1. ABPS Infrastructure Advisory Private Limited www.abpsinfra.com REC Mechanism in Himachal Pradesh Utility Perspective Ajit Pandit Director, ABPS Infrastructure Advisory Private Limited

2. ABPS Infrastructure Advisory Private Limited Outline of the Presentation Legal and Statutory Framework for Renewable Energy Development Regulatory Initiatives for Development of Renewable Energy Certificate Mechanism in India RE Certificate Mechanism in Himachal Pradesh : Utility Perspective – Significance of RPO – Opportunities & Liabilities – Implementation Issues – Consequences of non-compliance Way forward 23/05/2015 2

3. ABPS Infrastructure Advisory Private Limited www.abpsinfra.com Legal and Regulatory Framework for Development of Renewable Energy in India

4. ABPS Infrastructure Advisory Private Limited Key Drivers for Renewable Energy Development 23/05/2015 4 Source : Ministry of New and Renewable Energy RE capacity (18 GW) forms ~ 10% of total generation capacity (170 GW) in the country In energy terms, it constitutes ~ 4% - 5% of total consumption

5. ABPS Infrastructure Advisory Private Limited The EA 2003 has outlined several enabling provisions to accelerate the development of RE based generation: – (Section 3): National Electricity Policy and Plan for development of power system based on optimal utilization of resources including renewable sources of energy. – (Section 61(h)): Tariff Regulations by Regulatory Commission to be guided by promotion of generation of electricity from renewable energy sources in their area of jurisdiction. – (Section 86(1)(e)): Regulatory Commission to Specify Purchase Obligation from renewable energy sources. – (Section 66): Appropriate Commission shall endeavor to promote the development of market (including trading) in power in such a manner as may be specified and shall be guided by National Electricity Policy in Sec 3 Electricity Act, 2003 : Enabling Provisions

6. ABPS Infrastructure Advisory Private Limited  Appropriate Commission shall fix RPO and SERCs shall fix its tariff latest by April 1, 2006  Initially Appropriate Commission to fix preferential tariffs for distribution utility to procure RE  In future, distribution utility to procure RE through competitive bidding within suppliers offering same type of RE  In long-term, RE technologies need to compete with all other sources in terms of full costs  CERC to provide guidelines for pricing non-firm power if RE procurement is not through competitive bidding Tariff Policy (January 2006)

7. ABPS Infrastructure Advisory Private Limited  SERCs shall fix separate RPO for purchase of energy by the Obligated Entities from Solar Energy Sources  Solar RPO to go up to 0.25% by the end of 2012-13 and further up to 3% by 2022  Purchase of energy from non-conventional sources of energy to take place more or less in same proportion across different states  Renewable Energy Certificate Mechanism may be one of the mechanisms to achieve such target  It will take some time before non conventional technologies to compete with conventional technologies and accordingly procurement of renewable energy to be done on preferential tariff determined by Appropriate Commission Amendment to Tariff Policy (January 2011)

8. ABPS Infrastructure Advisory Private Limited Promotion of Renewable Energy by Policy Design and Regulatory Initiatives o Electricity Act 2003 (Jun 2003) o National Electricity Policy (Feb 2005) o National Tariff Policy (Jan 2006) o National Action Plan on Climate Change (Jun 2008) 23/05/2015 8 Central Government o Regulations for Preferential Tariff for RE (Sep 2009) o Renewable Energy Certificate Mechanism (Jan 2010) o Implementation Framework (2010 – ongoing) Central Electricity Regulatory Commission o Preferential RE Tariff Orders by SERCs (2002–2010) o Over 19 States have mandated Renewable Purchase Obligations (2004 – 2010) o Modification to RPO and adoption of REC framework State Electricity Regulatory Commission

9. ABPS Infrastructure Advisory Private Limited A BC A - Market model based on Open Access/wheeling for self use B - Model based on FIT and RPO for sale to distribution licensee & third party, within State C- Market model based on instruments with cross border features (REC) catering to National level demand Evolution of Market Model & Role of Utility

