Approach Paper REC

8/3/2019 Approach Paper REC

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Approach Paper to setting up Solar PV Power Project on REC Mechanism

Solar Advisory Services

Approach Paper to setting up Solar PVPower Project on REC Mechanism

Gensol Consultants Pvt Ltd205 206, 2 nd Floor,Sarthik II, S G Highway,

Ahmedabad, Gujarat 380015

W: www.gensolsolar.com E: [email protected] P: +91 79 39122200


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Table of Contents1. Solar PV Power Project ........................................................................... 3 1.1 Technology .............................................................. ..................................... ....... 3 1.2 Regulation ........................................ .................................... ............................... 4

1.2.1 National Solar Mission .................................................................................. 4 1.2.2 State Policies .................................... .................................... ......................... 5

1.3 Financial ...................................................... ..................................... ................... 5

2. Renewable Energy Certificate (REC) Mechanism ................................. 6 2.1 REC Financial Modeling ..................................... .................................... ............. 7 2.2 Risks with REC ................................. .................................... ............................... 8 2.3 REC versus PPA .................................... .................................... ......................... 8 2.4 Strategy Suggested ............................... ..................................... ......................... 9 2.5 Projects Precedent ................................. .................................... ......................... 9

3. About Gensol Consultants Pvt Ltd ...................................................... 10 3.1 Brief History ............................... ..................................... ................................... 10 3.2 Quality Commitment ..................................... .................................... ................. 10 3.3 Awards and Accolades ................................. .................................... ................. 10 3.4 Presence ......................................... ..................................... ............................. 10 3.5 Credentials ................................. .................................... ................................... 11

3.5.1 Owners Engineer ................................... .................................... ................. 11 3.5.2 Lenders Engineer .................................................... ................................... 11 3.5.3 Detailed Designing ............................................. .................................... ..... 11 3.5.4 Detailed Design Vetting ............................... ..................................... ........... 11 3.5.5 Feasibility Analysis & DPR ................................. .................................... ..... 11 3.5.6 Project Execution ........................................................................................ 11


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1. Solar PV Power Project

We will pool all our scientific, technical and managerial talents,with financial sources, to develop solar energy as a source of abundant energy to power our economy and to transform thelives of our people.

- Prime Minister Manmohan Singhon Launch of National Solar Mission

India enjoys ample sunlight with energy incident in the range of 5 7 kWh/sqm/day,approximately twice that of Germany the global leader in Solar Photovoltaic (PV)Installations. To tap into this potential and create new and sustainable options, thepolicy makers have framed policies inviting project developers to setup Solar PVPower Projects. The salient features of a Solar PV Power Project are:

Land Requirement for setting up 1 MW Solar Power Plant is 5 to 7 acres . Cost for Engineering, Procurement and Construction is Rs 10 crores* per MW

and is rapidly reducing. About 17 lac units of electricity is produced in a year from a 1 MW Solar PV

Power Plant. There is very little recurring Operation & Maintenance Costs on account of no

moving parts. The rate of purchase of solar power ranges in between Rs 7.5 to Rs 17 per unit

depending on the Policy. The guaranteed life of a Solar Power Plant in 25 years .

1.1 Technology

The energy from sunlight getsconverted into DC Current onhitting the solar panels. Thecurrent so produced is fed into

inverter to give AC Current at alow voltage. The transformerconnected to the inverter steps upthe voltage to an exportable levelafter which the electricity producedis fed to the grid.

The solar modules are the most important component of the solar power plant andaccount for approximately half of the total cost. The following types of modules are

commercially used in India today.


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Type Area Required Cost* (Rs) Generation per MWCrystalline 4 5 acres / MW 9.5 crores / MW 17 Lac units / year Amorphous Silicon 7 8 acres / MW 9 crores / MW 17.5 Lac units / year Cadmium Tellurium 6 - 7 acres / MW 9 crores / MW 17.5 Lac units / year CIS / CIGS 5 - 6 acres / MW 9.5 crores / MW 17.5 Lac units / year

*The costs are dependent on the dollar to rupee exchange rate at the time of transaction

1.2 Regulation

A Solar PV Project Developer can set up a solar power project in India in one of thefollowing 3 ways:

1.2.1 National Solar Mission

*Reverse Bidding is a process by which allocation is given to the project developersoffering the least tariff to sell solar power, accompanied by keeping proportionatelyhigh Bank Guarantees.

Project developers intending to claim the tax benefit of Accelerated Depreciationwould have had to give a further discount on the tariff arrived at after bidding.

Domestic Content Protection in National Solar Mission clause dictates that the solar PV power plants built on crystalline technology should purchase the modules andcells from Indian manufacturers only.

