Market Mechanisms in India s Clean Energy Efforts

Market Mechanisms in India s Clean Energy Efforts Renewable Energy Certificate Mechanism Balawant Joshi Director, ABPS Infrastructure Advisory Pvt. Ltd. ABPS Infrastructure Advisory Advisory Pvt. Ltd October, 2010

Outline of the Presentation Introduction to ABPS Infrastructure Advisory Renewable Energy Development in India Legal & Regulatory Framework for Renewable Energy Key Challenges in Deployment of Renewable Energy Renewable Energy Certificate Mechanism in India Summary

Introduction to ABPS Infrastructure Advisory ABPS Infrastructure Advisory Advisory Pvt. Ltd October, 2010

An Introduction to ABPS Infra Set up in Sep 2005 as start-up Consulting Organization by professionals, having wide range of experience in the energy and infrastructure sectors Promoted by Ajit Pandit, Balawant Joshi, Palaniappan M & Suresh Gehani Services Clients Regulatory & Policy Corporate & Financial Advisory Renewable Energy DSM & Energy efficiency Climate Change Advisory Regulatory Commissions Utilities (State and Private) State Governments Central Government Industry Associations Investors Regulations development Tariff determination Market Mechanisms Policy for Renewable energy Rural Electrification Diagnostic studies Due Diligence Financial Modelling Counter Party Risk Assessment Bid Process Management Business Valuation Contractual support Resource Assessment RPS and RPO Feed-in tariff Market Study Investment Strategy Project Structuring Project development Designing DSM Plans Energy Audit Life Cycle Assessment Monitoring & Verification End use energy efficiency improvement Climate Change Policy analysis Carbon Footprint Carbon Neutrality CDM project development support Emission Trading advice Developers Capacity Building Financial Institutions

Renewable Energy Consulting Ministry of New & Renewable Energy Forum of Regulators Central Electricity Regulatory Commission Maharashtra Electricity Regulatory Commission Indian Wind Energy Association Development of REC Mechanism in India (MNRE & REEEP Funding) Policies for Renewables across States & Implementation of REC Mechanism Norms for fixation of tariff for Generation of Power from RE Sources Development of RPS Framework for Long Term Development of RE in State Regulatory Advisor to InWEA Ministry of New & Renewable Energy IREDA Rajasthan Electricity Regulatory Commission International RE Investor World Institute of Sustainable Energy Development of Framework under Jawaharlal Nehru National Solar Mission Development of Framework for Promotion of Rooftop PV &Small Solar Systems Determination of Tariff for Solar Thermal Power Plants Acting as an advisor to assist in assessment of Wind, Biomass and Hydel Sectors in India Policy Roadmap for Solar Energy Development in India

Renewable Energy Development in India ABPS Infrastructure Advisory Advisory Pvt. Ltd October, 2010

India is at the forefront in harnessing Renewable RE capacity is approx 10% of total generation capacity (164 GW) RE Generation is approx 4% of total consumption Large hydro (>25 MW) is not considered in calculation of RE Including large hydro (37 GW), total RE capacity would sum up to 52 GW. Total RE capacity including Large hydro ~33% in terms of total generation capacity and 18% of total consumption Total Capacity 17174 MW Country Wind Capacity (GW) (2010) 15691 MW USA 35.2 China 26.0 Germany 25.8 Spain 19.1 Source: Ministry of Power, Govt. of India, April 2010 India 12.2 India has the fifth largest wind capacity in the World

Key drivers for Renewable Energy Development 20000 18000 NAPCC, JNNSM MW 16000 14000 12000 10000 8000 6000 Policy Announcement by Central Government Policy on Hydro Power Development Emergence of Electricity Regulatory Commissions Enactment of Electricity Act, 2003 Enactment of National Tariff Policy Generation Based Incentive 4000 2000 0 Wind Biomass Small Hydro Others Source : Ministry of New and Renewable Energy RE capacity (17 GW) forms ~ 10% of total generation capacity (164 GW) in the country In energy terms, it constitutes ~ 5% of total consumption

Efforts to develop all source of Renewable Energy RE Resource wise Capacity (MW) Utilization Summary Installed Capacity (18%) Technical Potentia (excluding Solar) 82200 MW 25% 5% 25% 15% 3% Source: Ministry of New and Renewable Energy, Govt. of India, 2009 Excluding following RE resources Large Hydro (> 25 MW) Solar

