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Financial Engineering as a means to support Jawaharlal Nehru National Solar Mission

April 2012


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Executive Summary India’s Jawaharlal Nehru National Solar Mission (JNNSM) is a one of its kind country level initiative that aims to help achieve the intertwined national objectives of ensuring energy security for the country and bringing about sustainable and environmentally efficient growth through large scale deployment of on-and off-grid solar power applications. With a supportive policy framework in place, the rapidly growing Indian solar industry offers immense investment opportunities. However, the key to realizing the projected unprecedented growth would be access to affordable and appropriate financing.

PwC undertook this study to analyse the financial aspects of the JNNSM to understand the projected demand-supply position of capital for meeting the Mission targets, identify potential barriers and develop solutions to foster robust public-private financial system to accelerate the growth of the Mission.

JNNSM is one of the eight National Missions laid out in India’s National Action Plan on Climate Change (NAPCC). It aims to incentivize the installation of 22,000 MW of on- and off-grid solar power using both PV and CSP technologies by 2022 as well as a large number of other solar applications such as solar lighting, heating, and water pumps. Under NAPCC, the government also announced various regulations, such as the ‘Renewable Purchase Obligation’ that has mandated distribution utilities to buy a minimum proportion (with annual increment) of their power from renewable energy based power plants. To further complement this framework, tradable renewable energy certificates (RECs) have been introduced to facilitate inter-state trade so that RPOs can be met. To aid the development of the solar industry, solar-specific RPOs and RECs have also been instituted.

The NSM will be rolled out over three phases by 2022 with targets of 1000 MW of grid connected solar by 2013, 4000 MW by 2017 and 20,000 MW by 2022. Phase I focused on establishing an enabling environment and on “capturing low hanging options in solar thermal; on promoting off-grid systems to serve populations without access to commercial energy and modest capacity addition in grid-based systems”. Using learnings from this phase, capacity will be aggressively scaled up in the subsequent phases. Projects under the Mission have been awarded on preferential feed-in-tariffs determined through a reverse bidding mechanism wherein, discount bids have been invited on CERC determined benchmark tariffs through the trading arm of India’s largest power producer NTPC- NTPC Vidyut Vitaran Nigam Ltd (NVVN).

As per the targets set out by the JNNSM and other state initiatives, the Indian solar sector has a number of projects in pipeline scheduled for commissioning in the next two-three years. However, the government recognizes that these targets cannot be achieved without private sector participation.

Stakeholder interactions with project developers, financiers and policy makers (see full list of stakeholders in Annexure II) revealed that under the first phase of the Mission, no perceptible gap in financing for solar projects existed although a majority of funding available was based on balance sheet recourse. Financial Institutions approached during the course of the study highlighted their concerns regarding accuracy of solar irradiation data and resultant future cash flows from the solar power projects. Further, due to limited technical exposure and competence to judge the viability of solar project proposals, most financial institutions conceded that they were following a “wait and watch” approach to first let a few projects come up successfully and then form an opinion on the type of lending (recourse or non-recourse) they wish to pursue.

Based on these stakeholder inputs, a detailed risk assessment matrix was developed. A majority of risks related to aspects like lack of technical qualification criteria for bidders, delays in getting clearances/ approvals, potential equipment supply crunch due to emphasis on domestic content, sub-optimal evacuation infrastructure, (un)reliability of solar irradiation data etc. Solar technologies are at a nascent stage in India and there are considerable risks in the execution of projects. Projects based on crystalline cells and modules are comparatively easier to execute and less risky as manufacturers generally guarantee the products for more than 20 years. However, newer technologies like thin-film and concentrated PV, although demonstrating higher efficiency and lower life-cycle cost of ownership, are yet unproven and therefore considered risky in the Indian context. The returns of a solar project


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are highly sensitive to radiation levels. High quality solar radiation data is a pre-requisite for proper potential assessment and project development. Hence, solar radiation assessment is a very important activity and typically requires several months for ground measurement of solar radiations. Any error in solar resource estimation adds an uncertainty to the expected future returns. As of now, on-ground solar radiation data is sketchy and the simulation models are at a preliminary stage. Evacuation of the electricity generated from power plants located in isolated areas is a potential challenge. It may require development of new transmission lines, which are often controversial, both because of their expense and the potential of damage to property and environment.

The risks identified and classified as per their impact, probability and time horizon indicates the overall nature of the risk on the solar sector as a whole. However, these risks are an even greater concern at a project specific level, where risk avoidance and mitigation measures tend to be limited and expensive. It is important to determine which of these risks directly impact project viability, and to what extent. As can be discerned from the analysis above, certain risks have a direct impact on interest rates and capital costs, which are among the two most important factors affecting project viability. This report analyzes the extent of impact that these specific risks and their mitigation measures can have on interest rates.

The report also includes simulations based on a typical financial model for a solar project.Simulating solar power generation regardless of the technology is not technically dissimilar to simulating generation from conventional energy sources. Specific technical and operational assumptions relating to each type of solar technology, which are relatively easily available from international experience, along with site specific parameters like radiation, regulatory and other expenses etc. are the predominant variables required to calculate generation from solar technologies.

However, the primary aim of simulating solar PV and thermal generation for this assignment is threefold:

1. analyze the effect of various risks, as perceived by different stakeholders, on project viability.

2. analyze the effect of mitigation measures for each of the risks analyzed in the previous steps on the project viability and;

3. assess the best combination of funding sources to improve project viability

As has been highlighted in this report, a solar PV or CSP plant can face several categories of risks ranging from policy & regulatory, technical, infrastructural and general project finance risks that are univerally applicable for all infrastructure projects. However, only some of these risks have a discernable effect on key variables that determine solar project viability. Other types of risks are more generic in nature and do not effect any single project variable directly, but rather put the entire project itself in jeopardy.

Sensitivity analysis on the financial model above confirms, apart from tariff, the capital costs is perhaps the most important parameters affecting project viability for both solar thermal and solar PV. This realization is important since unlike other parameters affecting IRRs, these two are directly under the control of the project developer. Retaining control over these two parameters simultaneously could ensure that even if other parameters are adverse, overall project viability is not severely impacted.

Based on the stakeholder consultation and our analysis the risk mitigation measures for various associated risks are proposed in detail. These measures are inclusive of the steps to be taken at policy level, industry level, by financial institutions, project developers, state bodies and other regulatory bodies.

This study also analyzed the Indian financial system’s capacity to provide the requisite funding to the NSM and scenarios of exceeding the NSM targets by 2 and 3 times. Our analysis suggests, contrary to some perceptions, that there does not appear to be any sizeable funding gap or significant dearth of funds for lending to solar projects under the phase I, batch I. Banks and financial institutions (FIs)


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are, however, cautious while treading into “uncharted” territory beyond phase I or relying on non-recourse financing. Banks are willing to finance projects that are backed by a company’s strong balance sheet and are cautious about providing project-based financing.

Apart from NSM targets, to estimate the investment required capital cost trends of the technology are required. To calculate the capital cost till 2022, capital costs for the technologies have been taken as assessed from stakeholder discussions have been taken for the base year 2011-12. The capital cost for solar technologies covers the equipment cost, land cost, interest during construction, evacuation cost and civil and commissioning costs. For the base year 2011-12, the capital cost for solar PV, irrespective of thin film or crystalline technology has been taken as Rs. 11.00 crores/ MW. For solar thermal the capital cost for the base year is Rs. 13 crores/ MW.

Capital cost reduction trends for solar PV have been taken at 5%, whereas for solar thermal it has been taken at 3% annual decrease. However when we consider the other cases for installation of 40,000 MW and 60,000 MW by 2022- technology costs will have to decrease even more aggressively to promote investors to fund the extra capacity. Despite this, capital cost reductions will most likely not be proportional to extra added capacity. We assume a 6% annual decrease in capital cost for solar PV for scenario 2 and a 7% annual decrease in capital cost for scenario 3. For solar thermal the base case capital cost reduction is 3%, under scenario 2 the capital cost reduction has been taken as 4% and under scenario 3 it has been taken at 6%.

Further, construction time for solar PV plants has been taken as 1 year, whereas for solar thermal the construction time has been taken as 2 years, with capital cost distribution of 70% in the first year and 30% in the second year.

The analysis revealed that under the base case (20,000 MW by 2022) the total investment required was calculated to be Rs. 172, 338 crores (USD 34.47 billion) based on the assumptions for capital cost, and year-wise installations. A significant participation from the private sector is critical to achieve the envisioned targets. Therefore, there is an urgent need to explore ways to catalyze private sector participation to support the Government of India in providing sufficient capital to scale up the Mission to achieve targets till 2022, and beyond.

To ensure 20,000 MW (10000 MW of solar PV, 10000 MW of solar thermal) of grid connected solar capacity addition, ramping up local manufacturing capacity is required. The National Solar Mission also targets to create a favourable environment for solar manufacturing and research for both PV and solar thermal. One of the mission’s targets is for India to become a global leader across the solar manufacturing value chain. This is necessary for the overall success of the National Mission as an evolving domestic industry would help decrease costs and also provide timely maintenance for projects. Estimates for adding both solar PV and solar thermal manufacturing has been made which comes out as, the capital outlay for the NSM base for 20,000 MW of solar (10,000 solar PV) requires Rs.27,698 crores or USD 5.54 billion. Achieving financial closure has come across a major impediment for few of the projects awarded

under Batch-1 of JNNSM, the reasons of which have been detailed in the report. The need of the hour

is to understand key features of the present sources and instruments of finance with respect to their

applicability for solar power projects. Accordingly, appropriate recommendations need to be made

which can be put into action readily or by bringing in changes in policies, so that future projects do

not face difficulty in raising financing.

There are primarily two methodologies of raising debt, which are through Project financing or Balance sheet based funding. The provisions of JNNSM allow the selected bidder (developer) to directly invest in the solar power project, without the need of creating a separate SPV. Debt can be raised by the developer on the strength of its balance sheet for financing the project. However, in this case, if the project fails, the lenders will have recourse to the developer’s other assets and hence is generally less preferred by developers.


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The report depicts, there are several sources of raising debt namely, commercial banks, IFC’s, capital markets, multilateral/bilateral agencies, export credit agencies, International banks, FI’s, pension funds, insurance companies, foundations etc. Each one has its unique features in terms of tenure, interest rates, moratorium period, currency of borrowing, suitability for SPV or developer, special features etc. These sources of debt has been studied in detail to evaluate which ones would be suitable for raising finance for financing solar power projects in India. The sources of debt have been categorised into two major heads, vis-à-vis, domestic and external sources. While the efficacy of existing financing sources such as commercial banks and Infrastructure financing Companies may be enhanced through financial engineering tools like sovereign guarantees, differential interest rates during loan tenures, take-out financing and securitization of loans, new sources of funding such as Green Infrastructure Bonds, Lease financing, Clean Renewable Energy Bonds and International Infrastructure/Energy Funds may be explored as well.

Equity financing is more critical for any project as compared to debt financing. When a project is identified, the first step is to select an appropriate project developer who has willingness and ability to put in equity in the project. Efforts towards raising debt are initiated in the next step. Debt financing can’t happen for a sector where interested parties, who are willing to take risks and invest equity in projects, are not present. The report covers different avenues of raising equity financing in detail. The study also emphasises the need for concerted and continued policy level engagement and leadership in order to enhance investor confidence and foster private sector participation.

Apart from maximizing equity IRR, developers need to take several other factors into consideration while raising debt. Some of the important factors include developer’s financial strength, project features, possibility of importing equipment and country of import, availability of government guarantee, creditworthiness in international markets etc. Considering these factors and constraints, we have arrived at the most optimal debt-raising combination applicable for solar power developers under certain specific conditions.

Some of the major recommendations that emerged from this study relate to policy and regulatory level suggestions, such as, establish separate exposure limits for renewable energy or solar power. Some financial institutions in India face a 5% cap on investments in the power sector. Renewable are a part of this allocation; therefore, investment in solar is limited by lenders’ investments in conventional power. In addition, lenders’ exposure is calculated over a four-year term (i.e., if a renewable project is on the books in year one, it stays there till year four, even if it is divested in year two). Discussions suggest that these guidelines could limit solar investment and could be revisited with a specific focus on how a separate ‘renewable energy’ allocation allowance could be appropriately structured. Other measures such as exploring financing vehicles such as solar bonds and Credit Default Swap instruments to unlock foreign capital and evolve PPA breach of contract insurance instruments, Policy interventions, especially to strengthen pre-qualification criteria for bidders and provide contractual flexibility to developers to choose from different market models for sale of power have also been suggested.

Indian Solar industry is currently driven almost exclusively by government policies. Capacity installations from National Solar Mission and other state policies would potentially increase up to 10 times of the current capacity. In the recent times the capital cost reductions for solar power decreased by about 16% to 20%. Irrespective of the associated risks and wait and watch policy of financial institutions most of the project developers are optimistic about the growth of solar markets in India. Some of the financial institutions claimed the tariffs resulting from the reverse bidding during Phase I batch I of the national solar mission, were very low which could make the projects unviable during long run, But with some of the common players from phase I batch I bidding were seen re bidding during batch II where the tariffs quoted were even lower, confirms the seriousness of developers and their readiness to invest and grow in the Indian solar markets. The capital cost for solar power has come down by about 16% to 20% in the last two years. It is expected to continue the downward trend for the next three years as the manufacturing scale increases and the technology matures.

The Grid parity projections which were earlier supposed to occur at the end of current decade is now being proposed to be seen much earlier near 2016-17 with , the cost for fossil fuels such as coal increasing day by day, thus driving up grid power prices.

Financial Engineering as a means to support Jawaharlal Nehru National Solar Mission SHAKTI Foundation

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Table of Contents

Executive Summary 2

Chapter 1: Jawaharlal Nehru National Solar Mission - A sound beginning 14

Introduction 14

Mission Roadmap 15

Institutional Framework for JNNSM 15

Ministry of Power 16

CERC 16

NTPC 16

NVVN 16

State Distribution Utilities 16

Policy Incentives 17

NSM (Phase I Batch I) 18

State Level Initiatives and Development Targets 20

NSM– Solar projects (Phase I Batch II) 22

Highlight of Phase I Batch II bidding results 23

Overview of Manufacturing Scenario 25

Chapter 2: Present Status of financing for NSM 27

Stakeholder Consultations 27

JNNSM – Tariff and policy framework 27

Funding – Options and Risks 28

Threats 28

Future 29

Conclusion: A current assessment of financing 29

Chapter 3: Challenges to advancing the NSM 31

Policy and Regulatory Risks 32

Policy framework 32

1. Past track record of bidders 32

2. Delays in getting clearances and approvals 32

3. Issues related to the Contractual Agreement between NVVN & SPD/Distribution Utility 33

Construction Risk 33

Generation & Operating Risk 33


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Payment security and default mitigation mechanism 34

4. Aggressive Bidding 34

5. Indigenous Manufacturing base - Supply Crunch 35

6. Scale of Projects 35

7. Political Risk 35

Infrastructure 35

1. Evacuation Infrastructure 36

2. Specific issues with relation to land 36

3. Specific issues with relation to water 36

Technological risks 36

1. Reliability of Solar Radiation Data 36

2. Risks associated with Quality and Service 37

Focus on long-term reliability of PV modules 37

Challenges during system integration 37

Financial Risks 37

1. Interest Rate risks 37

2. Currency risk 38

3. Commissioning risk 38

4. Raising of equity 38

5. Risks leading to non- fulfilment of in-time financial closure by the project developer 38

6. Exposure limits 39

Risk Matrix 39

Impact on expected returns 43

Past track record of bidders 43

Limited exposure of banks/FIs to RE sector 43

Delay in getting clearances and approvals 43

Interest rate risk 43

Currency risk 43

Chapter 4: Risk Mitigation Measures 45

Policy and regulatory Risks 45

Past Track record of bidders 45

Issues related to the Contractual Agreement between NVVN & SPD/Distribution Utility 45

Over Aggressive Bidding 45

Indigenous Manufacturing – Supply crunch 45

Scale of Projects 46

Political Risk 46


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Infrastructure 46

Evacuation Infrastructure 46

Technological risks 46

Reliability on available Solar Irradiation Data 46

Technology selection 46

Lack of performance data for Indian conditions 47

Financial Risks 47

Interest Rate Risks 47

Currency risk 47

Commissioning Risk 48

Raising of equity 48

Risks leading to non- fulfilment of in-time financial closure by the project developer 48

Chapter 5: Year-wise investment / funding requirements for NSM 49

Renewable Energy Year Wise Capacity Addition till 2022 49

Investment Required for other Renewable Energy till 2022 51

Solar Capacity Addition under NSM 53

Different Scenarios for the National Solar Mission 53

Estimating Investment Required under the Different Scenarios of NSM 53

Assumptions 53

Scenario 1: Base Case of 20,000 MW of Solar Power by 2022 54

Scenario 2: Twice the Base Case- 40,000 MW of Solar Power by 2022 56

Scenario 3: Thrice the Base Case- 60,000 MW of Solar Power by 2022 57

Solar PV Manufacturing 58

Chapter 6: Solar Power Plant Simulations 60

Introduction 60

Simulation model assumptions 62

Analyzing the effect of various risks 65

Optimal combination of capital cost and tariffs 70

Chapter 7: Estimation of the capacity of Indian financial system for providing funding to NSM 72

Approach 72

Chapter 8: Potential sources of funding 76

Background 76

Options for debt financing 77

Sources of raising debt 77

1. Domestic sources of raising debt 77


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1.1 Commercial banks in India 77

1.2. Specialised infrastructure financing companies (IFCs) 78

1.4. Other domestic institutional investors like insurance companies, pension funds, charitable institutions etc. 80

2. External sources of raising debt 81

2.1. Multi-lateral and bilateral agencies 81

2.2. Export credit agencies 82

2.3. International commercial banks 83

2.4. Financial institutions, like pension funds etc. 84

Ways to enrich current debt financing instruments 86

Steps by government 86

1. National Clean Energy Fund 86

2. Sovereign guarantees to agencies 86

Steps by other financial institutions/banks/agencies 86

1. Take-out financing 86

2. Differential interest rates during the tenure of the loan depending upon prevalent project risk 87

3. Securitization 87

4. Partial credit guarantee from Asian Development Bank 87

Steps by companies 87

1. Loan guarantees by parent companies 87

Options for equity financing 87

1. Project sponsor’s/developer’s equity 87

2. Capital markets (Public equity) 88

3. Private equity (PE) 88

Conclusion 88

Accelerating NSM by exploring new avenues of financing 89

Green Infrastructure Bonds 89

Lease financing 89

Clean Renewable Energy Bonds (US based) 90

International Funding Sources 90

Assessing the best combination of funding sources 90

Solar PV 90

CSP 91

Chapter 9: Policy Guidance for the Indian Government 92

Regulatory Interventions 92

Policy Interventions 93


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Other Interventions 94

Annexure-I: Assignment of weightages to the identified risks 95

Annexure-II: Minutes of meetings from Major Stakeholder Interactions 97

Annexure-III: International Funding Sources 119

List of Abbreviations

APPC Average Power Purchase Cost

CEA Central Electricity Authority

CERC Central Electricity Regulatory Commission

CPP Captive Power Plant

CSP Concentrating Solar Power

DTC Direct Tax Code

FDI Foreign Direct Investment

FI Financial Institutions

GDP Gross Domestic Product

GOI Government of India

GW Giga Watt

IDC Interest During Construction

IEA International Energy Agency

IFC Infrastructure Finance Company

IREDA Indian Renewable Energy Development Agency

IRR Internal Rate of Return

JNNSM Jawaharlal Nehru National Solar Mission

KV Kilo Volt

kWh Kilo Watt Hour

MNRE Ministry of New and Renewable Energy

MOP Ministry of Power

MW Mega Watt

NAPCC National Action Plan on Climate Change

NBFC Non Banking Financial Company

NTPC National Thermal Power Corporation

NVVN NTPC Vidyut Vyapar Nigam Ltd

O & M Operation and Maintenance

PE Private Equity

PFC Power Finance Corporation

PLF Plant Load Factor

PPA Power Purchase Agreement

PSA Power Sale Agreements

PTC Parabolic Trough Collector


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PV Photo-Voltaic

REC Renewable Energy Certificate

REC Rural Electrification Corporation

RES Renewable Energy Sources

RPO Renewable Purchase Obligation

SPD Solar Project Developer

STU State Transmission Utility

WtE Waste to Energy


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List of Tables Table 1: JNNSM Mission Targets ............................................................................................................... 15 Table 2: Indian Solar PV Manufacturing Companies ............................................................................... 25 Table 3: Risks Associated with JNNSM ..................................................................................................... 31 Table 4: Time Horizon Classification of Risks ........................................................................................... 41 Table 5: Impact of Risks ............................................................................................................................. 44 Table 17: Year-wise RE capacity addition (MW) ...................................................................................... 52 Table 18: Year-wise RE investment required (Rs. Cr) .............................................................................. 52 Table 19: Scenario wise investment required for grid connected solar power ........................................ 58 Table 20: Investment Required under NSM for Solar Power Capacity Addition ................................... 58 Table 21: Investment Required under NSM for Solar Power Capacity Addition and Manufacturing .. 59 Table 6: Major Risks .................................................................................................................................... 61 Table 7: Financial Model Assumptions ..................................................................................................... 62 Table 8: Features of different types of debt .............................................................................................. 64 Table 9: Impact due to capital costs .......................................................................................................... 65 Table 10: Impact due to commissioning time ........................................................................................... 66 Table 11: Impact due to REC prices ........................................................................................................... 66 Table 12: Impact due to CUF ......................................................................................................................67 Table 13: Impact due to interest rates ....................................................................................................... 68 Table 14: Impact on cost of generation per unit due to CUF and interest rates ..................................... 69 Table 15: Sensitivity in IRRs for changes in capital costs and tariff for Solar PV ................................... 70 Table 16: Sensitivity in IRRs for changes in capital costs & tariff for Solar Thermal .............................. 71 Table 22: Projections of Credit Availability for the Power Sector ............................................................ 72 Table 23: Projections of Credit Availability for Renewable Energy .......................................................... 73 Table 24: Funding capacity of select NBFCs for RE .................................................................................. 73 Table 25: Capacity of Indian financial system to finance solar power projects .......................................74 Table 26: Credit shortfall under different NSM scenarios ........................................................................74 Table 27: Features of loans from commercial banks ................................................................................. 77 Table 28: Features of loans from IFCs .......................................................................................................79 Table 29: Features of debt raised from Capital Markets ...........................................................................79 Table 30: Features of debt from other domestic institutional investors ................................................. 80 Table 31: Features of debt from foreign sources ....................................................................................... 82 Table 32: Features of debt from export credit agencies ........................................................................... 83 Table 33: Features of debt from international commercial banks .......................................................... 83 Table 34: Features of debt from other foreign sources ............................................................................ 84 Table 35: Sensitivity of sources of funds on IRR ...................................................................................... 85 Table 36: Risk Matrix ................................................................................................................................. 96 Table 37: Rates of PFC Rupee Term Loans ............................................................................................... 98 Table 38: Difference between Gujarat and NVVN solar schemes .......................................................... 105

List of Figures

Figure 1: JNNSM Framework ..................................................................................................................... 15 Figure 2: Solar Policy Incentives ................................................................................................................ 17 Figure 3: JNNSM Phase I Batch I bidding process ................................................................................... 18 Figure 4: Recent Market Developments under Phase I ............................................................................. 19 Figure 5: JNNSM Batch I Solar PV Bids .................................................................................................... 19 Figure 6: JNNSM Batch I Solar Thermal Bids .......................................................................................... 20 Figure 7: Recent Market Developments under State policies ................................................................... 21 Figure 8: JNNSM Phase I Batch II Bidding process ................................................................................ 22 Figure 9: Results of JNNSM Phase I Batch II Bidding ............................................................................. 24 Figure 10: Plot of the risk evaluation matrix ............................................................................................. 40 Figure 11: Past Trends of Renewable Energy Capacity Addition ............................................................. 49 Figure 12: Cumulative RE Installed Capacity ........................................................................................... 50 Figure 13: % Addition of RE Technologies ................................................................................................ 50 Figure 14: Capital Cost Trend for Solar PV (Rs. crores/ MW) ................................................................. 54


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Figure 15: Capital Cost Trend for Solar Thermal (Rs. crores/ MW) ........................................................ 54 Figure 16: Scenario 1- Solar Power Installations (MW) ............................................................................ 55 Figure 17: Scenario 1- Solar Power Investments (Rs. Crores) ................................................................... 55 Figure 18: Scenario 2- Solar Power Installations (MW) ........................................................................... 56 Figure 19: Scenario 2- Solar Power Investments (Rs. Crores) ................................................................. 56 Figure 20: Scenario 3- Solar Power Installations (MW) ........................................................................... 57 Figure 21: Scenario 3- Solar Power Investments (Rs. Crores) .................................................................. 57 Figure 22 Capital Cost fluctuations for Solar PV ...................................................................................... 65 Figure 23 Capital Cost fluctuations for Solar Thermal ............................................................................. 65 Figure 24 Impact due to commissioning- Solar Thermal ........................................................................ 66 Figure 25: Impact due to commissioning time -Solar PV projects .......................................................... 66 Figure 26 Decrease in REC prices- Solar PV ..............................................................................................67 Figure 27 Decrease in REC prices-Solar Thermal .....................................................................................67 Figure 28 Change in CUF - Solar PV ......................................................................................................... 68 Figure 29 Change in CUF-Solar Thermal .................................................................................................. 68 Figure 30 Variation in Interest rates - Solar PV ....................................................................................... 69 Figure 31 Variation in Interest rates-Solar Thermal ................................................................................ 69 Figure 32: Gap in financing for solar power from Indian financial system ............................................. 75 Figure 33: Sources of raising finance .........................................................................................................76 Figure 34: Fund Disbursements in 2010-11 ...............................................................................................97

Disclaimer

This report has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You

should not act upon the information contained in this publication without obtaining specific professional advice. No

representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this

report, and, to the extent permitted by law, PricewaterhouseCoopers Private Limited, its members, employees and agents do

not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining

to act, in reliance on the information contained in this report or for any decision based on it.

This initiative is supported by Shakti Sustainable Energy Foundation (“Foundation”), however the views expressed in this

document do not necessarily reflect views of the Foundation. The Foundation also does not guarantee the accuracy of any data

included in this publication nor does it accept any responsibility for the consequences of its use.


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In February 2010, the Central Electricity Regulatory Authority (CERC) announced benchmark feed-in tariffs for the financial year 2010–2011 of INR 17.91 (USD 0.36) per kWh for PV and INR 15.31 (USD 0.31) per kWh for CSP and declared that Power Purchase Agreements (PPAs) would have a validity of 25 years. It is assumed that at current cost levels, the tariff will allow investors to achieve an internal rate of return of about 16%–17% after taxes. The tariffs mentioned above were applicable for those solar power projects that had their PPA signed on or before 31st March, 2011. As capital costs decreased, CERC revised the tariffs for the financial year 2011-2012. As per the revision, a feed-in-tariff of INR 15.39 per kWh for PV and INR 15.04 per kWh for CSP projects will be applicable for projects whose PPAs are signed after 31st March, 2011. Further, if accelerated depreciation at the rate of 80% is considered, the net levelized tariff would work out to Rs. 12.94 and Rs. 12.69 for solar PV and solar thermal projects respectively.

Chapter 1: Jawaharlal Nehru National Solar Mission - A sound beginning

Introduction The Government of India together with various state governments has been working towards introducing policies and creating an environment conducive for developing solar power in the country. The Jawaharlal Nehru National Solar Mission (JNNSM), launched in November 2009, is one giant step in that direction. JNNSM is one of the eight National Missions laid out in India’s National Action Plan on Climate Change (NAPCC) and it aims to install 22,000 MW of on- and off-grid solar power using both PV and CSP technologies by 2022 as well as a large number of other solar applications such as solar lighting, heating, and solar powered water pumps. The JNNSM of India is a one of its kind countrywide initiative and it aims to address the shortcomings of prior schemes through revised and more attractive feed-in tariffs, a single-window application process and renewable energy purchase obligations (RPOs) that include a solar specific purchase obligation.

The Mission has introduced many innovative measures to propel the development of solar power in India. The “bundling scheme” is one such example. Under the bundling scheme, cheap unallocated power from central power stations is bundled with the more expensive solar power for sale to distribution utilities. This blending of conventional power with solar power is recognised as a highly innovative method to make solar power more affordable by the solar industry worldwide. With the objective of reducing the cost of solar power tariffs, the Mission has opted for a “reverse bidding mechanism” wherein reverse bids (discounts) on benchmark tariffs set by CERC are invited from prospective project developers. This mechanism, too, albeit questioned by many initially, has proved phenomenally successful in reducing the cost of tariff during the first phase of the Mission.

As the power trading arm of the National Thermal Power Corporation (NTPC), NTPC Vidyut Vyapar Nigam Ltd (NVVN) has been designated as the nodal agency for the execution of Phase I of the Mission. NVVN invited bids on benchmark tariffs and entered into Power Purchase Agreements (PPAs) with winning bidders. It would eventually purchase the expensive solar power from developers and bundle it with cheaper coal-based power from unallocated NTPC plants before selling the mixed power to the various state distribution utilities at a reduced average price.

Provisions were also made to allow solar power projects allotted before the launch of the Mission to migrate into it under the “Migration scheme”. Under this scheme, grid-connected solar projects that signed PPAs prior to November 19, 2009, were eligible to migrate to JNNSM under certain conditions until February 29, 2010. This allowed them to avail benefits offered by the Mission’s incentive framework. Further, through the Mission, the Government has instituted a progressive and forward-


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looking policy framework that will assimilate developments in the dynamic solar industry. The Mission itself envisions a thorough revaluation of the process at the end of each phase too.

