final report_pwc.pdf

7/25/2019 final report_pwc.pdf

1/125

www.pwc.com

Financial Engineeringas a means to support

Jawaharlal NehruNational Solar Mission

April 2012


2/125

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

PwC Page 2 of 125

Executive Summary

Indias Jawaharlal Nehru National Solar Mission (JNNSM) is a one of its kindcountry level initiativethat aims to help achieve the intertwined national objectives of ensuring energy security for thecountry and bringing about sustainable and environmentally efficient growth through large scaledeployment 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 keyto realizing the projected unprecedented growth would be access to affordable and appropriatefinancing.

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

JNNSM is one of the eight National Missions laid out in Indias National Action Plan on ClimateChange (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 suchas solar lighting, heating, and water pumps. Under NAPCC, the government also announced variousregulations, such as the Renewable Purchase Obligation that has mandated distribution utilities tobuy a minimum proportion (with annual increment) of their power from renewable energy basedpower 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 ofthe 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 connectedsolar by 2013, 4000 MW by 2017 and 20,000 MW by 2022. Phase I focused on establishing anenabling environment and on capturing low hanging options in solar thermal; on promoting off-gridsystems to serve populations without access to commercial energy and modest capacity addition ingrid-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-tariffsdetermined through a reverse bidding mechanism wherein, discount bids have been invited on CERCdetermined benchmark tariffs through the trading arm of Indias largest power producer NTPC- NTPCVidyut Vitaran Nigam Ltd (NVVN).

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

Stakeholder interactions with project developers, financiers and policy makers (see full list ofstakeholders in Annexure II) revealed that under the first phase of the Mission, no perceptible gap infinancing for solar projects existed although a majority of funding available was based on balancesheet 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 solarpower projects. Further, due to limited technical exposure and competence to judge the viability ofsolar project proposals, most financial institutions conceded that they were following a wait andwatch approach to first let a few projects come up successfully and then form anopinion on the typeof lending (recourse or non-recourse) they wish to pursue.

Based on these stakeholder inputs, a detailed risk assessment matrix was developed. A majority ofrisks related to aspects like lack of technical qualification criteria for bidders, delays in gettingclearances/ 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 ata nascent stage in India and there are considerable risks in the execution of projects. Projects based oncrystalline cells and modules are comparatively easier to execute and less risky as manufacturersgenerally 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


3/125


PwC Page 3 of 125

are highly sensitive to radiation levels. High quality solar radiation data is a pre-requisite for properpotential assessment and project development. Hence, solar radiation assessment is a very importantactivity and typically requires several months for ground measurement of solar radiations. Any errorin solar resource estimation adds an uncertainty to the expected future returns. As of now, on-groundsolar radiation data is sketchy and the simulation models are at a preliminary stage. Evacuation of theelectricity 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 theirexpense and the potential of damage to property and environment.

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

The report also includes simulations based on a typical financial model for a solar project.Simulatingsolar power generation regardless of the technology is not technically dissimilar to simulatinggeneration from conventional energy sources. Specific technical and operational assumptions relatingto 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 thepredominant variables required to calculate generation from solar technologies.

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

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 stepson 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 risksranging from policy & regulatory, technical, infrastructural and general project finance risks that areuniverally applicable for all infrastructure projects. However, only some of these risks have adiscernable effect on key variables that determine solar project viability. Other types of risks are moregeneric in nature and do not effect any single project variable directly, but rather put the entire projectitself 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 directlyunder the control of the project developer. Retaining control over these two parameterssimultaneously could ensure that even if other parameters are adverse, overall project viability is notseverely impacted.

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

This study also analyzed the Indian financial systems 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 tosome perceptions, that there does not appear to be any sizeable funding gap or significant dearth offunds for lending to solar projects under the phase I, batch I. Banks and financial institutions (FIs)


4/125


PwC Page 4 of 125

are, however, cautious while treading into uncharted territorybeyond phase I or relying on non-recourse financing. Banks are willing to finance projects that are backed by a companys strongbalance sheet and are cautious about providing project-based financing.