S o

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National Solar MissionSolar Policy of the Central Govt aimed at setting up 20,000 MW of Solar Power Plants by 2022

State PoliciesIndividual states like Gujarat, Rajasthan, Karnataka and Madhya Pradesh havereleased their own policies to set up Solar PV Power Plants in the respective states

Renewable Energy CertificatesAny Project Developer can set up any size of project anyhere in India. Unlikepreferrential tariff under NSM and State Policies, REC's offer a variable tariff over the lifetime of project.

100 MW allocated in sizesof 2 MW and smaller atRs. 15 to Rs. 17 per uniton 1st come 1 st serve

350 MW allocates of 5 to20 MW at Rs. 7.5 toRs 9.4 Per unit throughReverse Bidding

30 projects of 5 MW eachtotaling to 150 MW at Rs.11 to Rs 13 per unitthrough Reverse Bidding*

Objective of setting up20,000 MW by 2022.

July 2010 Dec 2010 Dec 2011 2022


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1.2.2 State Policies

Gujarat968 MW of Solar Power Projects have been allocated in 2 phases at a tariff of Rs 15for first 12 years and Rs 5 for 13 years after that. These projects have acommissioning deadline of 31st December 2011. The project developers could havetaken the benefit of Accelerated Depreciation without further discount in tariff.

The tariff of the next phase is proposed to be Rs. 12.04 for the first 12 years and Rs.6.84 for 13 years after that. However, the size, timing and process of allocation is notyet clear.

Rajasthan100 MW of PV Power Plants will be allocated in sizes of 5 and 10 MW to ProjectDevelopers on the basis of reverse bidding. 30 th Jan, 2012 is the last date to apply.Considering that 70% of bidders in National Solar Mission were from site in

Rajasthan, it is highly likely that the bidding in Rajasthan State Solar Policy will got tosimilar levels.

Karnataka80 MW of Solar Power Plants 50 MW PV and 30 MW Thermal - are waiting to beallocated to the 22 bidders who had applied under the Karnataka State Solar Policyand hope to be selected on the basis of reverse bidding.

Other StatesMadhya Pradesh, Tamil Nadu and Andhra Pradesh are among the states slated torelease their solar policies soon. However, as is clear from NSM and most of thestate policies, the new policies will also most likely incorporate Reverse Bidding as

the procedure to allocate projects.

1.3 FinancialTaking an average tariff of Rs. 8.77 / unit and an average project size of 12.5 MWbased on the latest round of Reverse Bidding in National Solar Mission, the projectshould be able to achieve an Equity IRR of 17.5% if the cost of the project includingEPC, land and soft cost is less than Rs. 8.5 crores / MW and generation is more than18 lac units / MW. This is under the assumption that the Project Developer isimporting modules and getting Exim Bank financing to the extent of 50% of theProject Cost at 10% interest rate (post hedging) for a tenor of 15 years. The balancedebt is taken from domestic banks at 12.75% interest rate from Domestic Banks for a

tenor of 12 years.

Average Tariff Rs 8.77Average Project Size 12.5 MWProject Cost Rs. 8.5 crores / MWLoan Interest Rate 10 % and 12.75%Loan Tenors 15 years and 12 years } Assumptions for17.5% Equity IRR


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2. Renewable Energy Certificate (REC) Mechanism

The State Electricity Regulatory Commissions (SERC) of most of Indian states have

made it mandatory to consume certain percentage of electricity from RenewableEnergy. This obligation is referred to as Renewable Purchase Obligation (RPO).RPO is separately set for Solar and Non Solar Resource and is on an average 0.25%and 5% respectively.

Though, the RPO is set for all states, but not all of them enjoy equal potential togenerate renewable power. In order to make a state capable of meeting its RPO bytaking credit for a project setup in a different state, which enjoys better potential, theRenewable Energy Certificate was instituted.

Under this mechanism, a project developer can set up a project in any state and sellelectricity to the grid of the respective state at Average Pooled in Power Cost (APPC)

approximately Rs. 2 to Rs 3 per unit or can sell the electricity to any 3 rd partyconsumer at a mutually agreed price. For every 1000 units of electricity generated 1REC would be earned by the Project Developer, which can be bought by theobligated consumer over Indian Power Exchanges to meet its own RPO.

The maximum and minimum costs for Solar and Non Solar RECs have been fixed for the next 5 years (2012 13 up to 2016 17) as follows:

Solar REC Non Solar RECMaximum Rs 13,400

(Rs. 13.4 / unit)Rs 3,300

(Rs. 3.3 / unit)Minimum Rs 9,300

(Rs. 9.3 / unit)Rs 1,500

(Rs. 1.5 / unit)

In case an obligated entity does not meet its RPO, and even a single REC remainsunsold on the exchange, a penalty of maximum cost of REC shall be imposed on theentity.