Mission Roadmap In order to ensure that the ambitious Mission targets are achieved, smaller targets with shorter time horizons have been set under each of the three phases of the Mission. The deployment across the application segments is as follows: Table 1: JNNSM Mission Targets

Institutional Framework for JNNSM The National Solar Mission, being a country level initiative that has ambitious targets of a large magnitude, demanded an effective implementation framework to ensure successful fruition. The government has responded to this demand by putting a robust institutional framework in place for the effective implementation of the Mission. The following figure gives a description of the institutional framework in place and identifies the various agencies involved along with their roles. The section further illustrates the role of each agency involved in the process.

Figure 1: JNNSM Framework

S No. Application Segment Target for Phase I

(2010-2013) Target for Phase II

(2013-2017) Target for Phase III

(2017-22)

1. Utility grid power, including roof top

1,000-2000 MW 4000-10,000 MW 20000 MW

2. Off grid solar applications

200 MW 1000 MW 2000 MW

3. Solar collectors 7 million sq meters 15 million sq meters 20 million sq meters


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Ministry of Power The Ministry of Power (MoP), directly under the purview of the Government of India, is primarily responsible for the development of electrical energy in the country.

It plays a significant role in the implementation of JNNSM. The ministry through NTPC; a major entity involved in the execution of the JNNSM, has appointed NVVN, a fully owned subsidiary of NTPC, for entering into PPAs and power sale agreements (PSAs) with power developers and state utilities respectively. The Mission states that in order to incentivize a large number of solar power projects and minimize tariffs, solar power will be bundled with cheap unallocated power from central power stations and then sold to distribution utilities. The Ministry is responsible for allocating an equivalent megawatt capacity, from the Central unallocated quota to NVVN for bundling together with solar power.

CERC CERC, the chief regulatory body in the country, issues guidelines for fixing feed-in-tariff for purchase of solar power taking into account current cost and technology trends. Under the National Solar Mission guidelines, CERC has been mandated to provide the benchmark tariff for selection of projects under the bundling scheme. CERC has also been entrusted to discharge the formulation of guidelines and solar specific regulations in order to achieve 3% solar RPO by 2022. Additionally, the CERC also notifies the Ministry of Power about the rates at which the unallocated power from the Central quota is to be bundled with solar power and sets durations for the PPA between NVVN and the project developers.

NTPC Set up in 1975, NTPC is India’s largest power company. Apart from power generation, which is the mainstay of the company, NTPC has also ventured into consultancy, power trading, ash utilisation and coal mining.

NTPC has a total installed capacity of 34,854 MW. NTPC has 15 coal based and 7 gas based stations, located across the country, under its purview. In addition, under joint ventures, there are 5 coal based stations & another naptha/LNG based station. The company has set a target to have an installed power generating capacity of 1,28,000 MW by the year 2032. The capacity, it is envisaged, will have a diversified fuel mix comprising 56% coal, 16% gas, 11% nuclear and 17% renewable energy sources (RES) including hydro. NTPC plans to expand its non fossil fuel based generation capacity to nearly 28% of its portfolio by 2032.

NVVN As stated earlier, NVVN is a fully owned subsidiary of NTPC engaged in the business of power trading.

The Mission provides for NVVN to be the designated nodal agency for procuring the solar power by entering into a PPA with solar power generation project developers who will be setting up solar projects during the next two years, i.e., before March 2013 and are connected to the grid at a voltage level of 33 kV or above. For each MW of installed capacity of solar power for which a PPA is signed by NVVN, the Ministry of Power shall allocate to NVVN an equivalent amount of MW capacity from the unallocated quota of NTPC coal based stations and NVVN will supply this "bundled" power to the distribution utilities.

State Distribution Utilities The state distribution utilities enter into a PPA with NVVN to buy the bundled power at rates determined as per CERC regulations. The state utilities are also entitled to use the solar part of the bundled power for meeting their RPOs as mandated under the Electricity Act, 2003. Further, the Mission document states that at the end of the first phase, well-performing utilities with proven financial credentials and demonstrated willingness to absorb solar power shall be included in the scheme, in case it is decided to extend it into Phase II.


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Policy Incentives Guidelines laid out by the JNNSM and the NVVN Mission statements have raised large business opportunities within the country. JNNSM Mission document, in particular, encompasses the objective of maximising indigenous content which, it is envisaged, will lead to the establishment of manufacturing facilities as well as R&D centres in the country. However, the issue of domestic content restrictions laid out by the Mission is an important concern. The following diagram highlights this challenge.

Figure 2: Solar Policy Incentives


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NSM (Phase I Batch I) The Bidding process under the first phase of the National Solar Mission was split into two batches with the understanding that this circumspect approach would leave enough room for rectification if some flaws or shortcomings that may emerge in the first batch of bidding. The following diagrammatic representation gives a snapshot of the bidding process that ensued in the first batch of bidding under the first phase of the Mission. Under the first batch, a total of 30 solar PV projects, each with an individual capacity of 5 MW (total capacity of 150 MW) and solar thermal projects (CSP Segment) with a total capacity of 470 MW were allocated. In addition to the 30 solar PV projects, capacity worth another 84 MW was contributed through the Migration Scheme that permits projects planned before the Mission was launched, to migrate into it and enjoy the incentives offered there under.

Figure 3: JNNSM Phase I Batch I bidding process

As the pictorial representation also suggests, there was substantial oversubscription for projects to start with, and then the government invited reverse bids asking for discounts on the initial benchmark tariff of Rs 17.91/ kWh for PV projects and Rs 15.40/ kWh on CSP projects. Thirty PV projects worth a cumulative capacity of 150 MW and seven CSP projects worth a cumulative capacity of 470MW were selected under Batch I of the scheme. Remarkably, the bidding process did result in exceedingly competitive bids. PPAs have been signed at an average levelized tariff of Rs. 12.16 / kWh for PV projects and Rs. 9.50/ kWh (taking accelerated depreciation into account) for CSP (thermal) projects, i.e., the government has secured 32.1% and 29.3% discount respectively in PV and CSP projects.

JNNSM-Phase I, Batch I

PV Segment

Benchmark Tariff – Rs 17.91/kWh

150 MW on Offer

Maximum size for a PV bid-5 MW

CSP Segment


500 MW on Offer

Maximum size for a PV bid-100 MW

400 bids for 650 MW on offer

Reverse Bidding

PV Segment

30 Projects worth 150 MW selected

Tariff Range: Rs 10.95-12.76/kWh

CSP Segment

7 projects worth 470 MW selected

Tariff Range Rs. 10.58-12.33/kWh


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The following map highlights the recent (till August, 2011) market developments under Phase I of the Mission.

Figure 4: Recent Market Developments under Phase I

Among solar PV projects, the highest discount offered during the round of bids invited for the first batch of Phase I was Rs 6.96/ kWh whereas the lowest successful discount offered was Rs 5.15/ kWh. Therefore, the tariffs varied from Rs 10.95/ kWh to Rs 12.76/ kWh. Notably, most of the successful bidders were new players in the sector. It can be deduced that the larger industrial houses failed to qualify as they did not bid aggressively, partly because of the 5 MW cap imposed on the size of the projects, presumably rendering the size of the project vis-à-vis the organizational commitment required, unattractive. New entrants have, as has emerged, made good use of the opportunity afforded by the minimal pre qualification requirements in the policy. For example, there was an absence of any technical experience requirements in the Policy. The policy merely required a bank guarantee of Rs 3 million per MW along with unconsolidated, audited accounts for the last four years as a proof of the net financial worth of the companies. The following diagrams illustrate the price discovery mechanism under Batch I bidding.

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Average discount - Rs 5.75/

Batch I

Figure 5: JNNSM Batch I Solar PV Bids


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Among CSP projects, the highest discount offered was Rs 4.82/ kWh while the lowest successful bid was for Rs 3.07/ kWh. As such, the average discount offered on the benchmark tariff of Rs 15.40/ kWh was Rs 3.65/ kWh. Notably, all CSP projects have made use of the accelerated depreciation of 80% in the first year. Consequently, the base feed-in-tariff before discount worked out to Rs 13.45/ kWh instead of Rs 15.40/kWh. The new tariff range taking into account the accelerated depreciation was from Rs 8.63 to Rs 10.38 per kWh and the average tariff offered was Rs 9.50/ kWh.

The figure below draws a comparison between tariffs offered by different project developers who won during the bidding process.

It is worth noting here that in spite of the recent rise in the CSP industry; the technology remains relatively expensive. The components used in such projects have not reached economies of scale and lack a competitive market. Further, most components are still manufactured by only a handful of manufacturers across the world and as such, there needs to be a continuous deployment of technology to ensure indigenization of such components and bring costs down.

State Level Initiatives and Development Targets Spurred by national level initiatives and policy push, several states like Gujarat, Rajasthan, Madhya Pradesh, Karnataka and Jammu & Kashmir have also formulated and adopted solar policies for development of solar energy projects in their respective states. Salient Features of these policies have been discussed herewith.

Gujarat • Gujarat, among all the other states, has taken the lead and already allotted projects worth a

cumulative capacity of 716 MW to 34 national and international project developers against the declared 500 MW in their policy. Of the 716 MW, 365 MW has been allocated to Solar PV and the remaining 351 MW to Solar Thermal Power plants.

• Major players in the state include AES Solar, Astonfield Solar, Azure Power Ltd. with allotments ranging from 5 to 50 MW.

Rajasthan (Draft) • Rajasthan has set a target of developing 10,000-12,000MW solar power capacity in the next

10-12 years.

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Average Tariff

Benchmark Tariff

Average Discount - Rs 3.65/ kWh

Figure 6: JNNSM Batch I Solar Thermal Bids


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• It has been mandated that 200MW of solar power shall be developed till 2012-13 and an additional 400MW power shall be developed between 2014 and 2017. The State also plans to develop 1000MW of solar parks

Madhya Pradesh (Draft) • Madhya Pradesh targets a total solar power capacity development of 500MW.

• The facility of wheeling solar power, exemption of open access charges and electricity duty shall be extended to developers and distributors

• Power evacuation facility shall also be extended to concerned licensees.

Jammu & Kashmir • Under this policy, prior weightages to be given to financial capacity, technical capability, past

experience and other relevant attributes of the applicants, the sub-categories of these attributes to be evaluated and their inter-se weightage, the guidelines for evaluation and the passing score on attributes /in aggregate required for pre-qualification shall be specified in the bid documents inviting bids for pre-qualification.

• The minimum project capacity shall be 1 MW. However, if MNRE launches any scheme for lower capacity power plant then that shall also be considered.

Karnataka

• Karnataka targets a total solar power capacity development of targeting capacity addition in solar power projects by 350 megawatts by 2016.

• The solar PV projects that plan to sell their electricity to state utilities at preferential tariff have to have a capacity of between three and 10 MW.

• To keep the costs lower, policy allows developers to inject power at 11kV and above.

Figure 7: Recent Market Developments under State policies


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NSM– Solar projects (Phase I Batch II) Building further on the lessons learnt from the first batch of bidding, bids were invited for a cumulative capacity of 350MW in the second batch of Phase I. The entire quota of 350MW was for capacity in solar PV only. CERC revised the benchmark tariff for solar PV in light of the dropping trends in solar equipment prices. The following diagrammatic representation further illustrates the Batch II bidding process and its outcome.

Figure 8: JNNSM Phase I Batch II Bidding process

Some of the salient features and enhancements made in Batch II guidelines include:

Maximum capacity of a single PV plant increased to 20 MW.

Plant capacity could be in multiples of 5 MW. In other words, a developer could bid for projects of size 5 MW, 10 MW, 15 MW or 20 MW.

Winners of projects under the previous round of bidding or under the Gujarat Solar Policy were allowed to bid for these projects.

JNNSM-Phase I, Batch II

PV Segment


350 MW on Offer

Capacity Maximum: 20 MW (+-5%)

Minimum: 5 MW In multiples of 5 MW

Total Capacity on Offer: 350 MW

Reverse Bidding

PV Segment

27 Projects worth 350 MW selected

Tariff Range: Rs 7.49-9.44/kWh


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A company in any form (including parent, affiliate, ultimate or any group company) could bid for a maximum of 3 projects totalling 50MW.

Financial Criteria for bidding: The net worth of the company was required to be greater than or equal to the value calculated at the rate of Rs 3 crore per MW of the project capacity up to 20 MW. For every MW additional capacity beyond 20 MW, an additional net worth of Rs 2 crore had to be demonstrated.

Foreign companies could participate in the bidding process. But before signing of the PPA, the policy mandated such companies to form an Indian company registered under the Companies Act, 1956

Deadline for achieving financial closure has been raised to 210 days (7 months) from the earlier 180 days (6 months). The timeline for the commissioning of the project has also been extended by a month – to 13 months from the date of signing PPA from 12 months earlier.

“Part commissioning of the Project shall be accepted by NVVN subject to the condition that the minimum capacity for acceptance of part commissioning shall be 5 MW and in multiples thereof. The PPA will remain in force for a period of 25 years from the date of acceptance of respective part commissioning of the project.”

As per the revised guidelines, the controlling shareholder of the project must now maintain 50% share for 1 year (up from 26% earlier)

Domestic requirement – Both cells and modules have to be manufactured in India. This domestic content requirement does not apply for thin film and Concentrating Photovoltaic (CPV) technologies.

The bidder will have to deploy only commercially proven technology – those that have at least one project successfully operational for at least one year, anywhere in the world. Crystalline Silicon and most of the Thin Films Technologies (CdTe, CIGS, a-Si) easily meet this criteria.

Highlight of Phase I Batch II bidding results The NVVN bidding results were out on 2.12.2011. Most notably, the lowest bid submitted in Batch II, offered more than 50% discount on the CERC benchmark tariff. This lowest bid submitted by Solaire Direct was for a 5 MW capacity project and the quoted tariff was Rs. 7.49 per KWh. 1The tariffs quoted by winning bidders in Batch II bidding ranged from Rs. 7.49 to Rs. 9.44 per kWh. This tariff range is remarkably lower than the one discovered in Batch I. In fact, the highest winning tariff in Batch II is almost Rs 1.5 lower than the lowest winning tariff in Batch I. Such a steep drop in tariffs, that too within a short of one year, augurs well for the Indian solar industry and may to some extent be attributed to the adaptive policy framework. Hence Other Developers such as Welspun quoted for 3 Projects at Rs.7.97, Rs.8.05 & Rs.8.14 respectively, Sun Edison at Rs.9.28 Mahindra Bids at Rs.9.34, Sai Sudhir at Rs.8.22, VS Lignite at Rs.8.54, Sunborne Energy at Rs.8.99. Azure Power quoted at a price of Rs.7.91 (50 MW), Sujana Energy at 9.09,and Kiran Energy quoting Rs.9.34 for a 50 MW Project.

For example, besides prevalent market conditions such as dropping module prices, we understand that by relaxing the 5MW size capping on PV projects to 20MWlarger companies were encouraged to participate and it was one of the contributing reasons that resulted in aggressive discounts. Some of the other highlights of Batch II bidding were:

Most of the successful bids belong to project development in Rajasthan.

As many as five developers have won bids in both rounds of JNNSM bidding. This goes to show that developers are confident of sustaining their projects even at tariffs that are still widely considered to be too low to guarantee viability.

1 EQ International Magazine : www.eqmqglive.com


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The lowest quoted tariff in Batch II bidding is approximately 32% lower than lowest tariff quoted in Batch I, Similarly, the highest quoted winning tariff is lower by nearly 26%.

.

Figure 9: Results of JNNSM Phase I Batch II Bidding

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Average Tariff

Benchmark Tariff

Average Discount - Rs 6.57/ kWh


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Overview of Manufacturing Scenario There are about 90 solar PV manufacturing companies in India; with 60 engaged in system integration. Of the 9 and 21 SPV cell and module manufacturers, 6 and 15 cell and module plants respectively are located in south India. The following table gives a brief description of the major players in the field.

Table 2: Indian Solar PV Manufacturing Companies

The overall production of solar cells and modules in India in 2008-09 was over 175 Wp and 240 Wp2 respectively. The cumulative production of solar PV in India is about 800 MW in cells.

While globally, nearly 75% of the power generated from solar PV technology is grid interactive and the remaining 25% accounts for off-grid applications, PV installations in India almost entirely account for off-grid connectivity and small capacity applications. In urban areas, solar PV technology finds application in street lighting, traffic lighting and domestic power backup whereas in rural areas it powers solar lanterns, small electrification systems and, off late, small water pumps as well.

There are, however, significant challenges before the solar PV industry in India. One of the major barriers for the industry is the absence of a manufacturing base for the basic raw material – silicon wafers. The industry, as such, relies heavily on imports from international markets and is exposed to fluctuating prices and availability. For the year 2008-09, the total value of India’s imported raw material was Rs. 1,750 crore (C.I.F.). Of this, nearly 80% was imported from Germany and Taiwan3.

Interestingly, till 2009, India had always been a net exporter of solar PV technology, with 66% of the cumulative domestic production of solar PV till 2009 catering to foreign markets. But as a consequence of the global economic slowdown in 2009, the off–takes from international clients reduced and resulted in low capacity utilization for Indian manufacturers. To add to it, domestic demand remained frugal.

Other threats to the solar PV industry in India include increasing competition from international markets like China and Taiwan and a lack of infrastructure for manufacturing. However, the Indian industry continues to hold an edge in cost effectiveness even though it operates at a much smaller scale compared to some of the other developer solar PV markets in the world.

2 MNRE presentation, Solar Energy Conclave, January 2010 3 Report on solar PV industry in India, May, 2010 – India Semiconductor Association


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As such, new investments are being planned by many players across the value chain comprising of raw material production, solar cell or module manufacture and system integration. Players such as Lanco Solar have a planned capacity addition of about 1330 MW in raw material with a planned capacity of 1250 MW in polysilicon and 80 MW in wafers. The BHEL-BEL joint venture also plans to have a capacity of 250 MW in wafers. To add to the 800 MW manufacturing capacity in solar cells, further investments are planned by companies such as Tata BP Solar, Moser Baer PV, Indo Solar, Microsol Power (P) Ltd. and Central Electronics Ltd. India has a solar module assembly line of 1250 MW capacity and apart from Tata BP Solar and Moser Baer Photovoltaic, Rajasthan Electronic Instruments Ltd., PLG Power and Titan Energy Systems Ltd. have large investments planned here as well.


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Chapter 2: Present Status of financing for NSM

This section presents a snapshot of the current financing status of the National Solar Mission (NSM) and is based on the interactions with different stakeholders who indicated their present outlook towards solar power in India and how it may evolve over a period of time. Stakeholders such as financial institutions, projects developers and equipment manufacturers have been approached for the purpose and they have been extremely supportive of our endeavour.

Stakeholder Consultations The following contains a gist of the opinions shared by different stakeholders presented under different heads and is concluded by an overall assessment of the current scenario.

JNNSM – Tariff and policy framework JNNSM has adopted a fixed levelized tariff policy whereby a fixed tariff would be paid to the developer over the entire period of 25 years (or the period for which PPAs are signed). Welspun Energy, a leading solar power developer in India, suggests that a constant levelized tariff would be unsuitable in the initial years, wherein cash flow requirements are high, and would contribute almost entirely to profits in the later years when all debt obligations are cleared.

Comparisons have been drawn with the Gujarat tariff policy wherein a tariff of Rs. 15/ kWh is payable for the first 12 years and Rs. 5/ kWh for the remaining 13 years of the contract. Although on levelized basis, this translates to a tariff similar to the one offered under the Mission, the stepped structure is more aligned with the cash-flow structure of a solar project.

Next, the reverse bidding mechanism being followed is not particularly popular among developers. As per Moser Baer India Limited, the reverse bidding mechanism skews down the tariffs to very low levels which may render many projects unviable. They raised their concerns regarding the high bank guarantees to be paid to NVVN as they feel that it could cause a huge blockage of money for players like them who are already investing aggressively in Germany and Italy. The company, however, welcomed the move to increase the size limits on solar power projects.

The developers feel that, a minimum technical qualification is essential for the success of the Mission. A mere net worth qualification would be inadequate and echoing the concerns of all developers, Welspun Energy remarked that a rich farmer or for that matter, even a diamond merchant could be a competitor! An interesting insight into the matter is the fact that among 301 bidders during the reverse bidding process initiated by NVVN, as many as 70 bidders did not submit any discount on the CERC benchmark tariff. This clearly reflects a lack of both seriousness and competence on the part of bidders.

A leading private equity firm in Delhi also expressed reservations regarding the PPA and PSA mechanism proposed by the Mission. According to them, it is improper to bank heavily on the credit worthiness of state distribution companies many of whom have, notoriously in the past, defaulted on several occasions. Further, they feel that since regulating tariffs puts a cap on the return on equity, funding equipment manufacturers, instead, could be more beneficial. For any PE firm, since the total Return on Equity (RoE) is an important parameter that helps them decide whether a proposition would be profitable or not, they would be comfortable owning and operating a power plant only if the project has a good expected internal rate of return (IRR), which they feel might be currently hampered by the extremely low tariffs. They also raised concerns regarding the present status of RPOs on the distribution companies and called for stronger regulations to implement the whole operation by fixing players to buy solar power.


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Funding – Options and Risks Corporations such as Power Finance Corporation and Yes Bank have been actively involved in the renewable energy space. Specifically, Power Finance Corporation has funded a number of projects under the Gujarat Solar Policy initiative while under the JNNSM it has funded only one project of 2 MW capacities under the migration scheme. Similarly, Yes Bank has funded projects in Gujarat adding up to a capacity of 50MW, off-grid projects in Madhya Pradesh, Rajasthan and Uttar Pradesh adding up to 10MW and two other solar thermal projects. Yes Bank did not albeit fund any solar PV projects in the first batch of projects under Phase I of JNNSM.

Power Finance Corporation also has not funded any solar thermal projects yet, as they perceive certain risks and uncertainties associated with the technology. Many of these issues have yet to be satisfactorily addressed and they are willing to wait for some projects to come up successfully before they can start funding any.

For lending agencies, issues regarding technology, estimation of solar irradiation and availability of evacuation infrastructure continue to be of high concern. As per Yes Bank, as of now, on-ground solar radiation data is sketchy and the simulation models are at a preliminary stage. Moreover, the high cost involvement, lack of proven track record among project developers and lack of dependable foresight on returns from the projects only make matters worse.

The developers, on the contrary, foresee an important role for the banks in financing the mission. However, at this stage, they do not entirely fault them for not financing projects more aggressively. In their opinion as well, banks do not have enough data or experience to fall back on as a means to verify claims made by project developers. Project developers themselves find it difficult to substantiate their claims through verifiable data or proven track record. An interesting suggestion put forth was that, the government could impose obligations on banks to lend a specific fraction of their entire portfolio to renewable energy/solar power projects. The mechanism could be similar in nature to the RPO mechanism embodied in JNNSM.

As discussed above, it is indeed imperative for banks to ensure payment security. The fixing of REC prices for a period of five years instead of declaring prices for a given year, therefore, is welcomed by the project developers. This would definitely give the banks a better idea about developer’s revenue stream. However, as was pointed out during interaction with Welspun Energy, RECs are generally traded only at the end of the year to meet the compliance requirements. Therefore, the cash flows remain scant during the rest of the year and developers may still find it difficult to pay their quarterly or half-yearly instalments of loan repayment.

Lastly, as observed by Power Finance Corporation, taking into account the time and administrative due diligence required for each loan application, especially in the solar sector, which has relatively higher risks and capital commitment requirements, the timelines proposed for achieving financial closure are stringent and there is a strong case for providing greater time to developers for achieving financial closure.

Threats As per opinions expressed by Welspun Energy, the likelihood of Indian manufacturers meeting the imminent steep demand for equipment is low. The industry is not well developed at this stage and resources are limited. Moreover, prices offered by Chinese manufacturers, who are content with realising a profit of as low as 5-6% in order to sustain their business, would be tough to match anyway. The Chinese manufacturers have already developed huge capacities in PV and wafers and this, in a way, substantiates the fact that they are forced to supply at low profit levels. Further, as far as solar thermal technologies are concerned, a leading private equity firm in Delhi pointed out that patented technology is a major concern as it increases the costs involved. As of now, there are no popular examples of solar thermal technologies being run successfully across the world.

On the Mission’s emphasis on use of indigenous technology, Mr Gupta of EQ International, said that developers should be given the flexibility to execute the project in the most economic manner. While


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he is in favour of developing a domestic eco-system for the solar industry, he also believes that in the short run there should not be stringent norms on domestic content.

Therefore, a complete ban on importing foreign equipment might be risky. The developers also do not see any harm in importing technology if it enables them to offer power at a relatively lower tariff. To further this argument, they pointed out that EXIM funding is also available at a relatively low cost. Besides, protectionism could be harmful for the economy as well.

Realizing the possibility that such domestic content restrictions may cause a gap in supply of critical components that may hamper the NSM, the MNRE announced, in the guidelines issued for the second batch of Phase I projects, that domestic content requirements would be relaxed for PV modules made from thin film technology or concentrator PV cells and project developers would be free to import them.

Future As per information shared with us by Welspun Energy, the western and European markets are near a

saturation state as far as demand for solar PV equipment is concerned. Germany, for instance, has

already set up 10GW of solar power. Further, the European financial crisis has led to an even more

pronounced fall in capital expenditure on Solar PV. As such, the rapidly growing Indian economy

offers an attractive market for PV manufacturers. Given the fact that the Indian market is extremely

Price sensitive and that competition is likely to be intense, prices in the most likely scenario will come

down in future. The cost of generation is also likely to come down as a consequence of lower capital

expenditure and higher Plant Load Factors (PLFs) in future through technological advancements. Mr

Gupta of EQ International, based on his own interactions with project developers, also shared the

opinion that as technology matures and we achieve economies of scale, reduction in the cost of

generation is imperative. Added to this is the fact that the government of India has created a

regulatory environment that encourages the industry. The competition that this will lead to, will also

contribute towards driving down the costs.

Conclusion: A current assessment of financing Based on the above stakeholder consultations and our broad desk research, the following points have emerged as significant facets of the current financing scenario under the JNNSM.

As such, there does not appear to be, as is commonly felt among the projects developers’ community, any sizeable funding gap or significant dearth of funds for lending to solar projects under the phase I, batch I. Banks and financial institutions (FIs) are, however, cautious while treading into “uncharted” territory. The funding available is primarily non-recourse in nature. Banks are willing to finance projects that are backed by a company’s strong balance sheet and are cautious about providing project-based financing.

In fact, as per the statement by the Union Minister of Ministry of New and Renewable Energy, Dr. Farooq Abdullah, NVVN has accepted the documents of financial closure of 35 project developers for setting up 610 MW capacity. Only one project of 5 MW failed to meet the requirements. Remarkably, however, most of the projects that reported financial closure were backed by their respective companies’ balance sheet. Now, this poses a stiff challenge for new entrants in the market. Many new project developers who do not have the backing of a strong balance sheet find it difficult to secure loans for their projects and hence are lead to believe that there may be a funding gap.

Financial closure has been achieved for 35 projects adding up to a capacity of 610 MW. Most projects got financial closures are being backed by the respective company’s balance sheet. A Brief snapshot of number of projects financed by consulted FIs in India

• Yes Bank: 3 projects under NSM; a 50MW project under Gujarat Policy


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• Bank of Baroda: 2 projects

• ICICI Bank: 2 projects

• Axis Bank: 4 projects

• PFC: 2 MW project (under the migration scheme)

Under the NSM, project developers sign PPAs with NVVN which in turn enters into PSAs with the state utilities for buying and selling solar power respectively. Project developers seek funding against these PPAs. However, most FIs are not convinced about the bankability of such PPAs.

Moreover, as brought out earlier as well, banks remain sceptical of the available solar irradiation data, effectiveness of technology, Concentrated Solar Power (CSP) technology in particular, and projected returns from these projects. Although some FIs acknowledge that some of the proposed technologies have been successful elsewhere, they are not convinced about their feasibility in Indian conditions yet and therefore, want the technologies to be tested and established first.

Many FIs have also conceded the fact that they themselves lack the technical exposure to judge the projects on merit. Their competence in assessing the viability of solar power projects is low. Consequently, they remain sceptical of developers, new entrants to the market in particular, in terms of whether or not they may be capable of developing and presenting a feasible business proposal.

Additionally, FIs and project developers believe that the Mission’s emphasis on use of indigenous technology could have a dampening effect on the progress of solar power projects in India. While on the one hand, the Indian manufacturing industry will take time to develop in order to be able to meet the demand for equipment, it may not be able to offer any significant cost advantage over imported technology any time soon, either.

Another key point of debate among financial institutions, pertinent to projects under the NSM, is the perceptible advantages offered by the Gujarat Solar Policy. The tariff policy in Gujarat offers are more front ended tariff schedule which enables the lenders to foresee a more secure cash flow pattern from the projects during the initial years of operation as compared to projects under the NSM. Further, the Gujarat State Policy mandates the state transmission utility, GETCO, to lay the transmission line between the solar power plant and the transmission sub-station closest to it; whereas under the NSM, onus for this lies with the project developer.

As such, most FIs, at this point in time, feel comfortable in waiting for a few projects to come up successfully and then frame their firm opinion on the type of lending (non-recourse or project based) they wish to pursue. Over time, they also plan to build their capacity in terms of their competence level to evaluate solar power projects and develop an understanding of the functioning and implementation of various organisations and policies involved.

The above snapshot, while presenting the current financing scenario of the NSM, revolves around various barriers and risks that project developers and FIs are confronted with at present. Subsequent chapters of the report discuss these risks and present a comprehensive overall assessment of the scenario in detail.


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Chapter 3: Challenges to advancing the NSM

As per the targets set out by the JNNSM and other state initiatives, the Indian solar sector has a number of projects in pipeline scheduled for commissioning in the next two-three years. However, the government recognizes that these targets cannot be achieved without private sector participation. From our discussions with stakeholders, we are able to summarise constraints and challenges that are being perceived by the financial institutions, bankers and equity providers. These constraints and challenges can be classified into various categories of risks that need to be mitigated in order for the Indian solar industry to achieve its targets. These risks are presented below. It is important to note that some of these risks are already being addressed, albeit to different degrees, by the constantly evolving policy & regulatory framework in the country. Consequently, after the initial classification, the risks are also further sub-divided according to their time-horizon of influence later in this chapter.

