Fighting Climate Change in a Climate of Regulatory Uncertainty

[Yogini Oke is an NUJS graduate currently pursuing the Young India Fellowship]

Climate change has emerged as amongst the most significant challenges of the present times. The ubiquitous nature of this problem has prompted diverse responses from stakeholders across the world addressing its many strands. The United Nations Framework Convention on Climate Change (“UNFCCC”) is an attempt of the nations of the world to arrive at common policies and standards necessary to the arrest the process of climate change. Nations which are signatories to agreements[1] under UNFCCC are required to take steps to reduce their carbon-footprint. One of the many mechanisms adopted by nations to control their carbon emissions is by reducing their reliance on fossil fuels and increasing their capacity to produce energy from renewable energy sources. India too is moving in this direction.

The spectre of regulatory uncertainty has haunted India’s renewable energy sector since the last decade. In this post, I argue for the conscious creation of a regime which advances a climate of predictability, and demands compliance, in the realm of renewable energy.

The need for the creation of such a regime becomes even more urgent, as India seeks to comply with its ambitious commitments to the Paris protocol. India aims at reducing its emissions intensity^[2] vis-à-vis its GDP by 33 to 35 percent by 2030 from its 2005 levels, in pursuit of its commitment to the Paris Protocol. It also seeks to achieve about 40 percent cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030. India’s ambition with respect to renewable energy include achieving 60 GW of wind power and a 100 GW of solar power by 2022.

One may surmise as to what are the legal, regulatory and financial measures which will facilitate achieving such voluminous targets. If there are such measures in place, why the argument for the need for creating a climate of regulatory certainty? This post is dedicated to understanding the above issues, specifically in relation to regulating grid-connected solar and wind energy projects.

Section 86 of the Electricity Act, 2003 laid down that the State Electricity Regulatory Commissions (SERCs) promote renewable energy by providing targets to distribution companies for obligatory purchase of renewable energy as a percentage of the total consumption of electricity in the area. These targets were also termed as ‘Renewable Purchase Obligations’ (“RPOs”). A further push in the field of renewable energy came in 2008 from the National Action Plan on Climate Change, 2008 (“NAPCC”). The NAPCC envisaged the concept of a ‘dynamic minimum renewables purchase standard’, which was a dynamic and incremental re-invention of RPOs as imagined under the Electricity Act, 2003. Dynamic minimum renewables purchase standard, which is used interchangeably with the term RPO, laid down “purchase obligations on electricity distribution companies to purchase certain amount of their energy requirements from renewable energy sources.”

According to the Electricity Act, 2003, which is the law governing renewable energy, the transaction of renewable energy between the generators and distributors, and thus the fulfillment of RPOs, could take place via two routes: (a) through renewable energy certificates and (b) through tariff-based contracts between the generators and distributors. The Renewable Energy Certificate Regulation, 2010 regulated the former of the two. The Renewable Energy Certificate (“REC”) is a “market based instrument to promote renewable energy and facilitate compliance of RPOs.” The RECs were framed as saleable and tradeable between distributing entities and had been introduced to assist distributors in states with less renewable energy potential to fulfil their RPOs.

Another way in which the RPOs could be fulfilled under the Electricity Act, 2003 was through tariff-based power purchase agreements (“PPAs”). Until recently, renewable energy tariffs were regulated and decided by the Central Electricity Regulatory Commission under sections 61 and 62 of the Act. The Ministry of Power released ‘Guidelines for Tariff Based Competitive Bidding Process for Procurement of Power’ for grid connected solar as well as grid connected wind energy projects in pursuance of National Tariff Policy, 2016 which recommended introduction of competitive bidding to keep tariff low. This objective, as envisaged under the National Tariff Policy, 2016, seems to be on its way to delivery as wind and solar prices have plummeted to grid parity levels with the introduction of the competitive bidding regime. The fall in prices has been noted to be indicative of ‘low-internal-equity rates’ which is suggestive of developers investing on the faith in an optimistic future scenario.

