19-Apr-2019: Taxing Renewable Energy Certificates

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 disincentivize 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.

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. 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. 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.

19-Nov-2018: NSE mobile app goBid for small investors

The new App will allow retail investors to invest in treasury bills (T-Bills) of 91 days, 182 days and 364 days and various government bonds from one year to almost 40 years.

National Stock Exchange of India Ltd (NSE) has launched its new mobile app and web-based platform ‘NSE goBID’ for retail investors to buy Government Securities (G-Secs). Investments in G-Secs are considered one of the safer investment options available to retail investors as the instruments bear Sovereign guarantee. G-Secs also provide opportunity of portfolio diversification and long-term investment avenues.

The App will be available to all the registered investors with NSE’s trading members and will allow retail investors to make payment directly from their bank accounts using the Unified Payments Interface (UPI) and internet banking.

The ‘NSE goBID’ platform will handle order collection, payment and refund that is currently required to be managed by Trading Members making the process convenient and cost effective.

After a one-time registration, the new App will allow retail investors to invest in treasury bills (T-Bills) of 91 days, 182 days and 364 days and various government bonds from one year to almost 40 years.

Treasury bills (T-bills) are zero coupon securities that pay no interest and are issued at a discount and redeemed at the face value at maturity. For example, a 91-day Treasury bill of Rs 100 (face value) may be issued at say Rs 98, that is, at a discount of Rs 2 and would be redeemed at the face value of Rs 100. The return to the investors is the difference between the maturity value or the face value (Rs 100) and the issue price (Rs 98) that is Rs 2 per T-bill or 7.98 per cent per annum.

Some of the other forms of G-Secs are short-term Cash Management Bills (CMBs), medium-and long-term Dated G-Secs, Fixed Rate Bonds, Floating Rate Bonds (FRB), Zero Coupon Bonds, Capital Indexed Bonds, Inflation Indexed Bonds (IIBs), Bonds with Call/Put Options, Separate Trading of Registered Interest and Principal of Securities (STRIPS), Sovereign Gold Bond (SGB), Special Securities like oil bonds, fertiliser bonds, food bonds etc.

G-Secs are liquid instruments and are traded actively in secondary market and have a transparent price dissemination mechanism. However, trading in the secondary market poses market risks for the G-Secs as the prices of the securities are influenced by the level and changes in interest rates in the economy and other macro-economic factors, such as, expected rate of inflation, liquidity in the market, etc.

If you buy a long-term G-Sec with low coupon rate and subsequently G-Secs are issued at higher interest rate, you will suffer loss either by holding it due to lower interest earning or suffer capital gain loss by selling it in secondary market as the price will crash following issue of instruments with higher coupon rate.

Hence, it is advisable to take advice of a financial advisor before you buy a long-term G-Sec, as an untimely investment may put you in loss. Otherwise, it will be better for you to enter the segment through debt mutual funds, where apart from diversification, your money will be invested in the G-Secs by a team of experts after due deliberations. Even FDs would be a better choice than an unsolicited investment in G-Secs, because you may suffer capital loss in secondary market despite the Sovereign guarantee.