Also, while in other policies the Project Developer is not able to claim the tax benefitsfrom Accelerated Depreciation (AD) without giving a further discount in tariff, under REC route the project developer can claim AD in the company which is setting up theproject without any reduction in other revenues.

Case Study: States like Kerala do not enjoy a good solar potential relative to other Indian states.To meet its RPO, the distribution companies of Kerala can purchase Solar RECsover the exchange sold by a Project Developer who might have set up the project inGujarat because of its higher solar potential.

The Project Developer would get Rs. 2.7 per unit from the Gujarat distributioncompany with which it would have a long term 25 year PPA. This price would alsokeep on increasing as the cost of electricity increase with time. The RECs sold onthe exchange shall fetch a minimum price of Rs. 9.3 for the next 5 years.

If the developer sets up the project in its profit making company, then he can further claim tax benefit on account of Accelerated Depreciation to the tune of 24% of theinvestment in the project reducing the payback period by more than 1 year.


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2.1 REC Financial Modeling

In spite of assuming the REC Prices to be ZERO after 5 years in

the most radical possible scenario, we are getting returnscomparable to the best possible scenario with Reverse Bidding.

Per MW Optimistic Conservative RadicallyPessimistic

Cost of Project Rs. 9.5 cores Rs. 10 crores Rs. 10.5 crores

Expected Generation 17.5 Lac units 16.5 Lac units 16 Lac Units

Power Sale Tariff Rs. 4.0 per unit* Rs. 2.7 per unit Rs. 2.7 per unit

Tariff Escalation 5% 3% 3%

Max possible tariff Rs. 8 Rs 7 Rs 6

Price of REC for 5 years Rs 11.5/unit Rs 9.3/unit Rs 9.3/unit

Price of REC after 5 years Rs. 6.0/unit Rs. 4.0/unit ZERO

Exim Financing 50% of Cost No No

Interest Rate (Exim) 10% NA NA

Interest Rate (Domestic) 12.5% 13% 14%

Tenor of Exim 15 years NA NA

Tenor of Domestic 12 years 12 years 12 years

Accelerated Depreciation Yes Yes Yes

Equity IRR 90% 40% 16%

*Assuming sale to a 3 rd Party


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2.2 Risks with REC

There is no visibility of tariff 5 years down the line. There is limited trading history available for Non Solar RECs and no trading

history available for Solar RECs till date The above lead to difficult in raising debt for the project, which as for now is being

given solely on the basis of balance sheet financing. The Obligated Entities need to meet their obligations on an annual basis which

concentrates the trading of RECs towards latter part of the year leading tounpredictable cash flows

The State Distribution companies which are the largest Obligated Entities to meetRPO have poor financial health and hence, there are doubts whether they will beable to meet RPO in the first place even if there is a fear of penalties

Resolutions under Discussion Quarterly enforcement instead of yearly enforcement to ensure more predictable

cash flows. Introducing a concept of vintage RECs wherein for an REC generated from aproject setup today shall be equivalent to multiple RECs generated from a project5 years from today. Even if the cost of the RECs reduces after 5 years the projectdeveloper offsets that loss by having more RECs to sell.

2.3 REC versus PPA

Parameters REC PPAReturn on Equity REC promises a much higher

Return on EquityLower return on equity which can

only be justified by large scaleBank Guarantees No Bank Guarantees required to

set up the projectBid Bond and Performance

Guarantees to the extent of Rs 2 3 crores / MW need to be kept on

allocationAcceleratedDepreciation

Can be claimed without anyrevision to tariff

Tariff is revised downwards in caseAD is claimed

Choice of Capacity

Any Capacity power plant canbe setup

Capacity Sizes allowed changefrom policy to policy

Choice of State Project can be setup in anystate

Project needs to be setup in thecorresponding state under whose

policy the project is proposed

Continuation of Tariff

No visibility beyond 5 years 25 year visibility of tariff

Bankability of Power Sale

A changing REC price withlower visibility reduces

bankability

Firm PPA signed at a preferentialtariff gives comfort to lenders

Predictability of Payments

Poor financial health of discomsleads to fears for payments.Yearly compliance leads to

concentrating payments towardsthe end of year.

NSM has payment securitymechanism. However, poor

financial health of discoms is amatter of concern in PPA route as

well.


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2.4 Strategy Suggested

As has been seen above that in the most radically pessimistic scenario also, thereturns from REC route are comparable to the best possible scenario under ReverseBidding.

