REC trade in FY2021 likely to fall by INR 6-7 billion

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In June 2020, the Central Electricity Regulatory Commission (CERC) published an order revising the prices of Renewable Energy Certificates (RECs). CERC removed floor price and proposes new Forbearance price of INR 1000 for solar and non-solar RECs. The new prices will be applicable to all RECs issued after April 01, 2017. Considering the historical price trend of RECs, this is the fourth revision in floor and forbearance prices by CERC. 

Figure 1: Floor and Forbearance price trends for RECs

REC trade

Source – CERC, JMK Research

The prime reason for this price revision is that there has been decline in the tariff discovered through competitive bidding for both solar and wind projects. During 2019-20, the average bid tariff discovered in the auction for solar projects is INR 2.74/kWh and that for wind projects is INR 2.85/kWh. Thus, it is evident that the market has matured and to encourage the sale of RECs and promote trade, the floor price is not required.

With removal of floor price, obligated entities, mainly state DISCOMs, which are non-compliant will now have an option to purchase RECs at lower prices and fulfill their RPO targets. This, in turn, is likely to increase demand of RECs leading to higher trading volume.

As can be seen from historical trend, REC was trading close to floor price. During the period of April 2018 to October 2018, Solar RECs traded at the floor price whereas the prices of Non-solar RECs soared 5 – 20 % above floor price. Also, every year, there is sudden rise in purchase of RECs in February and March, as obligated entities purchase maximum RECs before the closure of financial year in March.

Further, in the YoY comparison of trading of REC’s on both platforms, there is about 28-32% decrease in volumes of RECs traded. This was mainly because, in FY2019 (Apr 2018 to Mar 2019), trading of Solar RECs resumed after a gap of almost one year. Hence, demand was robust in the initial few months.

Figure 2: Annual REC trading trends

Source – IEX, PXIL, JMK Research

With new revision going to be effective from June 1, 2020, as per JMK Research estimations, for FY2021 (Apr 2020 to Mar 2021), assuming the volume traded remains same as that of previous year i.e. total 8.5 million RECs at a price of INR 1000, then about INR 8,490 million of REC trade is likely to be generated. In the second scenario, if we assume a 50% rise in trade of RECs to 13 million at an average price of INR 700/REC, then about ~ INR 9,100 million REC trade is likely to be generated. In both the scenarios, annual REC trade is likely to fall by about INR 6– 7 billion.

Figure 3: REC trade estimation for FY2021

Source – IEX & PXIL, JMK Research

*Projections

Other than falling REC prices, there was also a recent statement from Union Minister, Mr. RK Singh that, for non-compliance of renewable energy purchase obligations (RPOs), a penalty up to INR 1/kWh will be applicable on the obligated entities. Such high penalties will also lead to an exponential increase in REC demand. Therefore, going forward, to cater to the huge demand, even forbearance price can also be withdrawn, and pure play market forces will determine the future REC prices.

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