Taxing Renewable Energy Certificates — Yay or Nay?

Green power firms want GST on RECs removed. How justified is it?

By Shweta Miriam Koshy
Published: Friday 19 April 2019

Renewable Energy (RE) companies have moved the Delhi High Court, seeking an exemption for Renewable Energy Certificates (RECs) under the goods and services tax (GST).

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.

The Ministry of New and Renewable Energy (MNRE) introduced incremental annual RPO targets amounting to 21 per cent in 2022. However, these were neither thought through nor in-line with national installation goals.

State energy regulatory commissions (ERCs), on their part, have set their own RPO targets — which vary significantly from state to state but tend to be more in line with local potential and expansion plans.

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. Further, state distribution companies (discoms) with large shares of subsidised consumers would end up bearing disproportionately high costs.

The REC market was introduced to facilitate RPO compliance by incentivising 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.

RE-based power generators can provide power directly to the obligated parties (captive power plants/open access (OA) consumers, discoms) — in which case no RECs are issued, but the procurers can claim RPOs. Or they can register the RE project under the REC mechanism.

Here, the power generated can be purchased by discoms at average power purchase cost (APPC) or by OA consumers at mutually agreed rates — but cannot be used to meet their RPO obligations. They instead generate RECs that can be traded through power exchange(s).

In India, these are traded on two power exchanges — Indian Energy Exchange (IEX) and Power Exchange of India (PXIL). The price of RECs is determined by market demand, and contained between the ‘floor price’ and ‘forbearance price’ specified by the Central Electricity Regulatory Commission (CERC). These tariffs are reviewed periodically to reflect the average tariffs quoted in the latest RE Power Purchase Agreement (PPA).

The impact of the goods and services tax (GST) on the RE industry has been discussed widely. Confusion remained as to how the RECs would be impacted. However, a circular issued in June 2018, Circular No. 46/20/2018-GST, was issued to clarify the applicability of GST on RECs. The circular distinctly stated that a GST of 12 per cent will be levied on RECs.

By adding to the cost of electricity, the fear was that the GST on “green certificates” could disincentivise the power procurers from participating in the market.

REC sales fell on both the exchanges by almost 22 per cent in 2018-19 from 2017-18. “But, to blame this entirely on the GST component is incorrect. In 2019 RECs were traded at a price higher than the floor price, in comparison 2018 when it was traded at floor price. Till date, 5.4 crore RECs have been issued, of which around 96 per cent (5.16 crore RECs) were redeemed,” says Nitin Sabikhi, assistant vice-president at IEX.

“Of the total redemption, 57 per cent were in the last two financial years (32 per cent in 2018, 25 per cent in 2019). This demonstrates a higher RPO compliance rate resulting in lower inventory; successful market dynamics and true price discovery,” he adds.

Therefore, the primary motive of the writ petition, demanding that GST on RECs be scrapped is discriminatory. 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.  The preferential tariff (or feed in tariff) and competitive bidding applicable on renewable electricity are exempt of GST,” says Sabikhi.

“Therefore, GST applicable on the sale of RECs negatively affects its parity with similar electricity sale alternatives, be it conventional or renewable. Moreover discoms, the major buyer of RECs (around 50-60 per cent), do not get GST credit; and the increase in their cost of RPO compliance will translate to increased tariff for the end consumer.”

The Delhi High Court, on April 16, 2019, issued notices to the Centre, the GST Council and the Central Board of Indirect Taxes and Customs over the petition. It remains to be seen what decision the HC will take in the matter.

The irony, that the incentive ideated to drive RE procurement is now constricting the amount that can be procured by the addition of GST, is not lost.

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