CERC RCO Buyout Mechanism Set To Face Hurdles

The Central Electricity Regulatory Commission (CERC), in its latest suo motu order, issued a draft mechanism for a buyout price for compliance with the Renewable Consumption Obligation (RCO). RCO is an additional obligation imposed by the Ministry of Power (MoP) to ensure real consumption of renewable energy and to boost its growth in the country.

This obligation applies to entities such as electricity distribution companies (DISCOMs), open-access consumers, and captive power producers. The Energy Conservation (Amendment) Act of 2022 had earlier proposed specifying a minimum share of consumption from non-fossil fuel sources by designated consumers. In its earlier notifications, the Ministry of Power hinted at three broad pathways for RCO compliance to avoid penalties for non-compliance.

According to the ministry, an obligated entity can meet RCO compliance either by direct consumption of green power (either directly or through an energy storage system) or by purchasing Renewable Energy Certificates (RECs) through power exchanges. The ministry had also proposed a third option: compliance through a “buyout price.”

In its latest move, CERC has drafted a framework for determining the buyout price. The agency plans to fix the buyout price for a financial year at 105% of the weighted average REC price of that year. It has also mandated the National Load Despatch Centre (NLDC) to publish the weighted average REC price.

“The buyout price for a financial year shall be fixed at 105% of the weighted average REC price of that financial year. By 30th April of every financial year, up to 2029-30, the NLDC shall publish the weighted average price of RECs and the buyout price for the previous financial year, based on the above principles,” the draft rules stated.

Hurdles on the Path

Several challenges could confront this buyout price mechanism. Experts note that CERC derives its powers from the Electricity Act of 2003, and the Energy Conservation (Amendment) Act does not empower CERC to frame rules on RCO.

Many experts see this mechanism as a hurdle against the real generation of renewable energy, serving instead as a payment route that allows entities to evade promoting actual green energy production or supporting developers engaged in renewable generation. Some have termed it a mechanism for “pay-to-pollute.”

Experts also suggest that the buyout option could negatively affect green energy developers, as it may reduce the financial incentive for additional renewable projects. Historically, many DISCOMs have preferred paying fines rather than procuring renewable energy under the Renewable Energy Purchase Obligation (RPO). The same trend could continue under the RCO mechanism through the buyout option. Various agencies have previously raised concerns over the buyout provision for RCO compliance.

For instance, energy think tank Prayas Energy Group (PEG) has expressed reservations about this mechanism. PEG warns that it could lead to a number of legal disputes between states and the Centre.

Referring to the earlier MoP notification, PEG stated: “There are several issues with the proposed amendment, especially clause 6(iii), i.e., the ‘buyout price,’ which is a new way to meet RCO and is certain to lead to legal and jurisdictional complications between the Centre and the states. We highlight a few concerns with this option.”

PEG also added: ‘Payment of the buyout price’ is essentially akin to a penalty by a different name since this mechanism does not translate to any actual renewable energy capacity addition in the country. Unlike the REC mechanism, it does not correspond to equivalent renewable generation.”

Some experts also argue that such a provision could cap REC and carbon credit prices. With this ceiling, domestic carbon credit prices could align with global prices, potentially making the domestic carbon market less attractive to investors.