RESEARCHED IN NEW DELHI, INDIA | June 23, 2015

India high court enforces green energypurchasesSIGNIFICANCE: A favorable Supreme Court verdict will ensure that utilities, captive power producers,and bulk consumers no longer flout their renewable purchase obligation. This will boost costs forlarge manufacturing industries with captive power plants.

ON THE GROUND

"The verdict has come as a much-needed shot in the arm for the state electricity regulatory commissions tosignal that RPO can no longer be flouted."

– Vishal Pandya, REConnect Energy Solutions

IMPACTS

SOCIAL: The enforcement of green energy targets will ensure protection of the environment.

POLITICAL: The state energy regulators can now crack the whip in case green energy purchase

norms are flouted.

BUSINESS: Captive power producers and industrial consumers will see their power costs rising.

FULL BRIEFING

Through a landmark verdict in May, the Supreme Court has given power to state

electricity regulators in the country to enforce clean energy targets and penalize captive

power producers and open-access large industrial consumers if they fail to meet these. 

On May 13, the Supreme Court dismissed the appeal of 14 companies led by Hindustan

Zinc Ltd. against a Rajasthan High Court verdict, scotching their plea that the state commission

did not have the jurisdiction to impose the obligation and penalize its noncompliance with

clean energy standards. "The cost of fulfilling the obligation cannot be held above the larger

public interest," the supreme court ruled.

Renewable Energy Certificates (REC) are generation-based certified instruments used by power

distribution companies or utilities, captive power producers, and open access consumers to

meet their Renewable Purchase Obligation (RPO), which mandates either the purchase of a

particular portion of electricity from renewable energy sources, or certificates in lieu of, from

those generating clean energy. These are available to those producers who do not sell the

electricity generated at preferential tariff. Power producers can earn one certificate for every

megawatt per hour (MWh) of electricity fed into the power grid.

Large manufacturers will feel impact

The Supreme Court verdict has direct implications for large manufacturing industries that rely

on captive power, including cement, steel, aluminum, fertilizer, textiles, paper and pulp,

pharmaceuticals, and engineering. Their costs will go up by an additional 2 percent to 5

percent, depending on the RPO targets stipulated by the different state electricity regulatory

commissions for those impacted, according to Vishal Pandya, director and co-founder,

REConnect Energy Solutions, a major REC trading company. 

Manufacturing states like Gujarat, Tamil Nadu, and Maharashtra, in addition to Madhya

Pradesh, Chhattisgarh, and Orissa that make up the coal belt, will likely bear the brunt. 

Considering that there are 40 gigawatts (GW) of captive coal capacity in the country, and more

than 3,000 open access bulk consumers, the REC market should get a big boost over the

course of this financial year and the piling up REC inventory can be cleared.

“The verdict has come as a much-needed shot in the arm for the state electricity regulatory

commissions to signal that not complying with RPO is no longer an option,” Mr. Pandya tells

Monitor Global Outlook. 

There are clear cost implications for meeting the green energy obligation, depending on the

level of RPO a state has set and the capacity of captive power generation. Sources point out,

for example, that the RPO liability of Vedanta Ltd., one of the world's largest diversified

natural resources companies, can run up to $9 million in a year. State regulators can, in

addition, impose a penalty equal to the forbearance price (maximum price) of RECs the

company fails to buy. 

Companies have previously often appealed the enforcement of RPOs and penalties imposed

for their noncompliance, even getting the high courts in Gujarat, Madhya Pradesh, and Tamil

Nadu to stay enforcement. “With the Supreme Court now ruling in favor of imposing RPO, the

existing stay will become redundant,” says Pandya.

Indeed, enforcement of RPO has been mostly lax, due to political pressure from industrial

interests. “Many states like Delhi, Andhra Pradesh, Madhya Pradesh, and Bihar have gone

silent on RPO compliance of state electricity distribution companies, or DISCOMS,” says

Pandya, “or allowed it to be carried forward like Maharashtra did, or even lowered it to suit the

DISCOM as in the case of Gujarat.”

REC market may now function properly

The REC market never took off in the manner it was designed to perform. There is an inventory

of 13 million unsold RECs at the Delhi-based Indian Energy exchange, which accounts for 90

percent of the power trading market. In the financial year 2014-15, 9.6 million of these

certificates were in the market, while only a third of these were traded.

The exchange provides a demutualized and automated platform for the REC market. Not

surprisingly, after the Supreme Court verdict, the exchange saw the highest-ever trading

volume in the market since the start of the trade in solar RECs three years ago, with over 1,000

participants of the 2,400-odd registered in the segment at the exchange trading a record

292,000 certificates. The surge in volume was more than five times that of the previous month

when trading was limited to about 45,000 certificates.

Pandya estimated that demand could go up to 800,000 to 1 million certificates in the coming

month. 

 

Up to this point, enforcement of clean energy targets in India has been mostly lax, due to political pressure.  

Photo: Amit Dave/Reuters

OTHER IMPACTS

COMPANIES

■ Hindustan Zinc

■ IFFCO

■ NALCO

■ JK Cements

■ JSW Steel

■ Ambuja Cements Limited

■ ACC

■ Vedanta Group

■ Steel Authority of India Limited

■ Aditya Birla Group

INDUSTRIES

■ Utilities

■ Fertilizer

■ cement

■ Manufacturing

■ Construction

RISKS

■ Operational

SOCIAL RISK DASHBOARD

IndiaForecast for Q3, 2015

Labor and especially political risk rise in Q3 as the Modi government's reform agenda gets bogged down inParliament, according to Monitor Global Outlook's Social Risk Survey. Our panel of in-country experts isincreasingly skeptical the Goods and Services Tax or land-acquisition bills will pass.   

Read the full findings (/Strategic-Outlook/2015/06/India-Q3-survey-new-danger-of-political-paralysis) from thesurvey and our risk rating methodology (/Methodology).