10. ABPS Infrastructure Advisory Private Limited Key Challenges in Encouraging Deployment of RE 23/05/2015 10  Enabling Mechanism for Inter-State sales of Renewable Energy  Cost Effective Mechanism for purchase of Renewable Energy  Nation wide target for purchase of Renewable Energy  Stronger enforcement and penalty mechanism  Mechanism for purchase of small quantity of RE by individual Open Access consumer FOR Report (Nov 2008) on ‘Policies for Renewables’ recommended:  Need to facilitate ‘Inter-State Exchange of RE Power from National Perspective  Explore feasibility of introduction of REC mechanism as tool to promote RE within framework of EA 2003 Forum of Regulators (FOR) initiated study to address challenges

11. ABPS Infrastructure Advisory Private Limited NAPCC : Guideline for RE Development National Action Plan for Climate Change (NAPCC)  At National level for FY 2010, target for RE Purchase may be set at 5% of total grid purchase, to be increased by 1% each year for 10 years  SERCs may set higher target than this minimum at any point in time  Central & State Govts may set up a verification mechanism to ensure that renewable power is actually procured  Appropriate authorities may issue certificates that procure renewable power in excess of the national standard. Such certificates may be tradable, to enable utilities falling short to meet their RPS  Penalties as may be allowed under EA 2003 may be levied, if utilities are still falling short in RPS 23/05/2015 11

12. ABPS Infrastructure Advisory Private Limited NAPCC has set challenging target for RE Development 23/05/2015 12 NAPCC target of 5% for RE Procurement in 2010 Target to increase by 1% each year to reach 15% by 2020 Separate target for Solar Energy Provides for creation of Renewable Energy Certificate Mechanism NAPCC identified REC framework to realize annual target of National RPO Considering that demand for electricity would increase to 1700 BU by 2020, it would create market for 255 BU units of renewable energy generation

13. ABPS Infrastructure Advisory Private Limited www.abpsinfra.com Regulatory Initiatives for Development of Renewable Energy Certificate Mechanism in India

14. ABPS Infrastructure Advisory Private Limited Key Objectives for Introduction of REC Mechanism 23/05/2015 14  Effective implementation of RPO  Increased flexibility for participants  Overcome geographical constraints  Reduce transaction costs for RE transactions  Enforcement of penalty mechanism  Create competition among different RE technologies  Development of all encompassing incentive mechanism  Reduce risks for local distributor by limiting its liability to energy purchase In the view of hurdles faced by RE Development, it appears that these objectives should take precedence over others  In Indian Context, following aspects had to be considered for REC design  Electricity Market is regulated to great extent  (> 90% of electricity volumes continue to be transacted at regulated rate)  Preferential RE Tariff regime to continue (Feed-in tariff & REC to co-exist)

15. ABPS Infrastructure Advisory Private Limited Concept of REC Mechanism in India 23/05/2015 15 Avg. PP Cost of Host Utility (regulated) Market Rate as per Power Exchange At Tariff Determined by Regulatory Commission Renewable Energy Electricity REC Distribution Company Renewable Energy Electricity REC Distribution Company Obligated Entity (Buyer) Existing Mechanism REC Mechanism OA / Trader Bilateral agreement (de-regulated)

16. ABPS Infrastructure Advisory Private Limited REC Pricing Framework 23/05/2015 16 Renewable Energy Electricity Component REC Component (Environmental Attribute) Market Discovered Price (Obligated Entity/Voluntary Buyer) Average Power Purchase Cost (Distribution Utility) Andhra Pradesh- Rs 1.78/kWh Maharashtra- Rs 2.43/kWh Karnataka- Rs 1.85/kWh Kerala- Rs 1.46/kWh Tamil Nadu- Rs 2.62/kWh Himachal Pradesh- Rs 1.48/kWh Rajasthan- Rs 2.48/kWh Parameters Non Solar REC Solar REC Forbearance Price (Rs/MWh) 390017000 Floor Price (Rs/MWh) 150012000 Bilateral Agreement (de-regulated) (OA User/Trader)