Legal and Regulatory Framework for Development of Renewable Energy in India ABPS Infrastructure Advisory Advisory Pvt. Ltd October, 2010

Enabling Framework for Promotion of RE Electricity Act, 2003 Regulatory Commissions to specify purchase obligation from REC sources National Tariff Policy State Electricity Regulatory Commissions to fix Progressive RPO SERCs to fix Preferential Tariffs for distribution utility to procure RE Procurement of Renewable Energy by the Distribution Utility through Competitive Bidding in future National Electricity Policy Central Commission to provide guidelines for pricing non-firm power if RE procurement is not through competitive bidding

Promotion of RE is by policy design and regulatory initiatives o Electricity Act 2003 (Jun 2003) Central Government o National Electricity Policy (Feb 2005) o National Tariff Policy (Jan 2006) o National Action Plan on Climate Change (Jun 2008) Central Electricity Regulatory Commission o Regulations for Preferential Tariff for RE (Sep 2009) o Renewable Energy Certificate Mechanism (Jan 2010) o Implementation Framework (2010 ongoing) State Electricity Regulatory Commission o Preferential RE Tariff Orders by SERCs (2002 2010) o Over 19 States have mandated Renewable Purchase Obligations (2004 2010) o Modification to RPO and adoption of REC framework

Status of Renewable Purchase Obligation State RPO Target RPO Met Maharashtra 4% 3% Gujarat 2% 2% Karnataka 10% 11.5% Tamil Nadu 10% 11% State Rajasthan 2008-09 Distribution RE Obligation RE Procured Surplus/(Deficit) Utility (MU) (MU) (MU) JVVNL 970 310 (660) AVVNL 795 310 (485) JdVVNL 721 241 (480) BEST 240 59 (181) Punjab 1% 0.74% Haryana 4% 0% Madhya Pradesh 10% 0.07% TPC D 133 156 15.6 Maharashtra R Infra D 476 64 (412) MSEDCL 4022 2994 (1028) Tamil Nadu TNEB 6847 7532 685 Procurement of Renewable Energy generated within State boundaries recognised for RPO Few State Regulators specified Enforcement Provisions for Non-Fulfillment of RPO Several cases filed for reviewing RPO targets in view of shortfall in RE capacity addition in the State Mechanism which shall enable procurement of Renewable Energy Generated outside the State Boundaries in Cost Effective manner may help to address the situation.

Key Challenges in Encouraging Deployment of RE Enabling Mechanism for Inter-State sales of Renewable Energy Cost Effective Mechanism for purchase of Renewable Energy Nation wide target for purchase of Renewable Energy Stronger enforcement and penalty mechanism Mechanism for purchase of small quantity of RE by individual Open Access consumer Forum of Regulators (FOR) initiated study to address challenges FOR Report (Nov 2008) on Policies for Renewables recommended: Need to facilitate Inter-State Exchange of RE Power from National Perspective Explore feasibility of introduction of REC mechanism as tool to promote RE within framework of EA 2003

NAPCC has set challenging target for Renewable Energy Development NAPCC target of 5% for RE Procurement in 2010 Target to increase by 1% each year to reach 15% by 2020 Separate target for Solar Energy Provides for creation of Renewable Energy Certificate Mechanism Considering that demand for electricity would increase to 1700 BU by 2020, it would create market for 255 BU units of renewable energy generation. NAPCC identified REC framework to realize annual target of National RPO

Renewable Energy : Potential and Achievement Scenario Required Generation from RE by 2020 (BU) Average PLF - RE (%) Required Capacity Addition (MW) Current Capacity (MW) Capacity Addition p.a. (MW) Optimistic 255 40% 72774 17174 5560 Realistic 255 35% 83170 17174 6600 Actual 255 28% 103963 17174 8679 India has to increase its RE Capacity Addition by FIVE FOLDS from the Present Capacity of 17174 MW under Realistic Scenario to meet the target of 15% RE generation by 2020 envisaged under NAPCC

NAPCC: Guidelines for RE development National Action Plan for Climate Change (NAPCC) At National level for FY 2010, target for RE Purchase may be set at 5% of total grid purchase, to be increased by 1% each year for 10 years. SERCs may set higher target than this minimum at any point in time. Central & State Govts may set up a verification mechanism to ensure that renewable power is actually procured. Appropriate authorities may issue certificates that procure renewable power in excess of the national standard. Such certificates may be tradable, to enable utilities falling short to meet their RPS. Penalties as may be allowed under EA 2003 may be levied, if utilities are still falling short in RPS.

