Rising RECs demand could help wind

INDIA: India's new renewable-energy certificates (RECs) trading scheme is showing signs of growing health, with demand for RECs and the prices paid for them having jumped noticeably during the latest auction, held on 2 September.

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If this trend continues, wind-power producers will be more than adequately compensated for the likely removal of a long-standing accelerated depreciation programme.

Accelerated depreciation allows businesses to write off investments in developments such as wind projects rapidly, thereby reducing their tax liability. Launched in the 1990s, accelerated depreciation has been a key factor in the expansion of India's wind sector to more than 14GW of total capacity. However, the practice will probably be withdrawn once a new tax regime, called the goods and services tax code, comes into force from 1 April 2012.

Trading in RECs began in March, enabling wind and other renewable-energy producers to sell certificates to state-owned energy distribution companies as well as to businesses that buy energy on the open market - known as open-access consumers - and companies that generate energy for their own use, so-called captive consumers. All three groups are increasingly subject to renewable-purchase obligations (RPOs), requiring them to buy RECs equivalent to a specific proportion of their total energy consumption.

Growing demand

The first RECs auction was held in March but got off to a slow start as few states had RPOs. The September auction saw demand increase by nearly 100% compared with the previous auction in July, jumping from 96,000 to 183,000, and prices rose from the July average of INR 1,555 ($34) to INR 1,800 ($39). Most RECs traded so far have been linked to wind projects, as wind dominates India's renewables sector.

According to trading brokers the Indian Energy Exchange, demand for RECs has increased because open-access and captive consumers have come forward in larger numbers, while the price rise is due in large part to simple demand-supply mismatch. Presently, only 151 projects with a combined 967MW capacity are eligible for RECs and registered with the mandated federal government agency.

Given these factors, REC prices are forecast to increase further, at least in the short term, according to Power Exchange of India: "The market is expected to further grow towards the end of the financial year, when the entities would rush to fulfil their (yearly) obligation." While the Indian Wind Turbine Manufacturers Association has welcomed the increase in demand - and the prices paid - for RECs, it is not yet clear whether the certificates will stimulate new investment in additional capacity. "I think many developers are seeing this as initial volatility," said Narasimhan Santhanam from consultancy Energy Alternatives India. "They want to wait for about a year to see where this is headed."

In addition to the option of earning revenue from RECs, many grid-connected Indian wind-energy producers are eligible for a generation-based incentive introduced by the federal government in December 2009. Provided wind producers sell their energy at government-mandated prices they can receive an extra INR 0.50/kWh. This incentive is in lieu of accelerated depreciation.

Indian wind-energy producers are also often eligible for renewable-energy feed-in tariffs introduced by many Indian states, ranging from INR 3.39-5.32/kWh.

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