These risks are explained in detail below:

4 While most stakeholders highlighted financial risks as being the most serious of their concerns, detailed analysis of financial risks reveals that most of these are actually the results or the effects of possible or actual realization of other categories of risks listed in the matrix. The financial risks listed in this matrix are the generic project finance risk that are faced by all categories of infrastructure projects, modified to reflect concerns of solar power plant developers in particular.

Major risk categories Specific Risks

Policy and Regulatory Risks 1 Past track record of bidders

2 Delay in getting clearances and approvals

3 Issues related to the Contractual Agreement between NVVN & SPD/Distribution Utility

4 Aggressive Bidding

5 Indigenous Manufacturing-Supply Crunch

6 Scale of Projects

7 Political Risk

Infrastructural Risks 1 Evacuation Infrastructure

2 Specific issues related to land

3 Specific issues related to water

Technological Risks 1 Reliability of Solar Irradiation Data

2 Technology selection

3 Lack of Performance data for Indian conditions

Financial Risks4 1 Interest Rate Risk

2 Currency Risk

3 Commissioning Risk

4 Raising the equity

5 Timely financial Closure

6 Exposure Limits

Table 3: Risks Associated with JNNSM


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Policy and Regulatory Risks

Policy framework A significant proportion of the decision making regarding the location of solar power plants depends on the policies & regulations at central and state levels. Specifically, policies and regulations translate into key market aspects such as market size, policy continuity, and the overall ease of operating businesses in the state/country. The size of the market has to be large enough to attract the established players in the industry. Bringing in established players is often useful in setting benchmarks in a nascent industry like the Indian solar sector. Many established power project developers perceive the size of individual projects allotted under the first phase of the Mission to be limiting. For solar PV projects, Phase I, Batch I of JNNSM capped the project size to 5 MW for each player. This had dissuaded some of the leading utility-based companies such as NTPC Limited and Tata Power, which are now developing solar projects under state-level schemes. It was encouraging to note that Batch II guidelines significantly increased this limit, presumably in response to the reactions against the limits in Batch I.

Developers need to be assured of a market that is assured beyond the short-term horizon. Developers would be reassured of their investment decision if, for example, the government issues a detailed roadmap on how it plans to achieve 20,000 MW of solar capacity by 2020 as envisaged under the Mission. Uncertainty about future policies, as is the case with the allocation of JNNSM projects beyond the first Phase, impacts not only the investment outlook but also the developer’s trajectory in the market.

The ease of doing business in the country, which influences the transaction costs of developers, is another critical factor. It brings forth the long-standing demand for a single-window clearance system. As investors compare the costs and returns in various sectors, there is a bigger incentive for the solar power sector to streamline its processes in order to attract competing investments. The required infrastructure is already in place in the form of state nodal agencies, which can be strengthened for operating in service delivery mode. These agencies could offer packaged services to prospective developers for a fee. The central level nodal agencies can offer an umbrella support structure to ensure such a single window mechanism can be implemented efficiently.

1. Past track record of bidders The competence, expertise and experience of solar project developers, their technical partners and EPC contractors should be given due importance while short-listing the project developers. Policy level interventions need to ensure that due importance is afforded to past experience of bidder to weed out non-serious players that have no prior sector experience. Such a move is likely to reduce the number of projects that may not be able to obtain financial closure on account of financial institutions not being convinced of their technical credentials. The Batch II guidelines have already imposed higher net worth criteria, which is a move towards further enforcing eligibility criteria for bidders.

2. Delays in getting clearances and approvals From the developers and financial institution’s point of view, the timelines for achieving financial closure in the JNNSM Batch I guidelines were a bit stringent in nature. It was perceived that developers and financial institutions found it difficult to achieve the financial closures in the stipulated time. Considering the different risks and teething problems in this niche sector, the timelines could have been more lenient in order to encourage the developers and other involved stakeholders to properly gauge the risks involved at each stage, and plan mitigation measures. The policy-makers have been apprised of this risk, and have responded by extending the time for achieving financial closure by 30 days (from 180 to 210 days). It is now important to wait and watch to judge if this extension is sufficient.


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3. Issues related to the Contractual Agreement between NVVN & SPD/Distribution Utility

In order to achieve the target of 1000 MW during Phase I and to operationalise the ‘Bundling Scheme’ the NVVN, the designated agency, shall enter into the power purchase agreement with the solar power project developers and shall also enter into the power sale agreement with the distribution utilities of the State. The following paragraphs present the analysis of the proposed contractual agreement by the NVVN with the solar power project developers. The solar power projects require high initial capital investment compared to other renewable energy technologies and hence recognised under high risk category by the stakeholders as well as by the financial institutions providing debt for these segment of power generation plants. The NVVN has proposed a tripartite arrangement for purchase of power from Solar Project Developers (SPD) and sale to Distribution Utilities. Some of the key features of proposed contractual arrangement is summarised below: Construction Risk

Clause 4.6 of the PPA between NVVN and SPD suggests payment of Liquidated Damages for delay in commencement of supply of power to NVVN by the Solar Project Developer. The relevant section of the clause is re-produced below:

4.6.1 “If the SPD is unable to commence supply of power to NVVN by the Scheduled Commissioning Date other than for the force majeure conditions, the SPD shall pay to NVVN, Liquidated Damages for the delay in such commencement of supply of power and making the Contracted Capacity available for dispatch by the Scheduled Commissioning Date at the rate of …………/MW/day for delay of first 30days and Rs. …………. /MW/day for delay thereafter”

It is to be noted that solar power projects, solar thermal projects in particular, are amongst the first of their kind in India. International experience suggests that such solar thermal projects may take more than 3 years to commission from its financial closure, owing to the complexities involved in the project implementation schedule as well timeline for supply of critical components of solar field and power block components. The solar thermal technology is still in its early development phase in India and presently, the technology partners associated with the solar thermal technology are mostly based overseas with limited experience for supply and installation in Indian conditions. Further, deliveries for the solar thermal technology components, measurement of the solar irradiation and its varying pattern, detailed engineering of the projects and its optimisation vendor qualification and contract negotiation makes the stipulated timeframe for commissioning of solar projects very aggressive.

Generation & Operating Risk

Clause 4.8.3 of the PPA between the SPD and NVVN suggests for maintaining the capacity

utilisation factor by the solar power plant. The relevant section of the clause is reproduced below,

“At any time during the Term of the Agreement, if the CUF of the Power Project is found to be below …….. [Insert value i.e. 5% less than CUF] or if it is found that the SPD has not been able to maintain a CUF of ……… [Insert value i.e. 3% less than CUF] for a consecutive/non consecutive period of three (3) months during a Contract Year on account of reasons solely attributable to SPD, NVVN shall have the right to assign the liability of payment of liquidated damages to the distribution utility as identified in the PSA, to the SPD. The SPD shall be liable to pay such liquidated damages as identified in the PSA to NVVN.”

It is to be noticed that generation from most of the renewable energy are dependent on the vagaries of

the nature and therefore its generation output cannot be predicted accurately. Typically solar resource

data is required to be computed from 12 year solar cycle period and projected over 25 years to


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estimate the electricity generation potential of the site and determine the economic feasibility of the

project. Delays may be expected in procuring requisite certified data to accurately assess project

feasibility and secure guarantees of performance from technology providers. Solar resource, despite

the sophistication in techniques employed to forecast hourly solar irradiation using Typical

Meteorological Year (TMY), may vary by 15% on a year to year basis. Therefore, NVVN suggestion to

penalize lower generation of electricity may be considered contrary to the principles of power

generation through renewable sources and the generation/operation risk on this count may be

required to be factored in.

Furthermore, during the periods of generation from the solar projects in case the Distribution Utility

is unable to draw power for any reason, the solar project developer should not be penalised. The PPA

suggests the delivery point at the commercial metering point at the STU substation. Thus, the losses

up to metering point as well as risk of curtailment due to non-availability of evacuation line will have

to be borne by the solar project developer. The provision of deemed generation for non-availability of

transmission/evacuation arrangement has not been provided under PPA, hence the SPD will have to

bear such risk.

Payment security and default mitigation mechanism

Clause 6.4.8 of the Power Sale Agreement between the NVVN and Distribution Utility suggests a

tripartite agreement for the purchase of the power from solar project developers and sale to

Government owned Distribution Utilities. The relevant portion of the clause is reproduced below,

“As a further support for the Discom’s obligations, on or prior to the Effective Date, a Tripartite Agreement may be signed in between the central government, the state government of the Discom and RBI. NVVN shall be authorized by the central government to invoke such Tripartite Agreement in case of payment default by the Discom. If the Discom fails to pay a Monthly Bill or Supplementary Bill or part thereof within thirty (30) days from the Due Date, NVVN shall have the right to invoke such Tripartite Agreement, after giving a notice of seven (7) days to the Discom, whereby the pending dues from the Discom shall be routed through RBI to NVVN’s designated account.”

In its Power Selling Agreement, it has been implied that the final responsibility of payment rest on Distribution Utility and in eventuality if the Utility fails to make payment to the NVVN for the power procured, then it may make payment to the SPDs from separate fund created by Government of India/or through RBI (designated third party of the agreement) routing the fund to the SPD. The proposed mechanism suggested under the existing contractual framework for ensuring payment to SPD in event of default of payment by the Government owned Utility would enhance investor/lender confidence to ensure steady flow of revenue streams for the Solar Project developer and thereby enhance the bankability of the project.

4. Aggressive Bidding At the outset, several project developers and financial institutions were of the view that the reverse bidding mechanism would threaten the growth the nascent sector by exposing it to uncurtailed competition, thereby wiping out margins and destroying any incentives for investment. This view was supported by the fact that reverse tariff bidding for solar energy has not been adopted by any other country in the world. The results of the first phase of bidding further strengthened this view when the quoted tariffs were viewed by many project developers and financial institutions alike as being completely unviable. However, the Government of India was confident that the reverse bidding is potentially the fastest way to scale up solar energy, even if it is done at the expense of quickly and somewhat brutally weeding out the inefficient players that would be unable to compete. This expectation was borne out by the fact that despite pervasive reservations in the financial community, a majority of projects were


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able to achieve financial closure, and moreover, the second batch of bidding led to even more drastic cost reductions, reaffirming investor confidence in the sector. The Batch II bidding results also highlighted the fact that reverse bidding is in fact the fastest way to commercialize solar energy, with tariffs as low as INR 7.49 indicating a rapid descent towards grid parity. In light of these developments, the initial risk perception regarding unviable and unsustainable competitive bidding has been for the most part, alleviated.

5. Indigenous Manufacturing base - Supply Crunch Government has stipulated local sourcing for cells, panels and other equipments for JNNSM projects. However, project developers are apprehensive about the ability of the domestic manufacturing capacity to meet the projected demand or match international prices. Among other things, effective indigenisation will require large-scale manufacturers. There is a very limited manufacturing capacity in country itself as compared to any big international supplier. For the success of NSM, the Indian market requires individual large-scale manufacturing facilities of at least 500 MW to leverage pricing, supply and research capabilities.

The entire supplier base for solar PV segment which is the pre dominant technology in the present scenario of solar industry is concentrated in solar cells, modules as well as the balance of systems. For upstream segments comprising silicon wafers, ingots, etc., the sector depends on imports. Also, only five-six solar cell and module manufacturers are able to supply thin film technologies such as amorphous silicon while none supplies other key technologies like cadmium tellurium.

Domestic supplier base in the concentrating solar power (CSP) segment is yet to come up. Critical components for CSP projects such as receiver tubes are sourced under licensing agreements from overseas. Indigenisation in these projects is not yet possible as functional plants are about to come up in future and then only indigenisation of capacity building will pace up. Currently, developers are relying on high import content for timely commissioning of projects, but a domestic supplier base is crucial to sustain the market in the long term.

6. Scale of Projects In the case of solar PV, the restriction of 5 MW per business group (in phase I, batch I) makes the offer further more unattractive for large players to show active interest in solar PV projects. As in the batch II guidelines scaling issue had been addressed, but still bankers feel no waiver on the size restrictions shall be made in order to bring in better economies of scale. Financiers are of the view that the small project size does not support the transaction costs associated and also will lead to larger losses and trimming profitability. In addition, financial institutions have concerns with regard to technological uncertainty as they are not fully educated on the various technological issues and are not exact about which technologies could be the best and most profitable according to the environmental conditions of the country.

7. Political Risk A large part of the JNNSM is policy-driven. Project developers and financiers have apprehensions that a change in the government regime might alter some of the existing regulatory provisions that might result in changing the overall viability and attractiveness of the sector. For example, as was discussed during stakeholder discussions, PPAs signed at the current tariffs might be viewed as being too high if solar power approaches grid generation costs in the future, and the government may independently decide to renegotiate them in public interest. These types of risks are specific to the political situation on ground and can have a significant impact on project and sector viability.

Infrastructure Infrastructure is central to the sustainable development and economic competitiveness of any sector. Barriers with regard to infrastructural requirements emerged as one of the most important for the solar power developers in the country. An important parameter which is of critical importance specifically for solar thermal power projects is the proximity to water resource.


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The lead times required for all the approvals were quite substantial and hence the developers have highlighted the need for government intervention to reduce the same. In some cases, the developers of solar thermal power projects did not obtain allotment near water resources since the developers of PV projects were already allotted the land at those locations. Single window clearance for solar power project can potentially be a very powerful solution to address most infrastructure related aspects of solar projects. It is possible to bundle the land, evacuation and water related approvals under one clearance and the developer would have to approach just one entity to avail this clearance provided he meets the criteria set by the guidelines. However, such single window clearances need to be put in place by the individual state governments, since the central government does not have direct jurisdiction over the various state departments in charge of clearances.

1. Evacuation Infrastructure Grid availability is a major issue for developers once the project is completed. For the renewable project developers grid availability is a major issue of concern, especially for the plants connected at HT level (33Kv and above).As enunciated in the Electricity Act, 2003, responsibility of the making necessary arrangement of the solar power rests on the respective State Electricity Regulatory Commission. However, the approach for providing the evacuation arrangement is not uniform across regulatory bodies. This proposition creates a sense of uncertainty among the developers with regards to evacuation of generated power.

Lack of Planning and sharing of information by the respective state transmission utilities with the developers is seen as one of the major concerns by most of the project developers in finalizing their project locations. Typically, state utilities do not publicise their present and future infrastructural plans of setting up of new transmission lines and evacuation infrastructure, it is a major threat as concerned and upcoming developers are not aware of any developments in the area thus posing a major risk involving bad planning and changing policies.

2. Specific issues with relation to land Land related issues were the most discussed of all the infrastructure related issues with the developers. The process of land acquisition differed from state to state. While Gujarat gave a free hand to developers to choose based on the developers criteria (the type of land they needed), Rajasthan adopted a different path of first identifying government waste land for developing solar power projects and then allotting them to various developers. The lead time to acquire land in states by the developers could range anywhere between 6-12 months and in some cases more than a year. Land was the most important barrier as stated by most of developers as far as infrastructure issues are considered. The rest of the developers own the land on which they are developing the projects and hence did not face any challenges.

3. Specific issues with relation to water The canals in Gujarat and Rajasthan are the only water resource available to the solar power developers. The developers apply to the local authorities to disburse annual estimated amount of water to them. The authorities then analyse and gauge the current water usage pattern and also account for future usage either for irrigation or domestic use and then allocate the amount of water needed for the power project. The lead times required for acquiring this approval ranged from 3 – 6 months.

Technological risks

1. Reliability of Solar Radiation Data The biggest risk associated with solar projects lies with the estimation of solar radiation. The returns of a solar project are highly sensitive to radiation levels. High quality solar radiation data is a pre-requisite for proper market assessment and project development. Hence, solar radiation assessment is a very important activity and typically requires several months for ground measurement of solar radiations. Any error in solar resource estimation adds an uncertainty to expected outputs. According


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to Power Finance Corporation, as of now, on-ground solar radiation data is sketchy and the simulation models are at best at a preliminary stage.

The industry is relying on suboptimal solutions in the absence of credible and adequate data. Non availability of standardised information is leading to the developers opting different sources of information and hence bankers and financers are finding it very difficult to rely on the provided data and proceed with investments.

MNRE has initiated steps in this direction, with the Centre for Wind Energy Technology being assigned to set up 50 ground monitoring stations in association with the states. Probable sites have been identified in states including Andhra Pradesh, Chhattisgarh, Gujarat, Jammu & Kashmir, Madhya Pradesh, Maharashtra, Karnataka, Puducherry, Rajasthan and Tamil Nadu.

2. Risks associated with Quality and Service Focus on long-term reliability of PV modules

The Jawaharlal Nehru National Solar Mission (JNNSM) and various state solar programmes have provided a huge impetus to the deployment of utility-scale solar photovoltaic (PV) power plants across the country. However, banks and financial institutions that are funding solar PV projects are worried about the quality of components used for building solar PV systems and their long term performance in Indian conditions. PV equipment manufacturers and project developers are under pressure to demonstrate the long-term reliability and performance of modules, inverters, etc. in the Indian field conditions, despite the fact that each of the components come with standard international quality certifications.

Challenges during system integration

The performance of a solar PV system could also be impacted by the way it is installed. One of the major challenges facing the successful implementation of JNNSM and state solar programmes is the non-availability of skilled and trained manpower. The Ministry of New and Renewable Energy (MNRE) has been working with educational institutes like IIT Bombay through the National Centre for Photovoltaic Research and Education towards developing training infrastructure for solar PV installation, but these initiatives are struggling to keep pace with the huge demand for manpower. Using appropriate installation techniques is vital both from a performance perspective and safety viewpoint.

Financial Risks Banks and financial institutions remain averse to the idea of lending to solar power projects. While the general perception about solar technologies has improved over the years, the technical risk perception remains high. As a result, there is a near absence of non-recourse or project financing for solar projects. Most of the lenders insist on recourse to either the parent company’s balance sheet or a performance bond for the project. Industry experience in the energy sector has shown that capacity addition would not have been possible had financing been limited to only balance sheets. Clearly, this could defeat the larger objectives of jump-starting capacity addition in solar power.

1. Interest Rate risks The risk that interest rates will rise and reduce the market value of the solar investments has always been considered as a major issue as far as the financial markets are concerned. These risks are important to the business transactions in the future, as solar being capital intensive sector and considering its associated risk profiles bankers are concerned for the measures for balancing the interest rate risk. Finally, interest rate risk is important from the perspective of project finance on the whole, if interest rates rise; funding may not be available for a new loan for a project that has already started

http://financial-dictionary.thefreedictionary.com/Project+Finance

http://financial-dictionary.thefreedictionary.com/Loan


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2. Currency risk Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Since the solar markets will involve investments from various international banks, funding agencies and equity investors the risks associated to the currency rates fluctuations will always be involved in the sector. This will always involve the international interactions in terms of investments, production and technology, hence the participation of different currencies in the Indian solar industry. The currency risks is one of the major financial risks, especially considering the current market conditions across the world, particularly the European markets which are well advanced in the solar industry.

3. Commissioning risk Several infrastructure projects, specifically solar projects have loan agreements that incorporate commissioning charges. These charges refer to periodic payments associated with the undisbursed amount of the loan. Essentially, commissioning charges hedges the risk faced by the lender, in case the borrower is unable to drawdown the entire loan amount, as agreed at the time of financial closure.

For solar projects in particular, risk associated with commissioning charges can pose a significant threat since plant commissioning can be delayed on account of several factors outside the control of the developer. Without a revenue stream, commissioning charges, if applicable can impose a heavy burden on the developer.

4. Raising of equity Most of the equity financiers look for borrower credit-worthiness, speedy recovery and safety of investments are indeed sceptical about the financial success of these solar projects. They feel the prices and tariffs are too much regulated and the return on equity as fixed by the government is not very competitive for them to invest at such an initial stage of a new sector. Companies would alternatively have to take loans on their original balance sheet and provide a corporate guarantee. Balance sheet funding, however, limits the ability, to induct a higher-level debt and so increases the overall cost of the project. Private equity funds that provide equity, quasi-equity and mezzanine financing are interested in quick scalability and exit strategies. To compensate for the uncertainty involved, they expect a very a high rate of return. With traditional financiers for capital-intensive projects raising doubts about sustainability, developers have limited options to achieve the desired financial closure.

5. Risks leading to non- fulfilment of in-time financial closure by the project developer

Solar Project financing is difficult because lenders perceive the solar energy industry as highly risky. The main risk associated with this industry is lack of reliable solar irradiation data, which makes it difficult to estimate the return on investment. In addition, the majority of project developers are new entrants with no track record to prove their ability to build and operate solar power plants. Therefore majority of Indian financial institutions are unsure about the generation capacities of power plants and hesitant to finance the projects.

For JNNSM projects, banks are particularly wary of the heavily discounted tariffs resulting from the bidding process. Current tariffs are among the lowest in the world for solar, and banks are concerned that project risks have been underestimated in order to win bids. Lenders are also wary of the small margins that projects are looking to operate on, in order to be viable at low tariffs. In addition, the small size (5 MW) of solar photovoltaic (PV) projects (in phase I, batch I) is resulting in high transaction costs for large banks.

Considering the large number of projects waiting to achieve financial closure and begin construction, there is immense pressure on the market to explore options other than non-recourse project financing. The majority of large players are taking loans based on the strength of their balance sheets


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while providing corporate guarantees. Some companies are, for the most part, funding their projects themselves through equity.

6. Exposure limits Stakeholder consultations have revealed that several banks and FIs are constrained to lend to the renewable energy sector, in particular to solar energy due to their existing exposure limit norms. At present, banks and FIs are mandated to lend to priority sectors, which includes the power sector. However, no further classification within the power sector means that a majority of the allocation within this sector is diverted towards conventional power projects which are viewed as being less risky and more financially attractive. Due to an absence of specific exposure limit norms lending to renewable energy, investments for this sector are crowded out by conventional energy.

Risk Matrix The various categories and specific risks within each category, as described above, have the potential to significantly affect the viability of solar projects. However the severity of impact and the probability of occurrence of each risk are not uniform. In order to better understand these risks, it is important to classify the risks on two parameters:

1) Severity of Impact: This parameter gauges the extent to which the risk is likely to affect overall

project viability, in case it occurs

2) Probability of Occurrence: This parameter assess the likelihood of a particular risk occurring

As can be discerned, any risk is insignificant if it does not contain both these parameters. In other words, the higher the severity and / or probability, the more significant is the risk. In order to classify risks, a matrix of scores has been designed. This matrix assigns scores to the severity of impact and probability of occurrence. It is shows in the graph below5:

5 The numerical basis and other assumptions for this graph are given in Annexure I


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Figure 10: Plot of the risk evaluation matrix

Risk independent of time frame

Medium Term Risk

Short Term Risk

Long Term Risk

Track record of bidders

Delay in clearences PPA-risk

Tariff Bidding

Indigeneous manufacturing

Scale of projects

Evacuation Infrastructure

Reliability of Solar Irradiation Data

Currency risk Interest rate risk

Political risk

Availability of Suitable land and Water

Timely financial closure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10

Pro

bab

ality

of

Occu

rren

ce

Impact of Risk

Exposure Limit of Banks to RE

Commissioning risk


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The risk evaluation matrix highlights the fact that a majority of risks associated with the solar industry lie in the high impact high probability quadrant. This indicates the need for developing effective solutions for addressing and mitigating these risks. However, in addition, another parameter is important when assessing the severity of these risks. Risks can be classified according to the time horizon in which they are likely to be realized. The following table shows this classification:

Table 4: Time Horizon Classification of Risks

# Risks Time horizon Description

1 Past track record of bidders Short term Subsequent modifications in the RFS/RFP can mitigate this risk

2 Delay in getting clearances and approvals Short term As was done for Batch 2, time for financial closure can be further increased from 210 days

3 PPA- Risk in Payment Realisation Medium term Will need policy level changes to modify specific clauses in existing PPA – PSA regulations

4 Aggressive Bidding Short term Will need policy level consideration to discuss the merit of this risk

5 Indigenous Manufacturing-Supply Crunch Short term Policy level thrust is likely to address this challenge

6 Scale of Projects Short term As was done for Batch 2, minimum and maximum permissible size per project can be expected to increase to tap economies of scale

7 Political risk Long term Changes in political considerations leading to changes in policy/regulatory setup can occur anytime

7 Evacuation Infrastructure Medium term Will need policy level coordination between central and state transmission utilities to ensure solar projects receive priority while transmission planning is undertaken

8 Reliability of Solar Irradiation Data Short term As the sector matures, more and more data will clarify the uncertainty

9 Technology selection Short term Rapid technology development and experiences of Batch I will reduce the probability of occurrence

10 Lack of Performance data for Indian conditions Short term As the sector matures, more and more data will clarify the uncertainty

11 Interest Rate Risk Independent of time frame This is a project – intrinsic risk that will always remain

12 Currency Risk Independent of time frame This is a project – intrinsic risk that will always remain

13 Commissioning Risk Medium term As the sector matures, unforeseen delays will be reduced lenders will be persuaded to not apply commitment charges


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14 Raising of equity Medium term As the sector matures, risk perceptions decrease and equity will be available in greater amounts

15 Timely financial closures Short term As was done for Batch 2, time for financial closure can be further increased from 210 days to ensure timely closures

16 Exposure Limits Medium term As the sector matures, specific exposure limits for renewable energy, and even perhaps for solar can be mandated in light of the rising demand for financing from this sector


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Impact on expected returns The risks identified and classified as per their impact, probability and time horizon indicates the overall nature of the risk on the solar sector as a whole. However, these risks are an even greater concern at a project specific level, where risk avoidance and mitigation measures tend to be limited and expensive. It is important to determine which of these risks directly impact project viability, and to what extent. As can be discerned from the analysis above, certain risks have a direct impact on interest rates and capital costs, which are among the two most important factors affecting project viability. The following section analyzes the extent of impact that these specific risks and their mitigation measures can have on interest rates.

Past track record of bidders As has been described previously, past experience of bidders to design and execute a power project, and their familiarity with solar energy is an important criterion when considering their technical ability to successfully design and operate a solar power plant under the Mission. This consideration has been reaffirmed by banks and other financiers during several rounds of stakeholder interactions.

In light of this risk (lack of past experience), nearly all sources of financing, including ones with high risk appetites may not be forthcoming. Thus, a developer may have to take on credit at a premium over the risk hedging already built into interest rates, translating into higher than market average cost of borrowing. In other words, in the absence of a past track record, credit may not be forthcoming, even when the borrower may be willing to pay a high rate of interest.

Limited exposure of banks/FIs to RE sector This risk is in effect, ‘the other side of the same coin’ of the risk described above. Just as banks and FIs may be unwilling to lend to project developers with little or no prior experience in the field, they may be wary of taking exposure to this sector if they have no prior experience either. Consequently, even experienced, well qualified developers may find it difficult to secure funding for their projects, since credit may not be forthcoming even when the borrower is willing to take a loan at a higher than market rate of interest.

Delay in getting clearances and approvals Clearances and approvals have been cited as the most common reason for delays in plant commissioning. This has been corroborated over several rounds of discussions with a wide range of stakeholders. Delay in commissioning can have a significant detrimental effect on project viability, and this effect is exaggerated in case debt is sourced from certain specific sources. These sources, like funds from multilateral and bilateral funding agencies, and other sources that offer loans with a commitment charges impose a penalty if the loan disbursement schedule is delayed due to any reason. With such a provision, delays in getting clearances and approvals could translate into commitment charges as high as additional 100 basis points over base rate.

Interest rate risk LIBOR linked loans have interest rates that are linked to LIBOR, and consequently fluctuate on a daily basis. Although these fluctuations are relatively small, over time, depending on the international economic conditions, these could have a significant impact on the cost of borrowing. Considering that LIBOR fluctuations cannot be predicted with any reasonable accuracy beyond a limited time horizon, LIBOR linked floating loans present a significant risk. This risk is inherent to all sources that offer LIBOR linked loans, like capital markets, multilateral and bilateral funding agencies, ECBs etc.

In order to hedge against this uncertainty, borrowers can opt for fixed rate loans that pass the interest rate risk onto the lender. In such a case, the lender would charge a premium for absorbing the loan, and as a result, fixed rate loans can be up 500 basis points more expensive than floating rate loans.

Currency risk Akin to the interest rate risk, currency risk also arises due to uncertainties in the international economy. Loans that are provided in foreign currencies need to be converted into domestic currency for use. Typically, this conversion is made at the prevailing exchange rate as on date. As is the case with the LIBOR, exchange rates


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cannot be accurately predicted beyond a limited time horizon. If the exchange rate gets significantly unfavourable, loan and interest repayments can get substantially more expensive than anticipated. This risk is most visibly manifested in funding sources that offer such loans, namely, ECBs, international banks and other foreign lenders.

In order to hedge against this uncertainty, borrowers can opt for taking fixed rate loans. In this case, the exchange risk is passed onto the lender. However, in order to provide this service, the lender would typically increase the cost of borrowing by as much as 500 basis points over the base rate.

The following table summarizes the above assessments:

Table 5: Impact of Risks

Specific Risks Affected Financial Sources Net impact

Past track record of bidders All Financing may not be forth coming even at higher rates of interest

Limited exposure of Banks/FIs to RE sector

Commercial banks, Capital markets

Financing may not be forth coming even at higher rates of interest

Delay in getting clearances and approvals

Multilateral and Bilateral agencies, Other sources with commitment charges

Commitment charges of up to 100 basis points additionally may apply

Interest Rate Risk Capital markets, LIBOR linked loans

Differential of up to 500 basis point between fixed and floating interest rate

Currency Risk Export Credit agencies, International banks

Spread of up to 5oo basis point on LIBOR for hedging exchange rate fluctuations may apply


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Chapter 4: Risk Mitigation Measures

Based on the stakeholder consultation and our analysis the risk mitigation measures for various associated risks are proposed under following paragraphs. These measures are inclusive of the steps to be taken at policy level, industry level, by financial institutions, project developers, state bodies and other regulatory bodies.

