Monetisation of renewable energy in focus

By Milind Jha and Nakul Vohra, Dentons Link Legal
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Since India announced its 2070 net zero goals, decarbonisation has taken centre stage. Initiatives such as the Production-Linked Incentive tranche-I and tranche-II for high-efficiency solar module manufacturing will play a vital role in reducing the reliance on fossil fuels to meet electricity demands. Financial investors and banks are more willing to fund renewable energy (RE) transactions, encouraging companies to meet carbon-neutral targets while adding value to their brands.

Milind Jha, Dentons Link Legal
Milind Jha
Partner
Dentons Link Legal

Conventional power purchase agreements (PPA), in which buyers directly consume or re-sell electricity, are common in the RE sector. However, considering the lack of RE resources in several states and associated risks in project implementation, particularly in captive commercial and industrial (C&I) transactions, has encouraged companies to explore contracts similar to virtual PPAs, such as emission reduction payment agreements (ERPA), in which the environmental attributes of electricity generation and RE generation are sold separately.

In a virtual PPA, a form of derivative, the buyer does not own and is not responsible for electricity generated. Such contracts are purely financial transactions with variable-priced cash flows and transfers of carbon credits or other RE generation environmental attributes. In September 2023, Cleantech Solar, an RE project developer, commissioned its first virtual PPA with a fast-moving consumer goods company, with the project being registered under the International Renewable Energy Certificate (I-REC) framework.

The ERPAs allow businesses to contribute to their sustainability goals while ensuring stable energy supplies. They are binding agreements between buyers and sellers of carbon credits and identify and record rights in, responsibilities for and obligations to manage project risks. They define project terms, including price, whether fixed or market-linked, the volume and delivery terms of green attributes.

Nakul Vohra, Dentons Link Legal
Nakul Vohra
Principal Associate
Dentons Link Legal

While environmental attributes are not defined, they are intangible products representing underlying values linked to the environmental benefits of electricity generated from renewable sources such as solar, wind, hydro and biomass, biofuel cogeneration and urban or municipal waste. To monetise environmental attributes, RE developers must register their projects. The ERPAs must identify appropriate programmes under which RE projects are to be registered, such as the Verified Carbon Standard administered by Verra, the Gold Standard, I-REC and Tradable Instruments For Global Renewables.

The Central Electricity Regulatory Commission (CERC) introduced the CERC (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022 (CERC regulations), to launch renewable energy certificates (REC). The National Load Dispatch Centre (NLDC), that is the Grid Controller of India Limited, is the central agency for the implementation of the RECs. Entities eligible for the RECs include renewable energy generating stations, captive generating stations using renewable energy sources, distribution licensees and open-access consumers. The process of obtaining the RECs involve accreditation, registration and issuance. As per the CERC regulations, the eligible entities may apply for accreditation to a particular state agency or regional load despatch centre.

Since the regulations recognise double counting, an RE generator that has already availed of the RECs in the supply of renewable energy units cannot use them to offset consumer renewable purchase obligations.

The intricate regulatory framework has resulted in complexities in implementing the ERPAs in India, particularly considering that the CERC regulations do not expressly permit the transfer of the RECs from the RE project developer to the consumer, and can only be traded through power exchanges. This leads to additional costs and compliance of associated conditions on trading of the RECs, which has motivated the market to obtain carbon credits from non-statutory sources, such as the I-RECs issued by the Green Certificate Company Limited, which can be traded internationally.

As RE generators can now monetise green attributes, some existing C&I off-takers are re-evaluating their existing PPAs so far as the PPAs permit. This particularly applies to consumers who have given up their right to receive carbon credits or green attributes. The regulations must be amended to permit the bilateral trade of the RECs to promote efficiency in monetising green attributes derived from the RE projects. Those considering C&I transactions must ensure the PPAs allow renegotiation to take advantage of rapidly changing regulatory conditions.

Milind Jha is a partner and Nakul Vohra is a principal associate at Dentons Link Legal.

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