Government actions to facilitate the use of renewable energy certificates (RECs) can improve Indian companies’ ability to compete globally—a major policy objective of the current government.

Driven partly by consumer demand, firms are being serious about the “source” of energy they use for operations. According to the Harvard Business Review, firms that approach energy as merely a cost are making a strategic mistake of overlooking opportunities to reduce risk, improve resilience, and create new value. RECs can be an easy start for firms who are new to renewable energy procurement—whether mandatory or by their own will.

RECs in India

Renewable energy certificates unbundle the electricity from the renewable character of its generation, which is embodied in the REC. RECs can be sold independently to different customers in one or different markets and regions.

Since 2003, Indian companies—those who have set up captive generation using fossil fuels or those who purchase energy via open access—have been subjected to renewable purchase obligation (RPO) regulations. Companies use three types of power procurement tools to meet their RPO targets:

  • Investing in self-generation of renewables,
  • Procuring renewables from a generator, utility, supplier, or trader through a power purchase agreement, and
  • Purchasing renewable energy certificates.

In the recent past, Indian companies have explored their options for renewables procurement even if they are not subject to an RPO, primarily because the cost of rooftop photovoltaic is lower than the existing retail tariffs. However, complexity and the costs of regulation have proved to be a major impediment to renewable capacity addition.

For companies who do not wish to invest capital themselves or enter into binding long-term power purchase agreements with suppliers, purchasing RECs can be an easy start. Two type of RECs are available on the power exchanges—solar RECs (current price range: Rs. 1/kWh to Rs. 3.5/kWh) and non-solar RECs (current price range: Rs. 1/kWh to Rs. 1.5/kWh). In order to participate in REC trading, companies must register on the exchange, though there is no charge for registration for voluntary purchasers.

Companies can book their voluntary REC purchases as a corporate social responsibility (CSR) expense. Companies meeting financial thresholds—as defined by the government from time to time—are required to spend 2 percent of their net profits on CSR expenses as per the Companies Act, 2013. Purchasing RECs provides an easy way of meeting CSR obligations while at the same time building an environmentally conscious image.

Indian Energy Exchange data show that to date, 26 entities have made voluntary REC purchases. More than half of the voluntary purchases have been made by public sector enterprises (Rural Electrification Corporation Ltd., POSOCO, and National Mineral Development Corporation). This is largely attributable to December 2011 guidelines from the Department of Public Enterprises, which included RECs on the list of sustainable development projects allowed under CSR.

Government can guide more voluntary purchases

While companies may act by themselves, a little bit of a policy nudge can help accelerate demand for further voluntary action. That in turn shall expand the clean energy market in India. We present a few suggestions to do so:

  • Government and/or distribution utility “recognize” consumers who take voluntary action.
  • Allow distribution utilities to market RECs to their customers. They can target not only their industrial and commercial consumers, but also individual residential consumers and residential housing societies.
  • The CERC currently regulates prices for mandatory compliance purchases, as these costs are ultimately borne by ratepayers. However, price-setting should ideally be left to the market. Market-discovered prices provide the right investment signals to renewable developers, thereby accelerating renewable capacity addition.

Nielsen’s 2015 Global Corporate Sustainability Report found that 66 percent of consumers are willing to spend on a sustainable brand, even if it costs more. This need of the consumer can be fulfilled if the government facilitates it and companies act on it accordingly.

A version of this article was originally published by Energy World.