Policy and regulatory Risks

Past Track record of bidders Under the Phase I of JNNSM, it is proposed to promote only commercially established and operational technologies to minimize the technology risk and to achieve the commissioning of the projects. Although nothing substantial has been said regarding the experience profiles for the bidders under the solar PV segments. Through our various stakeholder interactions we have observed that the government should introduce more stringent technical qualification criterion for bidders. This would ensure that only players with prior experience in setting up power plants are eligible to bid which will in turn help them to achieve financial closure for their projects. In this regard, we propose that only players with prior experience of setting up power projects (including renewable energy) of more than 10 MW capacities should be eligible to bid. These policy level changes should be introduced in order to assert the seriousness of prospective developers towards NSM.

Delay in getting clearances and approvals Policy documents for NSM suggests heavy penalties for the delays in the commissioning of projects. From our stakeholder consultations, this has been observed that getting clearances from the various state departments can lead to delays in the projects and sometimes even the failures, hence most of the stakeholders demand a more efficient clearance mechanism to be set in place. Here we propose, that the state government should create a designated entity to provide single window clearances for-Land, Water availability, Environmental clearances and Evacuation Infrastructure, by coordinating with each department(including the STU) responsible for issuing these clearances.

Issues related to the Contractual Agreement between NVVN & SPD/Distribution Utility A number of discussions had been made at all the major forums and discussion panels regarding the PPA, its realisation, payment mechanism, security and all other associated issues. From our findings we found out that, the actual Risk associated to PPA is not that payment will not be realised but the risk is that PPA will be re-negotiated at a later stage. In the near future when solar power reaches grid parity, the developer should be free to choose the quantum of power to other market models besides NVVN.

Over Aggressive Bidding Tariff bidding mechanism is being opposed by most of the developers, but to encourage the competitive market mechanism such a scenario is a must in the sector. Some of the stakeholders are of view that solar technology is in its nascent stage; high competition at such a stage will kill innovation and development in the sector.

The mechanism which could be proposed to meet the risks involved in the tariff bidding can be introduction of a floor price on which the discount could be offered and floor should be decided as a discount based on a percentage of lowest bid received during last bidding.

Indigenous Manufacturing – Supply crunch Focus on indigenous manufacturing for building up the internal capacities is a good thought by authorities, but to provide economies of scale and cheaper power the mechanism should not be implemented at a faster pace, it would be better to bring in such a system in phases and the developers should be allowed to export the cheaper


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components and instruments. Moreover, closing the doors for the latest and more efficient technologies to Indian market to start with would be counterproductive from the point of view of reducing the costs and inculcating state of art technologies. Although incentives like tax benefits could be provided for the players adopting indigenous manufacturing.

Scale of Projects Scalability is one of the major issues seen by the funding agencies and bigger developers. Although much had been done in the phase I batch II guidelines, encouraging large scale development would further bring in economies of scale. Higher MW range of projects had to be promoted for using better evacuation infrastructure.

Political Risk Political risk is one of the most difficult risks to mitigate since it’s the sovereign right of the government of the day to modify existing policies and regulations in best public interest. However, certain measures can be taken to ensure that the impact of these changes is not directly and unilaterally imposed on the project developers/financial institutions. For example, developers and FIs can make the case that since tariffs are calculated based directly on the capital cost in existence at that time, and since payback periods for solar energy are significantly long, changing tariffs can destroy project viability and offer strong disincentives for future sector growth. However, apart from petitioning against clauses in the PPA/PSA can define legal redressal and compensation mechanisms in the case of change in law.

Infrastructure

Evacuation Infrastructure The concept of a single window entity had to be developed.

The State transmission Utilities (STUs) should public their present and future plans of development, as of putting in black and white their infrastructure plans including the areas where the transmission lines will be set up, such an action will help the project developers to make their development plans accordingly, it would bring in more clarity for the developers regarding the availability of evacuation infrastructure

Reliability of 33KV grid system in India had always been questionable; hence connection to the unreliable grid would result in loss of revenue to the solar power producers. The government should facilitate the grid connectivity at 132 KV or higher voltages and the responsibility for development and maintenance of transmission line shall be on the state transmission utilities.

Technological risks

Reliability on available Solar Irradiation Data

Although the government is in the process to set up radiation measurement centres across various locations in India, training and capacity building programs should be arranged for creating awareness among the financers and the other stakeholders and a standardized methodology should be adapted to measure the solar irradiations. Such a system will bring in more clear mechanism and encourage investments in the sector.

Project developer shall take up the responsibility for ensuring the validity of data. Solar energy centre data should be standardized which will remove all the confusions for both the developers and the financers.

Technology selection

Selecting technology for Solar Thermal is still an important issue for developers as well as the bankers. The technology has not been tested under Indian conditions.

Although, the guidelines for selection of projects mention about the technical standards, but since it’s a very new sector most of the stakeholders are quiet unsure of the performance concerned. Both the developer and the financers community proposes the adoption of some well proven and standardized mechanisms at policy levels to ensure quality of services and pitch in only the serious market players in the market and help to phase out non serious short term profit seekers from the solar industry.


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Lack of performance data for Indian conditions Solar sector is particularly in a niche stage at this point of time, lots of analysis regarding policies, finances and

behaviour of market can be done from the global perspective. But it’s very early to comment on the exposure

and response of all the market factors related to the solar industry as the performance data under the Indian

conditions would evolve slowly and steadily. This is a variable risk since no policy level or technology level

changes can be made. We propose that first, a study must be undertaken to establish the authenticity of data

from various sources. The study should determine the extent of discrepancies in data released by the Indian

Meteorological Department (IMD) and also highlight reasons behind the same. The government should then

designate a central agency to iron out errors in methods or procedures as established by the study and invest in

building necessary infrastructure for data collection through IMD. This would, over time, build an extensive

database and largely help address the concerns regarding the reliability of solar irradiation data in India.

Financial Risks

Interest Rate Risks Interest rate risk is the sensitivity of an institution’s cash flows, reported earnings, and economic value or

market value–of-equity (MVE) to changes in interest rates. The movement of interest rates affects the earnings

and book capital by changing the net interest income, the market value of balance sheet instruments accounted

for at market value and other interest sensitive income and expenses. Solar being a capital intensive sector

interest rate will always be affecting the investments in the solar industry.

A forward contract is the most basic interest rate management product. Forward Rate Agreements (FRAs) is

based on the idea of a forward contract, where the determinant of gain or loss is an interest rate. Under this

agreement, one party pays a fixed interest rate and receives a floating interest rate equal to a reference rate.

The actual payments are calculated based upon a notional principal amount and paid at intervals determined by

the parties. Only a net payment is made - the loser pays the winner, so to speak. FRAs are always settled in cash.

A futures contract is similar to a forward, but provides the counterparties with less risk than a forward contract,

namely a lessening of default and liquidity risk, due to the inclusion of an intermediary.

Similarly a swap is an exchange. More specifically, an interest rate swap looks a lot like a combination of FRAs

and involves an agreement between counterparties to exchange sets of future cash flows.

All these products all provide ways to hedge interest rate risk, with different products being appropriate for

different scenarios. Although need for that can be ascertained on case by case basis and market outlook.

Currency risk Fluctuations in foreign exchange are considered another major risk which might affect the solar project during

the construction and operation. Foreign companies who are interested to invest in Indian solar market are

analyzing the opportunities and threats associated with international currency transactions before they

proceed. This is preventing many of the foreign investors to invest freely in the Indian solar markets since, as of

present no guarantee mechanisms are in place to mitigate this risk.

Transactional currency risk can be hedged tactically or strategically to preserve cash flow and earnings,

depending on their currency view.

Translational currency risk is usually hedged opportunistically rather than systematically, notably to try to

avoid emerging market-related shocks to net assets, usually focusing on either long-term foreign investment or

debt structure.

Hedging economic risk is complex, requiring the corporation to forecast its revenue and cost streams over a

given period and then to analyze the potential impact on these of an exchange rate deviation from the rate used

in calculating revenue and cost. For the debt structure, the currency of denomination must be chosen, the

amount of debt estimated in that currency and the average interest period determined. The effect on cash flow

should be netted out over product lines and across markets. What’s left from this process is the economic risk

that has to be managed. For large multinationals, the net economic risk may in fact be quite small because of

offsetting effects. However, economic risk can be substantial for corporations that have invested in only one or

two foreign markets. Concluding it, either taking Rupee loans or hedging the risk by derivative contracts are the

http://www.investopedia.com/terms/f/forwardcontract.asp

http://www.investopedia.com/terms/r/referencerate.asp

http://www.investopedia.com/terms/n/notionalprincipalamount.asp

http://www.investopedia.com/terms/f/futurescontract.asp

http://www.investopedia.com/terms/c/counterparty.asp

http://www.investopedia.com/terms/d/defaultrisk.asp

http://www.investopedia.com/terms/l/liquidityrisk.asp

http://www.investopedia.com/terms/s/swap.asp

http://www.investopedia.com/terms/i/interestrateswap.asp


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most effective measures to mitigate the risk. Although the need for that can be ascertained on case by case basis

and market outlook.

Commissioning Risk Commissioning risk is another major financial risk of concern. NSM is tightly bounded with the stipulated time

frame; hence the timely completion of the projects is mandatory for the successful completion of the mission.

This has been observed that in a typical power project a number of issues come up which leads to delay in the

commissioning and operations, apart from many other risks, laxity from the developers and EPC contractor’s

side plays a major role in the causing delays. A mitigation measure to bring in better discipline amongst all can

be imposing a penalty clause on the EPC contractor if delay happens, this will reduce the occurrence of such a

risk from the developer’s side.

Raising of equity Rising of the equity is a pre-requisite for any project, arranging the equity had been one of the major concerns

for the solar projects under NSM. It has been observed that many equity investors are excusing themselves from

investing under NSM, their concerns and issues have been majorly addressed before in our risk chapters. In

order to encourage participation of equity players, an option which could be forwarded can be allotting

maximum preference shares to institutional investors i.e. fixed return for some period followed by conversion

into normal equity, which will be an encouraging step to pitch in more equity players in the solar projects under

NSM. Apart from this, mitigation of all major risks associated with the solar projects would be an encouraging

step for equity players to start investing in solar industry.

Risks leading to non- fulfilment of in-time financial closure by the project developer To help developers achieve timely financial closures most of the banks suggested for creation of a separate

window mechanism for investments in renewable particularly solar, as most of the banks are already filling

their appetites for investment in power sector by investing in the conventional projects. There is a need for

some investment scenarios where investments should be mandated will definitely help the development of

sector and will help developers achieve the timely financial closures. Another method could be tie-up funds with

banks first, and then raising the funds from other time consuming options like bonds, ECBs etc. can also help

reduce the probability for non fulfillment of timely financial closures.


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Chapter 5: Year-wise investment / funding requirements for NSM Renewable Energy Year Wise Capacity Addition till 2022 Currently India has an installed capacity of around 180 GW of electricity, with more than 60% generated from thermal energy. Hydro power is a distant second at 21%, whereas renewable energy contributes only 20 GW or 11% of the installed mix. However as the capacity utilization factor of renewable energy sources is very low as compared to capacity utilization factor of thermal electric plants, the energy mix of India from renewable energy further decreases to 4%.

India continues to grow at a rapid pace, but the growth in the power sector has not been very rapid and the demand supply gap has widened at now stands at around 10% of total electricity requirement which is around 13% for peak demand. India’s ability to close this gap will be critical for maintaining a high growth rate as supply of electricity is a major bottleneck for growth in India. To meet this demand and also account for increase in demand in the future years due to higher economic growth, rural grid electrification, urbanization, etc, India needs to have an installed capacity of over 300 GW by 2017. While in the 12th Plan most of this additional requirement will be met with cheaper thermal (mostly coal power), to grow sustain ably India needs to increase its mix of renewable energy.

The Ministry of New and Renewable Energy has projected the capacity addition of different renewable technologies till 2017 in its strategic plan6 and in its sub-group recommendations for the 12th Five Year Plan7. For the 13th Five Year Plan, MNRE has envisaged cumulative capacity addition for each of the renewable energy technologies.

Currently the Indian renewable energy scenario is dominated by the wind sector with an installed capacity of approximately 15GW as on 31/08/2011 which is 75% of the total installed renewable energy capacity. Wind has been driving the renewable energy sector and it has grown mainly due to incentives such as accelerated depreciation and preferential tariffs. However previously developers focussed on installing wind power plants to avail accelerated depreciation and emphasis on generation was low which is responsible for an overall low CUF of 17% for the wind sector in India. But with more encouragement from the government towards power generation through generation based incentives and RPOs, the CUF of wind plants should increase. The following graph represents the year wise addition of different renewable energy technologies from 2006/07 to 2010/11.

Figure 11: Past Trends of Renewable Energy Capacity Addition

6 Strategic Plan for new and renewable energy sector for the period 2011-17, extracted from: http://www.mnre.gov.in/policy/strategic-plan-mnre-2011-17.pdf 7 Extracted from http://www.mnre.gov.in/twelth-plan.htm

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http://www.mnre.gov.in/policy/strategic-plan-mnre-2011-17.pdf

http://www.mnre.gov.in/policy/strategic-plan-mnre-2011-17.pdf

http://www.mnre.gov.in/twelth-plan.htm


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Solar power addition during this period has been negligible with a total addition of around 37 MW of solar PV. Other technologies have shown little growth, but there is a huge potential for biomass and small hydro to grow in the coming years.

The graph below represents the cumulative capacity of renewable energy in India till 2022 based on MNRE targets. Wind energy will still be the most dominant technology for this entire period, though based on current planned scenarios, solar power addition will overtake wind power addition in the 13th Five Year Plan. The addition of other renewable energy technologies is not as prominent as the addition of wind and solar power.

Figure 12: Cumulative RE Installed Capacity

T he graph below depicts the year wise percentage distribution of addition planned capacity for different renewable energy technologies till 20228. In the 12th Five Year Plan and the remained of the 11th Five Year Plan, wind sector will dominate total renewable energy capacity addition, however solar power- both PV and thermal will dominate the renewable energy planned projections in the 13th Five Year Plan.

Figure 13: % Addition of RE Technologies

8 MNRE Projections extracted from: MNRE’s Strategic Plan 2011-2017, http://mnre.gov.in/policy/strategic-plan-mnre-2011-17.pdf, and Working Group for 12th Plan for MNRE: http://mnre.gov.in/twelth-plan.htm

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Wind Power Biomass WtE Small Hydro Power Solar PV Solar Thermal

http://mnre.gov.in/policy/strategic-plan-mnre-2011-17.pdf

http://mnre.gov.in/twelth-plan.htm


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Investment Required for other Renewable Energy till 2022 The investment required for the envisaged capacity addition has been determined by calculating year wise capital cost of the different renewable energy technologies. The capital cost trends of the various technologies are:

1) Wind Power: For wind power, a 1% year on year decrease in capital cost has been taken as the wind power market has matured, with various technological advances and large investments in local manufacturing capacity. Further technological advancements may not decrease the capital cost of turbines, but will increase efficiency and reduce per unit cost of generation.

2) Biomass: For the biomass sector a 2% year on year decrease in capital cost has been taken, as there is further scope in new technologies, and further R&D efforts will reduce capital costs along with providing cleaner power and reduced cost of generation.

3) Waste to Energy: For WtE, a year on year capital cost reduction of 2% has been taken as presently the capital cost is relatively high as compared to other RE technologies as WtE is relatively a new technology and as more R&D investment flows, capital costs will decrease.

4) Small Hydro: Yearly capital cost for small hydro has been taken as 1%, as the majority of capital cost is in the form of land and civil costs which will not decrease and will offset technology advancements in terms of capital costs.

5) Solar PV: Solar Costs for utility scale solar PV have drastically reduced, and as per reports from the International Energy Agency this trend will continue. Analysis from the Technology Roadmap- Solar Photovoltaic Energy, IEA9 and the University of Melbourne- Renewable Energy Technology Cost Review10, along with PwC analysis it has been estimated that the capital cost for solar PV will reduce by 5% annually. Capital cost for the solar technologies will decline as production increases to attain economies of scale, along with cost reduction measures from increased investment in research and development in this sector.

6) Solar Thermal: Yearly capital cost decrease for solar thermal has been taken at 3%, as solar thermal is a still a new technology and with further R&D in this sector, rapid decrease in costs will not be seen immediately, but in later years when it becomes a mainstream technology.

9 http://www.iea.org/papers/2010/pv_roadmap.pdf 10 http://www.earthsci.unimelb.edu.au/~rogerd/Renew_Energy_Tech_Cost_Review.pdf

http://www.iea.org/papers/2010/pv_roadmap.pdf

http://www.earthsci.unimelb.edu.au/~rogerd/Renew_Energy_Tech_Cost_Review.pdf


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The investment requirements have been calculated year wise, taking into account the phasing of capital costs for technologies such as biomass, small hydro, WtE and solar thermal power plants that take more than one year to complete. The year-wise capacity addition targets, along with the investment requirements to meet these

The table below gives the year wise capacity addition of the renewable energy technologies till 2022 based on MNRE projections and for solar only includes the NSM targets:

Table 6: Year-wise RE capacity addition (MW)

Year 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22

Wind Capacity Addition for Year (MW) 2400 2500 2300 2200 2100 1900 2016 2128 2240 2352 2464

Biomass Capacity Addition for Year (MW) 350 380 380 330 330 330 340 340 340 340 340

WtE Capacity Addition for Year (MW) 20 25 35 45 55 60 75 88 100 113 125

SHP Capacity Addition for Year (MW) 350 350 400 400 450 500 320 320 320 320 320

Solar PV Capacity Addition for Year (MW) 150 400 200 200 500 550 800 1200 1600 2000 2400

Solar Thermal Capacity Addition for Year (MW) 500 50 200 200 500 550 800 1200 1600 2000 2400

Total Capacity Addition (MW) 3770 3705 3515 3375 3935 3890 4351 5276 6200 7125 8049

The investment required for installation of this capacity is given below:

Table 7: Year-wise RE investment required (Rs. Cr)

Year 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22

Wind (Investment) in cr. 12000 12375 11271 10673 10086 9034 9490 9917 10335 10743 11142

Biomass (Investment) in cr. 1732 1548 1567 1416 1307 1281 1278 1268 1242 1217 1193

WtE (Investment) in cr. 128 193 255 330 403 449 523 613 692 768 840

SHP (Investment) in cr. 1950 1741 1846 1950 2051 2269 1942 1499 1484 1469 1454

Solar PV (Investment) in cr. 1650 4000 1900 1805 4287 4480 6190 8821 11173 13268 15126

Solar Thermal (Investment) in cr. 2391 1902 2395 4740 6024 7906 11422 15193 18727 22035 22524

Total Investment in RE in cr. 19851 21759 19235 20915 24158 25420 30846 37311 43653 49501 52280


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Solar Capacity Addition under NSM The National Solar Mission’s envisaged capacity addition of 20,000 MW of solar power has been presently equally distributed among solar photovoltaic and solar thermal technologies. The first phase of the mission till 2013 has envisaged a capacity addition of 1,000 MW, cumulative capacity of 4,000 MW till 2017 and 20,000 MW grid connected solar power. MNRE has provided figures for year-wise capacity of grid connected solar power till 2017 in its strategic plan, which adheres to the National Solar Mission targets.

Different Scenarios for the National Solar Mission Our analysis considers three potential scenarios for the National Solar Mission:-

The base scenario- 20,000 MW of grid connected solar power by 2022

Twice the base scenario- 40,000 MW of grid connected solar power by 2022

Thrice the base scenario- 60,000 MW of grid connected solar power by 2022 The allocation of the three scenarios into solar photovoltaic and solar thermal has been done by doubling or tripling the base scenario in line with the assumptions used by MNRE.

Estimating Investment Required under the Different Scenarios of NSM Assumptions

Apart from NSM targets, to estimate the investment required capital cost trends of the technology are required. To calculate the capital cost till 2022, capital costs for the technologies have been taken as assessed from stakeholder discussions have been taken for the base year 2011-12. The capital cost for solar technologies covers the equipment cost, land cost, interest during construction, evacuation cost and civil and commissioning costs. For the base year 2011-12, the capital cost for solar PV, irrespective of thin film or crystalline technology has been taken as Rs. 11.00 crores/ MW. For solar thermal the capital cost for the base year is Rs. 13 crores/ MW.

Capital cost reduction trends for solar PV have been taken at 5%, whereas for solar thermal it has been taken at 3% annual decrease. However when we consider the other cases for installation of 40,000 MW and 60,000 MW by 2022- technology costs will have to decrease even more aggressively to promote investors to fund the extra capacity. Despite this, capital cost reductions will most likely not be proportional to extra added capacity. We assume a 6% annual decrease in capital cost for solar PV for scenario 2 and a 7% annual decrease in capital cost for scenario 3. For solar thermal the base case capital cost reduction is 3%, under scenario 2 the capital cost reduction has been taken as 4% and under scenario 3 it has been taken at 6%.

Further, construction time for solar PV plants has been taken as 1 year, whereas for solar thermal the construction time has been taken as 2 years, with capital cost distribution of 70% in the first year and 30% in the second year.

These capital cost reduction trends for the three scenarios is given for both the technologies is given below:


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Figure 14: Capital Cost Trend for Solar PV (Rs. crores/ MW)

Figure 15: Capital Cost Trend for Solar Thermal (Rs. crores/ MW)

Scenario 1: Base Case of 20,000 MW of Solar Power by 2022 This scenario is the base scenario and adheres to NSM targets of 20,000 MW- 10,000 MW of solar PV and 10,000 of solar thermal by 2022. As per MNRE’s projections and guidelines, the distribution of this projected capacity has been done with 1000 MW in the 11th Plan, 3000 MW in the 12th Plan and the rest 16000 MW in the 13th Plan by 2022. The graph below captures the year wise target of grid connected solar power using figures provided by the MNRE strategic plan. For the years 2017 to 2022, the capacity addition of 16,000 MW of solar power has been distributed as given in the chart below.

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Figure 16: Scenario 1- Solar Power Installations (MW)

Based on the assumptions above, the capital cost requirements were calculated for this scenario by multiplying the year wise capacity addition and the annual capital costs. For solar thermal as the construction cost is two years, capital cost phasing has been done. Based on the assumptions for capital cost, and year wise installations the total investment required for the base scenario was calculated to be Rs. 172, 338 crores (USD 34.47 billion).

As can be seen on the graph below, investments for achieving installation targets for the period 2017 through 2022 are not linearly growing. We have assumed that due to learning curve and ‘bandwagon effects’, projects will come online faster towards the end of the plan period, rather than being equally distributed throughout. Accordingly, installation targets and corresponding investment requirements are bunched up towards 2020, dropping rapidly in the final year of the Mission period.

Figure 17: Scenario 1- Solar Power Investments (Rs. Crores)

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Scenario 2: Twice the Base Case- 40,000 MW of Solar Power by 2022 This scenario is twice of base scenario and targets an installed capacity of 40,000 MW by 2022- 20,000 MW of solar PV and 20,000 of solar thermal by 2022. The year wise distribution of this projected solar power capacity has been done by doubling the existing plan and year wise targets with 2000 MW in the 11th Plan, 6000 MW in the 12th Plan and the rest 32000 MW in the 13th Plan by 2022. The estimated funding requirement for this scenario is Rs. 320,902 crores (USD 64.18 billion). With double targets of the NSM under scenario 2, the total investment has increased 86% more than the base case scenario. The charts for year wise capacity addition and investment required is given below:



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Scenario 3: Thrice the Base Case- 60,000 MW of Solar Power by 2022 Under this scenario an installed capacity of 60,000 MW of solar power has been envisaged by 2022- 30,000 MW of solar PV and 30,000 of solar thermal by 2022. The year wise distribution of this projected solar power capacity has been done by tripling the existing plan and year wise targets with 3000 MW in the 11th Plan, 9000 MW in the 12th Plan and 48000 MW in the 13th Plan by 2022. The funding requirement for this scenario has been estimated to be around Rs. 429,080 crores (USD 85.82 billion). Even with tripling the targets of the NSM, the total investment under this scenario is only 149% more than the base case scenario. The charts for year wise capacity addition and investment required is given below:



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The following table gives the investment required under each scenario and also gives the % increase in investment required from the base case:

Table 8: Scenario wise investment required for grid connected solar power

Scenario Target (MW) Investment Required (Rs. Cr.)

Investment Required (US$ billion)

% increase in investment required over base case

1 20,000 Rs. 172,338 crores US$ 34.47 billion 0%

2 40,000 Rs. 320,902 crores US$ 64.18 billion 86.2%

3 60,000 Rs. 429,080 crores US$ 85.82 billion 149%

Solar PV Manufacturing To ensure 20,000 MW (10000 MW of solar PV, 10000 MW of solar thermal) of grid connected solar capacity addition, ramping up local manufacturing capacity is required. The National Solar Mission also targets to create a favourable environment for solar manufacturing and research for both PV and solar thermal. One of the mission’s targets is for India to become a global leader across the solar manufacturing value chain. This is necessary for the overall success of the National Mission as an evolving domestic industry would help decrease costs and also provide timely maintenance for projects.

At present India is currently an exporter of solar modules, but the domestic solar industry is heavily dependent on imports of raw materials and components including silicon ingots, wafers and cells. Cell production of both crystalline and thin film solar PV have risen in the last year with corporations like Moser Baer Solar, TATA BP Solar, Websol Energy, etc adding cell production capacity to their plants. To promote the nascent solar PV industry, the central government launched the Special Incentive Package (SIPs) policy which provided capital subsidies of 20% on capital expenditure for manufacturing units to be set up in Special Economic Zones (over and above the incentives of SEZ) and capital subsidies of 25% on capital expenditure for Non- SEZ manufacturing units. The scheme also provided other benefits including exemption from countervailing duties for manufacturing units being set up in Non- SEZ areas.

To estimate the investment required for solar PV manufacturing- the PV addition has been equally divided amongst crystalline and thin film technologies. Further 50% domestic content requirement has been taken for thin film, and 100% for crystalline technology. Year wise incremental manufacturing capacity was computed by finding the extra capacity required every year to meet at most the local demand with a production efficiency of 80%. Additional solar PV manufacturing capacity available for exports and other schemes is not considered as it is difficult to estimate the extent of India’s export. The capital cost for base year has been taken as Rs. 18 crores and then given a decreasing trend with the same % as the capital cost reduction in solar PV project cost. As per the estimations, the cumulative capacity of solar PV manufacturing based on the above estimations at the end of the 13th Five Year Plan comes out to be 2250 MW. This figure accounts only for capacity required to meet the mission targets and excludes additional capacity required for exports and other domestic RPO schemes. The capital outlay for the NSM base for 20,000 MW of solar (10,000 solar PV) requires Rs.27,698 crores or USD 5.54 billion. Solar Thermal manufacturing is not considered as globally, existing glass manufacturers are modifying their existing products to manufacture solar thermal grade reflectors and concentrators. In a typical solar thermal power plant, the solar field (reflectors/ concentrators) contributes around 40% of the total project cost, whereas power block equipment comprises of 17% capital cost. The power block is an existing technology, with a large domestic base. The rest of the capital cost includes engineering and layout of the plant along with construction, civil costs and land costs. Table 9: Investment Required under NSM for Solar Power Capacity Addition

Scenario Target (MW) Investment (Rs. Cr.) Investment (US$ billions)


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1 20,000 27,698 5.54

2 40,000 51,399 10.28

3 60,000 71,571 14.31

Table 10: Investment Required under NSM for Solar Power Capacity Addition and Manufacturing

Scenario Target (MW) Investment (Rs. Cr.) Investment (US$ billions)

1 20,000 200036 40.01

2 40,000 372301 74.46

3 60,000 500651 100.13


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Chapter 6: Solar Power Plant Simulations

Introduction Simulating solar power generation regardless of the technology is not technically dissimilar to simulating generation from conventional energy sources. Specific technical and operational assumptions relating to each type of solar technology, which are relatively easily available from international experience, along with site specific parameters like radiation, regulatory and other expenses etc. are the predominant variables required to calculate generation from solar technologies.

However, the primary aim of simulating solar PV and thermal generation for this assignment is threefold: 4. analyze the effect of various risks, as perceived by different stakeholders, on project viability. 5. analyze the effect of mitigation measures for each of the risks analyzed in the previous steps on the

project viability and; 6. assess the best combination of funding sources to improve project viability

As has been highlighted in earlier sections of this report, a solar PV or CSP plant can face several categories of risks ranging from policy & regulatory, technical, infrastructural and general project finance risks that are univerally applicable for all infrastructure projects. However, only some of these risks have a discernable effect on key variables that determine solar project viability. Other types of risks are more generic in nature and do not effect any single project variable directly, but rather put the entire project itself in jeopardy. In order to understand effect of the various risks on the key parameters that effect solar projects, it is essential to define these parameters upfront.

1. Capital Cost: Capital cost is perhaps the most important and the largest cost component associated with solar projects, since operating costs for solar power plants is negligible. Any increase in capital cost has a significant impact on the overall project IRR.

2. Commissioning time: Apart from capital costs, interest costs are the most significant portion of a solar project’s cost components. Any delay in commissioning, delays revenues and increases costs associated with interest during construction (IDC), and commissioning charges, if any.

3. REC prices: The REC RPO regime provides project developers with an alternative revenue stream to substitute for the discounted preferential tariffs available under the JNNSM. However, the REC prices are market determined within a band of regulated prices. Depending upon the prevailing demand-supply situation, the prices of RECs can fluctuate wildly, and considering the infancy of the market, it is impossible to predict price trends.

4. CUF: Capacity utilization factor (CUF) determines the amount of electricity that can be generated from a given size of the system installed. A plant’s CUF can be affected by several factors like insolation, deration etc.