Apart from NSM targets, to estimate the investment required capital cost trends of the technology arerequired. 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 forsolar technologies covers the equipment cost, land cost, interest during construction, evacuation costand civil and commissioning costs. For the base year 2011-12, the capital cost for solar PV, irrespectiveof thin film or crystalline technology has been taken as Rs. 11.00 crores/ MW. For solar thermal thecapital 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 beentaken at 3% annual decrease. However when we consider the other cases for installation of 40,000MW and 60,000 MW by 2022- technology costs will have to decrease even more aggressively topromote investors to fund the extra capacity. Despite this, capital cost reductions will most likely notbe proportional to extra added capacity. We assume a 6% annual decrease in capital cost for solar PVfor 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% andunder 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 theconstruction time has been taken as 2 years, with capital cost distribution of 70% in the first year and30% in the second year.

The analysis revealed that under the base case (20,000 MW by 2022) the total investment requiredwas 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 theenvisioned targets. Therefore, there is an urgent need to explore ways to catalyze private sectorparticipation to support the Government of India in providing sufficient capital to scale up theMission 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 solarcapacity addition, ramping up local manufacturing capacity is required. The National Solar Missionalso targets to create a favourable environment for solar manufacturing and research for both PV andsolar thermal. One of the missions targets is for India to become a global leader across the solarmanufacturing value chain. This is necessary for the overall success of the National Mission as anevolving domestic industry would help decrease costs and also provide timely maintenance forprojects. Estimates for adding both solar PV and solar thermal manufacturing has been made whichcomes out as, the capital outlay for the NSM base for 20,000 MW of solar (10,000 solar PV) requiresRs.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 houris 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 Balancesheet based funding.The provisions of JNNSM allow the selected bidder (developer) to directly investin the solar power project, without the need of creating a separate SPV. Debt can be raised by thedeveloper on the strength of its balance sheet for financing the project. However, in this case, if theproject fails, the lenders will have recourse to the developersother assets and hence is generally lesspreferred by developers.


5/125


PwC Page 5 of 125

The report depicts, there are several sources of raising debt namely, commercial banks, IFCs, capitalmarkets, multilateral/bilateral agencies, export credit agencies, International banks, FIs, pensionfunds, 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, specialfeatures etc. These sources of debt has been studied in detail to evaluate which ones would be suitablefor raising finance for financing solar power projects in India. The sources of debt have been

categorised into two major heads, vis--vis, domestic and external sources. While the efficacy ofexisting financing sources such as commercial banks and Infrastructure financing Companies may beenhanced through financial engineering tools like sovereign guarantees, differential interest ratesduring loan tenures, take-out financing and securitization of loans, new sources of funding such asGreen Infrastructure Bonds, Lease financing, Clean Renewable Energy Bonds and InternationalInfrastructure/Energy Funds may be explored as well.

Equity financing is more critical for any project as compared to debt financing. When a project isidentified, the first step is to select an appropriate project developer who has willingness and ability toput in equity in the project. Efforts towards raising debt are initiated in the next step. Debt financingcant happen for a sector where interested parties, who are willing to take risks and invest equity inprojects, 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 leadershipin order to enhance investor confidence and foster private sector participation.

Apart from maximizing equity IRR, developers need to take several other factors into considerationwhile raising debt. Some of the important factors include developers financial strength, projectfeatures, possibility of importing equipment and country of import, availability of governmentguarantee, creditworthiness in international markets etc. Considering these factors and constraints,we have arrived at the most optimal debt-raising combination applicable for solar power developersunder certain specific conditions.

Some of the major recommendations that emerged from this study relate to policy and regulatory levelsuggestions, such as, establish separate exposure limits for renewable energy or solar power. Somefinancial institutions in India face a 5% cap on investments in the power sector. Renewable are a partof this allocation; therefore, investment in solar is limited by lenders investments in conventionalpower. In addition, lenders exposure is calculated over a four-year term (i.e., if a renewable project ison the books in year one, it stays there till year four, even if it is divested in year two). Discussionssuggest that these guidelines could limit solar investment and could be revisited with a specific focuson how a separate renewable energy allocation allowance could be appropriately structured. Othermeasures such as exploring financing vehicles such as solar bonds and Credit Default Swapinstruments to unlock foreign capital and evolve PPA breach of contract insurance instruments, Policyinterventions, especially to strengthen pre-qualification criteria for bidders and provide contractualflexibility to developers to choose from different market models for sale of power have also beensuggested.

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 10times of the current capacity. In the recent times the capital cost reductions for solar power decreasedby about 16% to 20%. Irrespective of the associated risks and wait and watch policy of financialinstitutions 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 Ibatch I of the national solar mission, were very low which could make the projects unviable duringlong run, But with some of the common players from phase I batch I bidding were seen re biddingduring batch II where the tariffs quoted were even lower, confirms the seriousness of developers andtheir readiness to invest and grow in the Indian solar markets. The capital cost for solar power hascome down by about 16% to 20% in the last two years. It is expected to continue the downward trendfor 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 coalincreasing day by day, thus driving up grid power prices.