Key Objectives for Introduction of REC Mechanism Effective implementation of RPS Increased flexibility for participants Overcome geographical constraints Reduce transaction costs for RE transactions Enforcement of penalty mechanism In the view of hurdles faced by RE Development, it appears that these objectives should take precedence over others Create competition among different RE technologies Development of all encompassing incentive mechanism Reduce risks for local distributor by limiting its liability to energy purchase In Indian Context, following aspects had to be considered for REC design Electricity Market is regulated to great extent (> 90% of electricity volumes continue to be transacted at regulated rate) Preferential RE Tariff regime to continue (Feed-in tariff & REC to co-exist)

Concept of REC Mechanism in India Existing Mechanism Renewable Energy Electricity REC Distribution Company At Tariff Determined by Regulatory Commission OA / Trader Bilateral agreement (de-regulated) REC Mechanism Renewable Energy Electricity Distribution Company Avg. PP Cost of Host Utility (regulated) REC Obligated Entity (Buyer) Market Rate as per Power Exchange

Salient Features of REC Mechanism ABPS Infrastructure Advisory Advisory Pvt. Ltd October, 2010

REC Mechanism Key Design Features Design Features Eligible Source Eligible Entities Obligated Entities REC Issuing Authority Sale/Purchase of REC Eligible Source All sources recognised by MNRE under Renewable Energy Category Two Categories of Certificatesone for Solar and other for Non-Solar Eligible Entities Grid Connected RE Power Projects having NO PPA at preferential tariff and received accreditation certificate from State Agency Shall sell electricity at Pooled cost of Power Purchase to distribution utility or at mutually agreed price to any other licensee Obligated Entities As defined by SERC, distribution utility, OA User, Captive Consumer States to amend existing RPO Regulations (FOR Model REC Regulations) REC Issuing Authority National Load Despatch Centre shall issue REC to Generator based on the Energy Injection Report prepared by SLDC Sale/Purchase of REC Transaction of REC shall take place at Power Exchanges operating under the guidance of CERC

REC Mechanism Key Design Features Design Features Denomination Form of REC Pricing of REC Redemption of REC Shelf Life Denomination One (1) REC shall be issued corresponding to 1 MWh of renewable energy is generated and injected into the Grid Form of REC REC shall be issued electronically to the Generator Pricing of REC To be discovered only on Power Exchanges through auction route. Floor and Forbearance Price shall be determined by the CERC Redemption of REC Obligated entities shall purchase REC from Exchange Platform and redeem it in-lieu to their fulfilment of RPO with State Agency. Only single trade (once through) permissible. Multiple trades not allowed. Shelf Life RE Generator shall apply for issuance of certificate from 3 months of energy injection in the grid REC shall be valid for 1 year from the date of issuance

Entities involved to operationalise REC Mechanism Institutional Framework Central Entities Forum of Regulators Central Electricity Regulatory Commission Central Agency (National Load Despatch Centre) Power Exchanges Compliance Auditors State Entities State Electricity Regulatory Commission State Load Despatch Centre State Agencies Eligible Entities Obligated Entities

Operational Framework for REC Mechanism RE Generators RPS Obligated Entities 3 Electricity to Grid DISCOMS /Buyer Open Access Users Power Exchange 7 DISCOMS Voluntary Entities REC Purchase Agreement/Trading Captive Generators 4 Energy Accounting 6 Issuance of REC 2 RE Generator Registration Central Agency 8 SERC Redemption of RECs SLDC Application to issue REC 4A 5 State Agency Confirmation of EA RE Generator Accreditation 1 9 Compliance Monitoring Auditors 9 RPO Compliance Reporting State Agency

Roles & Responsibilities of FOR Regulatory Framework FOR CERC SERC Instrumental in evolving consensus on Operating Framework for REC Mechanism across States Crucial Role in Design, Development and Coordination for Implementation of REC Mechanism Specified Model Regulations to be adopted by SERCs enabling Obligated Entities to their RPO through purchase of REC Periodic review for the development and implementation of REC Mechanism Provide Guidance to Central Regulator on Pricing of REC Actions taken by Forum of Regulators (FOR)

