Carbon Credits Are Financing Renewable Energy Projects in India

Sep 4, 2008 - Anupam Tyagi - RenewableEnergyWorld.com

Photo Credit: Anupam Tyagi. Data: Institute for Global Environmental Strategies

Ghaziabad, India - When a firm in India invests in a renewable energy source to meet growing energy needs, it may be able to acquire carbon credits. These carbon credits are sold on international markets generating income for the owner of the credits. Carbon credits, which are issued to organizations based on their efforts to limit climate change, and renewable energy projects are intricately linked in India.

A carbon credit represents the removal of one ton of carbon dioxide or its green-house gas (GHG) equivalent from the environment. Firms in the European Union and the OECD member countries are buying carbon credits — called CER (Certified Emission Reductions) — from firms in India. CER are registered and issued by the Executive Board of the Clean Development Mechanism (CDM) of United Nations Framework Convention on Climate Change. CER are used to meet a part of the obligations in the EU and OECD countries to reduce GHG emissions; obligations that were agreed upon in the Kyoto Protocol and are now mandated by national governments.

The World Bank estimates that in 2006 approximately US $5 billion worth of CER were sold. The European Climate Exchange added CER Futures for trading in March 2008, followed by CER Options in May 2008. The CER for December 2008 delivery was trading at about US $30 (EU €21) on September 1 on the European Climate Exchange.

Financing of renewable energy projects via carbon credits is a relatively new activity in India. It requires simple and innovative models that are easy to implement, manage and finance. Renewable energy firms like C TRADE are working to help develop renewable energy projects through carbon financing. The company's president, Prabhu Dayal, explains: "We have developed Biogas projects to help local organizations and farm owners where the potential funding from CDM carbon credits will be used to recover our cost for design, development, construction and operation."

C-TRADE develops renewable energy projects in developing countries and finances them partly by having the rights to the carbon credits that the project will generate. Its biogas renewable energy projects turn waste manure from farms into electricity that the farmers use. The projects are completed on a Build-Operate-Transfer (BOT) basis, transferring the asset to the farmer at the end of the agreement period. C-Trade finances the entire operation. "The farmer does not have to invest anything. They give C TRADE rights to carbon credits," says Dayal.

Because many of the renewable energy projects in India tend to be on the smaller scale, innovative business models have made aggregation of investments possible in these projects. Developers of these projects are starting to use the growing market for carbon credits to finance a part of their project costs.

The Wind Market and Carbon Credit Financing

In recent years, the wind energy market has grown significantly and much of this growth can be attributed to supportive governmental policies and innovations in management and financing. A 6.5-megawatt (MW) wind energy project in the state of Madhya Pradesh was issued 10,413 CER for offsetting green house gas emissions over a 13-month period. With 5 wind turbines, the wind farm is owned by a consortium of 5 companies but operated and maintained by the supplier.

Wind turbines in another 9.6-MW project being developed by a hotel firm are also operated and maintained by their supplier. This project is expected to generate 15,245 CER annually for 10 years. At the CER price of US $30, the project could generate about US $457,000 annually, which is equivalent to about US $47 worth of CER per KW of installed capacity.

In India, an additional 70,000 MW of electricity generation capacity is expected to be built between 2007 and 2012 and about 21% of this addition is expected to come from renewable sources. Small Hydro potential in India is estimated to be 15,000 MW and as of March 2008 about 2,000 MW projects have already been installed. Small hydro electric projects of various sizes are taking advantage of carbon credit financing.

The mountainous state of Uttarakhand has an active list of hydro electric projects of various sizes under development and at the proposal stage. Many potential project sites have been identified in the state for development of hydro-electric projects. These include a large number of run-of-river projects ranging from 0.4 MW to 230 MW, and also a few large projects (between 25 and 100 MW) based on water storage. The four small hydro projects for which project design documents have been prepared for CDM are expected to generate 160,000 carbon credits valued at US $1.6 million per year [Note: This is based on a CER priced at US $10, not the current price of US $30 — the value at current CER price will be three times this amount].

Other CDM Benefit

In the past sugar mills in India have been able to generate energy for their use from bagasse (sugarcane pulp) however, the mills were unable to supply the surplus power to the grid, and had little incentive to use efficient technologies. Some of the CDM projects are changing this. One bagasse-based renewable energy project at a sugar factory in India is expected to offset 42,446 tons of carbon dioxide annually for ten years. This 9-MW biomass renewable project was issued 33,434 CER between May 2006 and March 2007. It supplies electricity to the state electricity grid, replacing the need to build more fossil-fuel based power plants.

In the past few years a large number of renewable energy projects have benefited from carbon financing, meeting the energy security needs, and preventing the release of green house gases into the atmosphere. Still, many dispersed and disaggregated renewable energy activities have not yet been able to tap markets for carbon credits. With the development of the carbon credit market and new approaches to renewable energy businesses and policy this may change in the future.

Anupam Tyagi is a RenewableEnergyWorld.com Indian Correspondent based in Ghaziabad, India.