6/125

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

PwC Page 2 of 100

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

NSMSolar 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 29Conclusion: 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


7/125


PwC Page 7 of 125

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


8/125


PwC Page 8 of 125

Infrastructure 46

Evacuation Infrastructure 46

Technological risks 46

Reliability on available Solar Irradiation Data 46Technology 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 65Optimal 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


9/125


PwC Page 9 of 125

1.1Commercial 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 812.1. 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 86Steps 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 projectrisk 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 sponsors/developers 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 89Clean 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


10/125


PwC Page 10 of 125

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 PlantCSP 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 ChangeNBFC 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


11/125


PwC Page 11 of 125

PV Photo-Voltaic

REC Renewable Energy Certificate

REC Rural Electrification Corporation

RES Renewable Energy Sources

RPO Renewable Purchase ObligationSPD Solar Project Developer

STU State Transmission Utility

WtE Waste to Energy


12/125


PwC Page 12 of 125

List of TablesTable 1: JNNSM Mission Targets ............................................................................................................... 15Table 2: Indian Solar PV Manufacturing Companies ............................................................................... 25Table 3: Risks Associated with JNNSM ..................................................................................................... 31Table 4: Time Horizon Classification of Risks ........................................................................................... 41Table 5: Impact of Risks ............................................................................................................................. 44Table 17: Year-wise RE capacity addition (MW) ...................................................................................... 52Table 18: Year-wise RE investment required (Rs. Cr) .............................................................................. 52Table 19: Scenario wise investment required for grid connected solar power ........................................ 58Table 20: Investment Required under NSM for Solar Power Capacity Addition ................................... 58Table 21: Investment Required under NSM for Solar Power Capacity Addition and Manufacturing .. 59Table 6: Major Risks .................................................................................................................................... 61Table 7: Financial Model Assumptions ..................................................................................................... 62Table 8: Features of different types of debt .............................................................................................. 64Table 9: Impact due to capital costs .......................................................................................................... 65Table 10: Impact due to commissioning time ........................................................................................... 66Table 11: Impact due to REC prices ........................................................................................................... 66Table 12: Impact due to CUF ......................................................................................................................67

Table 13: Impact due to interest rates ....................................................................................................... 68Table 14: Impact on cost of generation per unit due to CUF and interest rates ..................................... 69Table 15: Sensitivity in IRRs for changes in capital costs and tariff for Solar PV ................................... 70Table 16: Sensitivity in IRRs for changes in capital costs & tariff for Solar Thermal .............................. 71Table 22: Projections of Credit Availability for the Power Sector ............................................................ 72Table 23: Projections of Credit Availability for Renewable Energy .......................................................... 73Table 24: Funding capacity of select NBFCs for RE .................................................................................. 73Table 25: Capacity of Indian financial system to finance solar power projects .......................................74Table 26: Credit shortfall under different NSM scenarios ........................................................................74Table 27: Features of loans from commercial banks ................................................................................. 77Table 28: Features of loans from IFCs .......................................................................................................79Table 29: Features of debt raised from Capital Markets ...........................................................................79

Table 30: Features of debt from other domestic institutional investors ................................................. 80Table 31: Features of debt from foreign sources ....................................................................................... 82Table 32: Features of debt from export credit agencies ........................................................................... 83Table 33: Features of debt from international commercial banks .......................................................... 83Table 34: Features of debt from other foreign sources ............................................................................ 84Table 35: Sensitivity of sources of funds on IRR ...................................................................................... 85Table 36: Risk Matrix ................................................................................................................................. 96Table 37: Rates of PFC Rupee Term Loans ............................................................................................... 98Table 38: Difference between Gujarat and NVVN solar schemes .......................................................... 105

List of Figures

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

Figure 13: % Addition of RE Technologies ................................................................................................ 50Figure 14: Capital Cost Trend for Solar PV (Rs. crores/ MW) ................................................................. 54
http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022018http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022018http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022026http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022026http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022027http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022027http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022055http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022055http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022058http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022058http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022059http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022059http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022059http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022058http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022055http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022027http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022026http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022018


