Home / Politics / Policy /  Can market mechanisms help India fight climate change?

Mumbai: Earlier this month, India promised to reduce the emission intensity of its gross domestic product (GDP) by about a third from 2005 levels by the year 2030.

However, unlike the rest of the world, which has embraced emissions trading schemes to check production of greenhouse gases, India does not have any such programme. It has always maintained that as a developing country, setting emissions caps will harm economic growth.

That said, India has three market-based mechanisms to fight climate change: trading in renewable energy certificates (RECs), where power utilities have to buy a share of their power from renewable energy producers; the launch of the first phase of the Perform Achieve Trade (PAT) scheme for 2012 to 2015; and a pilot emissions trading scheme (targeting air pollution) launched in Gujarat, Tamil Nadu and Maharashtra.

Out of these three mechanisms, only the REC scheme has been fully functional since its inception. Under this scheme, utilities have to purchase a certain proportion of their power from renewable energy producers. If they aren’t able to do so, they can make this up by buying renewable energy certificates.

These certificates are tradable via two power exchanges: Indian Energy Exchange (IEX) and the Power Exchange of India Ltd (PXIL).

Each REC, which is generated by a renewable energy producer after getting clearances, is the equivalent of 1 megawatt hour (1 MWh).

So far, this scheme hasn’t had much success.

As chart 1 shows, there has been an inventory pile-up of RECs as there are few takers.

REC inventory was 16 million certificates at the end of September. The certificates are valid only for three years, and hence, the build-up is not good news for renewable energy producers.

The pile-up has happened simply because of non-compliance by utilities. As chart 2 shows, there is a huge difference between number of RECs available for sale in the exchanges and the actual amount purchased by utilities.

Why aren’t utilities buying these certificates? Because they can’t afford to do so given their poor financial conditions. State distribution companies (discoms) supply power at cheap rates to various classes of consumers which has led to a huge pile of debt in their balance sheets. Renewable energy, till recently, was the most expensive source of power, making it difficult for utilities to meet their obligations.

For instance, when RECs from solar power were introduced in 2012, they were traded as high as 13,000 apiece, as chart 3 shows.

The central electricity regulatory commission (CERC), which sets the trading band for RECs, has since cut the price to 3,500- 5,800, owing to poor compliance by buyers. But that is not the sole reason for falling prices. The cost of generating renewable energy too has fallen, contributing to lowerREC prices.

But despite the falling prices, there have been few takers. One reason is that state discoms are able to get away without meeting their renewable power purchase obligations. The CERC has recommended that entities at fault be penalized by making them purchase RECs at their upper ceiling price. However, the final decision on this has to be taken by state-level electricity regulators.

“Penalties are rarely imposed, and if at all, then only in those states whose state electricity regulatory commissions are vigilant. Even then, they are typically allowed to carry their obligation forward," says Jasmeet Khurana, consultant with Bridge to India, a consulting firm.

To be sure, there has been a slight pick-up in REC trading volumes after a Supreme Court judgment in May which required captive power plants to be compliant with renewable power purchase obligations. Moreover, the bulk of the trading happens towards the end of the financial year, when most companies rush to fulfil their renewable purchase obligations.

“Theoretically, it’s a good scheme. However, it is failing because of poor RPO (renewable purchase obligation) enforcement. Even though compliance is increasing, the early setback to the system, in the form of piled-up certificates, etc., has already discouraged new investors from setting up plants which will sell power through RECs", says Khurana.

The lessons from the REC fiasco are that stricter monitoring and greater compliance are needed to ensure that market mechanisms to control climate change work.

Even in the case of the pilot emissions trading scheme,which was launched in the industrial areas of Gujarat, Tamil Nadu and Maharashtra in 2011, similar challenges persist.

“The monitoring mechanism to keep track of particulate matter emission was put into place, but the trading process never started. Practical on-ground challenges on continuous emission monitoring, technology and data linkages, need for stronger regulatory framework, etc. are some reasons why the take-off has been slower than expected," says Vivek Adhia, head (business engagement), World Resources Institute India, a research firm.

In the PAT scheme, firms that have been able to achieve certain levels of energy efficiency will be able to sell Energy Saving Certificates (ESCerts) for the amount of their surplus energy improvements. Trading will happen through the two power exchanges while prices will be fully determined by the market.

Government expects energy saving under the PAT scheme to amount to 6.6 million tonnes of oil equivalent in its first phase.

However, as with the REC programme, regular monitoring and strict compliance will be essential for the scheme to take off.

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