Why the recent CERC solar benchmark tariff may not be good news for REC project developers

Mr. Akhilesh Magal heads the Project Development team as Senior Consultant at BRIDGE TO INDIA.

The Central Electricity Regulatory Commission (CERC) recently announced the revised benchmark capital cost for solar projects. In the order, dated October 25th 2012, the benchmark capital expenditure (CAPEX) for solar photovoltaic (PV) projects in India has been reduced to INR 8cr/MW. This is largely driven by the falling costs of PV modules. This has resulted in a 20% reduction from the earlier benchmark of INR 10cr/MW. While this may be good news for power consumers and for solar technology, it has ramifications for developers who are looking to set up projects under the Renewable Energy Certificate (REC) mechanism (refer to our report for details on the REC mechanism).

• The CERC fixes REC prices in India partly on the basis of benchmark CAPEX
• With a revised benchmark CAPEX, the CERC would be required to revise REC prices as well
• Revision in prices of RECs is likely to have a negative impact on the REC market

In India, REC prices have been fixed by the CERC for the control period of 2012 to 2017. The floor price has been fixed at INR 9,300 and the forbearance price at INR 13,400. These prices are driven by two factors:

1. The benchmark CAPEX for solar in India
2. The lowest Average Pooled Purchase Cost (APPC) of power in any Indian state (currently Kerala)

The recent announcement from the CERC revising the benchmark CAPEX means that the CERC cannot continue to use the older benchmark of INR 10cr/MW – which is partly the basis of REC price calculations. We can, therefore, expect a mid-term revision of the prices by 20%. The expected REC prices are likely to be between the range of a floor price of INR 7,500/REC to a forbearance price of INR 10,800/REC.

If this happens, it is likely to have the following impact:

1. A mid-term revision of the prices can lead to uncertainty in the REC market. This goes against the initial intention of the CERC to provide price visibility on the RECs for at least 5 years. Therefore, it is likely that the CERC will introduce a vintage multiplier which will ensure that all project developers who have already commissioned their projects will be guaranteed the older benchmarks.
2. The anticipation of the revised REC prices, will see many developers rushing to register their projects to avail the older tariffs. This should boost the supply of solar RECs – and drive down prices on the exchange.
3. The lower prices will incentivize obligated entities to explore RECs as a viable means of meetings their solar purchase obligations. However, BRIDGE TO INDIA is of the opinion that the prices would be still too high to make this a viable alternative to purchasing solar power directly.
4. Any mid-term revision will reduce the confidence in project developers and banks. This will affect the bankability of REC projects which has been a challenge for the market traditionally as well.

This brings the REC market to a crucial juncture. Lessons from the non-solar REC market tell us that unless the penalty for non-compliance of RPOs is enforced, the market will be dead. While lowering REC prices may be a good idea, it must be done in a manner that does not jeopardize confidence in the mechanism. Bankability is already a crucial issue with REC based projects. Banks do not have confidence on future cash-flows from sale of RECs. It is a tough call for the CERC. It remains to be seen which bullet they will choose to bite.

For a complete background and analysis on the REC mechanism in India, you can read our India Solar Decision Brief on The REC mechanism: Viability of solar projects in India.