13/125


PwC Page 13 of 125

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

Figure 33: Sources of raising finance .........................................................................................................76Figure 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.
http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022077http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022077http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022078http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022078http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022078http://d/Documents%20and%20Settings/vineetb285/Desktop/Shakti-NSM%20conference/Final%20ClimateWorks-%20Report.docx%23_Toc320022077


14/125


PwC Page 14 of 125

In February 2010, the Central Electricity Regulatory Authority (CERC) announced benchmarkfeed-in tariffs for the financial year 20102011 of INR 17.91 (USD 0.36) per kWh for PV andINR 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 allowinvestors to achieve an internal rate of return of about 16%17% after taxes. The tariffsmentioned above were applicable for those solar power projects that had their PPA signed onor before 31stMarch, 2011. As capital costs decreased, CERC revised the tariffs for the financialyear 2011-2012. As per the revision, a feed-in-tariff of INR 15.39 per kWh for PV and INR 15.04per kWh for CSP projects will be applicable for projects whose PPAs are signed after 31stMarch, 2011. Further, if accelerated depreciation at the rate of 80% is considered, the netlevelized tariff would work out to Rs. 12.94 and Rs. 12.69 for solar PV and solar thermalprojects respectively.

Chapter 1: Jawaharlal NehruNational Solar Mission - A

sound beginning

IntroductionThe Government of India together with various state governments has been working towardsintroducing policies and creating an environment conducive for developing solar power in thecountry. The Jawaharlal Nehru National Solar Mission (JNNSM),launched in November 2009, is onegiant step in that direction. JNNSM is one of the eight National Missions laid out in Indias NationalAction Plan on Climate Change (NAPCC) and it aims to install 22,000 MW of on- and off-grid solarpower using both PV and CSP technologies by 2022 as well as a large number of other solarapplications such as solar lighting, heating, and solar powered water pumps. The JNNSM of India is aone of its kind countrywide initiative and it aims to address the shortcomings of prior schemesthrough revised and more attractive feed-in tariffs, a single-window application process andrenewable 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 inIndia. The bundling scheme is one such example. Under the bundling scheme, cheap unallocatedpower from central power stations is bundled with the more expensive solar power for sale todistribution utilities. This blending of conventional power with solar power is recognised as a highlyinnovative method to make solar power more affordable by the solar industry worldwide. With theobjective of reducing the cost of solar power tariffs, the Mission has opted for a reverse biddingmechanism wherein reverse bids (discounts) on benchmark tariffs set by CERC are invited fromprospective 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 VyaparNigam Ltd (NVVN) has been designated as the nodal agency for the execution of Phase I of theMission. 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 developersand bundle it with cheaper coal-based power from unallocated NTPC plants before selling the mixedpower 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 tomigrate into it under the Migration scheme. Under this scheme, grid-connected solar projects thatsigned PPAs prior to November 19, 2009, were eligible to migrate to JNNSM under certain conditionsuntil February 29, 2010. This allowed them to avail benefits offered by the Missions incentiveframework. Further, through the Mission, the Government has instituted a progressive and forward-


15/125


PwC Page 15 of 125

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

Mission RoadmapIn 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 theapplication segments is as follows:

Table 1: JNNSM Mission Targets

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

Figure 1: JNNSM Framework

S No. Application SegmentTarget 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


16/125


PwC Page 16 of 125

Ministry of PowerThe Ministry of Power (MoP), directly under the purview of the Government of India, is primarilyresponsible 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 ofNTPC, for entering into PPAs and power sale agreements (PSAs) with power developers and stateutilities respectively. The Mission states that in order to incentivize a large number of solar powerprojects and minimize tariffs, solar power will be bundled with cheap unallocated power from centralpower stations and then sold to distribution utilities. The Ministry is responsible for allocating anequivalent megawatt capacity, from the Central unallocated quota to NVVN for bundling together withsolar power.

CERCCERC, the chief regulatory body in the country, issues guidelines for fixing feed-in-tariff for purchaseof solar power taking into account current cost and technology trends. Under the National SolarMission 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 guidelinesand solar specific regulations in order to achieve 3% solar RPO by 2022. Additionally, the CERC alsonotifies the Ministry of Power about the rates at which the unallocated power from the Central quotais to be bundled with solar power and sets durations for the PPA between NVVN and the projectdevelopers.