The following approach would balance the risks and returns: Chose a profit making company under which to set up the project Chose the size of project so as to absorb the tax benefit of Accelerated

Depreciation Commission the project as early as possible to enjoy the complete benefit of the

predictable REC prices for the next 5 years

2.5 Projects Precedent

Jain Irrigation Systems Ltd*

The only Solar PV project visible on the REC website ( www.recregistryindia.in ) under accreditation is 8.5 MW project at Jalgaon, Maharashtra where in Jain IrrigationSystems Ltd is setting up the project using modules from its own manufacturing lineand using power in its own factories after wheeling from the grid. The project hasachieved financial closure and is expected to commission by February.

Gensol Consultants Pvt Ltd has the proud privilege of being theOwners Engineer to this project wherein we are advising JainIrrigation Systems on the design, procurement and execution of the project.


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3. About Gensol Consultants Pvt Ltd

3.1 Brief History

While the climate change debate was still brewing, Gensol Consultants Pvt. Ltd. wasamong the first in India to take a proactive approach. Today, we boast of reduction of 25 million tonnes of carbon dioxide through our 450+ client base spread across therenewable energy spectrum in India.

Gensol Solar Division , set up in early months of 2009 is dedicated to usingtechnology, engineering and innovation to give its clients the best returns on their capital. It is with this view that we strive to provide support and engineering expertiseto clients and investors in Solar Power Sector through our offerings of completeconcept to commissioning services for MW scale grid-connected and off-gridstandalone solar power projects.

3.2 Quality Commitment Among one of the first ISO 9001:2000 certified consultancyfirms since inception.

3.3 Awards and Accolades BusinessWorld 1 Hottest Young Entrepreneur of the Year 2010Economic Times 2 Power of Ideas Winner 2009

Featured InBusiness Dailies: Business Standard Economic Times Financial ExpressBusiness Magazines: Business India BusinessWorld Forbes IndiaIndustry Journals: Power Line Energetica Carbon News

3.4 Presence

In order to have a local presence in the ever-dynamic renewable energy sector andensuring easier access to clients has 3 offices to serve projects all over the country: Ahmedabad, Gujarat Gurgaon (New Delhi), Capital of India Bangalore, Karnataka

1 BusinessWorld is Indias largest Business Magazine in terms of readership2 Economic Times is Indias largest Business Newspaper in terms of readership


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3.5 Credentials Gensol Consultants has been a partner of choice for many a Fortune 500,internationally and nationally Listed Companies. Our reach spans across 16 Indianstates and entire renewable energy spectrum.

Solar Clients of Gensol Consultants Pvt Ltd include:

3.5.1 Owners Engineer 60 MW (4 Projects) Haryana Power Generation Corporation Ltd,

Haryana Govt. enterprise 25 MW Alex Astral Solar Power Ltd., Gujarat 5 MW Konark Group, Gujarat 5 MW Swiss Park Vanijya Pvt Ltd, Rajasthan 5 MW OPG Energy Pvt Ltd, Rajasthan 5 MW Alex Spectrum Radiation Pvt Ltd, Rajasthan

3.5.2 Lenders Engineer Exclusive Lenders Engineer to L&T Infra Finance 6 MW Indiabulls Power, UP & Maharashtra 10 MW Greeninfra Solar, Gujarat 5 MW ESP Urja, Gujarat (Sun Edison Project) 10 MW Millennium Synergy, Gujarat (Sun Edison Project) 20 MW PLG Power, Gujarat 25 MW Sun Group, Gujarat 10 MW Ruchi Soya, Gujarat

3.5.3 Detailed Designing 20 MW Client Confidential, Gujarat 1 MW L&T ECC Division, Rajasthan 8.5 MW Jain Irrigation, Maharashtra

3.5.4 Detailed Design Vetting 2 MW R V Akash Ganga, Uttarakhand

3.5.5 Feasibility Analysis & DPR 20 MW Cargo Motors, Gujarat 5 MW RSB Energy, Orissa 5 MW Chemtrol Industries, Rajasthan 5 MW Shashi Kiran Group, Karnataka 2 MW Shri Bhagirathi Textiles Ltd, Maharashtra 5 MW Tip Top General Agencies Pvt Ltd, Rajasthan

3.5.6 Project Execution 1 MW Sheth Developers, Maharasthra 100 kW off Grid Dibrugarh University, Assam 200 kW off Grid Natural Dehydrates, Gujarat 100 kW off Grid Raheja Developers, Gurgaon 12 kW off Grid Residential Project, Gujarat 5 kW off Grid Raheja Developers, Delhi 2 kW off Grid JSS Academy, Noida

Documents

Approach Paper REC