Indian carbon investors move away from renewables on weak demand, additionality concerns

Carbon project developers in India are moving away from renewable energy to generate credits amid ongoing weakness in demand for the segment within the voluntary carbon market, and some concerns over declining additionality of such projects, market sources told S&P Global Commodity Insights.

The sources added that interest had moved to setting up projects in the afforestation/reforestation, cookstoves, REDD+ and biochar segments in the country, with these categories often fetching a premium over their renewable counterparts.

The Platts Renewable Energy Current Year price was assessed steady from the previous session at $1.4/mtCO2e on July 15, showed Commodity Insights data. The Platts Household Devices Current Year price was assessed at $4.30/mtCO2e while the Platts Natural Carbon Capture Current Year price was at $12.40/mtCO2e, both steady over the same period.

An India-based developer/trader said that investors were exploring other segments like biochar as their carbon sequestration was more significant than is offered by renewable energy projects.

Platts heard indicative values for biochar credits in the range of $130-$150/mtCO2e in late June.

Additionality fades

The credits generated from renewable energy projects that are categorized as "avoidance-based" are among the cheapest types of credits in the VCM market. Sources said that the additionality for such projects in their places of origin has eroded over the years as renewable energy prices have grown more cost competitive.

"The trend of investors moving towards other segments and away from renewable energy has been seen in India over the past six months to one year," a second India-based developer said.

Sources said that since renewable energy projects in the country were able to sustain themselves without having to generate revenue from carbon credits, there was not much interest from investors to set up such projects to generate revenues from selling credits.

The second developer source added that credits from renewable energy projects were avoidance-based at the end of the day, while credits from other project categories fetched a premium as they were "removal-based" credits.

A lack of liquidity in the renewable energy segment, evident from sporadic trades since the start of this year and that too for lower volumes, was also encouraging investors to gradually move towards other project segments.

An India-based investor said that there isn't much buying interest for renewables credits currently despite some suppliers, sitting on large inventories, being willing to liquidate their credits at prices lower than market levels.

The lack of revenue from carbon credits in the segment was also pushing project developers towards other segments, the investor source said.

Integrity concerns

The general demand across the VCM market has also fallen as most participants have stayed on the sidelines amid a slew of integrity issues in the last few years.

A recent such instance involved C-Quest Capital and Verra Carbon Standard, in which the latter suspended as many as 27 cookstove projects in June amid allegations of C-Quest overissuing credits under its previous CEO.

Besides integrity-related concerns, sources said that excess supply of renewable energy credits was also limiting upticks in demand.

A total of 9 million mt of renewable energy credits were issued globally in June, which was 49.7% higher on the month and 25% higher on the year, Commodity Insights data showed.

A Singapore-based broker said that there was no rush to purchase credits amid ample options for buyers to choose from.

Not the end for renewables

Project developers are absolutely not refraining from getting new renewable energy projects in the country certified, sources said, adding however that those interested in generating a sizeable revenue had started looking at other segments.

A third India-based developer said that a large chunk of revenue for a renewable energy project comes from electricity rather than carbon credits.

"There was preference for renewable energy over projects such as cookstoves, but nature-based avoidance projects such as afforestation took precedence over renewable energy," the third India-based developer said, adding that there was at least better cashflow in setting up renewable energy projects compared with a cookstove project, which had minimal cash flow.

A fourth India-based project developer said that global carbon project certifiers such as Gold Standard and VCS were not certifying projects in India for renewable energy as the electricity generation is exceeding half the capacity of projects now.

Even though a few participants said that they weren't expecting a revival in market activity towards the second half of 2024, some said that there could be a slight improvement in buying going ahead across all segments.

An India-based broker said that despite the bearish market conditions, project developers were continuing to invest in renewable energy projects as it was much easier to generate credits by setting up a solar or wind power plant.

"It would take a minimum of three years to generate credits from any of the nature-based projects, while operational costs of running and maintaining such a project was also higher compared to renewable energy projects," the India-based broker said.