Key Role performed by FOR Formulated Model REC Regulations for SERCs Sought Legal Opinion from Solicitor General on key legal aspects Applicability of RPO to Captive Users and Open Access Consumers Statutory backing for Enforcement mechanism as regulatory measure Introduced Enforcement Mechanism for non-compliance Apart from legal provisions under EA 2003, obligated entity has to contribute a charge to Fund at Forbearance Price. Fund to be utilised for purchase of RECs or creation of RE infrastructure as directed by SERCs Extended scope of RPO applicability to captive users, open access consumers apart from DISCOMs Undertook study for setting RPO targets and long term trajectory at National level to accomplish NAPCC goals

Roles & Responsibilities of CERC and SERCs Regulatory Framework FOR CERC SERC Specify Framework for Recognition and Issuance of REC Develop Institutional and Regulatory Mechanism for REC Registry Approve Procedures for Operationalising REC Mechanism Approve Rules and Bye Laws for Exchange Platform Specify Floor and Forbearance Price for Solar and Non-Solar REC Appoint Compliance Auditors Specify Fee and Charges for Entities involved at Central Level Recognition of REC as valid instrument for fulfilling RPO Specify separate RPO for Solar and Non-Solar Categories Designate State Agency for Accreditation and ensuring Compliance at State Level Specify Remuneration and Charges for State Agency Specify RPO targets and trajectory Specify Enforcement Provisions for Obligated Entities

Roles & Responsibilities of Monitoring Institutions Monitoring Framework Compliance Auditors (Central level) Monitor/Investigate compliance of Eligible Entities in accordance with CERC REC Regulations. Report on Revocation of Registration of the Eligible Entity to the Central Agency Follow the instructions/directions specified by the Central Regulator from time to time Monitor compliance of RPO by Obligated Entities in accordance with State Agencies (State level) SERC s RPO/REC Regulations. Report on Non-Compliance with the Accreditation criteria to Central Agency Report on Non-Compliance with the RPO by Obligated Entity to State Regulator

REC Pricing Framework Renewable Energy Electricity Component REC Component (Environmental Attribute) Bilateral Agreement (de-regulated) (OA User/Trader) Average Pooled Power Purchase Cost (Distribution Utility) Market Discovered Price (Obligated Entity/Voluntary Buyer) Andhra Pradesh - Rs 1.78/kWh Maharashtra Karnataka - Rs 2.43/kWh - Rs 1.85/kWh Parameters Non Solar REC Solar REC Kerala Tamil Nadu Gujarat Rajasthan - Rs 1.46/kWh - Rs 2.62/kWh - Rs 2.21/kWh - Rs 2.48/kWh Forbearance Price (Rs/MWh) Floor Price (Rs/MWh) 3900 17000 1500 12000

Summary... 1/2 Implementation of REC framework is at advanced Stage. Subsequent to notification of REC Regulations by CERC during Jan 2010, CERC has formulated Orders for following: Designation of Central Agency (NLDC to act as REC Registry) Approval of Procedures for REC implementation (viz. accreditation, registration, issuance, redemption) upon extensive consultation process Determination Floor Price and Forbearance Price Approval of Fees & Charges for registration, issuance and redemption Approval of rules/bye laws by Power Exchanges (advanced stage) Development of Software for REC registry, pilot testing is completed and scheduled for launch during Oct 2010.

Summary... 2/2 Status update on State level implementation Over 7 States have already revised/notified their RPO/REC Regulations in line with FOR Model Regulations In addition, 9 States have published draft RPO/REC Regulations in line with FOR Model Regulations and are at advanced stage of finalisation through regulatory process. Around 6 States have designated State Agencies for accreditation of RE projects. It is envisaged that REC mechanism shall be implemented for FY 2010-11 very soon.

ABPS Infrastructure Advisory ABPS Infrastructure Advisory A-309, Kohinoor City Kirol Road, off LBS Marg Kurla (West), Mumbai 400 070 Ph: +91 22 6124 0400/ 6124 0444 Fax:+91 22 6124 0499 Email: contact@abpsinfra.com ABPS Infrastructure Advisory Advisory Pvt. Ltd October, 2010