannot operate side by side with an emissions trading scheme (including the Clean Development Mechanism of the Kyoto Protocol). The two markets can operate side by side. However the renewable energy certificate scheme may distort the market for carbon by providing an additional incentive for certain types of technology that make that technology more viable than the next least cost option, In this sense, a renewable energy scheme "picks winners". Once the carbon price becomes sufficient to incentivise the lowest cost renewable energy electricity generation of its own accord, one would expect the price of renewable energy certificates to drop to zero assuming there is sufficient supply of the lowest cost renewable energy electricity generation. This is the same as having another incentive for renewable energy that is sufficient of its own accord to make renewable energy capacity corresponding to the target under the TREC scheme viable (which we discussed above). Some commentators argue that it is unnecessary to have incentives for renewable energy if there is a greenhouse gas emissions trading scheme in the jurisdiction. India does not currently have a mandatory greenhouse gas emissions trading scheme, but it does participate as an offset provider under the Clean Development Mechanism to the Kyoto Protocol. Indian companies are entitled to create a type of carbon offset called "certified emissions reductions" or "CERs" for certain projects that reduce emissions of greenhouse gases below business as usual and are accredited by the Clean Development Mechanism Executive Board. This mechanism provides some incentive for renewable energy projects that might not have been viable without the carbon offsets to be undertaken. However, such projects are undertaken primarily by the private sector and are not subject to any particular target within India. For this reason, participation in the Clean Development Mechanism is not enough of itself to encourage India's renewable energy capacity to move towards any particular target. Further, there are a series of environmental or other benefits associated with renewable energy that do not relate to reductions in greenhouse gas emissions and so a renewable energy target may be desirable as a separate measure from other mechanisms that aimed to reduce greenhouse gas emissions. For example, the environmental impacts associated with exploiting renewable resources are sometimes less than the impacts associated with fossil fuel mining and consumption, renewable energy will diversify the energy mix, and localised and distributed renewable energy can be beneficial for national security, and can also reduce the need for significant further grid infrastructure (if it is distributed). Additionally, incentives to reduce greenhouse gas emissions may not be effective to provide a stage of transition from conventional energy sources. Greenhouse gas emissions schemes may target the "low 78 Legal frameworks for renewable energy in India

84 hanging fruit" (that is, the least cost projects) without promoting more sustainable projects like those that replace conventional energy with alternative sources of power. If a renewable energy incentive overlaps with an incentive that promotes greenhouse gas emissions reductions, it might be argued that this is "double counting" the benefits from the renewable energy generation. This might represent a windfall to the renewable energy generator if one or other of those incentives would have been sufficient to make the renewable energy project viable. However, if the renewable energy project would not have been viable without the revenue from both the renewable energy incentive and the carbon incentive, it might be argued that it is not double counting to allow a project proponent to generate both renewable energy certificates and carbon offsets from the same electricity generation. Under the test of "additionality" applied under the carbon schemes like the Clean Development Mechanism, project proponents can only create carbon offsets (like CERs) if the project would not have been viable without the revenue from the carbon offsets. If a renewable energy incentive is not sufficient of itself to make a renewable energy project viable, the renewable energy project would not go ahead without this additional revenue from the carbon offsets and so a regulator might consider allowing the double benefit to be taken. In our view this is entirely consistent with "additionality" under the Kyoto Protocol and it would be open to the Clean Development Mechanism Executive Board to accredit projects to create CERs that are also likely to receive renewable energy certificates under domestic law, provided that the renewable energy project would still not have been viable without the additional revenue from the CERs. 5.7 Conclusions on global experiences with TREC schemes The global experiences with TREC schemes demonstrate that such a scheme can be effective if it is: mandatory and enforceable; administratively efficient so that transaction costs are low; otherwise well designed to ensure that it is harmonised with existing measures, domestic laws, and the local context. It is important to implement an effective design from the outset with TREC schemes because marketbased mechanisms can sometimes be difficult to change without distorting the market and, inevitably, making some parties worse off. TREC schemes can be flexible if they are well designed and can be well adapted to dealing with a number of different jurisdictions, with different resource capacities, different existing measures and different geographical conditions or infrastructure. The main advantage of a TREC scheme is that the price of the incentives can be set by the market, provided that a sufficiently large, liquid and competitive market can be established. By comparison, other measures involve a level of regulator discretion or the price of the incentive is chosen only between a select number of tenderers and not across the whole market. If the market is properly designed, the transaction costs are low and there is sufficient competition and price discovery, the TREC scheme should achieve the required renewable energy capacity with the least possible impact on electricity consumers. Competition and price discovery is particularly important so that the costs of complying with the TREC scheme that are passed downstream to users of electricity reflect the minimum cost required to achieve the renewable energy target. November

85 6. Undertaking RE projects in India broader issues 6.1 Project approvals and implementation Introduction Practical issues associated with the implementation of a project can be the difference between a viable project and an unprofitable one. The availability of the necessary renewable resources, a site for the project with appropriate land tenure, obtaining necessary project approvals and having arrangements in place to ensure the project outputs can be sold at the right price, are all essential factors in any renewable energy project. The CleanTech Report notes (at p.32) that "one of the greatest implementation challenges [for renewable energy projects in India] lies with delays in permitting, siting and the regulatory process." Having partners with local knowledge in India, and investing in existing project proposals implemented at a local level, can help. Ultimately, as is the case for projects undertaken in jurisdictions outside of India, sheer commercial will, good local advice, and early planning, can help to ensure that projects in India overcome the practical and regulatory issues arising when implementing a project. As background, most grid-connected renewable energy projects in India are implemented by developers as turn key projects. These developers are responsible for all the various mandatory requirements, including land acquisition, obtaining all mandatory clearances and obtaining labour. Division of powers multiple approvals The constitutional division of powers between Central Government and the States affects the process of granting clearances for projects. Since land, water, mining rights and the environment fall within the purview of the States, clearances relating to these issues have to be obtained from the relevant ministries of the State Government where the project is to be implemented. However, if part of the land happens to fall under the category of forest, clearances have to be obtained from both State and Central Government ministries since forests fall under the Concurrent list. Therefore, delays are likely to occur wherever segmental clearances are involved. (Historically, forestry as a subject originally resided with the States but was transferred to the Concurrent list with the objective of conservation of existing forests.) In recent times, the Central Government has delegated certain powers to the States for expediting the implementation of small projects. Since many renewable energy projects would fall within this definition, they would not necessarily be affected by the need for multi-level clearances. Similar considerations may apply for projects in ecologically sensitive or protected areas. In the case of largescale conventional electricity generation projects, the list of necessary clearances to be obtained has been publicized. Similar lists of required clearances for renewable energy projects are available, but they vary by technology and from State to State to some degree. 80 Legal frameworks for renewable energy in India