5. Interest Rates: While interest rates can affect the overall viability of any project, for solar project in particular, there are several factors that can adversely affect interest rates, including the inherently high risk perception harbored by lenders, as well as lack of investor confidence in new project developers, who inadvertently receive a higher interest rate to hedge risks.


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In order to assess the impact of various risks on each of these key parameters, the following section presents, in brief, the assumptions used by the simulation model.

11 While most stakeholders highlighted financial risks as being the most serious of their concerns, detailed analysis of financial risks reveals that most of these are actually the results or the effects of possible or actual realization of other categories of risks listed in the matrix. The financial risks listed in this matrix are the generic project finance risk that are faced by all categories of infrastructure projects, modified to reflect concerns of solar power plant developers in particular.

Major risk categories

Specific Risks Affected Parameters

Policy and Regulatory Risks

1 Past track record of bidders Interest rates

2 Delay in getting clearances and approvals

Commissioning time, interest rates

3 Issues related to the Contractual Agreement between NVVN & SPD/Distribution Utility

Capital cost, commissioning time, interest rates

4 Over Aggressive Bidding REC prices

5 Indigenous Manufacturing-Supply Crunch

Capital cost, commissioning time, CUF

6 Scale of Projects Capital cost, commissioning time

7 Political Risk Commissioning time

Infrastructural Risks

1 Evacuation Infrastructure Capital cost, commissioning time

2 Specific issues related to land Capital cost, commissioning time

3 Specific issues related to water Capital cost, commissioning time

Technological Risks 1 Reliability of Solar Irradiation Data CUF

2 Technology selection Capital cost, CUF

3 Lack of Performance data for Indian conditions

CUF

Financial Risks11 1 Interest Rate Risk Interest rates

2 Currency Risk Interest rates, capital cost

3 Commissioning Risk Interest rates

4 Raising the equity Interest rates, capital cost

5 Timely financial Closure Interest rates, capital cost

6 Exposure Limits Commissioning time

Table 11: Major Risks


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Simulation model assumptions The assumptions on this model can be classified under different heads; these are reproduced in the table below:

Solar Power Plant related assumptions CERC norms Actual

S. No. Assumption Head Sub-Head Unit Solar PV Solar Thermal Solar PV Solar Thermal

1 Power Generation

Installed Power Generation Capacity MW - - 5 25

Annual Deration Factor % 0% 0% 0.15% 0.15%

Auxiliary Consumption % 0% 10% 0% 10%

Capacity Utilisation Factor % 19% 23% 19% 23%

Transmission and distribution losses % 0% 0% 3.5% 3.5%

2 Time period

Life of the project Years 25 25 25 25

Construction period Months 12 24 12 24

Start date Date - - 1-April-12 1-April-12

Time required for achieving financial closure Months - - 6 6

3 Project Cost

Power Plant Cost Rs Mn/MW 144.2 150 120 125.7

Land requirement Sq. m/MW 20,000 30,000 20000 30000

Land Cost including administrative and incidental charges

Rs. Per sq.m. 314.25 314.25 314.25 314.2314.25

4 Financial Assumptions

Debt % 70% 70% 70% 70%

Equity % 30% 30% 30% 30%

Upfront equity % - - 25% 25%

Loan Repayment Period years 10 10 Specific to combination

Specific to combination

Moratorium period months 24 Specific to combination

Specific to combination

Table 12: Financial Model Assumptions


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Interest Rate % 13.25% 13.25% 12.50% 12.50%


4 Financial Assumptions

Return on equity for first 10 years % p.a 19% 19% 15% 15%

Return on Equity after 10 years % p.a 24% 24% 15% 15%

5 Tax and depreciation

Income Tax % 32.45% 32.45% 32.45% 32.45%

MAT Rate % 20.01% 20.01% 20.01% 20.01%

Depreciation Rate - First 10 years % 7% 7% 5.28% 5.28%

Depreciation Rate - Remaining Years % 1.3% 1.3% 5.28% 5.28%

Years for 7% rate Years 10 10 - -

Salvage value % 10.0% 10.0% 10% 10%

Depreciation as per Income tax Act - - 15% 15%

Accelerated depreciation rate 80% 80%

Salvage value as per IT Act - - 5% 5%

6 Working Capital

O&M Charges Months 1 1 1 1

Receivables for Debtors Months 2 2 0 0

Maintenance % of O&M exp. 15% 15% 15% 15%

Interest On Working Capital % 12.75% 12.75% 12% 12%

7 Operation & Maintenance

O&M charges for FY 2011-12 Rs. mn/MW 1.01 1.45 1.01 1.45

Total O & M Expenses Escalation % 5.72% 5.72% 5.72% 5.72%

8 Sale of Power

Tariff period 1 Years 25 25 10 12.00

Tariff period 2 Years - - 15 13

Tariff for Tariff period 1 under PPA Rs/kWh 15.39 15.04 12.16 11.57

Tariff for Tariff period 2 under PPA Rs/kWh - - 12.16 11.57

REC Rs/kWh - - 12 12

Average pooled cost of power purchase Rs/kWh 2.65 2.65 2.65 2.65


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Discount factor: normative for levelizing tariff 15.88% 15.88%


9 Other assumptions

Transmission line cost per km Rs mn/km 1.1 1.1

Transmission length to the nearest sub-station Km 5 5

Water supply cost Per unit - 0

Water requirement Units/MW - 0

10 Tax regime: DTC is applied

Direct tax code: No tax holiday, No AD, no MAT credit, change in MAT calculations, carry forward of losses for infinite time

Corporate tax rate 32.45%

MAT rate 20.01%

MAT rate-calculated on GFA 2%

In addition to these solar plant specific assumptions, we have also included assumptions regarding the various sources of finances available for solar projects. These sources of finances have specific characteristics that can have a significant impact on project viability. The following table lists out the key features of the various sources of financing considered for this simulation.

Table 13: Features of different types of debt

Mode of raising debt and its features

Interest rate Repayment tenure (years)

Moratorium period (years)

Commercial banks 12.5% 10 2

Specialised infrastructure financing companies 13.0% 12 3

Non-convertible debentures 11.0% 15 2

Multi-lateral agencies 9.0% 20 5

Export credit agencies 7.0% 7 2

External commercial borrowings 9.0% 10 2

While it’s likely that the specific values assumed for the different features of each financing source may differ, the values given above are largely representative of actual numbers.


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Analyzing the effect of various risks As described previously, the various categories of risks can have a significant impact on key variables of the project. In order to clearly deliniate the impact of risks on variables, they have been considered one at a time, for each variable. Funding source is chosen as 100% commercial bank borrowing.

Table 14: Impact due to capital costs

Result of scenario analysis Solar PV Solar Thermal

Capital cost fluctuations Project IRR Equity IRR Project IRR Equity IRR

-15% 11.36% 14.53% 10.92% 13.75%

-10% 10.47% 12.70% 10.15% 12.32%

-5% 9.65% 11.12% 9.45% 11.08%

0% 8.89% 9.74% 8.77% 9.92%

5% 8.22% 8.59% 8.18% 8.94%

10% 7.61% 7.58% 7.64% 8.08%

15% 7.01% 6.63% 7.09% 7.23%

Figure 22 Capital Cost fluctuations for Solar PV

Figure 23 Capital Cost fluctuations for Solar Thermal

0.00% 2.00% 4.00% 6.00% 8.00%

10.00% 12.00% 14.00% 16.00%

-15% -10% -5% 0% 5% 10% 15%

% IR

R

Capital Cost Fluctuations

Solar PV

Equity IRR Project IRR

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

-15% -10% -5% 0% 5% 10% 15%

% IR

R

Capital Cost Fluctuations

Solar thermal



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0%

2%

4%

6%

8%

10%

12%

30 days 60 days 90 days

% IR

R

Solar thermal


0%

2%

4%

6%

8%

10%

30 days 60 days 90 days

% IR

R

Solar PV


Table 15: Impact due to commissioning time

Result of scenario analysis Solar PV Solar Thermal

Delay in commissioning Project IRR Equity IRR Project IRR Equity IRR

30 days 8.73% 9.52% 8.64% 9.76%

60 days 8.58% 9.33% 8.48% 9.57%

90 days 8.40% 9.08% 8.32% 9.36%

Table 16: Impact due to REC prices


Decrease in REC prices: Revenue by REC and APPC Project IRR Equity IRR

Project IRR Equity IRR

0% 12.02% 15.92% 12.06% 15.96%

-1% 11.99% 15.85% 12.04% 15.91%

-2% 11.96% 15.79% 12.01% 15.85%

-5% 11.87% 15.60% 11.93% 15.69%

Figure 24 Impact due to commissioning- Solar Thermal

Figure 25: Impact due to commissioning time -Solar PV projects


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Figure 26 Decrease in REC prices- Solar PV

Figure 27 Decrease in REC prices-Solar Thermal

Table 17: Impact due to CUF


Decrease in CUF Project IRR Equity IRR Project IRR Equity IRR

-1.50% 8.67% 9.36% 8.60% 9.64%

-1% 8.74% 9.48% 8.66% 9.73%

-0.50% 8.81% 9.60% 8.72% 9.83%

+0.50% 8.97% 9.89% 8.84% 10.03%

1% 9.05% 10.03% 8.90% 10.14%

+1.50% 9.14% 10.18% 8.97% 10.25%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

0% -1% -2% -5%

%IR

R

Decrease in REC prices

Solar PV

Project IRR

Equity IRR

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

0% -1% -2% -5%

%IR

R

Decrease in REC prices

Solar thermal

Project IRR

Equity IRR


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Figure 28 Change in CUF - Solar PV

Figure 29 Change in CUF-Solar Thermal

Table 18: Impact due to interest rates


Increase in interest rates Project IRR Equity IRR Project IRR Equity IRR

-1.50% 9.13% 10.89% 9.05% 10.91%

-1% 9.06% 10.51% 8.95% 10.57%

-0.50% 8.97% 10.12% 8.86% 10.24%

0.50% 8.84% 9.43% 8.72% 9.66%

1% 8.77% 9.10% 8.63% 9.36%

1.50% 8.69% 8.75% 8.54% 9.05%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

-1.50% -1% -0.50% 0.50% 1% 1.50%

% IR

R

Change in CUF

Solar PV


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

-1.50% -1% -0.50% 0.50% 1% 1.50%

% IR

R

Change in CUF

Solar thermal



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Figure 30 Variation in Interest rates - Solar PV

Figure 31 Variation in Interest rates-Solar Thermal

Finally the impact on the levelized cost of generation per unit has been calculated by running sensitivities by varying CUF and interest rates (these parameters are affected by the risks as mentioned in Table 6). Following table helps us determine as to how the cost of generation varies by controlling various affected parameters due to the associated risks.

Table 19: Impact on cost of generation per unit due to CUF and interest rates

Sensitivity analysis for Cost of generation with varying CUF(Solar PV)

17.50% 18% 18.50% 19% 19.50% 20% 20.50%

4.27 4.886 4.750 4.622 4.500 4.385 4.275 4.171

Sensitivity analysis for Cost of generation with varying CUF(Solar CSP)

17.50% 18% 18.50% 19% 19.50% 20% 20.50%

4.69 6.158 5.987 5.825 5.672 5.527 5.388 5.257

Sensitivity analysis for Cost of generation with varying interest rates(Solar PV)

11.00% 11.50% 12.00% 12.50% 13.00% 13.50% 14.00%

4.27 4.11 4.16 4.22 4.27 4.33 4.38 4.44

Sensitivity analysis for Cost of generation with varying interest rates(Solar CSP)

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

-1.50% -1% -0.50% 0.50% 1% 1.50%

% IR

R

Variation in interest rates

Solar PV


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

-1.50% -1% -0.50% 0.50% 1% 1.50%

% IR

R

Variation in interest rates

Solar thermal



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11.00% 11.50% 12.00% 12.50% 13.00% 13.50% 14.00%

4.69 4.33 4.45 4.57 4.69 4.80 4.92 5.04

Optimal combination of capital cost and tariffs As the sensitivity analysis above confirms, apart from tariff, the capital costs is perhaps the most important parameters affecting project viability for both solar thermal and solar PV. This realization is important since unlike other parameters affecting IRRs, these two are directly under the control of the project developer. Retaining control over these two parameters simultaneously could ensure that even if other parameters are adverse, overall project viability is not severely impacted.

The following graphs show the ‘golden zone’ – the sweet spot where optimal combination of tariffs and capital costs result in the best possible IRRs for each technology. Areas highlighted in grey are unfavourable IRRs and the zone in the middle in white represent IRRs in the neighbourhood of base case assumptions presented previously in this chapter.

Table 20: Sensitivity in IRRs for changes in capital costs and tariff for Solar PV

Capital Costs in Rs. Millions --->

75

80

85

90

95

100

105 110

Tari

ff in

Rs.

/kW

h -

-->

7.50 7.77% 6.92% 6.16% 5.46% 4.82% 4.23% 3.67% 3.15% 8.00 8.83% 7.93% 7.13% 6.40% 5.74% 5.11% 4.53% 4.00% 8.50 9.87% 8.92% 8.07% 7.31% 6.61% 5.95% 5.37% 4.83% 9.00 10.88% 9.88% 9.00% 8.20% 7.47% 6.78% 6.17% 5.62% 9.50 11.86% 10.83% 9.90% 9.06% 8.31% 7.60% 6.95% 6.37% 10.00 12.84% 11.75% 10.79% 9.91% 9.12% 8.41% 7.72% 7.11% 10.50 13.80% 12.69% 11.66% 10.75% 9.92% 9.18% 8.49% 7.83% 11.00 14.73% 13.58% 12.54% 11.59% 10.71% 9.93% 9.22% 8.57% 11.50 15.66% 14.46% 13.38% 12.40% 11.52% 10.69% 9.94% 9.27%


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Table 21: Sensitivity in IRRs for changes in capital costs & tariff for Solar Thermal

Capital Costs in Rs. millions

75

80

85

90

95

100

105

110

Tari

ff in

Rs.

/ k

Wh

7.50 9.64% 8.82% 8.09% 7.42% 6.78% 6.22% 5.70% 5.21% 8.00 10.52% 9.67% 8.91% 8.21% 7.56% 6.96% 6.43% 5.92% 8.50 11.38% 10.50% 9.70% 8.98% 8.32% 7.68% 7.12% 6.61% 9.00 12.24% 11.33% 10.49% 9.73% 9.05% 8.42% 7.80% 7.27% 9.50 13.05% 12.12% 11.27% 10.47% 9.76% 9.11% 8.50% 7.92% 10.00 13.87% 12.89% 12.01% 11.22% 10.47% 9.78% 9.16% 8.58% 10.50 14.63% 13.66% 12.75% 11.92% 11.17% 10.47% 9.80% 9.21% 11.00 15.40% 14.39% 13.47% 12.63% 11.84% 11.12% 10.47% 9.82% 11.50 16.13% 15.12% 14.18% 13.31% 12.51% 11.76% 11.08% 10.46%


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Chapter 7: Estimation of the capacity of Indian financial system for providing funding to NSM

Approach Indian financial system is primarily composed of three major categories of institutions:

Scheduled commercial banks

NBFCs

Regional cooperative banks etc.

Out of these, we have not considered small NBFCs and regional cooperative banks as a potential source of finance for solar power projects as power projects require large scale investment and they may not have adequate appetite to finance large scale projects. Thus, to estimate the capacity of Indian financial system for financing solar power projects, scheduled commercial banks and select NBFCs such as RECL, PFC and IREDA have been considered for the projections.

Capacity of scheduled commercial banks to finance renewable energy projects To estimate capacity of scheduled commercial banks to finance solar power projects, we have first estimated credit availability from these banks for the whole economy by regressing credit availability over factors such as GDP at nominal rate, cash-reserve ratio, SLR, repo rate, gross NPAs of Indian banks, US M2 and inflation. The results of the regression analysis indicate that GDP and repo rate are the most determining factors for estimating credit availability. Basis these results, credit availability from scheduled commercial banks for the whole economy is estimated. Table 22: Projections of Credit Availability for the Power Sector

Year (Rs.’000 crores)

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

GDP at nominal

rate

8,451

9,621

10,960

12,417

14,036

15,994

18,170

20,634

23,418

26,586

30,208

GDP growth

rate (%) 15.7 13.8 13.9 13.3 13.0 13.9 13.6 13.6 13.5 13.5 13.6

Credit-GDP

ratio % 53.8 55.1 56.2 57.1 58.0 58.7 59.4 59.9 60.4 60.9 61.3

Credit

availability in

the economy

4,549

5,300

6,160

7,095

8,134

9,391

10,787

12,369

14,156

16,189

18,514

Credit for

power: credit

for economy

(%)

5.9 6.3 6.5 6.3 6.4 6.4 6.3 6.4 6.4 6.4 6.4

Credit available

for power

267

336

402

443

518

599

683

787

901

1,029

1,178


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After this, credit availability for power sector has been estimated using past figures, which is then apportioned to renewable energy in the ratio of investment required for renewable vs. Power. This is further apportioned to solar power on the basis of investment required.

For this, firstly nominal GDP has been projected for FY 12 to FY 16 using projections from IMF. GDP for rest of the years till FY 2022 has been estimated using five year CAGR. Credit availability is estimated using GDP as a factor. Repo rate is not considered for estimations as it is nearly impossible to predict repo rate till FY2022.

Credit availability for the economy is apportioned to power sector assuming 3 year moving average of credit to power: credit to economy ratio.

Credit availability for power sector is apportioned to the renewable energy in the proportion of investment required in both the sectors. Projections for investment requirement for renewable sector are described in the previous section. Investment for power sector is calculated using a GDP growth rate multiplier of 0.7-0.8 of power sector growth. 12

Table 23: Projections of Credit Availability for Renewable Energy

Year (Rs.’000 crores)

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

Growth in

power sector

investment

(%)

19.58 17.30 17.41 17.72 17.38 18.60 18.14 18.08 19.27 19.32 19.47

Investment in

power sector

at current

prices

468 549 644 758 890 1,055 1,247 1,473 1,756 2,096 2,521

Credit

availability

for RE

11.4

13.4

12.0

12.3

14.1

14.5

17.0

20.1

22.6

24.6

24.8

Capacity of select NBFCs to finance renewable energy projects

We have considered three NBFCs which are prominent in lending to power sector, namely, RECL, PFC and IREDA. We have estimated their financing plan for renewable energy using company news and assumed growth rates for future disbursements.

Table 24: Funding capacity of select NBFCs for RE

Growth in disbursements % Assumption

IREDA 15%

PFC 10%

RECL 5%

Year

(Rs.crores) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

IREDA

1,850

2,128

2,447

2,814

3,236

3,721

4,279

4,921

5,659

6,508

7,484

PFC

513

564

620

682

750

826

908

999

1,099

1,209

1,330

RECL

560

560

560

560

560

588

617

648

681

715

750

12 Handbook of Power Sector- Multiplier calculated using data from 1970-2009


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Capacity of Indian financial system to finance solar power projects (Base case) Using the lending capacity available for renewable energy from scheduled commercial banks and select NBFCs, we have calculated lending capacity for solar power projects by apportioning it in the proportion of credit required.

Table 25: Capacity of Indian financial system to finance solar power projects

Similarly, shortfall is calculated under Scenario 2: Double NSM and scenario 3: triple NSM are mentioned below:

Table 26: Credit shortfall under different NSM scenarios

Years(Rs.Crores) Scenario 1: Base case Scenario 2: Double NSM Scenario 3: Triple NSM

FY 12 79 (82) (394) FY 13 375 240 (183) FY 14 493 554 364 FY 15 530 227 (407)

FY 16 759 (86) (1,409) FY 17 909 (418) (2,207) FY 18 712 (1,894) (4,828) FY 19 374 (3,918) (8,262) FY 20 (336) (6,540) (12,266) FY 21 (1,151) (9,308) (16,240)

FY 22 (1,629) (10,974) (18,433)

Year (Rs. crores) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

Total credit

available for RE

14,283

16,615

15,672

16,333

18,688

19,660

22,838

26,699

30,066

33,036

34,334

Credit available

for solar power

2,908

4,507

3,499

5,111

7,976

9,580

13,040

17,184

20,594

23,561

24,727

Credit required

for solar power

2,829

4,131

3,006

4,581

7,218

8,670

12,329

16,810

20,930

24,712

26,355

Credit (shortfall)

for solar power

79

375

493

530

759

909

712

374

(336)

(1,151)

(1,629)


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Figure 32: Gap in financing for solar power from Indian financial system

It can be seen that under base case, credit shortfall is reaching significant amount from FY 2019 onwards. Further, the shortfall is emerging from FY 2015 onwards under Scenario 2: Double scenario and from FY 2014 in Scenario 3: Triple scenario. This indicates there is an urgent need to explore other innovative areas of financing to meet this shortfall and to position solar power as a priority sector for lending from banks.

-30000

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-15000

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-5000

0

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res

Scenario 1: Base case

Scenario 2: Double NSM

Scenario 3: Triple NSM


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Chapter 8: Potential sources of funding

Background Achieving financial closure has come across a major impediment for few of the projects awarded under Batch-1 of JNNSM, the reasons of which have been detailed in the previous section. The need of the hour is to understand key features of the present sources and instruments of finance with respect to their applicability for solar power projects. Accordingly, appropriate recommendations need to be made which can be put into action readily or by bringing in changes in policies, so that future projects do not face difficulty in raising financing.

Solar power projects require financing only for meeting capital cost requirements. It is to be noted that solar power projects require less working capital as no fuel stock needs to be maintained. Working capital is required to the extent of receivables of few days as generally distribution companies take couple of months to make payment to the generation company. Central Electricity Regulatory Commission (CERC) has also specified working capital norms as 2 months of receivables, 1 month of O&M expenses and 15% of O&M expenses as maintenance spares in its (Terms and Conditions for Tariff determination from Renewable Energy Sources) Regulations, 2009, hereinafter referred to as CERC Renewable Energy Tariff Regulations. However, the scope of our study is related only to the long term financing.

Financing of project involves two components, namely, debt and equity. The various sources of raising debt and equity are represented in the following figure:

Figure 33: Sources of raising finance

Potential Sources of Financing

Debt

Domestic sources

Commercial banks

IFCs like IREDA, RECL, PFC

Other sources like insurance companies,

pension funds etc.

Capital market (public issue of bonds)

External sources

Multilateral/bilateral agencies

Export credit agencies

International banks

Financial institutions, pension funds,

charitable institutions, foundations etc.

Equity

Sponsors’ equity

Private equity (domestic or

international)

Capital market (public equity)


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Options for debt financing There are primarily two methodologies of raising debt, which are described below:

1. Project finance: Debt can be raised by the Special purpose vehicle (SPV) created for the identified solar project. This is essentially non-recourse debt, where financing is done solely on the basis of cash flows of the project, with no recourse to the parent company i.e. developer. Project developers prefer this mode of financing to safeguard their other businesses in the event of failure of project. However, our stakeholder consultations with leading financial institutions suggest that lenders consider solar power industry in a nascent stage and perceive solar power projects as risky ventures. Hence, they are reluctant to provide project finance to solar power developers.

2. Balance sheet based funding: The provisions of JNNSM allow the selected bidder (developer) to directly invest in the solar power project, without the need of creating a separate SPV. Debt can be raised by the developer on the strength of its balance sheet for financing the project. However, in this case, if the project fails, the lenders will have recourse to the developer’s other assets and hence is generally less preferred by developers.

Sources of raising debt As depicted in the previous figure, there are several sources of raising debt. Each one has its unique features in terms of tenure, interest rates, moratorium period, currency of borrowing, suitability for SPV or developer, special features etc. These sources of debt need to be studied in detail to evaluate which ones would be suitable for raising finance for financing solar power projects in India.

The sources of debt have been categorised into two major heads, vis-à-vis, domestic and external sources.

1. Domestic sources of raising debt There are numerous domestic sources of raising debt, such as, commercial banks, infrastructure finance companies, insurance companies, pension funds etc. Each of the domestic sources is discussed in detail in this section.

1.1 Commercial banks in India

There are two categories of commercial banks in India, viz. domestic commercial banks (including nationalised banks and private banks) and international commercial banks having offices in India (such as HSBC, Standard Chartered, Bank of America etc.). These two categories of banks are different from each other in terms of their appetite for giving long tenure rupee loans. While domestic commercial banks can extend rupee loans of long tenure (10-12 years), international commercial banks are generally not willing to take such long term exposure in rupee, hence they are reluctant to provide long tenure rupee loan. Since solar power projects have long gestation period and require long term loans, only domestic commercial banks have been analysed in detail below:

Table 27: Features of loans from commercial banks

Parameters Details

Instruments Term loans

Suitability

Domestic commercial banks can be tapped by the SPV (as project financing) as well

as by the developer (as balance sheet based funding). The developer’s ability to raise

debt from commercial banks would be dependent on the existing relationships and

credit appraisal of the project/company done by the banks.

Interest rate

Interest rate of ~ 12-13%. These rates are equal to base rate of the bank + spread.

Base rate is different for each bank and is reset periodically as per monetary policy


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Parameters Details

changes by RBI. The spread is dependent on credit rating/credit appraisal of the

borrower.

The changes in base rate will expose the borrower to interest rate fluctuations, but

currently no derivative instrument is available for hedging interest rate risk of loans

from domestic commercial banks.

Tenure of the loan

Long-tenure loan of maturity 10 years with a moratorium of 2-3 years are usually

extended by domestic commercial banks

Lead time in raising debt

Generally, banks take 3-4 months in doing credit appraisal and finalising loan

documents for solar power projects.

Special features

Generally banks impose strict covenants on borrowers like maintenance of Debt

service reserve account etc. The favourable feature is RBI has included solar power

generating systems as priority sector under Clause 1.2.1.3 in Master Circular on

Priority Sector Lending-2004.

Administrative expenses

Typically, banks charge 2-3% of the loan amount as commitment fees and other

administrative charges. Initial project appraisal costs and ongoing expenses incurred

by the banks to monitor the project performance are also included in administrative

expenses.

Example State Bank of India and the Export-Import Bank of India has extended a 14-year

loan to a solar plant being built by Spain’s Grupo T- Solar Global SA and Astonfield

Renewable Resources in Rajasthan. It is said that this long tenure loan may be the

longest in the south Asian nation, where banks have been reluctant to offer loans for

more than 10 years to solar power projects.13

Remarks Considering that domestic commercial banks can give long term rupee loan and

expedite the whole process quickly, they are one of the most sought after source of

raising money by developers.

1.2. Specialised infrastructure financing companies (IFCs)

Infrastructure projects, due to their large scale and long gestation period need long term finance. Long-term loans create problem for commercial banks due to mismatch in duration of their assets and liabilities. To overcome this shortcoming, government has created specialised infrastructure financing companies such as IDFC, Power Finance Corporation (PFC), Rural Electrification Corporation Limited (RECL) to provide long tenure loan to infrastructure projects. Typically, these companies have been created with a specific objective of investing in a particular sector, for e.g. PFC’s objective is to finance power projects.

These institutions can raise funds from multilateral agencies like World Bank, Asian Development Bank (ADB) (with sovereign guarantee), issue infrastructure tax-free bonds and explore other sources of low cost financing such as external commercial borrowings (ECBs) etc. For example, in the past, International Finance Corporation (IFC) has lent USD 75 million to IDFC as part of its Climate Change strategy of partnering with financial intermediaries to scale up the impact for climate change projects in India.14

Similarly, Government of India has created a dedicated NBFC, Indian Renewable Energy Development Agency (IREDA) to promote renewable energy and energy efficiency initiatives.

13 http://www.bloomberg.com/news/2011-06-01/sbi-agrees-to-record-14-year-loan-for-t-solar-astonfield-plant.html 14 http://www.ifc.org/ifcext/spiwebsite1.nsf/f451ebbe34a9a8ca85256a550073ff10/90a9316abecfa844852577070062fca0?opendocument


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However, currently IREDA can’t raise ECBs as it is not yet registered as an IFC with Reserve Bank of India (RBI). It has submitted an application to be registered as an IFC with RBI in 2010. Once IREDA gets status of an IFC, it will play a much greater role in extending low cost finance to the renewable energy sector by exploring option of raising ECBs.

The detailed analysis of IFCs is mentioned below:

Table 28: Features of loans from IFCs

Parameters Details

Instruments Term loan

Suitability IFCs can be tapped by SPVs as well as by project developers.

Interest rate

Interest rate would range between 13%-14% (PFC), depending upon market conditions. Further, RECL and PFC reduce interest rates by 0.5% after CoD.

IREDA (12.25%-13%)

Tenure of the loan

IFCs provide long tenure loans to the developers


IFCs generally take 6-8 months in extending loan due to their rigorous project appraisal mechanism and several rounds of discussions within the organization.

Special features IFCs also impose certain covenants on the borrowers


Typically, IFCs charge 2-3% of the loan amount as commitment fees and other administrative charges.

Example Power Finance Corporation has floated a special subsidiary ‘PFC Green Energy’ to provide loans to renewable energy projects.15

Remarks Owing to the long gestation period of solar power projects, IFCs play an important role in meeting financing requirements of solar power projects. This would especially be true for IREDA as its primary objective is promoting renewable energy.

1.3. Capital markets (Public issue of bonds) Public is also an important investor base which participates in bond issues of companies. The detailed analysis is presented below:

Table 29: Features of debt raised from Capital Markets

Parameters Details

Instruments Bonds (convertible and non-convertible) via public issue

Suitability Capital market can be tapped by SPVs as well as by project developers. However, SPV may not have good credit rating to issue bonds at lower coupon rates as compared to the parent developer.

Further, as per Clause 2.2.1 (b) of SEBI DIP Guidelines 2007, convertible bonds can only be issued by company which is listed and has track record of distributable profits for at least 3 out of immediately preceding 5 years as per. This implies that convertible bonds can only be issued by the developer.