Undoubtedly, there has been an attempt in the past decade to incentivize and mandate generation and distribution of solar and wind energy connected to the grid. However, there is still a sense of looming uncertainty over the future of renewable energy due to the questionability of the effectiveness of instruments such as RECs and PPAs. Why is that?

While the REC mechanism was introduced to overcome the geographical disparity between various states as regards their capacity to produce power from renewable sources, a concern regarding the actual compliance to RPOs has been expressed due to the failure on the part of most state utilities to comply with their targets. Such non-fulfilment of the RPO in many cases has led to low-trading in RECs. Shrimali and Tirumalachetty have opined that achieving the full potential of this instrument would be impossible until strong compliance to RPOs is made mandatory and confidence in the bankability of the REC instrument is created. In the absence, or inadequacy of such measures, the opinion of the authors seems to have been validated by the crash in the REC market caused due to the lack of demand for the REC certificates.  Problems in enforceability of RPOs is thus a major blockade on the path of making the REC-RPO mechanism effective.

Power-purchase agreements have been recently in news due to the surge in renewable energy sector. This surge has also been compounded by the falling of prices of renewable energy with the introduction of competitive bidding to determine tariffs of renewable energy. Prior to the introduction of the recent guidelines for grid-connected solar and wind energy power projects, the determination of tariff was carried out through the system of ‘feed-in’ tariffs determined by the Central Electricity Regulatory Commission.  Even as the fall in prices of renewable energy due to the introduction of competitive bidding was only expected, and also desired, was the impact of such falling of prices on existing PPAs factored in? If indeed it were factored in, were any safeguards or mechanisms set up to contain the risks?

Currently, investor sentiment in this sector is at risk as state utilities which entered into PPAs earlier desire renegotiation or cancellation of existing PPAs quoting tariffs to be higher than the current tariffs. Such attempts at renegotiation of PPAs or their cancellation has created uncertainties in the renewable energy market and has the potential to hurt the union government’s renewable energy commitments.

While tariff-based PPAs and RECs are not directly comparable, they do point towards a certain trend in the renewable energy sector. While ‘any person’ can be a distribution licensee under the Electricity Act, 2003, very often distribution licensees required to comply with renewable energy obligations have been state distribution companies (“DISCOMs”). The financial condition of DISCOMs creates risk with respect to investing in the renewable energy sector, opines Moody’s. Therefore, a solution to the issues of lack of confidence in the renewable energy sector will involve (i) creation of an effective and enforceable compliance system for the mechanisms therein and (ii) the restoration of the financial health of the DISCOMs.

The Government is seeking to achieve the former through framing a legislation with strict and punitive measures for ensuring compliance to PPAs and RPOs. Steps towards restoration of the financial health of DISCOMs have been undertaken through a scheme The Central Government announced Ujwal Discom Assurance Yojana (UDAY) on November 5, 2015 in order to effect a turnaround in the financial viability of state-owned DISCOMs and improve operational efficiency. This scheme has recently been shown to have a positive impact on the profitability and operational efficiency in 23 out of 27 DISCOMs who have joined UDAY.

Such policy measures towards reducing the uncertainty associated with the generation and distribution of renewable energy will hopefully allow India to fulfil its international obligations. They will, if framed and implemented properly, also go a long way in creation of a ‘sustainable market’ for renewable energy.

What needs to be examined whether off-grid solar and wind energy markets and the clean energy-finance instruments and institutions such as the Indian Renewable Energy Development Agency are also affected by the issues of lack of compliance- enforcement mechanisms and setting of standards. Further exploration of these issues is crucial to understand the regulatory climate of the Indian renewable energy markets in an exhaustive way, and for suggesting means to bridge the existing gaps.

– Yogini Oke

[1] These include for instance the Kyoto Protocol to the United Nations Framework Convention on Climate Change, 1998, Paris Agreement, 2015.

[2] Emission intensity is “the level of greenhouse gas emissions per unit of economic activity, usually measured at the national level as GDP.”