NTPCSet up in 1975, NTPC is Indias largest power company. Apart from power generation, which is the

mainstay of the company, NTPC has also ventured into consultancy, power trading, ash utilisation andcoal 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 basedstations & another naptha/LNG based station. The company has set a target to have an installedpower generating capacity of 1,28,000 MW by the year 2032. The capacity, it is envisaged, will have adiversified 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 nearly28% of its portfolio by 2032.

NVVNAs 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 byentering into a PPA with solar power generation project developers who will be setting up solarprojects during the next two years, i.e., before March 2013 and are connected to the grid at a voltagelevel of 33 kV or above. For each MW of installed capacity of solar power for which a PPA is signed byNVVN, the Ministry of Power shall allocate to NVVN an equivalent amount of MW capacity from theunallocated quota of NTPC coal based stations and NVVN will supply this "bundled" power to thedistribution utilities.

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


17/125


PwC Page 17 of 125

Policy IncentivesGuidelines laid out by the JNNSM and the NVVN Mission statements have raised large businessopportunities within the country. JNNSM Mission document, in particular, encompasses the objectiveof maximising indigenous content which, it is envisaged, will lead to the establishment ofmanufacturing 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 thischallenge.

Figure 2: Solar Policy Incentives


18/125


PwC Page 18 of 125

NSM (Phase I Batch I)The Bidding process under the first phase of the National Solar Mission was split into two batcheswith the understanding that this circumspect approach would leave enough room for rectification ifsome flaws or shortcomings that may emerge in the first batch of bidding. The following diagrammaticrepresentation 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 anindividual 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 worthanother 84 MW was contributed through the Migration Scheme that permits projects planned beforethe 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 tostart with, and then the government invited reverse bids asking for discounts on the initial benchmarktariff of Rs 17.91/ kWh for PV projects and Rs 15.40/ kWh on CSP projects. Thirty PV projects worth acumulative capacity of 150 MW and seven CSP projects worth a cumulative capacity of 470MW wereselected under Batch I of the scheme. Remarkably, the bidding process did result in exceedinglycompetitive 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 fora PV bid-5 MW

CSP Segment

Benchmark Tariff Rs 15.40/kWh

500 MW on Offer

Maximum size fora PV bid-100 MW

400 bids for 650 MWon offer

Reverse Bidding

PV Segment

30 Projects worth150 MW selected

Tariff Range: Rs10.95-12.76/kWh

CSP Segment

7 projects worth470 MW selected

Tariff Range Rs.10.58-12.33/kWh


19/125


PwC Page 19 of 125

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

Figure 4: Recent Market Developments under Phase I

Among solar PV projects, the highest discount offered during the round of bids invited for the firstbatch 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 successfulbidders were new players in the sector. It can be deduced that the larger industrial houses failed toqualify as they did not bid aggressively, partly because of the 5 MW cap imposed on the size of theprojects, presumably rendering the size of the project vis--vis the organizational commitmentrequired, unattractive. New entrants have, as has emerged, made good use of the opportunity affordedby the minimal pre qualification requirements in the policy. For example, there was an absence of anytechnical experience requirements in the Policy. The policy merely required a bank guarantee of Rs 3million per MW along with unconsolidated, audited accounts for the last four years as a proof of thenet financial worth of the companies. The following diagrams illustrate the price discovery mechanismunder Batch I bidding.

10

12

14

16

18

Rs/kWh

Bidders

PV Bid tariff Average Tariff Benchmark Tariff

Average discount - Rs 5.75/

Batch I

Figure 5: JNNSM Batch I Solar PV Bids


20/125


PwC Page 20 of 125

Among CSP projects, the highest discount offered was Rs 4.82/ kWh while the lowest successful bidwas for Rs 3.07/ kWh. As such, the average discount offered on the benchmark tariff of Rs 15.40/ kWhwas Rs 3.65/ kWh. Notably, all CSP projects have made use of the accelerated depreciation of 80% inthe first year. Consequently, the base feed-in-tariff before discount worked out to Rs 13.45/ kWhinstead of Rs 15.40/kWh. The new tariff range taking into account the accelerated depreciation wasfrom 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 wonduring the bidding process.

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

State Level Initiatives and Development TargetsSpurred by national level initiatives and policy push, several states like Gujarat, Rajasthan, MadhyaPradesh, Karnataka and Jammu & Kashmir have also formulated and adopted solar policies fordevelopment of solar energy projects in their respective states. Salient Features of these policies havebeen 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 thedeclared 500 MW in their policy. Of the 716 MW, 365 MW has been allocated to Solar PV andthe remaining 351 MW to Solar Thermal Power plants.