Only if the project is developed by an infrastructure company16 or if it is appraised by a Public Finance Institution (PFI)/IDFC/IL&FS or a bank which was earlier a PFI, or

15 http://www.greenworldinvestor.com/2011/05/12/power-finance-corporation-green-energy-pfc-subsidiary-to-become-one-of-the-biggest-green-energy-financiers-in-india/


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Parameters Details

5% or greater of the project cost is financed by any of the above mentioned institutions by way of loan or subscription to equity or a combination of both; then convertible bonds can be issued without the qualifying criteria of past profitability and can be issued by SPV.

Interest rate

Coupon rates and bond pricing would depend upon market conditions. Convertible bonds are issued at comparatively lower coupon rates. However, interest rates are largely dependent upon prevalent market conditions, credit worthiness and rating of the borrower.

Tenure of the loan Bonds can be raised for longer tenure like 15 years.


Lead time for bond issue is longer than debt syndication. Preparation of issue material, credit rating, road shows, book building process, listing with a recognized stock exchange etc. may take up to 6-7 months, as book building process is dependent upon market sentiments. For a reputed company, lead time may be lower.

Special features Bonds are better than commercial banks as they are generally issued at lower interest rates and impose lesser covenants on issuers.

One of the main advantage of issuing bonds is they are issued at fixed coupon rates; hence project is not exposed to interest rate risk.


Floatation costs are incurred in the range of 0.5-1% of the issue amount.

Example Typically, large companies with good creditworthiness find it viable to publicly issue bonds. Currently given the scale of most of the solar power developers, this is not considered as preferred source of financing by them.

Remarks In future, public issue of bonds can play an important role in meeting financing requirements of solar power projects. To enable that solar power projects need to first demonstrate their creditworthiness to be able to tap such source of fund.

1.4. Other domestic institutional investors like insurance companies, pension funds, charitable institutions etc.

Apart from the lending institutions, there are other institutions such as, insurance companies, pension funds, charitable institutions, foundations, which invest in other companies via, term loans, bonds or shares to earn required rate of return on their assets. These companies scrutinize investment opportunities available in the market and take investment decisions keeping in mind their return objective, risk tolerance and liquidity needs.

Since most of these institutions deal with public money, their utmost objective is principal protection. Due to this, these institutions invest only in certain grade of instruments. If solar power projects can meet their investment criteria, new avenues of raising finance can be tapped by project developers.

Table 30: Features of debt from other domestic institutional investors

Parameters Details

Instruments Term loans (LIC has given term loans to few power developers), private placement of bonds (convertible and non-convertible).

Suitability

These sources can be tapped by SPVs as well as by project developers.

However, typically these institutions invest in certain grade of instruments with a primary objective of principal protection. Considering these factors, institutional

16 Infrastructure Company means, a company wholly engaged in the business of developing, maintaining and operating infrastructure facility. Infrastructure Facility refers to the meaning of Section 10(23G) (c) of Income Tax Act, 1961.


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Parameters Details

investors can be tapped only by developers enjoying high credit rating. SPV will have to take guarantee from a higher rated developer to avail the same rating.

Interest rate

Coupon rate and bond pricing would be contingent upon market conditions. Convertible bonds are issued at comparatively lower coupon rates.

Bonds are issued at fixed coupon rates, while loans may be raised at floating rates

Tenure of the loan

Long tenure term loans are available from these sources as they have long term liabilities.

Bonds can also be raised for a longer tenure, such as 15 years. Certain blue chip companies like TATA Steel has raised perpetual bonds with no fixed maturity. However, solar power developers will take substantial time to reach that level of creditworthiness to be able to issue a product like this.


Lead time for private placement of bonds is 3-4 months, as book building process is dependent upon market sentiments.

Raising term loans from these sources may entail lower lead time.

Special features Coupon rates for private placements are slightly higher than that of public issue.

Bonds are issued at fixed coupon rates, avoiding interest rate risk.

Interest rate of loans can be linked to a base rate which is subject to change with changing market conditions.



Example As of now, institutional investors have not actively participated in meeting debt requirements of solar power developers. This could be due to developers finding it difficult to convince qualified institutional buyers to invest in a relatively new and untested concept of solar power.

Further, for small developers, raising money from institutional investors would be difficult.

Remarks We believe once few solar projects are successfully commissioned, tapping this source of debt may become viable for the solar power developers.

2. External sources of raising debt Apart from domestic sources, debt can also be raised from foreign sources such as multi-lateral agencies, export credit agencies, international commercial banks etc. Debt raised from foreign sources will be in a foreign currency and hence, need to be hedged against foreign exchange fluctuations. The various sources of raising debt from external sources are discussed in detail below.

2.1. Multi-lateral and bilateral agencies

Several multi-lateral and bi-lateral agencies like World Bank, Asian Development Bank, Japan International Cooperation Agency (JICA), KfW and others provide funds for infrastructure projects of developing countries via soft loans or grants. With increasing focus towards environment protection and clean energy, these agencies have started focusing on renewable energy especially solar power in India.

Funding from World Bank is accessible only for governments or government companies with sovereign guarantee. Since majority of the solar power projects are taken up by private players, it is not possible for them to get sovereign guaranteed loans. They can avail loan from other agencies meant for financing private sector projects, such as, IFC-World Bank’s private lending arm.


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Table 31: Features of debt from foreign sources

Parameters Details

Instruments Soft loans, government guaranteed loans by World Bank and ADB (classified as External commercial borrowings)

Suitability The strict restrictions imposed by multi-lateral agencies make it difficult for an SPV to raise funds from them. It is more appropriate for a developer to raise debt from these sources using balance sheet financing.

Interest rate

Interest rates charged by some multi-lateral agencies are given below:

World Bank: LIBOR+0.2%+0.25% (upfront fees) + sovereign guarantee ;

ADB: LIBOR+0.4%+0.15% (commitment charges) + sovereign guarantee;

Sovereign guarantee fee ranges between 1-2% and is applicable when govt. agency is undertaking the project

Additional spread of 2-3% (assumed) in case of non-sovereign loan

Additional cost of ~6% for hedging interest rate risk and foreign exchange risk

Current six month LIBOR is 0.59%

Tenure of the loan Multi-lateral agencies provide long tenure loans (20-30 years) with up to 5 years of moratorium period. The tenure and moratorium will differ from one agency to another and will depend upon the type of project.


Multi-lateral agencies take around 6 to 12 months to complete project appraisal, finalizing loan documents, term sheet etc.

Special features Sovereign guarantee require approval from Ministry of Finance.

Further, multi-lateral agencies require adoption of several international best practices such as international competitive bidding framework for procurement of raw materials/equipments, establishment and implementation of an environmental and social management system (ESMS). Abiding by these compliances result in longer lead time in raising debt and may lead to delay in project execution.


Administrative expenses would be incurred by the developer while availing loan for the first time as processes of the company would need to be aligned as per lender’s requirements. Subsequent borrowings won’t have significant administrative expenses.

Example KfW has signed EUR 250 million loans for 125 MW Mahagenco solar PV plant in Maharashtra.

Remarks Multi-lateral agencies are playing a crucial role in fulfilling financing requirements of solar power developers either by directly lending to them or lending to intermediaries such as IREDA. Considering that long tenure loans can be availed from these agencies and the net interest rate (including hedging costs) is lower than that of domestic banks, these agencies will continue to act as a saviour in solar power financing.

2.2. Export credit agencies

Export credit agencies (ECAs) extend loans to project developers of other countries in lieu of importing equipments/raw material from the country of ECA to promote its industrial growth and exports. Presently, limited technology is available for CSP equipments in India and there is need to import the equipment from foreign equipment manufacturing companies.

JNNSM has allowed import of 70% of equipments for CSP projects, which would largely be parabolic troughs, reflectors etc. Presently, only a handful of equipment manufacturing companies are supplying CSP equipment worldwide. Some of the known names are Brightsource Energy, eSolar, Solar Reserve (US based); Solar Millennium, Siemens (Germany); Abengoa Solar, Acciona (Spain-


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based); Areva (France-based). Raising debt from ECAs of these countries can be explored if Indian CSP developers decide to import equipments from these countries.

For solar PV projects, JNNSM doesn’t allow import of high value items like solar cells and modules. However, inverters (costing Rs. 90 lacs for each MW of solar PV generation17) are usually imported from China. Loan from China Development Bank can be explored in this regard. Further, JNNSM has allowed import of PV modules made from thin film technologies or concentrator PV cells. Raising debt from the corresponding ECAs can also be explored, if these PV modules are imported.

Table 32: Features of debt from export credit agencies

Parameters Details

Instruments Term loans (classified as external commercial borrowings)

Suitability SPV may find it difficult to raise debt from this source. It will be more appropriate for an established developer to raise loan from export credit agencies.

Interest rate

Considering current LIBOR of 0.59%, ECAs may charge nearly 6.5-7.5% as interest rates (including hedging costs). This would however depend upon the international relations between India and the country of ECA and creditworthiness of the borrower and viability of the project.

Tenure of the loan Typically, ECAs provide loans for medium term- up to 7 years


Lead time in raising debt will depend upon sourcing of equipments and negotiations with the EXIM banks, which is longer than domestic debt raising

Special features Financing from export credit agencies is dependent upon the country from where equipment is imported, restricting this source for the developer.


Higher as compared to domestic debt raising

Example Export Import Bank of United States has extended USD 16 million loan of 16.5 year tenure to Azure Power to import thin film PV modules for construction of 5MW solar project in Rajasthan. US EX-IM Bank has also provided financing to three other projects in India, namely, Dalmia Solar Project in Rajasthan, the Punj Lloyd Solar Project in Rajasthan and ACME Solar Technology Project in Gujarat.18

Remarks Considering the lower interest rates offered by ECAs, this financing should definitely be explored to the extent of import of equipments.

2.3. International commercial banks

International commercial banks offer long tenure floating rate loans in USD or their home currency to project developers.

Table 33: Features of debt from international commercial banks

Parameters Details

Instruments Term loans (classified as external commercial borrowings)

Suitability Both SPV as well as developer can raise loan from international commercial banks. But, SPV may find it difficult to raise ECBs due to low creditworthiness.

17 India Solar PV Advisor, A comprehensive guide for developers and investors. (Updated Sept 2011) 18 Export-Import Bank of the United States, Office of Communications. July 18, 2011 news release EX-IM Bank Announces $16 Million Loan to Support First Solar Inc. Exports to Azure Power Project in India


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Parameters Details

Interest rate

Floating interest rate based on LIBOR + spread of nearly 2-3% (depending upon the creditworthiness of the borrower)

Hedging costs to hedge interest rate risk and foreign exchange risk is nearly 6%

Tenure of the loan 10-12 years


Shorter lead time as compared to multi-lateral agencies

Special features No need to take approval from RBI as automatic route is allowed for ECBs raised for infrastructure development. Maximum borrowing allowed in a year by a company is USD 750 million.


Comparable to that of domestic debt raising

Remarks A large business group having good relationships with bankers/or having treasury desks can explore this option.

2.4. Financial institutions, like pension funds etc.

Foreign pension funds, insurance companies and other foreign institutional investors (FIIs) also invest in Indian market via bonds or stock issue. It is important to give serious consideration to this source of fund raising as they have large amount of funds and generally have certain allocations for renewable energy or emerging economies. However, Indian solar sector is still in nascent stage making it difficult for developers (esp. smaller ones) to tap this source. The industry needs to establish a sound track record of performance and profitability and build credibility in international markets to attract debt funds from these sources.

Table 34: Features of debt from other foreign sources

Parameters Details

Instruments Private placement of bonds (convertible and non-convertible)

Suitability More suitable for an established developer

Interest rate

Interest rate may be lower than that of domestic bond issue, and will depend upon market conditions.

Tenure of the loan Bonds can be raised for a longer tenure like 15 years


Lead time for international bonds is 3-4 months, as book building process is dependent upon market sentiments. For a reputed company, lead time may be lower.

Special features Preparation of issue material, road shows etc would be necessary to issue bonds. Further, the developer also needs to conduct credit appraisal from an international credit rating company before issuing bonds in international market.



Remarks In the current scenario, it is difficult for a developer to raise funds from these sources. Once the solar industry matures, it will be easier for an established developer to tap this source.


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Conclusion

The above detailed analysis gives us following key insights:

1. In the present scenario where high technology and contractual risks exist with solar power plants, domestic commercial banks and specialised infrastructure financing companies will continue to be the most sought after source of raising debt financing for solar power developers. Their shorter lead time, low degree of complexity in documentation process and other arrangements make it easier for developers to raise debt from these sources as compared to other domestic sources like institutional investors and bond issue. Further, as of now, solar power is not lucrative enough to entice institutional investors and capital markets to lend to solar power projects.

2. Interest costs are dependent upon the creditworthiness of the borrower and associated project risk. This may decrease in future once few projects are successfully commissioned and demonstrate good track record of operational performance.

3. Till date, only few established developers have been able to tap external sources of finance for solar power projects. Going forward, once the technological and contractual risk factors diminish, it will become easier for the project developers to explore these sources of finance.

Along with the qualitative factors, attempt has been made to evaluate the best option of raising debt in terms of its impact on project IRR and equity IRR. IRR for a solar power project (both PV and CSP) after considering various sources of debt financing are:

Table 35: Sensitivity of sources of funds on IRR

It can be deduced that:

1. Multi-lateral agencies top the list in terms of equity IRR owing to their long tenure loans, which spread repayment over a longer period and hence result in increase in free cash flows to the equity.

2. Export credit agencies provide highest project IRR due to their low interest rates, followed by other commercial borrowings.

3. Borrowing from commercial banks and special IFCs lead to lowest project and equity IRR. But, currently these are the most preferred source of raising debt as raising debt from other sources have their own impediments.

4. Though IRR of raising debt from multi-lateral agencies and export credit agencies is high, it is not feasible for small project developers to explore these avenues.

It is expected that going forward, solar power will gain momentum and financial institutions will gain more confidence in solar power. Once that confidence is generated and risks are resolved by bringing in policy and structural changes, solar power developers would be able to raise funds from capital markets, financial institutions and other external sources.

Source Project IRR Equity IRR

Multi-lateral agencies 10.08% 24.23%

Export credit agencies 10.80% 16.78%

External commercial borrowings 10.36% 15.83%

Non-convertible debentures 9.85% 14.09%

Commercial banks 9.76% 11.46%

Specialised infrastructure financing companies 9.41% 10.69%


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Ways to enrich current debt financing instruments Currently, solar power projects don’t have established history of high performance and creditworthiness, due to which, lenders perceive these projects as risky and therefore, charge higher interest rates. In order to improve financial viability of these projects, it is important to finance these projects at reasonable rates. This can be possible by enriching it with some other instruments/techniques given by government, lenders or companies. Some of these are discussed in detail below.

Steps by government Certain steps undertaken by the government to promote financing of clean energy in India are as follows:

1. National Clean Energy Fund

The Government of India has set up a National Clean Energy Fund to serve as a separate corpus for funding green energy projects with the broader objective of cutting down India’s carbon footprint. The collections for the fund come from clean energy cess of Rs 50 per ton imposed on production/import of coal, lignite and peat. The corpus of this fund is expected to expand to over Rs 6,500 crore in 2011-12.19 It will be used for entrepreneurial ventures and research in the field of clean energy technologies. Use of this fund for development of solar PV and CSP technology will further give boost to solar power development in the country.

2. Sovereign guarantees to agencies

Typically, multilateral agencies provide debt at lower rates to the emerging economies. To safeguard their money, they demand guarantee from government of the concerned country. The Government in turn charges sovereign guarantee fee from the borrower, such as Government of India (GoI) charges 1-2% guarantee fee from the borrower. However, GoI gives guarantee only to the government companies or PSUs and not to the private companies.

For example, IREDA avails such loans from multi-lateral agencies with sovereign guarantee and use the proceeds for solar power development.

Steps by other financial institutions/banks/agencies Bank and financial institutions can also adopt certain techniques to extend financing to solar power developers while mitigating their risk.

1. Take-out financing

It has been observed that although banks have enough liquidity to fund power projects in India, they don’t have confidence in viability of solar power projects owing to contractual and technological risks. Due to this reason, they have been reluctant to lend to this sector. Once CoD is achieved and project generates power as per capacity utilization factor assumed at the time of bidding, and developers are getting regular payment from distribution companies, project risk decreases significantly. At this stage, the lending institutions, which have been earlier reluctant to extend loan to solar power, can acquire loan assets of existing lenders at a lower interest margin than the initial spread.

In this way, the bank which has provided loan to the project developer at the time of construction will be able to free up its capital for further lending to solar projects, and at the same time, earn a margin for its risk-taking ability. The other lending institution can’t provide a longer tenure loan to a risky project, but is able to provide medium term financing to a project when risk has been reduced. This feature is called Take-out financing. Take-out financing allows lending institutions to earn a higher margin for their ability to take this risk, while allows others to lend medium term loans to infrastructure projects.

19 http://articles.economictimes.indiatimes.com/2011-04-07/news/29392656_1_national-water-mission-water-resources-clean-energy


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2. Differential interest rates during the tenure of the loan depending upon prevalent project risk

Due to high risk perception of the project during pre-stabilization period, banks charge higher rate of interest to safeguard themselves from construction and operation risks. Considering this feature, project developers can negotiate terms with the lenders in such a way that spread charged by banks reduce once the project risk decreases, i.e. post 1-2 years of CoD. In nutshell, banks can provide discount to spread once the project achieves stabilization phase.

3. Securitization

Securitization is a process through which illiquid assets are transferred into a more liquid form of assets and distributed to a broad range of investors through capital markets. Loans extended to solar power developers can also be bundled together and sold in the form of securities in capital markets. However, as per RBI regulations, lending institutions can undertake securitization only for risk transfer and not for profit booking.

4. Partial credit guarantee from Asian Development Bank

Asian Development Bank has decided to extend up to USD 150 million in credit guarantees to help India scale up its use of solar power under “India Solar Generation Guarantee Facility”. The guarantees will be provided to commercial banks that finance private sector solar power plants (PV or CSP) and will cover 50% of the bank loans against default risk by project developers. This scheme aims to mobilize long-term funding for solar energy development in India.20

Steps by companies 1. Loan guarantees by parent companies

If a special purpose vehicle is formulated for setting up a solar power project, the SPV may find it difficult to raise debt at competitive rates due to its high risk profile. However, if the SPV is backed by a parent company with strong financial strength, parent company’s good relationships with bankers and better credit rating can be leveraged to raise loans at competitive interest rates. For this arrangement, it is necessary that the parent company should have strong financial strength.

Based on our stakeholder interactions, it was observed that banks and financial institutions are willing to lend to the developer as balance sheet financing, but are averse to project based lending. Taking guarantee from parent company would resolve this issue.

Options for equity financing Equity financing is more critical for any project as compared to debt financing. When a project is identified, the first step is to select an appropriate project developer who has willingness and ability to put in equity in the project. Efforts towards raising debt are initiated in the next step. Debt financing can’t happen for a sector where interested parties, who are willing to take risks and invest equity in projects, are not present. In this section, we have studies different avenues of raising equity financing in detail.

There are primarily three sources of equity:

1. Project sponsor’s/developer’s equity

Sponsor’s equity comes from reserves and surplus of sponsor’s existing businesses. Large business houses such as Moser Baer, TATA Group, Abhijeet Group etc. would play an important role in the development of solar power in India. Large companies have high risk taking and execution capabilities to undertake capital intensive projects. To ensure success of JNNSM, it is imperative to select technically equipped and financially sound companies with committed management.

20 http://www.adb.org/About/Private-Sector/India-Solar-Guarantee-Facility.asp


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It has been noticed that developers of CSP projects announced under Batch 1 of JNNSM have not faced much problems in achieving financial closure of the projects. This could be due to the fact that CSP projects were largely awarded to established players, which have good creditworthiness to raise debt. Problems were witnessed by solar PV project developers in achieving financial closure. To avoid this problem in future, financial criteria of minimum net worth and technical criteria of minimum capacity (MW) under execution can be included in subsequent bidding processes under JNNSM to select only creditworthy bidders.

2. Capital markets (Public equity)

Established players in power sector can raise equity from capital markets. However, tapping capital markets is feasible only for those companies which have achieved significant scale and have profitable operations. Probably, small solar power developers who have won projects under Batch-1 of JNNSM will be able to raise funds from capital markets once they commission 2-3 power projects.

3. Private equity (PE)

Private equity plays an important role in providing equity to companies requiring capital to execute their business plan from conceptualization to execution stage. From our stakeholder discussions, it has been observed that private equity firms prefer to provide company-based funding rather than project based funding for renewable projects. Typically, PE firms invest in those companies which have pipeline of credible upcoming projects. PE firms invest in the projects before CoD is achieved at discounted price and wait for CoD and project to stabilise. Once the project stabilises and returns are generated as per the assumptions factored by the management and investment committee of PE firm, PE firms sell their stake at premium. Some of the PE firms interested in solar energy space in India are Olympus Capital, IFC- investment in Azure Power, Baring Private Equity and Blackstone- investment in Moser Baer Projects.

However, our stakeholder consultation with a major private equity firm indicated that PE firms are less attractive towards solar projects due to capping of returns by CERC. Instead, they are more focussing on value chain enablers such as equipment manufacturers, EPC firms etc. For example, Moser Baer Photo Voltaic has received investment of USD 92.5 million from Japan's Nomura, CDC Group, IDFC PE, Morgan Stanley, Credit Suisse and IDFC in September 2008.21 It had also raised USD 100 million in November 2007 from a round led by IDFC PE, with other investors including GIC Special Investments, CDC and IDFC.22

Apart from direct investment in companies, some PE firms have created innovative business models regarding investments in renewable energy. The leading example is Green Infra Limited, set up by funds managed by IDFC PE. Green Infra works like an independent power producer and develops/operates renewable power generation projects across wind, solar, biomass, waste-to-energy, small hydro, and energy efficiency verticals.

Conclusion

Considering today’s scenario of solar power projects, only sponsor’s equity and private equity can be tapped depending upon the project’s viability. Solar power is still in a nascent stage in India, thus it will be difficult to generate enough interest in capital markets to raise equity for these projects. Upon commissioning, if projects show consistent record in terms of planned generation and distribution companies honour the PPA agreement, solar power will be able to build credibility in the market to be able to raise funds from capital markets. Till then, it will have to rely on investor’s own equity or private equity for meeting its growth targets.

21 http://www.vccircle.com/500/news/moser-baer-pv-gets-925m-from-investors-in-second-round 22 http://www.vccircle.com/500/content/moser-baer-photovoltaic-biz-gets-100m-from-idfc-pe-gic-cdc-group-and-idfc


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Accelerating NSM by exploring new avenues of financing Undoubtedly, there is need to explore other avenues of raising finance for solar power development in India. Some of the international best practices which can be replicated in our case are explained below:

Green Infrastructure Bonds

Considering the increasing need of renewable energy in India and world as a whole, the conventional sources of finance may not be sufficient to meet its investment requirements. The need of the hour is to mobilize funding from global capital markets having investors with significant asset base, such as pension funds, insurance companies, sovereign funds etc. Generally, nearly 25-40% of their assets are allocated to fixed income investments. To tap these markets, investment products need to be designed in a way to appeal to this class of investors. Issue of Green Infrastructure bonds by the government would help in raising funds from these markets, which is otherwise difficult for a single developer to do.

Green bonds have ability to provide attractive returns at relatively low risk to foreign institutional investors. In addition, they bring in benefits of diversification by participating in emerging markets growth. Green bonds especially lure investors who focus on environment and sustainability in their analysis and/or have a separate asset class for climate-focused investments. Money raised from these sources can be lent to low-carbon projects, such as solar power, at lower interest rates.

For example: Green bonds were first introduced by World Bank to stimulate and coordinate public and private sector activity to combat climate change. Since 2008, the World Bank has issued green bonds worth over USD 2 billion through 42 transactions and 16 currencies. Since then, World Bank’s green bonds have generated significant interest worldwide. The green bonds issued by the World Bank appealed to large institutional investors who had both significant allocations to fixed income and a strategic interest in investing in the climate. This helped World Bank to reach investors who otherwise didn’t normally invest in World Bank bonds. These bonds have enabled investors to take advantage of the rigorous process of appraising and implementing projects followed by the World Bank. It also helps investors to monitor projects’ effectiveness in countries that they would not have invested into without an expensive due diligence process. World Bank’s projects supported by green bonds include solar and wind installations.23

In Indian scenario, upon issuing green bonds to institutional investors, Government of India will have to appoint an agency such as IREDA, or create a new agency to disburse raised money to solar power developers. As foreign institutional investors will form a major subscriber base for green bonds, rigorous project due-diligence, project appraisal and monitoring and documentation need to be done to avoid risk of default.

Lease financing

Solar power developers can also consider the option of leasing equipments for setting up a solar power plant. Under a lease, the developer (lessee) typically leases the equipments with the explicit intent to eventually own it and makes periodic payment to the lesser in lieu of using the equipment. At the end of the term of the lease, the developer has a buyout option usually at a “bargain purchase price” that is fixed in advance at the time the lease is established. In other words, the lessee pays for essentially the full cost of equipments over the lease period, based on the intent to own the system. The depreciation and tax benefits can be shared by the lesser and lessee depending upon the structuring of the lease and treatment in accounting system. 24

Lease financing is advantageous from bank finance in broadly two ways:

23 THE EUROMONEY ENVIRONMENTAL FINANCE HANDBOOK 2010 Green bonds: a model to mobilise private capital to fund climate change mitigation and adaptation projects. By Heike Reichelt, The World Bank 24 Financing Non-Residential Photovoltaic Projects: Options and Implications Mark Bollinger, Lawrence Berkeley National Laboratory


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The developer can finance 100% of the equipment using lease financing, which is not possible in case of bank financing.

Lease financing can also be made available for long term such as 20 years, whereas it is almost impossible to get bank finance for such a long tenure

Currently, lease financing is not prevalent in India for solar power projects. In fact, in US, which is a much developed marked for solar power projects, lease financing (operating) is more popular for solar PV projects than CSP. The accounting system (IFRS and Direct Tax Code) and equipment leasing industry need to be studied in detail to understand its implications in the Indian context.

Clean Renewable Energy Bonds (US based)

Another new avenue can be Clean Renewable Energy Bonds (CREBs) which is a new form of tax credit

bond in which interest on the bonds is paid in the form of tax credits by the United States government in lieu of interest paid by the issuer.25 The tax credit derived from a CREB can be used to offset, on a dollar for- dollar basis, a holder’s current-year tax liability. Bonds of similar structure can also be launched in India for development of solar power projects.

International Funding Sources

Power sector particularly renewable has a good chance to see return of profitability in near future. Many of the projects will start functioning and will probably move towards becoming higher yielding assets. All this coupled with the attractive valuations at which the companies in the sector are available, makes it a great time to for the infrastructure and other funds start investing in the sector.

We analysed some of the global infrastructure funds, who are willing to or will be interested in investing in the Indian solar industry. Once some of the investments are given practical shape, solar industry would be having series of such investments and the sector would become relatively better option for such international sources of financing to invest and earn from the growing sector. The details of same is enclosed in Annexure-III.

Assessing the best combination of funding sources As mentioned in Chapter before Exploring innovative areas of financing, borrowing 100% of debt requirement from multi-lateral agencies results in highest equity IRR, followed by export credit agencies. However, apart from maximizing equity IRR, developers need to take several other factors into consideration while raising debt. Some of the important factors include developer’s financial strength, project features, possibility of importing equipment and country of import, availability of government guarantee, creditworthiness in international markets etc. Considering these factors and constraints, we have arrived at the most optimal debt-raising combination applicable for solar power developers under certain specific conditions.

Solar PV Small developers Most of the developers of solar PV projects are small in terms of their financial strength. For these small developers, raising loan from domestic commercial banks and specialised infrastructure financing companies is much easier as compared to any other source. Out of these two, raising debt from specialised infrastructure offers higher equity IRR. Assuming 50:50 ratios between domestic commercial bank and specialised IFCs, project IRR is 8.76% and equity IRR is 9.42%26.

Established developers Established developers can issue domestic bonds or raise debt from external sources. Of these options, raising debt from export credit agencies and ECBs provide the highest IRR.

25 An Explanation of Clean Renewable Energy Bonds, Authored By: Edwin Oswald and Michael Larsen http://www.pionline.com/article/20110418/PRINTSUB/304189979/tiny-green-bonds-market-looking-ready-to-sprout 26 As per our model, assuming D/E ratio of 80:20, periodic payment of principal in equal installments


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In case, a developer is planning to set up imported thin-film or concentrator PV cells based solar PV plant, it can raise debt from export credit agencies to finance the cost of imported equipment. In the past, EXIM banks such as EXIM Bank of United States, China Development Bank and Korea have provided export credit to Indian companies.

Assuming 30% debt from non-convertible debentures, 50% from export credit agencies and 20% from ECBs, project IRR is 9.49% and equity IRR is 12.69%. IRR will increase if proportion of ECBs and export credit agencies increases in total debt.

CSP Established developers Most of the CSP projects have been awarded to established developers who have proven track record in power industry. For such companies, it is much easier to tap unconventional sources of financing, such as ECBs, bonds etc. Most likely, this is the major reason why most of the CSP developers who were awarded projects under Batch 1 of JNNSM-Phase 1, have achieved financial closure. The most ideal source of financing for CSP developers are multi-lateral agencies and export credit agencies. Raising debt from multi-lateral agencies enables maximum equity IRR of 15.35%, owing to long repayment and moratorium period.

Raising debt from export credit agencies provide high project IRR of 9.76%, but average equity IRR of 12.89% (at D/E ratio of 70:30).It is not possible for CSP developers to finance 80% of capital by export credit agencies, as JNNSM guidelines mandate them to use at least 30% of domestic content in all plants/installations (excluding land). This implies that developers can use imported equipment to the extent of 70% of the project cost.

Assuming 70:30 D/E ratio, and 80% debt financing by export credit agencies and 20% from ECBs, equity IRR decreases to 12.78%.


