Renewable Projects in India: What to adopt-CDM or REC?

Posted on February 14, 2011 by

Renewable Energy is being betted on as the new sunrise sector of India. Within the broad renewable energy space – wind and Solar are the ones where the potential is high and relatively easier to monetize (as against say biomass or biogas).

Only 7 % of electricity supplied in India is generated from the renewable energy sources. The share of RE in installed power is slightly higher than this due to the fact that generation in RE is not continuous and predictable as in the case of conventional sources. Among the various financing/subsidy mechanisms for Renewable Energy projects, Clean Development Mechanism (CDM) introduced by the Kyoto Protocol has been very important contributor in the last 4-5 years. Carbon credits generated from CDM registered-verified RE projects are important revenue streams in the financial closure and decision making for high capital cost projects in RE.  Following table shows CDM revenues earned by the Indian Renewable Energy projects. As can be seen, the cash inflow driven by CDM component of RE projects is upwards of 900 crores INR, translating to 200 million USD.

Sector No of Projects CERs Revenue in INR
Wind 139 75,31,244 406,68,71,760
Biomass 166 74,82,864 404,07,46,560
Hydro Power 70 19,10,321 103,15,73,340

* Issued CERs volume till December 2010.

The graphs below indicate the share of India in the registered projects by RE class and share in the CDM revenues.

RE CDM Projects registration Renewable Energy CDM Project revenue generation


India has recently launched the Renewable Energy Certificates (REC) mechanism to encourage Renewable Energy generation in the country. Similar mechanisms have been operations in the developed markets such as Australia, Europe etc. By mandating a growing percentage of electricity mix to come from renewable sources for the distribution companies, REC mechanism is expected incentivize RE generators. REC mechanism views the electricity generated from renewable sources as composed of 2 benefits – one the power generated and second is the environmental attribute with the ‘renewability’ of this power. Second part is known as REC will be traded in the energy markets of India. REC price range would be in the range of 12000- 15000 INR for the solar projects and 1500-3900 for non solar projects (1REC = 1 MWh of electricity).  What REC achieves is to treat the environmental benefit of renewable power separately and values it as a tradable commodity as against the fixed feed-in or preferential tariff.  Since the introduction of REC mechanism, three Renewable Energy (RE) generators have registered and four have accredited their projects on REC registry of India (Feb 2011).

REC or CDM or is it and?

Loaded with the technical details of the Renewable Energy technology already, renewable energy project developers face the confusion of mechanism to follow – the REC or the CDM. The developers also need to understand if the two can be accessed simultaneously. The choices made at the beginning stage of the project are essential since they will determine the financial profile of the project over the entire life cycle of the project.

The important considerations to be kept in mind are as under

  1. CDM is an international mechanism instituted under the Kyoto Protocol. The relevant conditions for registration under CDM are additionality and contribution to sustainable development.
  2. REC is a national mechanism. To be eligible for this mechanism, the PPA for the power project must be signed at the Average Purchase pooled cost (APPC) and not at the preferential tariff. The APPCs for various Indian states are as under Andhra Pradesh – Rs 1.78/kWh, Maharashtra- Rs  2.43/kWh, Karnataka – Rs 1.85/kWh, Kerala – Rs 1.46/kWh, Tamilnadu- Rs 2.62/kWh, Gujarat- Rs 2.21/kWh, Rajasthan- Rs 2.48/kWh.

Thus, the question of having to choose between CDM and REC does not arise. As long as the condition for the ‘additionality’ – i.e. the project being financially not-most-attractive in absence of carbon credit revenues is fulfilled, the project developer can continue to access REC market as well as the carbon credits under the CDM framework. Since there are only a few projects registered under the REC mechanism and the market of RECs will take some time to develop, the price discovery of RECs will happen only after significant volumes expansion. Till such a time, the REC market and CDM markets are not expected to interfere with each other.

The more appropriate question should be whether the RE project developers should sign up for REC mechanism by signing PPA at the APPC and registering themselves under the REC registry or to lock-in the state utility at the preferential tariff.

Some of the other aspects that need to be kept in mind in analyzing the profitability of RE projects under the REC mechanism are –

  1. The range of price at which PPA will be signed with the state utilities is significant across states. This is partially driven by the composition of the current portfolio of states energy mix. States such as Tamilnadu and Maharashtra for which renewable constitute a significant portion of energy bought by the distribution companies. This energy coming in at a higher price has increased the APPC for these states. This implies that the any renewable energy project coming in the states with a higher APPC is likely have a lower working capital requirement since a larger portion of their overall tariff will be provided by the utilities and the realization will depend less on the trading of RECs.
  2. The durations of PPAs need to be comparable between the preferential tariff sale and the sale at APPC to state utility. This can create a difference in which the 2 cases need to be addressed.

We can undertake both CDM project development and REC management for our clients. Do get in touch with us for more details.

Contact us at : Agneya Carbon Ventures Pvt. ltd. Pune (India)

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