From UPSC perspective, the following things are important :
Prelims level : REC
Mains level : REC and its functioning
- Renewable Energy (RE) companies have moved the Delhi High Court, seeking an exemption for Renewable Energy Certificates (RECs) under the GST.
RECs in India
- In a bid to promote renewable energy market in India, the Indian government has framed policies under the Electricity Act, 2003 and the National Action Plan on Climate Change (NAPCC) to increase the total renewable power generation capacity in the country.
- Renewable Energy Certificates (REC) is a policy instrument to catalyze the development of renewable energy.
- It is a market based mechanism which will help the states meet their regulatory requirements (such as Renewable Purchase Obligations (RPOs)) by overcoming the geographical constraints on existing renewable potential in different states.
- RECs unbundle the electricity component (commodity) from the green/environmental attributes of the power generated from renewable sources.
- Both the components can then be traded separately.
- Thus RECs help in incentivizing the production of renewable energy over and above the RPO state limit as tradable certificates are not constrained by the geographical limitations of commodity electricity.
Working with RECs
- The tradable RECs are awarded for every 1 mega-watt hour (MWh) of electricity generated.
- Together with Renewable Purchase Obligations (RPO), RECs act as market-pull incentives that create demand for renewable energy installations.
- RPO, instituted in 2011, is a mandate that requires large power procurers to source a pre-determined fraction of their electricity from renewable sources.
Problems of states
- The concentration of RE potential in a few states means that the same level of RPO compliance cannot be expected from all states.
- Low potential states will have to resort to expensive cross-border procurement, accompanied with many regulatory hurdles and additional charges.
- The REC market was introduced to facilitate RPO compliance by incentivizing RE procurement.
- First, the REC mechanism presents an alternative for state discoms, with insufficient renewable capacity, to meet their RPO obligations.
- Second, stand-alone projects built independent of the well-established auction regime have little incentive and a high risk perception, lacking purchase guarantees and payment default protections.
- The income generated from trading RECs will bolster such independent projects.
Why GST on RECs?
- RECs are being charged GST, while bundled power (RECs plus electricity, irrespective of source) or even just electricity are devoid of the same.
- Cost of electricity generation from renewable energy sources is classified as cost of electricity generation (equivalent to conventional energy sources) and the cost of environmental attributes.
- RECs is the environmental attribute of the electricity derived from RE.
- As per regulations, RPO compliance through REC is at par with sourcing electricity directly from RE.
- Therefore, GST applicable on the sale of RECs negatively affects its parity with similar electricity sale alternatives, be it conventional or renewable.