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Chapter 9: Policy Guidance for the Indian Government

Discussions with project financiers and developers in India carried out during the course of this project identified a number of regulatory adjustments that could help enable greater investment in the solar energy sector. These suggestions are preliminary but, with the support of the Ministry for New and Renewable Energy could be taken forward. Building on issues highlighted in the preceding sections of the report, this section summarizes the suggestions for the Government’s consideration. For clarity these are categorized under the following heads:

Regulatory Interventions

Policy Interventions

Other Interventions

Regulatory Interventions Establish separate exposure limits for renewable energy or solar power. Some

financial institutions in India face a 5% cap on investments in the power sector. Renewable

are a part of this allocation; therefore, investment in solar is limited by lenders’ investments in

conventional power. In addition, lenders’ exposure is calculated over a four-year term (i.e., if a

renewable project is on the books in year one, it stays there till year four, even if it is divested

in year two). Discussions suggest that these guidelines could limit solar investment and could

be revisited with a specific focus on how a separate ‘renewable energy’ allocation allowance

could be appropriately structured.

Support efforts to access foreign pools of capital. As efforts to scale solar continue, the

amount of domestic finance available for investment is reduced by regulations that limit

banks’ ability to guarantee infrastructure bonds and that set sector limits for renewable

energy. Discussions suggest that policy makers should consider the range of prospective

financing vehicles that could unlock international and institutional capital. These could

include solar bonds and the novel Credit Default Swap markets. Discussions suggest that a

greater degree of dialogue between financiers and regulators would help to identify how these

mechanisms could play a role in the sector and identify the specific regulatory changes that

would enable their effective deployment in the market (tax allowances for bonds etc).

Further, with increasing exposure to foreign funds, the Mission could also benefit from a

foreign exchange hedging facility instituted by the Government. The primary benefit of such a

facility would be to help mitigate foreign exchange exposure risk.

Support emergence of Indian REC market. In this regard, the Mission could benefit

from incorporating a mandatory penalty mechanism for RPO compliance. The penalty clause

could lead to the fostering of the Renewable Energy Certificates market in India as these could

be used to meet predetermined targets. In addition, to further strengthen the REC

mechanism, greater clarity on the trajectory of floor and ceiling prices for RECs should be

provided.

Evolve PPA breach of contract insurance instrument. As also brought up earlier in

the report, the bankability of PPAs is perceived to be uncertain. As such, the availability of an

appropriately priced insurance product to mitigate the PPA risk would eliminate the most


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commonly cited barrier to investment and allow borrowers to project a stable and secure

revenue stream. This would also reduce the cost of borrowing. With PPA risk mitigated, it is

also possible that a larger quantity of international capital could be made available for solar

and other renewable energy projects in India.

Policy Interventions Make the case for pre-qualification for bidders. Bidding under Phase I of the NSM was

intentionally structured to allow applications from a wide variety of sources with the intention

of encouraging broad participation in the emergent sector. This was a laudable goal; however

it did lead in some instances to a negative perception of solar technology’s viability as

inexperienced developers made uneconomical bids. This in turn has resulted in greater lender

concern about risk. To address this misperception, a more evolved pre-qualification process

could be applied to ensure that bidders are viable developers with a long-term interest in the

solar sector. This could be done by including adding specific criteria for lining up engineering

procurement and construction (EPC) contracts in advance of bidding and/or qualification

only on the basis of submitting an initial due diligence report on project performance. This

pre-qualification may not exclude first time solar developers but could possibly provide

weight to past experience in the power sector to ensure that applicants have the requisite

capabilities and a minimum level of commitment to the sector.

Rework tariff structure. Taking a cue from the Gujarat tariff policy, there is a strong case for introducing a similar two-part tariff mechanism under the NSM as well. CERC could consider releasing a two-part benchmark tariff wherein separate levelized tariffs could be determined for the first 12 years and the remaining 13 years of the project’s life respectively. NVVN could then explore the possibility of inviting reverse bids in two parts, one for discounts on the benchmark tariff for the first 12 years and the other for discounts on tariff for the remaining 13 years. This could possibly help address the concern among developers that tariffs under the NSM might prove to be inadequate during the initial years of operation of the solar power plant.

Provide contractual flexibility to project developers. As per the current policy, project

developers may not sell power to any other entity or chose any other market model even in

case of default. Providing such flexibility to developers, in their contractual agreement (PPA),

could be considered as a hedge against future defaults from state distribution utilities.

Strengthen the bid bond to penalise non-compliance. Closely related to the issue of

pre-qualification is the issue of bid-bonds. Under the current solar bidding rules, developers

face penalties for failing to complete projects within the allotted time periods. This

mechanism should act as a form of pre-qualification by creating a disincentive for low bids.

However evidence from project financiers suggests that this is not creating a sufficient

disincentive and should be revisited to ensure it is effective in holding developers to account.

Another suggestion here could be to modify the bidding mechanism to penalise or completely

weed out the highest and the lowest bids, as is done in construction contracts. The penalty for

the lowest bidder could, for example, mean a 10 times higher bid bond as compared to the

others. While such a mechanism would discourage overly adventurous bids, it would also

encourage bidders to be bid competitively to stay in contention.

Extend the time allowed for projects to achieve financial closure. The time

allocated under the NSM for achieving financial closure has been cited by some sector

participants as creating a challenge for the level of due diligence possible and impacting the

ability of developers and lenders to appropriately structure a financing agreement.

Recognising this MNRE announced in September 2011 an extended time period for financial

closure under batch II of the NSM phase 1 (from 180-210 days). This has been broadly


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welcomed by the financial community. However some stakeholders suggest that the benefits

for further extending the completion window (With suggestions ranging from 6-9 months),

would be significant and should be considered further

Other Interventions Re-affirm the government’s commitment to a dynamic NSM review process.

MNRE should be recognized for its proactive, ongoing revisions to the implementing

guidelines for the NSM, as well as its consultation with industry. To address continued data

and perception issues, continued engagement with the financial sector should be encouraged.

One proposal is to facilitate more frequent interactions between the bankers’ community and

MNRE through a bankers’ forum that brings together domestic financiers.

Provide quarterly reports on progress. Financiers regularly cited the need for more

transparent, routine dissemination of solar plant performance and ground insolation data.

This would, it is suggested, enable superior market intelligence, thereby reducing investor and

lender risk perceptions. To facilitate this, a nodal agency designated by the Government,

should maintain a repository of non confidential, non proprietary financial and technical

information regarding various solar installations.

Consider allocating money from the coal cess. Funds accumulated within the coal cess

(a tax on domestic and imported coal at the rate of Rs. 50 a ton) provide a potential source of

funds to credit enhance the purchase scheme under NSM or state programs. Policy makers

could re-evaluate the disbursement of these funds (currently earmarked for the National

Clean Energy Fund) to destinations that would support the scale up of solar (e.g., through

tariffs or solar parks).

Build Capacity for effective data collection. We propose that first, a study must be

undertaken to establish the authenticity of data from various sources. The study should

determine the extent of discrepancies in data released by the Indian Meteorological

Department (IMD) and also highlight reasons behind the same. The government should then

designate a central agency to iron out errors in methods or procedures as established by the

study and invest in building necessary infrastructure for data collection through IMD. This

would, over time, build an extensive database and largely help address the concerns regarding

the reliability of solar irradiation data in India.


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Annexure-I: Assignment of weightages to the identified risks Assigning weightages to the risks for plotting the risk matrix has been made on the basis of impact of the impact of the risk and the probability of occurrence of the risk. For severity of impact, scores are assigned on a 10 point scale, with the following rating:

1-2: Very Low Impact risks 3-4: Low Impact risks 5-6: Medium Impact risks 7-8: High Impact risks 9-10: Very High Impact risks

Similarly, for probability of impact, scores are assigned as percentages, with the following rating:

1-20% : Very Low probability of occurrence 21%-40% : Low probability of occurrence 41%-60% : Medium probability of occurrence 61%-80% : High probability of occurrence 81%-100%: Very High probability of occurrence

From the obtained results, a risk evaluation graph has been plotted depicting the impact of risk Vs its probability of occurrence. Evaluating the plot of graph the significance of risks could be determined and respective actions could be taken to mitigate these risks.

The following two figures show the risk matrix and the risk evaluation plot.


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Table 36: Risk Matrix

Risks Impact Probability of

occurrence

Past track record of bidders Low High

Delay in getting clearances and approvals Low High Contractual Agreement between NVVN & SPD/Distribution Utility High High

Tariff Bidding Medium Very High

Indigenous Manufacturing-Supply Crunch High Medium

Political Risk Medium Low

Evacuation Infrastructure High High

Reliability of Solar Irradiation Data Very High Low

Scale of projects Low Medium

Availability of suitable land and water High High

Interest Rate Risk High Medium

Currency Risk High Medium

Commissioning Risk High Medium

Exposure Limit of Banks High Very High

Non-fulfilment of timely financial closures Very High Very High

Ratings scale for matrix on 10 point scale

Rating Very High High Medium Low Very Low

Score 8-10 6-8 4-6 2-4 1-2


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Annexure-II: Minutes of meetings from Major Stakeholder Interactions Power Finance Corporation

Overview of Operations

Power Finance Corporation has a total of 7 per cent disbursements to private sector, 65 per cent to state sectors

and rest to the Central government agencies in FY11. Its project-wise loan assets stood around Rs 99,570 crore

in the last financial year. The company has posted a 14 per cent rise in its net profit to Rs 2,618.8 crore in FY11

compared to Rs 2,357.24 crore reported a year earlier. Its total income rose 25.8 per cent to Rs 10,160.55 crore

in the financial year 2009-10.The following is a pie chart of the percentage disbursements of loans made

available to different sectors in 2010-11.27

Figure 34: Fund Disbursements in 2010-11

Power Finance Corporation in renewable energy space

Power Finance Corporation has established a Renewable Energy and Clean Development Mechanism (CDM)

group to focus and accelerate the development of business in renewable energy generation projects such as

27 Power Finance Corporation Annual Report 2010-11.

90%

8%

2%

Thermal Generation Hydro Generation Wind,Solar and Bagasse


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wind, biomass, small hydro, solar etc. In order to provide incentives for this nascent sector in its portfolio,

Power Finance Corporation takes higher exposures in renewable energy generation projects and offers special

interest rates for such projects.

Power Finance Corporation exposure to the renewable energy sector is not new as it had been funding these

projects for the past 7 to 8 years. Although the major focus had been on wind, small hydro and biomass based

projects, lately they also started funding solar based projects based

Power Finance Corporation is planning to float a subsidiary, Power Finance Corporation Green Energy Ltd, to

finance the renewable energy projects in the country. Power Finance Corporation has already received a

Certificate of Incorporation from the Government of India for floating this subsidiary and it is expected to begin

operations soon. Last financial year, Power Finance Corporation had sanctioned around Rs 3,000 crore (USD

600 million) to various projects under the renewable energy segment and disbursed around Rs 1,800 crore

(USD 360 million) during the period.

Power Finance Corporation funded a number of projects under the Gujarat Solar Policy initiatives while under

the JNNSM; only one project of 2 MW under the migration scheme has been funded.

System of funding

Power Finance Corporation restricts its funding to a maximum of 50% of the project cost and its funds are

always made available only against the progress of the project. In terms of fund availability, Power Finance

Corporation asserts that it has sufficient funds to support any project that approaches them since; they don’t

have any fixed allocation of funds for funding any particular segment of projects.

For funding any project Power Finance Corporation appoints Lending engineers, who look after the technical

aspects of the projects and the relative fund requirements. Although all the loans are disbursed on market rates

and no subsidies are provided, except for renewable energy projects, as detailed below.

Table 37: Rates of PFC Rupee Term Loans

RUPEE TERM LOANS (other than STL): (Effective from 27.07.2011 as per Policy Circular dated 27.07.2011) 3 Year & 10 year Reset Rates

State Sector Borrowers (Category 'A+' ) [AND] Identified CPSUs [AND] AAA rated Companies

State Sector Borrowers (Category 'A' ) [AND] Central Sector Borrowers (Other than Identified CPSUs & AAA rated) [AND] Private Sector Borrowers (Generation Projects with Integrated Rating of IR-1)

Private Sector Borrowers : (a) Generation Projects with Integrated Rating of IR-2 (b) Entity Grade : E I & E II

Private Sector Borrowers : (a) Generation Projects with Integrated Rating of IR-3 (b) Entity Grade : E III & E IV (c) Discom : Grade A

Private Sector Borrowers : (a) Generation Projects with Integrated Rating of IR-4

Private Sector Borrowers: (a) Generation Projects with Integrated Rating of IR-5 (b) Discoms: Grade B. (c) Entity Grade: E V (d) Non-graded.

12.5% 12.75% 13.25% 13.5% 13.75% 14.00%

Interest Rates for renewable energy projects (as per MNRE) are lower by 25 bps than the rates as applicable for Generation loans for the respective category of borrower.


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Funding Solar Thermal Projects

Power Finance Corporation has not yet funded any solar thermal project, as they perceive the risks and

uncertainties associated with this technology to be presently unsatisfactorily unaddressed and are waiting for

some projects to come up successfully before starting funding for any solar thermal based projects.

Power Finance Corporation precautions for funding solar projects

Before disbursing the funds to the developers, Power Finance Corporation ensures full promoter

contribution equity has been arranged.

Power Finance Corporation focuses on funding projects with strong parent company backing and

support. At times applications are rejected due to:

Promotes not being able to arrange their equity share.

Past performance and credit history including cases of default, if any

Risk and uncertainties associated with solar thermal projects.

Risks in funding solar projects

The biggest risk associated with solar projects lies with the estimation of solar radiation. The returns of a solar

project are highly sensitive to radiation levels. High quality solar radiation data is a pre-requisite for proper

market assessment and project development. Hence, solar radiation assessment is a very important activity and

typically requires several months for ground measurement of solar radiations. Any error in solar resource

estimation adds an uncertainty to expected outputs. According to Power Finance Corporation, as of now, on-

ground solar radiation data is sketchy and the simulation models are at best at a preliminary stage.

Other risks of concern in a solar project as stated by the organization are:

The high end cost involvement.

Availability of evacuation infrastructure for the projects.

Technological requirements

Manpower

Proper weather forecasting

Final Word

Power Finance Corporation proposes the time lines being provided under the National Solar Mission to achieve

financial closures is very less and should be increased , as the Power Finance Corporation being a government

organization has its own stature of working .It follows its own time in making clearings and disbursing funds

following some set procedure and rules. Hence to encourage participation of Power Finance Corporation in

funding projects under NSM timelines for financial closures shall be increased by the Ministry of New and

renewable Energy

According to the Power Finance Corporation, taking into account the time and administrative due diligence

required for each loan application, especially in the solar sector, which has relatively higher risks and capital

commitment requirements, a larger amount of time should be allocated for projects to achieve financial closure.


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Yes Bank

Overview

YES BANK has been actively funding infrastructure projects in India and has made infrastructure a key focus area of its lending and advisory operations. The dedicated Infrastructure Banking Group at YES BANK offers the complete range of financial products for infrastructure - from project conceptualization to financial closure. The sector coverage includes Telecom, Energy (Power, Oil & Gas and Renewable Energy), Transport (Roads, Ports and Shipping), Logistics, Manufacturing, Urban Infrastructure, and EPC. Spectrum of YES BANK offerings in infrastructure include:

Project Conceptualization, Advisory and Appraisal,

Bid Bond Guarantees

Project Finance and Arrangement of Long Term Loans

Performance Guarantees, Underwriting, Syndication, ECA, ECB

Structured Debt/Products like Bond Issuance, Mezzanine Financing, Equity-like instruments such as

CCD and OCD

Trade Products like Buyers Credit, Suppliers Credit, Capex LCs, SBLCs, TRA/Escrow, CMS

The infrastructure focus of YES BANK is also clear from its advances to, and high single- and group-borrower

limits for, the sector:

Advances to Infrastructure Sector equivalent to 20% of total bank-wide advances

High Borrower Limits: Single Borrower Limit of Rs. 10.50 Billion (USD 210 million)and Group

Borrower Limit of Rs. 26.00 Billion(USD 520 million)

Exposure to Renewable Energy sector

Yes Bank has been providing loans to renewable energy projects to various technologies including biomass, wind, solid waste, solar PV and solar thermal based projects. Yes bank has been a pioneer in funding solar based projects in India. Recently they have funded

50Mw of solar projects in Gujarat

10 Mw of off grid projects in Madhya Pradesh, Rajasthan and Uttar Pradesh co-founding with IREDA.

Two solar thermal projects of different capacities.

As of now, Yes Bank has not funded any solar PV projects under the Phase I Batch I of the JNNSM, but perceives an optimistic scenario for solar projects in India in the next few years. The Bank also expresses its willingness to fund on-balance sheet solar projects, but is not as comfortable lending to stand alone projects.

All loan disbursements are made on market rates and the loan tenure varies between 12-14 years for solar PV projects.


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The integration of concentrating solar thermal power plants into the electricity grid requires both day-ahead

and intra-day forecasting of the energy production. Direct solar irradiance forecasting is needed together with

temperature and wind speed forecasts. Yes Bank feels that the biggest risk associated with solar projects lies

with the estimation of solar radiation. The returns of a solar project are highly sensitive to radiation levels. Any

error in solar resource estimation adds an uncertainty to expected outputs. As of now, on-ground solar

radiation data is sketchy and the simulation models are at a preliminary stage.

As per the bank, other risks and concerns relating to solar projects are:

The high initial investment

Availability of evacuation infrastructure for the projects

Technological requirements

Till date, Yes Bank has never availed any grants for funding renewable energy projects but has nonetheless been a key institution funding renewable energy based projects in India. The Bank has also not funded any off grid projects as on date, as they express concerns regarding the commercial viability and sustainability of such projects.


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Axis Bank

Axis Bank is currently involved in funding discussions with many project developers .Bank suggests solar to be

a non- viable option without considering the government subsidies. Reverse bidding undertaken to start up

with is not being considered as a viable option.


Tariff fixing and assurance on the power sale agreement. For the first phase, the single-buyer model is a

concern.

Technology yet to be proven on the real grounds.

Uncertainties in the implementation of the project as per schedule.

Inadequate evacuation facility and clearances on land and other statutory clearances.

Non-assurance of repayment from the utilities may result in repayment risk to the developers/financial

institutions.

Changes in fixing of unallocated power with respect to change in political system

Assurance of long-term policy with greater accuracy and uncertainties in the department of the solar

sector.

Availability of long-term guarantee and warranty from technology providers for new technology.

Separate Window for funding RE Projects

Axis bank claimed that most of the banks are already full with their stipulated power sector exposure .Hence

will not be much interested in funding further projects where much more risks are associated. They proposed

that a separate window shall be created for funding of the Renewable energy projects and that too particularly,

solar taking in consideration the higher risks associated. To encourage the banking community to participate

and boost up solar sector funding a mechanism should be build in place where in the separate guidelines

regarding all the financial aspects of solar shall be considered and put forward.

Such a system would help in fulfilling the appetite of solar financing sector.


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Srei Infrastructure Finance Ltd.

Srei forayed into power sector in 2003 with the incorporation of India Power Corporation Limited (IPCL) which operates and maintains windmills in Gujarat (10.4 MW) and Karnataka (24.8 MW). IPCL has further contributed to the development of renewable energy by way of expansion in Rajasthan (60 MW) and is contemplating setting up additional capacities in the adjoining states. Srei is also actively involved in increasing its financial exposure in the sector with a 450 MW thermal power plant in Haldia, West Bengal through India Power Corporation (Haldia) Limited, scheduled for commissioning in 2012 end. With the pacing up of the Srei’s mega power projects in Bihar and Gujarat of 1320 MW each, Srei is fast evolving as a key player in power generation in India.

According to Srei Infra, investment in wind energy is a safe bet; however investments in solar energy are highly risky due to local regulation and high tariff rate. According to them, only a promoter’s level comfort and short term corporate secured loan can be thought of at this stage. However their company has invested heavily in renewable energy including wind, bio-mass energy and hydro power projects.

Loan schemes initiated by your institution for financing Solar PV and Solar Thermal

projects

Srei provides Corporate loans for Solar industry, the current allocation to solar sector being in the range of Rs.

300 crores and the interest rate for the provided loan is in range of 10-11%, while the name of beneficiaries

could not be disclosed, Srei seems to be highly motivated to invest in solar sector. Although no fixed allocation

has been made for solar, all the loans are initiated on case to case basis.

They have also availed certain grant facility previously from different bi-lenders of Europe. Only important

term involved was the fund should be used for green/renewable projects strictly and Srei had been religiously

following this condition.

Reasons for rejection of certain loan applications for Solar PV/Thermal

Bad Credit Rating

Market risk

Financial Risk Interest Rate

Technology Risk

Environmental & Social Incompliance

Government Support can improve the credit worthiness of your borrowers for Solar

Projects

Organization is of view that to boost up the investments in solar sector, government should come up with some

lucrative options in the financial sector involved in solar such as:

Interest rate reductions

Subsidizing principal repayments

Subsidizing Tariff Rate, RBI regulation making environmental lending mandatory in the

range between 20%-25% for all Banks and NBFC


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Risks involved in Solar

Biggest risk in developing and operating a solar project is the uncertainty about domestic solar energy policy,

high cost of power generation and high technology cost .These can be only overcome by adopting a long term

commitment to clean energy development.


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L&T Infrastructure Finance Company Ltd.

L &T Infrastructure Finance Company Ltd. is amongst the leading financial institutions to actively seek and finance Solar Power projects in India.

• Sanctioned 96 MW of solar projects using Solar PV Crystalline as well as Thin film Technology under various Feed-in-tariff schemes

• Long tenor Financing • Customized and Efficient financing structure as per requirements of the project • End to end financing solutions including Underwriting, syndication, senior debt, EPC financing,

structured finance L&T ECC provides EPC services for solar PV as well as solar thermal power plants.

Challenges in Financing Solar Power Projects

Considering India’s growing power deficit and dependence on international coal, we believe that Solar Power has great potential with decreasing capital costs and active interest/support by the government.

Key Challenges:

Sustainable Policy Framework

PPA Issues

Financing Issues

Solar resource assessment

Project Specific Challenges

PPA issues

L&T seeks the PPA to be a major roadblock in the financing of NSM seeking:

Financial health of state Discoms

Grid Availability

Bankable framework

Step- in rights for Lenders

Termination Clause

Re-inventing the wheel by various state governments.

Table 38: Difference between Gujarat and NVVN solar schemes

Gujarat NVVN

Termination Clause

3 times the revenue of first year

None /only Merchant Power

Step in Rights for Lenders

Yes Yes

Payment security Mechanism

1 month revolving LC

1 month revolving LC + Rs. 486 Cr of budgetary support

Grid Availability Assurance

None None


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Asian Development Bank

In our discussion with Asian Development bank, following major points came out, which need to be addressed at policy levels. This provides us with the view point and the considerations of a multilateral agency towards NSM:

How do we manage payment risk for “expensive” power?

Will new technologies or lower cost modules lead the off taker to renege on the PPA? How to manage?

Payment security mechanisms.

Will solar RPOs (and enforcement of penalties) stand up?

Will the state grid be available to evacuate my energy and strengthened to handle variability?

In addition to other risks, seasonality and uncertainty of solar resource leading to variability of project cash flow.

On the financial perspective ADB has following major concerns:

Finances could be arranged by maximizing the leverage to meet investor expectations.

Agency is also considerate about the optimal balance of debt to equity for both parties?

What is debt servicing capacity of the tariff? Can you sculpt amortization to meet target DSCRs?

Are the promoters to bring in equity up front?

Share retention, cash sweeps, dividend blocks, other covenants

Guarantees from promoters or third-parties, to be involved.

For cost and time overruns; plant performance; debt service (e.g., corporate finance)


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International Finance Corporation (IFC)

World Bank and International Finance Corporation (IFC) have mentioned that they will double loans given to renewable energy projects to $2 billion (Rs. 9,103 crore) in the next three years in India. Further, the lending will primarily be for power generation and energy efficiency projects. The World Bank largely funds government projects while the IFC caters to the private sector.

IFC has been one of the most active investors in the Renewable Energy space in India in terms of both equity and debt funding. International Finance Corporation (IFC), the investment arm of the World Bank, announced its plan to set up $55 million debt-equity investment (about Rs 248 crore) in Simran Wind Project, the clean energy arm of Kolkata-based listed firm Techno Electric and Engineering Company.

IFC had announced corporate equity financing of up to $15 million (around Rs 69 crore) to Andhra Pradesh-based Shalivahana Green Energy Limited (SGEL), a privately owned entity producing power based on biomass. The fund would be used by the company for its projects.

In India, the National Solar Mission is heating up interest in the sector. In markets with a huge need for power, renewable energy is taking off.

The major issues at the policy levels highlighted by IFC:

PPA risk – risk of realization.

Risk of return to the investors is a major issue of concern, as reverse bidding had brought down the

tariffs to much lower levels, the tariff will further decrease in the next phases, if such competition

perceives, but the returns for the equity investors had to be ensured by some way, in order to encourage

equity investors to enter the sector.

Another issue of concern being, solar technologies are at a nascent stage in India and there are

considerable risks in execution of the projects. Crystalline cells and modules are comparatively easier to

execute and less risky as manufacturers generally guarantee the products for 20+ years. However newer

technologies like thin-film and concentrated PV, may provide lower up-front costs, but are unproven

and therefore considered more risky.

Political risks associated to projects were also highlighted.


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Baring Equity

Following are minutes of meeting we had with a Delhi based equity fund (Baring Equity). The minutes contain a topic wise account of the conversation

Their take on involvement in Solar Power Projects

The fund showed good interest in funding solar sector projects focusing more on CSP based projects. Funding is provided to the equipment manufacturers as well as the EPC contractors involved in the solar business. Funding by the equity player can be made for a company identifying good projects or direct project based funding can also is made. The minimum funding for a project would be of the order of $ 15- 20 Million. As such, it is unlikely that they would fund smaller projects. Further they would not finance more than ten or twelve projects of the aforementioned magnitude.

The equity player showed their major concern to be the PPA’s and PSA’s to be involved in the NSM. As, they raised concerns over the creditworthiness of the institutions involved in PPA/PSA particularly the state discos. Further solar tariffs being too much regulated being another concern for the equity players to move forward with the funding options. As equity players consider regulated tariffs can’t make more money as the Return on Equity is capped hence not willing to invest in developers and rather consider funding equipment manufacturers and EPC contractors as a more viable option.

For any Private Equity (PE) firm, the total Return on Equity (Roe) is an important parameter that helps them decide whether a proposition would be profitable. As such, they would be comfortable owning and operating a power plant only if the project with a good expected Internal Rate of Return (IRR) as per their standards. They also raised concerns regarding the present status of Renewable Purchase Obligations (RPO) on the discoms and recommended strong regulations to be made and brought forward to implement the whole operations by fixing the players to buy the solar power. REC mechanism should also be used and made more of a variable option to implement the whole business of arranging the funds and cash flows.

Raised concerns regarding the indigenous manufacturing of equipments as Chinese manufacturers had already developed huge capacities in PV and wafers and hence are able to provide much cheaper solutions than their Indian counterparts.

Patented technology in case of Solar Thermal projects is another concern which increases the costs involved, as of now no popular examples of solar thermal technologies being successfully run across the world.

Another option that was brought forward by the player would be providing the initial equity requirements to a project developer and then quit later when the operation of the plant is underway.

A new point which came forward was equity players considering funding an entity, which is further buying up the licences from a number of players say 3-5 smaller developers and forming a bigger unit more in number of MW, say there being 5 players who are having licences to develop 5MW projects, then an entity paying premium to these licences and buying out their licences and hence adding up their capacity to be 25 MW. The equity player shared such a scenario being prevalent in Chhattisgarh where licences were given by CREDA.


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IREDA

IREDA is a Public Limited Government Company established in 1987, under the administrative control of Ministry of New and Renewable Energy (MNRE) to promote, develop and extend financial assistance for renewable energy and energy efficiency/conservation projects.

IREDA’s point on NSM funding:

IREDA feels the reverse bidding procedure followed in the Phase I batch I, is a good initiative, but such mechanism takes their own time to develop and mature in the newer markets like Solar in India.

Till date IREDA has not financed any solar project under the NSM scheme.

IREDA showed concerns regarding the quality aspects of materials being used to bring down costs, and suggests a firm check should be made on the same. In fact they suggested consultants to be appointed to view the quality of plants under construction.

Economic health of SEB’s is another major concern for financial institutions going forward with solar project financing.

IREDA also forwarded the concept of demonstration projects to be undertaken under NSM.

They feel strong policies can be a much greater push in advancing solar sector as on whole.

Viability of projects on exceptionally low tariffs is also under question.

IREDA also proposes timeframe for achieving the financial closure to be increased.

For pitching in the banks in financing tariff should be more realistic in nature

Government should focus on tapping the international funds at lower rates for the solar projects.

Standardization, publication of data will encourage financial institutions and bankers to start funding the sector.

http://www.mnes.nic.in/


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Moser Baer Solar Limited

Moser Baer Solar Limited erstwhile PV Technologies India Limited is a subsidiary of MBIL and was launched between 2005 and 2007 with the primary objective of providing reliable solar power as a competitive non-subsidized source of energy.

They had a Global presence with products sold in more than 82 countries. Present across the entire value chain and investments in multiple PV technologies. Current production capacity of 100 MW Crystalline Cells, 90 MW Crystalline Modules, and 50 MW Thin Films with expansion plans in place.

Moser Baer Clean Energy Limited (MBCEL), a subsidiary of Moser Baer Projects Private Limited (MBPPL) has commissioned India’s largest and the first 5 MW solar power project at Sivaganga in Tamil Nadu. The technical expertise for commissioning was provided by the EPC (Engineering Procurement Commissioning) arm of Moser Baer Solar Limited. The International Finance Corporation and the IDBI bank has provided debt for the project.

