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INVESTMENT & FINANCING PATTERN IN RENEWABLE ENERGY PROJECTS (WITH REFERENCE

TO SOLAR & WIND ENERGY PROJECTS) - A COMPARATIVE STUDY

Submitted by: Dhiren Patel & Purvang Shah

Diploma in Financial Management Batch : Jan-2015 to July-2015

Ahmedabad Management Association

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TABLE OF CONTENTS

INTRODUCTION ................................................................................................................................ 3

Renewable energy scenario......................................................................................................... 3

RE potential and growth in India ................................................................................................ 3

Enabling framework for growth of Renewable Energy sector in India ...................................... 5

Other planned initiatives ............................................................................................................. 6

Incentives available to Renewable Energy Projects in India ...................................................... 7

Investment Opportunities ............................................................................................................ 8

Financing Renewable Energy in India ...................................................................................... 10

OBJECTIVE OF THE STUDY ............................................................................................................ 12

The present study is strategically aimed: .................................................................................. 12

METHODOLOGY ............................................................................................................................. 13

SCOPE OF THE STUDY ..................................................................................................................... 14

LIMITATIONS OF THE STUDY ......................................................................................................... 15

STATE GOVERNMENT POLICY FOR RENEWABLE ENERGY PROJECT ............................................... 16

Rajasthan State: Incentives / Facilities for Solar Power Projects ............................................. 16

Maharashtra State: Incentives/Facilities for Wind Power Projects........................................... 16

FINANCING OPTIONS AVAILABLE FOR RENEWABLE PROJECTS IN INDIA ....................................... 17

FINANCIAL PATTERN AND FINANCIAL MODEL .............................................................................. 18

FINDINGS OF THE STUDY ............................................................................................................... 20

CONTACTED COMPANIES ............................................................................................................... 21

QUESTIONNAIRES ........................................................................................................................... 22

REFERENCE WEBSITES ................................................................................................................... 27

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INTRODUCTION .

Renewable energy scenario Renewable energy is one of the cleanest sources of energy options with almost no pollution or carbon Emissions and has the potential to significantly reduce reliance on coal and other fossil fuels. By expanding renewable energy, world can improve air quality, reduce global warming emissions, create new industries and jobs, and move world towards a cleaner, safer, and affordable energy future. The quest for energy independence, economic growth, and environmental sustainability increasingly suggests the importance of renewable energy sources across the globe. Renewables are seen not only as sources of energy, but also as tools to address many other pressing needs, including: improving energy security and access; reducing the health and environmental impacts associated with fossil and nuclear energy and mitigating greenhouse gas emissions. In 2013, renewables accounted for 10 percent of the world’s global energy consumption and around 19 percent of global electricity needs were satisfied by renewable sources. India’s substantial and sustained growth has placed enormous demand on the country’s natural resources. Today, India imports substantial quantities of gas, oil and coal in order to meet its growing energy demand. The increasing dependence on imported fuels may create a serious threat to the future fuel security of the country. In addition, the country’s 254 GW2 of power generation capacity based mainly on conventional sources has further strained the natural resources. Around 60% of India’s current power generation capacity is based on coal which is expected to remain the dominant power source in the future. However, the coal sector is facing many challenges and India is increasingly relying on coal & oil imports to meet its requirements of energy, thereby exhibiting a lot of pressure on Indian economy from these high import factors.

RE potential and growth in India India meets close to 60-65% of its electricity needs from fossil fuels and is expected to continue doing so in the foreseeable future. This poses questions on cost of electricity supply in future, environmental impacts and energy security. At this juncture, Renewable Energy (RE) is being seen as one of the important means to meet the growing power needs of the economy while enhancing energy security through diversification of fuel sources and providing opportunities for mitigating greenhouse gas emissions. India has vast renewable energy potential through wind, solar, biomass, small hydro etc. The potential is Concentrated in certain parts of India. The wind and solar potential is mainly in the southern and western States viz. Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Gujarat and Rajasthan, however the exercise on mapping of potential is continuing in several other areas in the country.