17. ABPS Infrastructure Advisory Private Limited Entities involved to Operationalise REC Mechanism 23/05/2015 17 Institutional Framework Central Entities State Entities  Forum of Regulators  Central Electricity Regulatory Commission  Central Agency (National Load Despatch Centre)  Power Exchanges  Compliance Auditors  State Electricity Regulatory Commission  State Load Despatch Centre  State Agencies  Eligible Entities  Obligated Entities

18. ABPS Infrastructure Advisory Private Limited Key Role performed by FOR Formulated Model REC Regulations for SERCs Sought Legal Opinion from Solicitor General on key legal aspects – Applicability of RPO to Captive Users and Open Access Consumers – Statutory backing for Enforcement mechanism as regulatory measure Introduced Enforcement Mechanism for non-compliance – Apart from legal provisions under EA 2003, obligated entity has to contribute a charge to Fund at Forbearance Price. – Fund to be utilised for purchase of RECs or creation of RE infrastructure as directed by SERCs Extended scope of RPO applicability to captive users, open access consumers apart from DISCOMs Undertook study for setting RPO targets and long term trajectory at National level to accomplish NAPCC goals

19. ABPS Infrastructure Advisory Private Limited Initiatives for the Implementation of REC Mechanism 23/05/2015 19

20. ABPS Infrastructure Advisory Private Limited www.abpsinfra.com Overview of RE Framework in Himachal Pradesh

21. ABPS Infrastructure Advisory Private Limited  State has vast hydro potential in India  MNRE has identified around 536 sites with a total potential of around 2267.81 MW  The State has installed power generation capacity of around 375.385 MW and another 132MW is under implementation, predominantly comprising Small Hydel Power.  Biomass Power Generation Potential comprises of around 415MW (Agro based - 133MW & Forest Residue based – 282MW)  Wind Energy have little or no power generation potential in the State Renewable Energy in Himachal Pradesh Source : Ministry of New and Renewable Energy

22. ABPS Infrastructure Advisory Private Limited  State Commission specified RPPO as 20% for distribution licensee, vide Notification dated June 18, 2007 5. Quantum of purchase of electricity from renewable sources.-( 1) Energy from renewable sources and cogeneration, available after the captive use and third party sale outside the State, shall be purchased by the distribution licensee(s): Provided that subject to the availability of renewable energy and co-generation within the area of a distribution licensee the quantum of purchase of energy from renewable sources and cogeneration by a distribution licensee, under these regulations shall be minimum 20% of its total consumption during a year ; ………………………………………. (4) Subject to supply constraints or any other uncontrollable factors, the Commission may, at the request of the distribution licensee, waive off the quantum of purchase laid down under sub-regulation(1).  Applicability of RPPO was for 3 years Past Initiatives for Promotion of RE and impact on DISCOM  During 2009, RPPO achievement was around 4% against target of 20%  During 2010, RPPO achievement increased to 7%  Renewable Energy is essentially available from SHP

23. ABPS Infrastructure Advisory Private Limited  May 2010, HPERC had specified Regulations recognising REC as valid instrument for compliance of RPPO by ‘Obligated Entity’  RPPO shall be applicable to,  Distribution Licensee  Person consuming electricity generated from Conventional Captive Generating Plant having capacity 1MW and above for his own use  Person consuming electricity procured from conventional generation through Open Access  Quantum of ‘minimum’ Renewable Power Purchase,  Commission may suo-motu or on request of a licensee, revise the targets in supply constraints and factors beyond control of licensee  Solar Obligation shall be fulfilled through purchase of solar energy or by Solar REC only Change in Scenario : Recent Initiatives RPO REC Regulations YearNon Solar RPOSolar RPOTotal 2010-1110%-10.0% 2011-1211%0.1%11.1% 2012-1312%0.1%12.1%