Major players in the state include AES Solar, Astonfield Solar, Azure Power Ltd. withallotments 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.

0

2

4

6

8

10

12

14

16

18

Rs/kWh

CSP Bid Tariff

Average Tariff

Benchmark Tariff

Avera e Discount - Rs 3.65/ kWh

Figure 6: JNNSM Batch I Solar Thermal Bids


21/125


PwC Page 21 of 125

It has been mandated that 200MW of solar power shall be developed till 2012-13 and anadditional 400MW power shall be developed between 2014 and 2017. The State also plans todevelop 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 dutyshall 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 theseattributes to be evaluated and their inter-se weightage, the guidelines for evaluation and thepassing score on attributes /in aggregate required for pre-qualification shall be specified inthe bid documents inviting bids for pre-qualification.

The minimum project capacity shall be 1 MW. However, if MNRE launches any scheme forlower 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 tariffhave 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


22/125


PwC Page 22 of 125

NSMSolar projects (Phase I Batch II)Building further on the lessons learnt from the first batch of bidding, bids were invited for acumulative capacity of 350MW in the second batch of Phase I. The entire quota of 350MW was forcapacity in solar PV only. CERC revised the benchmark tariff for solar PV in light of the droppingtrends 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 forprojects 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

Benchmark Tariff Rs15.39/kWh

350 MW on Offer

Capacity Maximum:

20 MW (+-5%)Minimum: 5 MW Inmultiples of 5 MW

Total Capacity on Offer:350 MW

Reverse Bidding

PV Segment

27 Projects worth350 MW selected

Tariff Range: Rs

7.49-9.44/kWh


23/125


PwC Page 23 of 125

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

Financial Criteria for bidding: The net worth of the company was required to be greater thanor equal to the value calculated at the rate of Rs 3 crore per MW of the project capacity up to20 MW. For every MW additional capacity beyond 20 MW, an additional net worth of Rs 2crore had to be demonstrated.

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

Deadline for achieving financial closure has been raised to 210 days (7 months) from theearlier 180 days (6 months). The timeline for the commissioning of the project has also beenextended 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 thatthe 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 ofrespective part commissioning of the project.

As per the revised guidelines, the controlling shareholder of the project must now maintain50% share for 1 year (up from 26% earlier)

Domestic requirement Both cellsand modules have to be manufactured in India. Thisdomestic 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 leastone 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 resultsThe 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 SolaireDirect was for a 5 MW capacity project and the quoted tariff was Rs. 7.49 per KWh. 1The tariffsquoted by winning bidders in Batch II bidding ranged from Rs. 7.49 to Rs. 9.44 per kWh. This tariffrange is remarkably lower than the one discovered in Batch I. In fact, the highest winning tariff inBatch 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 extentbe 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 atRs.9.34, Sai Sudhir at Rs.8.22, VS Lignite at Rs.8.54, Sunborne Energy at Rs.8.99. Azure Powerquoted at a price of Rs.7.91 (50 MW), Sujana Energy at 9.09,and Kiran Energy quoting Rs.9.34 for a50 MW Project.

For example, besides prevalent market conditions such as dropping module prices, we understandthat by relaxing the 5MW size capping on PV projects to 20MWlarger companies were encouraged toparticipate and it was one of the contributing reasons that resulted in aggressive discounts. Some ofthe 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.

1EQ International Magazine : www.eqmqglive.com


24/125


PwC Page 24 of 125

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

.

Figure 9: Results of JNNSM Phase I Batch II Bidding

0

2

4

6

8

10

12

14

16

18

Rs/kWh

PV Bid Tariff

Average Tariff

Benchmark Tariff

Average Discount - Rs 6.57/ kWh


25/125


PwC Page 25 of 125

Overview of Manufacturing ScenarioThere are about 90 solar PV manufacturing companies in India; with 60 engaged in systemintegration. Of the 9 and 21 SPV cell and module manufacturers, 6 and 15 cell and module plantsrespectively are located in south India. The following table gives a brief description of the majorplayers 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 Wp2respectively. 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 theremaining 25% accounts for off-grid applications, PV installations in India almost entirely account foroff-grid connectivity and small capacity applications. In urban areas, solar PV technology findsapplication in street lighting, traffic lighting and domestic power backup whereas in rural areas itpowers 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 majorbarriers for the industry is the absence of a manufacturing base for the basic raw material siliconwafers. The industry, as such, relies heavily on imports from international markets and is exposed tofluctuating prices and availability. For the year 2008-09, the total value of Indias imported rawmaterial 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 thecumulative domestic production of solar PV till 2009 catering to foreign markets. But as aconsequence of the global economic slowdown in 2009, the offtakes from international clientsreduced and resulted in low capacity utilization for Indian manufacturers. To add to it, domesticdemand remained frugal.