The panels installed at Sivaganga Project were procured from Moser Baer Solar Limited. These panels were used as they are best suited in ramping up grid connected solar farms in high ambient temperature region like India.

Apart from providing the company’s successful initiatives, Moser Baer seemed one of the most optimistic organizations seeking the success of NSM.

They are quite satisfied with the Phase I Batch II guidelines which have increased the size limits of the solar projects. Although Moser Baer does not favour the process of reverse bidding as at the competition skews down the tariff to a very lower range that makes projects unfeasible under many circumstances.

They also raised their concerns regarding the high bank guarantees to be paid to the NVVN as they suggested it a huge blockage of money for players like them who are already investing big amounts in Germany and Italy. They had already raised this issue with the government and want certain favourable steps to be taken on this aspect.

Over all, they are working very hard to trap this opportunity to become leaders in the country in coming years. As far as grid parity is concerned they again showed high optimism and suggested the achievement of grid parity even before 2020.


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Welspun Energy

The following are minutes of our meeting with Mr. Rajesh Peddu, General Manager – Business Development, Welspun Energy Limited. The minutes contain a topic wise account of the conversation we had.

Current Portfolio

Welspun Energy has a two Solar PV projects under implementation. One of them is a 15MW plant in Gujarat and is likely to be commissioned by October, 2011. This plant is set up under the Gujarat State Policy on Solar Energy. The second plant is a 5MW facility in Andhra Pradesh being developed as per policies set out by the Jawaharlal Nehru National Solar Mission (JNNSM).

Comments on Tariff policy under the JNNSM

As per their point of view, the tariff policy adopted by the JNNSM, which offers the same tariff over the entire period of 25 years, is not in the best interest of developers. It was pointed out to us that solar power projects require maximum investment upfront and cash outflow in terms of loan repayments is also high. Consequently, a constant levelized tariff would be insufficient in the initial years and would contribute almost entirely to the profits of the developers later. He further opined that this constant tariff mechanism could in fact, be a deterrent for many lending agencies as it would be difficult for them to foresee an assured cash flow from the project during the first few years of operation.

Gujarat’s tariff policy was cited as a possible alternative to the JNNSM tariff mechanism. As per the Gujarat tariff policy, a tariff of Rs 15 per unit would be applicable for the first 12 years of operation and a tariff of Rs 5 per unit would be applicable for the next 13 years. The levelized tariff, therefore, works out to about Rs 12.50 per unit over the entire period of 25 years. This is comparable to the levelized tariff of Rs 12.64 per unit that the company would receive for its 5MW project in Andhra Pradesh under JNNSM. The only concern for the company, however, is that while they would be able to cover initial costs easily for their Gujarat project, they may not be able to do so for their other project under JNNSM. Therefore, it was suggested that the tariff disbursed must start from a high figure and follow a decreasing trend thereafter.

Expected trends in Capital Expenditure required for Solar PV plants

As per information shared with us, the western and European markets are near a saturation state as far as demand for Solar PV equipment is concerned. Germany, for instance, has already set up 10GW of solar power. Further, the European financial crisis has led to an even more pronounced fall in capital expenditure on Solar PV. As such, the rapidly growing Indian economy offers an attractive market for Photo Voltaic (PV) manufacturers. Given the fact that the Indian market is extremely price sensitive and that competition is likely to be intense, prices in the most likely scenario will come down in future. The cost of generation is also likely to come down as a consequence of lower capital expenditure and higher Plant Load Factors (PLFs) in future through technological advancements.

Besides, they foresee grid parity being achieved by 2020. In fact, as per their estimates, it could easily happen by 2018-19 also.

Overemphasis on use of Indigenous technology in the JNNSM

As per opinions expressed, the likelihood of Indian manufacturers meeting the imminent steep demand for equipment is low. The industry is not well developed at this stage and resources are limited. Moreover, prices offered by Chinese manufacturers, who are content with realising a profit of as low as 5-6% in order to sustain their business, would be tough to match anyway. Therefore, a complete ban on importing foreign equipment might be risky. The developers do not see any harm in importing technology if it enables them to offer power at a relatively lower tariff. To further this argument, they pointed out that EXIM funding is also available at a relatively low cost. Besides, protectionism could be harmful for the economy as well.


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Qualification requirements for bidders

The developers feel that, a minimum technical qualification is essential for the success of the mission. As per them, a mere net worth qualification would be inadequate. From their perspective, a rich farmer or for that matter, even a diamond merchant could be a competitor. An interesting insight highlighted was that among 301 bidders during the reverse bidding process initiated by NVVN, as many as 70 bidders had submitted a discount offer of Rs 0 on the CERC benchmark tariff of Rs 17.91 per kWh. This clearly reflects the lack of seriousness among bidders.

Role of Banks

The developers foresee an important role for the banks in financing the mission. However, at this stage, they do not entirely fault them for not financing projects more aggressively. In their opinion, banks do not have enough data or experience to fall back on as a means to verify claims made by project developers. Project developers themselves find it difficult to substantiate their claims through verifiable data or proven track record. An interesting suggestion put forth was that, the government could impose obligations on banks to lend a specific fraction of their entire portfolio to renewable energy/solar power projects. The mechanism could be similar in nature to the RPO mechanism embodied in JNNSM.

RECs

It is indeed imperative for banks to ensure payment security. The fixing of REC prices for a period of five years instead of declaring prices for a given year, therefore, is welcomed by the project developers. This would definitely give the banks a better idea about developer’s revenue stream. However, they pointed out that RECs are generally traded only at the end of the year to meet the compliance requirements. Therefore, the cash flows remain scant during the rest of the year and developers may still find it difficult to pay their quarterly or half-yearly instalments.


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Lanco Solar

Current Portfolio

The presence of Lanco group is widely spread across the country, major achievements of the group can be stated with 3290 MW of Installed Capacity (Thermal, Hydro, PV), 8000 MW Power Plants under construction. It is also the largest private sector power trading company with strong EPC capabilities with overall 7000 employees. Hence Lanco has potential to be a major developer for participation in the NSM.

Along with other major players, Lanco is also satisfied with the Phase I Batch II guidelines which increased the size limits of the solar projects.

According to Lanco Solar the major challenges faced by solar power projects are:

Sustainable Policy Framework

Issues with PPA

Financing Issues

PPA issues, organization seeks the PPA to be a major roadblock as both developer and financial community are not clear of the guidelines and future

Financial health of state Discoms

Evacuation Infrastructure unavailability

Strict norms from the government side to be imposed on the financial community to participate in funding of the solar industry

Over all, they are also working very hard to trap this opportunity to become leaders in the country in coming years. As far as grid parity is concerned they again showed high optimism and suggested the achievement of grid parity even before 2020


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Acme Tele Power Ltd.

ACME was first to introduce the cutting-edge modular Solar Thermal technology in India. The group has an exclusive agreement with leading technology provider eSolar of USA.

Current Solar Portfolio of ACME group:

• 2.5 – 50 MW modules for power generation • First 10 MW plant is under implementation and first module is likely to be ready by March

2010 in Bikaner • 50 MW plant to be ready by Dec 2010 in Gujarat • 150 MW being developed in Rajasthan for Northern regional states (Delhi, Haryana, Punjab,

Rajasthan) • 100 MW MOU signed with MP Govt • 5 MW allocated by Maharashtra Government under MNRE scheme

Take on Solar Industry and NSM

• India has got huge potential for development of MW class Solar Thermal power projects. • Technologies are credible, reliable & simple. • Biggest deterrent is high initial cost due to the fact that all critical components of solar block are

imported government support is expected to overcome this scenario. • Certain level of installed capacity in order to achieve economies of scale, critical components being

imported can be localized 100%; hence unlike others organization favors the concept of indigenous manufacturing in the solar industry.

• Capital cost of Solar Thermal Power Project can be brought down by localization. Government support by means of setting up of R& D centers is taken up in order to develop Solar Thermal technologies in the country and making India as a leader in the area.

• ACME has similar concerns in promoting National Solar mission as seen by other major developers being difficulty in obtaining finances, need of government support.

• Better policy levels level initiatives to be promoted at central government level, will pitch in more developers who had been initially excluding themselves from participation in the NSM.

• Better RPO mechanism should be brought in place which will further support the NSM. • Cheaper loans and government support is always invited to encourage the private sector participation.


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KVK Energy Venture Pvt. Ltd.

KVK Energy & Infrastructure Pvt. Ltd. is developing a 100 MW Solar thermal power project in Rajasthan through KVK Energy Ventures Pvt. Ltd., which had participated in bidding for development of solar thermal power project under Jawaharlal Nehru National Solar Mission for supply of power to NTPC Vidyut Vyapar Nigam Limited (NVVN), the nodal agency designated by Government of India. The Project is scheduled to be commissioned by March 2013.

Organization proposed Single Window Clearance with the government acquiring land and providing

evacuation to the same and then transferring it to the developers

The evacuation network to be strengthened and guaranteed availability of transmission line to be

provided by the utilities.

Solar thermal power plants need detailed feasibility study and technology identification along with

proper solar radiation resource assessment. The current status of international technology and its

availability and financial and commercial feasibility in the context of India needs to be strengthened.

Resource assessment, technological appropriateness and economic feasibility are the basic requirement of project evaluation.

Issues pertaining to raising of equity – domestic / International sources are of major concern.

Issues pertaining to raising of debt – domestic / International needs further discussions and propositions.

Organization also proposes to increase the time frame for achieving financial closures.

Impact of foreign exchange variation on project economics / viability should be concerned at macro levels.


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Abhijeet Group

Abhijeet Projects is the special purpose vehicle of Corporate Ispat and Alloys Ltd, which won the 50 MW project through the bidding process under the Jawaharlal Nehru National Solar Mission.

Abhijeet’s is the first project to announce the finalisation of EPC contract among the seven winning bidders of solar thermal projects under the Mission. Award of EPC cost of Rs 640 crore for a 50 MW CSP project to a domestic company is a welcome development and affirms our belief that Indian engineering companies are competitive and ready to absorb new technology cost of Rs 12.8 crore/MW, the project cost is likely to be around Rs 13.5-14.0 crore depending upon the source of finance and financing cost.

Abhijeet Group won the project by bidding a tariff of Rs 12.24 per unit, the highest tariff amongst the seven developers who won the thermal projects. They claim, at this price, it is unlikely that there will be any significant margins for them

Organization is highly optimistic regarding the NSM, and plans to increase their portfolio in near future.

Solar Project financing is difficult because lenders perceive the solar energy industry as highly risky, policy interventions shall be made to encourage the investment scenarios.

The main risk associated with this industry is lack of reliable solar irradiation data, which makes it difficult to estimate the return on investment. For JNNSM projects, banks are particularly wary of the heavily discounted tariffs resulting from the bidding process. Current tariffs are among the lowest in the world for solar, and banks are concerned that project risks have been underestimated in order to win bids. Lenders are also wary of the small margins that projects are looking to operate on, in order to be viable at low tariffs. In addition, the small size (5 MW) of solar photovoltaic (PV) projects (in phase I, batch I) is resulting in high transaction costs for large banks.

But on the whole, group seems to be satisfied with the advances in the National Solar Mission.


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Sunborne Energy

SunBorne Energy has tied up funds to the tune of Rs 140 crore from domestic banks for its 15 MW solar photovoltaic plant in Gujarat.

State Bank of Patiala, the lead bank, with three other banks — Export-Import Bank of India, Canara Bank and State Bank of Travancore — participated in the debt programme. The debt advisory was led by SBI Capital Market Ltd.

Indian commercial banks are lending cautiously to projects in the solar sector because large-scale projects are being commissioned for the first time in India but the company appreciates the support from Indian banks at this stage and are very optimistic about their future plans .The company plans to commission the project before the end of this year. The plant will provide 15 MW of photovoltaic power, producing enough electricity annually to power more than 10,000 households.

The project is expected to be operational by December 2011 and falls under the solar programme of Gujarat that provides a stable and favourable business environment for the development of renewable energy generation facilities. India has just commenced on an ambitious solar power development programme and one of the key success criteria for developers is to be able to attract equity from both Indian and global investors.

Sun Borne Energy has joined hands with Europe-based IPP Epoxies Energy for executing the 15 MW solar photovoltaic (PV) projects being built in Gujarat. According to an official statement here, this is Eoxis' first investment in India and demonstrates its strong commitment to the country. Eoxis has ambitious plans to reach 300 MW of installed capacity in the next three years and intends to make several further investments in wind and solar generation plants.

With rising coal prices, there is now a significant thrust on solar power. Company views Jawaharlal Nehru National Solar Mission programme (NSM) as a huge opportunity for serious players in the market

The company has set a target of developing projects of over 1,000 MW in the next five-seven years, and commissioning over 200 mw plants by 2014.

Apart from NSM, SunBorne is also looking at state-level solar power programmes as potential opportunities. States such as Gujarat, Maharashtra, Karnataka and Rajasthan have already initiated policies to meet renewable energy purchase commitments.

Concerns for NSM:

Payment mechanism should be further strengthened

RPO mechanisms to be implemented with force.

Separate window for bankers to fund solar projects.

Single window clearance mechanism to be brought in figure.


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Anand Gupta, CEO,Editor EQ International

Mr. Anand Gupta had been looking into the various aspects of NSM since the inception of the program. He shared his views and the interviews they conducted with various participants of the mission.

What are the prospects do you foresee in Indian market?

The Solar potential of India is huge and with the government policies becoming more liberal and open, we see great potential in the grid and off-grid markets. All of India is gearing up for adoption of greener forms of energy. From a solar energy company point of view - In India, given the power problems and low electricity connections, off-grid projects with smaller capacities are more favourable. Hence, India would be the best place to start off-grid development. (Off-grid capacities can be as low as 5-10 KW as compared to at least 20 KW in grid connected systems). Where there are caps on applications, we work as technology partners for various organizations.

For developing Solar PV plant in India, NVVN suggest to rely on domestic content. How does the domestic content issue impact the overall financial structure of the plant?

We believe that developers should be given the flexibility to execute the project in the most economic manner.

While we are in favour of developing a domestic eco-system for the solar industry, we also believe that in the

short run there should not be stringent norms on domestic content.

How we can reduce per unit cost of generation?

As technology matures and we achieve economies of scale, reduction in the cost of generation is imperative.

Added to this is the fact that government of India has created a regulatory environment that encourages

industry. The competition that this will lead too, will also contribute to driving down the cost.

What is your take on payment security mechanism?

We believe that the payment security mechanism could be further strengthened and dishonouring the PPA

should attract significant penalties.

What would be your response to grid interconnection?

We are of the opinion that grid interconnection is best provided by the distribution companies. States like Gujarat and Rajasthan have been proactive and have taken excellent steps in this regards and other states should emulate the model.

A few major concerns quoted by Mr. Gupta:

Creditworthiness of PPA’s.

Competition from the Chinese and Taiwanese manufacturers who had already achieved economies of scale.

Strong Payment mechanism should be in place.

Arrangement of funds for the projects.


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Annexure-III: International Funding Sources India aims to emerge as one of the biggest player in the Asian Solar market along with China and Japan. With the ambitious National and State programs on Solar, India is expected to have a considerable chunk of Solar Power Generation capacity. One of the biggest hurdles that Solar faces in India is that of financing.

With higher interest rates and conservative roles being played by banks to finance the new investment model of Solar Power Projects, is adding to the woes of the developers. One way to solve the funding problem is to go for international financing, which are typically lending at lower rates. Such kind of funding makes the projects financially feasible. Following is the list of some international funds which could be tapped for boosting international funding for Indian solar industry:

ADIA Country: Abu Dhabi

Established: 1976

Government of Abu Dhabi wholly owns a globally diversifies investment institution by the name of The Abu Dhabi Investment Authority (ADIA). ADIA has a diversified global investment portfolio, across more than two-dozen asset classes and sub-categories, including quoted equities, fixed income, real estate, private equity, alternatives and infrastructure. ADIA is governed by a well defined governance standard, processes and systems. ADIA’s management comprises of the Board of Directors including the Chairman and Managing Director who, together with other Board members, are appointed by a decree of the Ruler of the Emirate. According to the Law (5) of 1981 of the Emirate of Abu Dhabi, the board holds primary responsibility for the implementation of ADIA's strategies, financial performance and the activities of management. Although no involvement of the board is there in the investment and operational decisions, all such decisions comes under the preview of the Managing Director. The investment programmes of ADIA are independent of the Government of the Emirate of Abu Dhabi or other entities that also invest on the Government’s behalf. ADIA’s Managing Director is vested under the law with responsibility for implementing ADIA’s Policy and the management of its affairs, including decisions related to investments, and Acts as its legal representative in dealings with third parties.

In order to tap the attractive returns from the investments in the infrastructure sector for the long term investors, ADIA‘s Infrastructure Group was created in 2007. Main aim of this Infrastructure Group is on assets with strong market-leading positions and relatively stable cash flows, including utilities, such as water, gas and electricity distribution and transmission companies, as well as transport infrastructure, such as toll roads, ports, airports and freight railroads. The group aims to acquire minority equity stakes alongside proven partners, with an emphasis on developed markets but an ability to look at emerging markets on an opportunistic basis.

Investments in India According to the latest news reports , the meeting between the Commerce and Industry Minister Anand Sharma and Abu Dhabi Investment Authority (ADIA) Managing Director Sheikh Hamed bin Zayed Al Nahyan in New Delhi ,ADIA world's largest sovereign wealth funds plans to invest in the $90-billion ambitious Delhi Mumbai Industrial Corridor (DMIC) and other infrastructure funds. Keeping in mind the worsening investment climate in developed nations, both leaders agreed that the UAE and India should work towards a greater level of engagement.


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Alaska Permanent Fund Corporation Country: United States

Established: 1976

The state of Alaska established the Alaska Permanent Fund, managed by a semi-independent corporation. Investments by the fund are fully diversified to both the public and private asset classes. The fund aims that all the investments made either in Alaska or around the world must be produce income with a certain perception of risk involved. This fund does not invest in the activities focused on the economic and the social development. Hence it is a purely business oriented fund.

Some of their asset allocation consists of:

Equities

Private Equity

Fixed Income

Infrastructure

Real Estate (Funds or Direct Investments)

Absolute Return Strategies

Achieving an average annual real rate of return of 5 % over the long term is the investment goal of the Board of Trustees. In order to achieve the target return, investments are yearly target returns are set, on the basis of which the types and proportion of investments are decided. Over thirty years the Trustees have gradually guided the Fund from a portfolio entirely in bonds to a portfolio that is diversified across asset types. Whenever the new investment opportunities appear, they are evaluated by the trustees in order to decide whether or not they fit into the Fund’s risk and return targets. To reduce the level and amounts of risks involved investments across the sectors are made after due diligence with an aim to reduce the overall risks.

Investment in India The fund had been investing highly in the sectors such as real estate sector, bonds, private equity and infrastructure. It can be a good opportunity for both Indian Solar industry as well as the fund making investments in the Indian industry. Government and industry both can play their roles encouraging the fund to make investments in the sector. Temasek Holdings Country: Singapore

Established: 1974

Temasek Holdings owns a $193 billion diversified portfolio as on 31st March 2011. With its headquarters in Singapore, it has 12 affiliates and offices in Asia and Latin America. In Temasek’s portfolio there are a broad category of industries where in the investments are made, including financial services, transportation, logistics and industrials, telecommunications, media & technology, life sciences, consumer & real estate, energy & resources.

Fund holds stakes in many large foreign companies including Standard Chartered, Bank of China, China Construction Bank, ICICI Bank, Global Crossing, as well as many of Singapore's largest companies, such as SingTel, DBS Bank, Singapore Airlines, PSA International, SMRT Corporation, Singapore Power, Neptune Orient Lines and Mediacorp. Although 75% of Temasek's holdings are in Singapore, it has set a target of eventually reducing this to only one-third. Another one-third will be in developed markets and the final third is planned for investment in developing economies.

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Investment in India With its plans to make investments in developing economies Temasak Holdings provides a good opportunity for the Indian solar industry to approach the fund and encourage them making investments in the up growing sector. With strong government support and policies attached, solar industry can be an encouraging sector for the fund to make investments in India. Kuwait Investment Authority In order to manage the funds of the Kuwaiti Government in light of financial surpluses after the discovery of oil, The Kuwait Investment Authority (KIA) was formed. It is Kuwait's sovereign wealth fund which specialises in local and foreign investment. KIA manages the Kuwait General Reserve Fund, the Kuwait Future Generations Fund, as well as any other assets committed by the Ministry of Finance.

As of fiscal year 2004/2005, the annual contribution to the Kuwait Future Generations Fund was valued at 896.24 million Kuwaiti dinars (USD$3.07 billion). The Minister of Finance heads the KIA's board of directors ; in its board the other major members include the Energy Minister, Governor of the Central Bank of Kuwait, Undersecretary of the Ministry of Finance, and 5 other nationals who are experts in the field, 3 of which should not hold any other public office.

KIA is estimated to hold in excess of $200 billion of assets, and is reportedly one of the largest Sovereign Wealth Funds in the World. KIA invests in the Local, Arab and International Markets with its main office located in Kuwait City and a branch office in London, UK.

Investment in India With its huge investment capital and interests to invest in global energy sector, the fund could be tapped by Indian solar industry for funding the various aspects of the sector. Terra Nex Group As an International Wealth Management Company Terra Nex Group based out in Switzerland is involved in consulting governments, institutions and ultra high net individuals in the field of private equity investments, value creation, wealth structuring, project development and asset management.

In collaboration with the Middle East Best Select Fund (MEBS), Terra Nex, recently announced its plans to invest US$2bn to develop a solar energy value chain project in the sultanate of Oman, which includes a solar panel factory, a factory to produce aluminium frames for panels, an educational institution for the renewable energy sector and a series of solar power stations to generate a total of 400MW electricity annually.

Terra Nex Group also acts as project and business developer in the Middle East and in Europe maintaining partnerships to Institutional Investors in Europe and to Industries in various sectors. Terra Nex provides Project Management services to European Institutional Investors by developing renewable energy projects in the Middle East for direct investments.

Investment in India With its plans to invest in renewable energy sector particularly solar, the upcoming Indian solar industry could serve as a major booster providing opportunities for Terra Nex Group for investing in solar sector. India’s most ambitious plans to achieve 20000 MW solar by 2020 could be another opportunity for the fund. Both Industry as well as government can play their roles tapping investments from the group to Indian solar sector. Berkley Energy Berkeley Energy specializing in renewable energy infrastructure investments is having offices based out in London and Delhi and a presence in Manila. It is authorised and regulated by The United Kingdom Financial Services Authority authorises and regulates the Berkley Energy fund. Berkeley Energy is the trading name of Berkeley Partners LLP, an English limited liability partnership.

Berkeley Energy was founded in 2007 to tap the private equity investment opportunities and yield higher returns from the attractive yet relatively untapped opportunities for renewable energy infrastructure in developing markets, with an initial focus on Asia. Berkeley Energy seeks to make equity investments into

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development stage renewable energy projects and project developers, mature and consolidate these investments into operating portfolios and generate superior returns through successful exits.

According to Berkeley Energy, the Renewable Energy Asia Fund (‘REAF’) invests into post-permitted projects and project developers with a technology focus is wind, small hydro, biomass, solar, geothermal and landfill gas and a primary geography focus of India and additional target markets including Philippines, Sri Lanka, Thailand and Vietnam.

Investment in India According to the news reports, in an announcement, OPIC has approved $62 million in financing to this fund, which targets renewable energy projects and project developers in Asia, primarily India and the Philippines. The fund focuses on mature renewable technologies, such as wind and small hydro, to help close the sizeable electricity demand-supply gap in its target markets. Currently the fund has $125 million under management, which would increase to $187 million with the OPIC financing. Olympus Capital Established in 1997, Olympus Capital Holdings Asia is a leading independent middle market private equity firm. Since inception, Olympus Capital has invested approximately $1.5 billion in a varied portfolio comprising of nearly 35 portfolio companies throughout Asia, including China, India, Japan and South Korea. Areas of investment for the Olympus Capital include the sectors such as agribusiness and resources, clean energy and environmental services, and financial and business services. With the experienced team of investment professionals Olympus Capital has its offices located in Hong Kong, New Delhi, New York, Seoul, Shanghai and Tokyo. This extensive regional infrastructure gives the firm a decided advantage in identifying, structuring, monitoring and adding value to its investments. Olympus Capital's global investor base comprises of the leading pension funds, financial institutions, endowments and family offices from North America, Asia, Europe and the Middle East.

Good Energies Founded in 2001, Good Energies Capital is one of the private equity fund focused on investments in the Energy Industry. Good Energies is a leading global investor in renewable energy and energy efficiency industries. The firm invests in solar, turbine-based renewable, green building technologies and other emerging areas within clean energy with its mission to accelerate the global transition to a low-carbon economy, Good Energies manages the renewable energy portfolio of Netherlands-based COFRA Holding, a family owned and managed group of companies. The firm operates globally from offices in London, New York, Toronto, Washington, D.C., and Zug, Switzerland.

Major areas of investments for Good Energies are:

Wind Power

PV Solar

Concentrated Solar Power

Natural Gas E&P

Natural Gas Generation Development

Transmission Development

Biofuel Plant Development

Natural Gas Distribution

Energy Service Businesses


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The Good Energies fund size is estimated to be 4 billion pounds. It invests about 350 million pounds per year. Good Energies and its portfolio companies have shown outstanding growth in recent years, and this trend looks set to continue as the world transitions to cleaner and more efficient energy sources. As one of the earliest and most active movers in the renewable energy space, Good Energies offers a proven track record, strong in-house technology and financial expertise, and a broad network in the industry.

Investment in India With Good Energies' expansion into the green building technology, developing world, and game-changing technology clusters, Good Energies is now a global industry leader with a team of more than 30 employees, bringing outstanding financial and industry expertise. As a vertically integrated renewable energy company, Good Energies offers both technical and financing expertise, and seeks to apply these skills to assist developers as a long-term partner and owner of renewable energy generation assets. The expansion plans of Good Energies in developing renewable energy sector seems in line with the NSM, which could offer certain opportunities for the fund for making investments in Indian solar sector and develop the renewable energy sector. First Reserve Corporation First Reserve Corporation has been a front runner amongst the global energy-focused private equity firms and infrastructure investment firms. Firm has raised nearly $23.1billion since its inception since January 1983. The firm has developed a global platform by investing in the energy industry, having invested more than $18 billion in equity since inception. First Reserve has invested in over 100 platform acquisitions and First Reserve portfolio companies have completed more than 300 add-on transactions since inception.

Main areas of investment for the firm includes sectors as oilfield services, equipment and manufacturing, energy infrastructure and reserves, renewable and alternative energy, and energy-related insurance and financial products. First Reserve's investor base is primarily made up of corporations, endowments, foundations, governments, and public retirement funds. Over the years First Reserve has invested more than $12.5 billion. Reserve’s investor base is predominately institutional and consists primarily of corporate and public retirement funds, sovereign wealth funds, endowments and foundations.

Investment in India Firm has focus on making investments in energy sector, can serve as an opportunity for Indian solar industry if investments in certain related areas could be made by the firm. Macquarie SBI Infrastructure Fund Macquarie SBI Infrastructure Fund (MSIF) is a $1.2-billion fund and MSIT is a joint venture of State Bank of India (SBI), Macquarie, the Australian financial conglomerate, and the International Finance Corporation, the private sector lending arm of the World Bank, for investments in infrastructure projects in India. MSIF is an unlisted fund with approximately US $910 million of committed capital. MSIF is an unlisted private equity style infrastructure fund and provides its investors (located outside India) with access to the growing number of investment opportunities available to the private sector in India’s infrastructure and infrastructure-like assets. The manager of MSIF is Macquarie SBI Infrastructure Management Pvt. Limited. IFC, a member of the World Bank Group, is a minority shareholder in MSIMPL. MSIF has now invested over half its capital in businesses across power generation, telecom tower infrastructure and airports creating an investment portfolio that is well diversified by sector.

MSIF has made several major investments. There was the recent $310-million deal in Viom Networks, $125 million in Moser Baer’s power project, $30 million in Adhunik Power and a proposed investment of $200 million in GMR Airports Holding Pvt Ltd. The fund has raised $1 billion and is set to close after raising another $200 million by this month.

Global Energy Efficiency and Renewable Energy Fund (GEEREF) European Commission proposed to form The Global Energy Efficiency and Renewable Energy Fund (GEEREF) in 2006 by the European Commission. The fund is administered by the European Investment Bank (EIB) through a fund management team from the European Investment Fund (EIF).


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It is a Public-Private Partnership (PPP) fund. GEEREF invests in private equity funds (sub-funds) that specialise in providing equity finance to small and medium-sized project developers and enterprises (SMEs). Energy efficiency and renewable energy projects will be implemented in developing countries and economies in transition.

Investments by the fund till date are nearly EUR 47.8 million (USD 64.08 million) which has been approved as of January 2012.

GEEREF’s beneficiaries are small and medium size renewable energy and energy efficiency projects and enterprises in developing countries and economies in transition. These projects and enterprises often suffer from lack of capital financing – despite potentially attractive returns of the sector.

Investments by the fund would be majorly providing risk capital to different types of sub-funds. This will amount to 10%-20% of the total fund size depending on the actual needs for capacity building which is likely to be larger in less developed economies.

Basically, the investments would comprise of:

Small hydro and biomass with on-shore wind also offering significant potential.

Co-firing solutions (e.g. co-firing coal and bagasse)

Manufacturing, energy service, trading and micro finance ventures

Photovoltaics only for middle and high-income contexts because too costly.

GEEREF will provide technical assistance under the EU Commission mandate. The financial support from the support facility will be channelled to the regional funds or to promoters of the regional funds. The support can be in the form of grants, bridge financing or seed capital and can be provided both during the pre-operational phase of a regional fund and during the operational phase.

GEEREF will only invest in equity and quasi-equity in the eligible regional funds. This investment is structured as a typical fund of fund private equity funding but it also takes under consideration strict social and environmental aspects.


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