As national governments make a final attempt to save the global carbon trading market, it is time for Indian policy makers to review the struggling renewal market in India.
According to a recent study by Climate Policy Initiative and the Indian School of Business, the lack of clarity over long-term commitments by states for buying renewable energy and the lack of price signals are acting as a dampener for the renewal market.
Recent data shows the price of a RE certificate, a tradable instrument, fell to Rs 1,500 last month on the Indian Energy Exchange compared with Rs 3,900 (non-solar REC) in March last year.
Alarmingly, there were 851,000 certificates on offer last month, of which only 132,000 found buyers.
An REC is a tradable instrument, each representing 1,000 units of power generated from renewable sources and sold to the grid. Trading in RECs started in March 2011.
"In the one year of trading so far, participation in the REC markets has been low; they have failed to attract investment," said David Nelson, senior director at CPI and one of the authors of the report. CPI is an advisory organisation.
By March 2012, when the first compliance period ended, only 12.5 per cent (2,513 Mw) of the estimated installed RE capacity was accredited, he added.
In 2008, India's National Action Policy on Climate Change had set a target, called the Renewable Purchase Obligation (RPO), to produce 15 per cent of the country's electricity with RE sources by 2020.
To help reach these, the government had launched the market-based REC mechanism in 2010.
Under the scheme, state utilities are required to purchase a part of their electricity needs from renewable sources such as wind, solar, biomass, biofuel and small hydro sectors, and supply to the grid.
If they cannot purchase it from states, they can meet their obligations by buying certificates from the IEX or the Power Exchange India.
The study highlighted that the financial condition of State Electricity Boards, the major buyer for RECs, is often poor and affects trading.
Aggregate SEB losses in 2009-10 were $12.7 billion and projected to reach $ 23.2 bn by 2014-15 from the current levels.
"The financial conditions of the SEBs raise questions about their ability to meet RPO targets, participate in REC markets, and promote renewable energy development," said Nelson.
Besides, the absence of long-term RPO targets at the state level undermines credible price signals to investors.
The targets set by the states are not representative of the national RE development goals.
Of the 26 states with RPO targets in place, only 10 have specified quota obligations for more than three years.