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

2MNRE presentation, Solar Energy Conclave, January 20103Report on solar PV industry in India, May, 2010 India Semiconductor Association


26/125


PwC Page 26 of 125

As such, new investments are being planned by many players across the value chain comprising of rawmaterial production, solar cell or module manufacture and system integration. Players such as LancoSolar have a planned capacity addition of about 1330 MW in raw material with a planned capacity of1250 MW in polysilicon and 80 MW in wafers. The BHEL-BEL joint venture also plans to have acapacity of 250 MW in wafers. To add to the 800 MW manufacturing capacity in solar cells, furtherinvestments are planned by companies such as Tata BP Solar, Moser Baer PV, Indo Solar, MicrosolPower (P) Ltd. and Central Electronics Ltd. India has a solar module assembly line of 1250 MWcapacity and apart from Tata BP Solar and Moser Baer Photovoltaic, Rajasthan ElectronicInstruments Ltd., PLG Power and Titan Energy Systems Ltd. have large investments planned here aswell.


27/125


PwC Page 27 of 125

Chapter 2: Present Status offinancing 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 outlooktowards solar power in India and how it may evolve over a period of time. Stakeholders such asfinancial institutions, projects developers and equipment manufacturers have been approached for thepurpose and they have been extremely supportive of our endeavour.

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

JNNSM Tariff and policy frameworkJNNSM has adopted a fixed levelized tariff policy whereby a fixed tariff would be paid to the developerover the entire period of 25 years (or the period for which PPAs are signed). Welspun Energy, aleading solar power developer in India, suggests that a constant levelized tariff would be unsuitable inthe initial years, wherein cash flow requirements are high, and would contribute almost entirely toprofits 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 payablefor the first 12 years and Rs. 5/ kWh for the remaining 13 years of the contract. Although on levelizedbasis, this translates to a tariff similar to the one offered under the Mission, the stepped structure ismore aligned with the cash-flow structure of a solar project.

Next, the reverse bidding mechanism being followed is not particularly popular among developers. Asper Moser Baer India Limited, the reverse bidding mechanism skews down the tariffs to very lowlevels which may render many projects unviable. They raised their concerns regarding the high bankguarantees to be paid to NVVN as they feel that it could cause a huge blockage of money for playerslike 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 worthqualification 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 acompetitor! An interesting insight into the matter is the fact that among 301 bidders during thereverse 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 ofbidders.

A leading private equity firm in Delhi also expressed reservations regarding the PPA and PSAmechanism proposed by the Mission. According to them, it is improper to bank heavily on the creditworthiness of state distribution companies many of whom have, notoriously in the past, defaulted onseveral 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 totalReturn on Equity (RoE) is an important parameter that helps them decide whether a propositionwould be profitable or not, they would be comfortable owning and operating a power plant only if theproject has a good expected internal rate of return (IRR), which they feel might be currently hamperedby 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 fixingplayers to buy solar power.


28/125


PwC Page 28 of 125

Funding Options and RisksCorporations such as Power Finance Corporation and Yes Bank have been actively involved in therenewable energy space. Specifically, Power Finance Corporation has funded a number of projectsunder the Gujarat Solar Policy initiative while under the JNNSM it has funded only one project of 2MW 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 Pradeshadding up to 10MW and two other solar thermal projects. Yes Bank did not albeit fund any solar PVprojects 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 perceivecertain risks and uncertainties associated with the technology. Many of these issues have yet to besatisfactorily addressed and they are willing to wait for some projects to come up successfully beforethey can start funding any.

For lending agencies, issues regarding technology, estimation of solar irradiation and availability ofevacuation infrastructure continue to be of high concern. As per Yes Bank, as of now, on-ground solarradiation 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 foresighton 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. Intheir opinion as well, banks do not have enough data or experience to fall back on as a means to verifyclaims made by project developers. Project developers themselves find it difficult to substantiate theirclaims through verifiable data or proven track record. An interesting suggestion put forth was that, thegovernment could impose obligations on banks to lend a specific fraction of their entire portfolio torenewable energy/solar power projects. The mechanism could be similar in nature to the RPOmechanism embodied in JNNSM.