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The renewable power generation portfolio stands at 33.79 GW out of the total 254 GW in the country, as of December 2014. India is already the world’s fifth largest producer of wind power. Other renewable energy

Source : Investors Guide - Re-invest 2015 Sources like solar, small hydro, biomass power and bio-fuels are also being increasingly tapped. As per the present estimates, India has an estimated renewable energy potential of about 895 GW from commercially exploitable sources with 750 GW solar power potential assuming only 3% wasteland is made available. Further, there exists significant potential from decentralized distributed applications for meeting hot water requirement for residential, commercial and industrial sector through solar energy and also meeting cooking energy needs in the rural areas through bio-gas. Renewable energy has great capacity

Technology Potential (MW)

Wind 102,800 (80m hub height)

Small Hydro (up to 25MW) 19,700

Biomass including biogases co-generation (including waste to energy) 22,500

Solar 50MWp/km2

Source: Ministry of New & Renewable Energy (MNRE)

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to usher in universal energy access. In a decentralized or standalone way renewable energy is quite appropriate, scalable and viable solution for providing power to un-electrified or power deficient villages. Around 1.1 million households are using solar energy to meet their lighting energy needs and almost similar number of the households meets cooking energy needs from bio-gas plants. Solar Photo-voltaic (PV) power systems are being used for a variety of applications such as rural electrification, railway signaling, microwave repeaters, TV transmission and reception and for providing power to border outposts. Over 10000 remote and inaccessible villages have been provided with basic electricity services through distributed renewable power systems.

Enabling framework for growth of Renewable Energy sector in India Existing policy and regulatory support

Electricity Act 2003: Launched in June 2003, this is the most important piece of legislation for the sector and nullifies all earlier enactments that governed the electricity businesses. EA 2003 provides for policy formulation by the Government of India and mandates State Electricity Regulatory Commissions (SERCs) to take steps to promote renewable and non-conventional sources of energy within their area of jurisdiction. It calls to promote co-generation and generation of electricity from renewable sources of energy by providing suitable measures for connectivity with grid and sale of electricity to any person, and also specify, for purchase of electricity from such sources, a percentage of total consumption of electricity in the area of distribution licensee. Further, EA 2003 has explicitly stated the formulation of National Electricity Policy (NEP), National Tariff Policy and plan thereof for development of power systems to ensure optimal utilization of all resources including renewable sources of energy.

National Electricity Policy 2005: Aims to exploit feasible potential of renewable energy resources, reduce capital costs, promote competition and private sector participation. The percentage for purchase of power from non-conventional sources should be made applicable for the tariffs to be determined by the SERCs. Progressively the share of electricity from non-conventional sources would need to be increased as prescribed by SERCs. Such purchase by distribution companies shall be through competitive bidding process. It essentially reemphasize the need of harnessing RE generation.

National Tariff Policy 2006: Formulates that a minimum percentage of RE procurement should be made applicable. Also, a preferential tariff should be determined by SERC’s to enable RETs to compete and procurement of RE should be through competitive bidding.

NAPCC 2008: The National Action Plan of Climate Change by the Government of India identifies 8 core national missions running through 2017, envisaging several measures to address global warming. One of the missions states that a dynamic minimum renewable purchase standard (DMRPS) be set, with escalation each year till a pre-defined level is reached. It set targets of 5% RE purchase for FY 2009-10, with an increase of 1% in target each year to reach 15% renewable energy penetration by 2020. SERCs may however set higher percentages than this minimum at each point in time.

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Renewable Purchase Obligation (RPO): SERCs set targets for distribution companies to purchase certain percentage of their total power requirement from renewable energy sources know as RPO. The states have already specified their RPOs ranging from 2% to 14% of their total energy demand to be met by renewable energy. In order to address the mismatch between availability of RE sources and the requirement of the obligated entities to meet their RPO across States, the REC mechanism was introduced in 2010 to enable and recognize interstate RE transactions. The REC mechanism facilitates emergence of large number of cross-border RE transactions based on non-firm RE sources, while at the same time, enhancing the volume of cross-border RE transactions based on firm RE sources as well. RECs serve as a motive for high RE potential states to further develop their RE potential and for lesser potential states to develop maximum RE as they can.

Other planned initiatives

Solar park scheme: Solar parks are concentrated zones of development for solar power generation projects, demarcating an area that is well characterized, properly infra-structure and where the project risks are minimized & clearances are facilitated. As per the National Schemeon Draft Solar parks, MNRE will setup 25 solar parks of capacity sizes between 500 MW to 1000 MW. It will provide support of INR 20,00,000/MW to the park development agencies.

National offshore wind policy: Preliminary assessments suggest interesting prospects of development of offshore wind energy in India. The MNRE in order to tap this potential is currently working on a policy for deployment of offshore wind energy projects in the Exclusive Economic Zone (EEZ) of the country. The policy proposes to address issues such as resource assessment & surveys, seabed allocation & lease arrangement, facilitation in clearances and approvals and evacuation of power generated from offshore wind power projects. As a first step towards development of offshore wind sector in India a MoU was signed on 1st October 2014 for setting up of a Joint Venture Company (JVC) towards undertaking the First Demonstration Offshore Wind Power Project in the country. The MoU was signed by MNRE, National Institute of Wind Energy (NIWE), and consortium of partners consisting of National Thermal Power Corporation (NTPC), Power Grid Corporation of India Ltd (PGCIL), Indian Renewable Energy Development Agency (IREDA), Power Finance Corporation (PFC), Power Trading Corporation (PTC), and Gujarat Power Corporation Ltd (GPCL).

