Solar Renewable Energy Certificates (RECs)

Understanding the regulatory framework

Under the RPO mechanism, obligated entities, which have to fulfil their RPO quotas have four options: they can avoid fulfilling their obligations, in which case they could be penalized. Alternatively, they can purchase solar power from the market or generate their own solar power. The fourth option is to buy Renewable Energy Certificates (RECs) to meet the quota. Solar plant owners, who sell their power outside of preferential feed-in-tariffs to the grid, generate these certificates. This offers a new type of project to solar project developers, i.e., they can find an off-take for their power under market conditions and simultaneously generate RECs.

Headway Solar's REC pricing model shows that projected REC floor and forbearance prices for the control period 2017-2022 are:

(2012-2017) (2017-2022) (2022 onwards)
Floor Forbearance Floor Forbearance Floor Forbearance
INR 9,300 INR 13,400 INR 3,000 INR 4,200 INR 0 INR 0

However, enforcement of obligations is a key issues related with the REC mechanism. Developers and investors should be cautious about such investment decisions.

Key questions that a developer needs to ask before betting on the REC mechanism are as follows:

  • What part of the revenues are projected to come from the REC mechanism>
  • What percentage of RECs are expected to be sold?
  • How will the concentration of REC demand towards the end of a financial year impact the project's cash-flow?
  • How will the irregular cash flow impact debt servicing timelines?
  • others

Headway Solar helps develop a project strategy around the REC mechanism.

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