As discussed above, it is indeed imperative for banks to ensure payment security. The fixing of RECprices for a period of five years instead of declaring prices for a given year, therefore, is welcomed bythe project developers. This would definitely give the banks a better idea about developers revenuestream. However, as was pointed out during interaction with Welspun Energy, RECs are generallytraded only at the end of the year to meet the compliance requirements. Therefore, the cash flowsremain scant during the rest of the year and developers may still find it difficult to pay their quarterlyor half-yearly instalments of loan repayment.

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

ThreatsAs per opinions expressed by Welspun Energy, the likelihood of Indian manufacturers meeting theimminent steep demand for equipment is low. The industry is not well developed at this stage andresources are limited. Moreover, prices offered by Chinese manufacturers, who are content withrealising 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 away, substantiates the fact that they are forced to supply at low profit levels. Further, as far as solarthermal technologies are concerned, a leading private equity firm in Delhi pointed out that patentedtechnology is a major concern as it increases the costs involved. As of now, there are no popularexamples of solar thermal technologies being run successfully across the world.

On the Missions emphasis on use of indigenous technology, Mr Guptaof EQ International, said thatdevelopers should be given the flexibility to execute the project in the most economic manner. While


29/125


PwC Page 29 of 125

he is in favour of developing a domestic eco-system for the solar industry, he also believes that in theshort 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 notsee any harm in importing technology if it enables them to offer power at a relatively lower tariff. Tofurther 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 criticalcomponents that may hamper the NSM, the MNRE announced, in the guidelines issued for the secondbatch of Phase I projects, that domestic content requirements would be relaxed for PV modules madefrom thin film technology or concentrator PV cells and project developers would be free to importthem.

FutureAs 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 morepronounced 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 financingBased on the above stakeholder consultations and our broad desk research, the following points haveemerged 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 unchartedterritory. The funding available is primarily non-recourse in nature. Banks are willing to financeprojects that are backed by a companys strong balance sheet and are cautious about providingproject-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 forsetting 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 respectivecompanies balance sheet. Now, this poses a stiff challenge for new entrants in the market. Many newproject developers who do not have the backing of a strong balance sheet find it difficult to secureloans 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 projectsgot financial closures are being backed by the respective companysbalance sheet. A Brief snapshot ofnumber of projects financed by consulted FIs in India

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


30/125


PwC Page 30 of 125

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 thestate utilities for buying and selling solar power respectively. Project developers seek funding againstthese 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 projectedreturns from these projects. Although some FIs acknowledge that some of the proposed technologieshave been successful elsewhere, they are not convinced about their feasibility in Indian conditions yetand 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 theprojects 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 termsof whether or not they may be capable of developing and presenting a feasible business proposal.

Additionally, FIs and project developers believe that the Missions emphasis on use of indigenoustechnology could have a dampening effect on the progress of solar power projects in India. While onthe one hand, the Indian manufacturing industry will take time to develop in order to be able to meetthe demand for equipment, it may not be able to offer any significant cost advantage over importedtechnology 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 morefront ended tariff schedule which enables the lenders to foresee a more secure cash flow pattern fromthe projects during the initial years of operation as compared to projects under the NSM. Further, theGujarat State Policy mandates the state transmission utility, GETCO, to lay the transmission linebetween 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 upsuccessfully 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 competencelevel to evaluate solar power projects and develop an understanding of the functioning andimplementation of various organisations and policies involved.

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


31/125


PwC Page 31 of 125

Chapter 3: Challenges toadvancing the NSMAs per the targets set out by the JNNSM and other state initiatives, the Indian solar sector has anumber of projects in pipeline scheduled for commissioning in the next two-three years. However, thegovernment 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 arebeing perceived by the financial institutions, bankers and equity providers. These constraints andchallenges can be classified into various categories of risks that need to be mitigated in order for theIndian solar industry to achieve its targets. These risks are presented below. It is important to notethat some of these risks are already being addressed, albeit to different degrees, by the constantlyevolving 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:

4While 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 listedin this matrix are the generic project finance risk that are faced by all categories of infrastructureprojects, 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 equity5 Timely financial Closure

6 Exposure Limits

Table 3: Risks Associated with JNNSM

7/25/201