RECs trade in FY21 likely to fall by Rs 6-7 billion, says report

• Considering the historical price trend of RECs, this is the fourth revision in floor and forbearance prices by CERC

• With the removal of the floor price, obligated entities, mainly state DISCOMs, which are non-compliant will now have an option to purchase RECs at lower prices

New Delhi: In June, the CERC (Central Electricity Regulatory Commission) published an order revising the prices of RECs (Renewable Energy Certificates). The CERC removed floor price and proposed a new forbearance price of Rs 1,000 for solar and non-solar RECs. The new prices will be applicable to all RECs issued after April 1, 2017. Considering the historical price trend of RECs, this is the fourth revision in floor and forbearance prices by CERC. 

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 was Rs 2.74/kWh and that for wind projects was Rs 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.

Price revision of RECs likely to increase demand

With the removal of the 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 for RECs, leading to higher trading volume, said JMK Research in a recently-released report.

As can be seen from the historical trend, REC was trading close to the 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 percent above the floor price. Also, every year, there is a sudden rise in purchase of RECs in February and March, as obligated entities purchase maximum RECs before the closure of the financial year in March.

Annual REC trade is likely to fall by about Rs 6-7 billion

Further, in the year-on-year comparison of trading of RECs on both platforms, there is about 28-32 percent decrease in volumes of RECs traded. This was mainly because, in FY2019, trading of solar RECs resumed after a gap of almost one year. Hence, demand was robust in the initial few months.

With new revision going to be effective from June 1, as per JMK Research estimations, for FY2021, assuming the volume traded remains same as that of the previous year, ie, total 8.5 million RECs at a price of Rs 1,000, then about Rs 8,490 million of REC trade is likely to be generated. In the second scenario, if we assume a 50 percent rise in trade of RECs to 13 million at an average price of Rs 700/REC, then about ~ Rs 9,100 million REC trade is likely to be generated. In both the scenarios, annual REC trade is likely to fall by about Rs 6-7 billion.

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