24. ABPS Infrastructure Advisory Private Limited  Distribution Licensee may purchase renewable energy or renewable energy certificates for compliance with the RPPO targets  Distribution Licensee to indicate the estimated quantum of purchase for the ensuing year in tariff/annual performance review  Estimated quantum shall be in accordance with the RPPO  Unable to fulfil the obligation, the shortfall of the specified quantum of that year would be added to the specified quantum for the next year but credit of excess RE purchase shall not be adjusted  If fulfilling the RPPO through Purchase of Certificates Solar RPPO shall be fulfilled by purchase of Solar REC only  Certificates under respective category shall be purchased from Power Exchange(s) operating under the guidance of CERC only  Obligated Entity should deposit Certificates with the Commission as per the procedure specified by CERC to show compliance with RPPO Duties of Distribution Licensee

25. ABPS Infrastructure Advisory Private Limited  Non fulfillment of RPPO in any year through procurement of RE or through purchase the respective RECs, Commission may direct ‘Obligated Entity’ to create and maintain separate fund  Obligated Entity to deposit an amount determined on the basis of shortfall in units in RPPO and Forbearance Price determined by CERC  Fund shall be utlilised on the direction of Commission for purchase of RECs and partly for the development of infrastructure for evacuation of power from RE generating stations  Obligated Entity may be liable for penalty under Section 142, if fails to comply with the RPPO  In case of genuine difficulty in compliance with RPPO, the Obligated Entity may approach Commission to carry forward the compliance requirement to next year  Section 142 shall not be invoked if Commission has consented to carry forward the compliance requirement Section 142 (Punishment for Non-Compliance of Directions by Appropriate Commission) the Appropriate Commission may after giving such person an opportunity of being heard in the matter, by order in writing, direct that, without prejudice to any other penalty to which he may be liable under this Act, such person shall pay, by way of penalty, which shall not exceed one lakh rupees for each contravention and in case of a continuing failure with an additional penalty which may extend to six thousand rupees for every day during which the failure continues after contravention of the first such direction Recent Initiatives : Consequences of Non Compliance

26. ABPS Infrastructure Advisory Private Limited Impact on DISCOM for Compliance of RPPO using RECs DescriptionFY 11FY 12FY 13FY 14FY 15 Energy Requirement (MU)6692.87 7016.907356.617712.788086.18 Non Solar RPO (%)10% 11%12%13%14% Solar RPO (%) -0.10% Non Solar RPO (MU)669.29771.86882.791002.661132.07 Non Solar RE Available (MU)*639.21 739.21839.21939.211039.21 Non Solar Shortfall (MU)30.08 32.6543.5863.4592.86 Solar RPO (MU)-7.027.367.718.09 Solar Available (MU) - - - - - Solar Shortfall (MU) -7.027.367.718.09 * Note : assumed additional availability of at least 100 MU p.a. of non-solar RE power

27. ABPS Infrastructure Advisory Private Limited Impact on DISCOM for Compliance of RPPO using RECs

28. ABPS Infrastructure Advisory Private Limited Status of Accreditation and Registration of Projects 23/05/2015 28

29. ABPS Infrastructure Advisory Private Limited Status of Transaction of RECs 23/05/2015 29

30. ABPS Infrastructure Advisory Private Limited  REC mechanism offers alternative to fulfill RPO targets by Obligated Entities.  Obligated Entities can plan to meet their RPO targets in efficient manner.  Long term visibility of Floor Price and Forbearance price is necessary to ensure regulatory certainty for Utility as well as RE project developers.  Impact on Avg. power purchase cost of Utility is not very significant.  Utility /SERCs may develop Model Power Purchase Agreement for procurement of electricity from RE projects at APPC.  Bilateral transactions of RECs as & when enabled would provide larger flexibility and liquidity for REC market, which is the need of the hour. Way Forward

31. ABPS Infrastructure Advisory Private Limited www.abpsinfra.com ABPS Infrastructure Advisory Practical Solutions to Real Life Problems ABPS Infrastructure Advisory A-309, Kohinoor City Kirol Road, off LBS Marg Kurla (West), Mumbai 400 070 Ph: +91 22 6124 0400/ 6124 0444 Fax:+91 22 6124 0499 Email: contact@abpsinfra.comcontact@abpsinfra.com