Accounting treatment of renewable energy certificates

Dear Colleagues.

Can any one give some inputs on the accounting treatment of Renewable Energy Certificates ( RECs ) which are being sold by Power Generating Companies.

Similar to CERs, and in line with Electricity Act 2003, to promote /increasing the share of renewable in the generation capacity in the country, the concept of REC (Renewable Energy Certificate) has evolved over the period of time in India. In order to increase the renewable energy off take various SERCs (State Electricity Regulatory commissions) have made it obligatory for state utilities (obligated entities) to buy renewable energy to meet their renewable purchase obligations (RPO). This had lead to introduction of Renewable Energy Certificate (REC) mechanism which is a market based instrument to promote renewable energy business and facilitate buying renewable energy.

REC is a paper/electronic instrument which represents the property rights to the environmental, social, and other non-power qualities of renewable energy generation.

One number of REC is issued for 1000 KW (i.e. 1 MW) of power generated and sold by the Power generating Company / Entity. These RE Certificates are tradeable and can be sold on power exchange at market determined price. As per the current regulations, the non-solar RECs can be traded at a floor price of Rs 1500 and a cap price of Rs 3300. The exact price for REC (between the floor and cap prices) functions of demand and supply, i.e. it is determined by market forces. These RE Certificates are bought by the State Electricity Utilities or Obligates Entities to meet their RPO as mentioned above. These are being sold by Power generation companies who are in renewable energy sector.

There are no separate guidelines issued by the institute of accounting treatment of RECs, hence many companies in the Power generation business follow different accounting policy for sale / accrual of RECs and the relevant disclosure is made is made in the financial statements. There is one view that the guidance note issued by the Institute on CER is to be applied for RECs also. But there are basic differences between RECs and CERs. There is no uniform practice followed for RECs accounting treatments.

Would like to have your views on this.

This is vinod goyal and working as a finance guy in "CHOICE GROUP" engaged in Solar Power generation .

My views are that the REC issued / collected during the year can not be treated as an income or as an assets in view of AS 37 because the realisation of these certificates is not certain or guaranteed by any authority rather a max period of three years for sale of REC has been provided in the relevant Policy and the balance unsold inventory of certificate at the end of three years would be lapsed . The present situation of market is not encouraging and these certificates are being traded around 2 to 3% of average inventory . Under these circumstances , how the generators can treat these certificates as an income and can afford to pay the MAT around 19% ?

My suggestion is that these REC must be considered as an contingent assets on year to year basis and and should be disclosed in financial statement in Note of Accounts . However , the income earned on sale of certificate /realised part during the year would be considered as an Income of that particular year .

vinod goyal

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