Transmission infrastructure: This involves development of a network specifically for wheeling of RE power. The proposed evacuation infrastructure will be capable of evacuating power from proposed capacity additions such as UMPPs in Leh. It proposes a high capacity transmission system (Green energy corridor) that will evacuate renewable power from RE rich states to load centres and make make pockets of RE generation grid interactive. It will be integrated with the existing grid and foster reliable forecasting of RE based generation and reduce evacuation losses.

Green energy transmission corridor: In 2012, Powergrid has planned high capacity transmission systems (green energy corridors) for evacuation of renewable power from RE rich states to load centers with an aggregate capital outlay of around INR 425 billion. With the

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implementation of the Green corridor, the pockets of the RE generation would get grid interactive and thereby the restrictions on RE evacuation, losses (as RE would be connected at EHV than HV level) would reduce.

RE resource assessment databases: To locate potential RE rich sites in the country through field measurements, India has developed data bases for renewable energy resource assessment. This has been done in a bid to promote development of utilization of RE in the country. The National Institute of wind energy(NIWE) has developed the wind atlas of India. NIWE also collects data from Solar Radiation Resource Assessment (SRRA) stations to assess and quantify solar radiation availability, quality of data assessment, processing, modeling and to make solar atlas of the country.

Incentives available to Renewable Energy Projects in India Government of India provides a mix of tax and non-tax benefits to promote these technologies, so as to create an enabling investment climate where these projects are taken up by market forces. The different incentives offered by central and state governments can be broadly illustrated as under:

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Source : Investors Guide - Re-invest 2015

Investment Opportunities The renewable energy sector in India is full of opportunities and merits careful consideration by market participants. The Indian renewable energy market is highly attractive as it has the potential to reduce India’s rising demand supply gap, hence becoming a key cog in the wheel for India’s energy security strategy. The government in India has placed and encouraging policy & regulatory framework with a combination of feed-in tariffs, renewable procurement obligations, and Renewable Energy Certificates. The most dominant asset classes, wind and solar, have attracted considerable supplier interest and hence equipment and EPC is available at increasing competitive rates thus boosting margins. The JawaharLal Nehru National Solar Mission (JNNSM) and several state-level solar policies are helping

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develop solar energy market. Recent budgetary allocation for generation based incentives and reintroduction for accelerated depreciation for wind power will spur investments in wind energy. The size of the renewable energy market will see further growth as the application of Renewable Purchase Obligation expands to cover open access and captive consumers. Existing targets JNNSM: The JNNSM was launched in January 2010 by the Government of India under the National Action Plan of Climate Change (NAPCC). It is envisaged that as a result of rapid scale up as well as technological developments, the price of solar power will attain parity with grid power by the end of the Mission period, enabling accelerated and large-scale expansion thereafter. The mission includes a majorinitiative for promoting solar photovoltaic (PV) applications. It had three phases out of which the first phase finished in 2013, and subsequent phases are under way which target a capacity addition of 20,000 MW in India via grid connected solar power plants. Apart from grid connected targets, JNNSM also set up targets for off grid applications and Solar Thermal in India.

MNRE strategic plan till 2017: This aims that renewable energy source based generation will make up a significant part of India’s installed power capacity (targets 82 GW of installed capacity via renewable energy sources by 2020). MNRE has also been continuously revising targets corresponding to the market factors such as reducing prices of renewable source based generation including solar and the MNRE is committed to achieve these targets much in advance of the set time limits. State targets: Apart from the national renewable energy targets, individual states have their own specific renewable energy policy targets as per their feasibility and potential. Wind and solar dominate the following table lists select states with solar policies and their planned solar targets:

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The following table lists down select states with wind power policies and their planned wind power targets:

Financing Renewable Energy in India Immense potential for Renewable Energy source based electricity generation coupled with policies and plans for harnessing it has opened up vast opportunities for this sector in India. India witnessed globally the third highest investments in solar water heating capacity and the fourth highest investments in CSP and wind power in 2013. Also, India saw record small-scale project investment of USD 0.4 billion. FDI in the renewable energy sector

100% Foreign Direct Investment (FDI) in renewable energy is permitted.

FDI inflows in renewable energy industry from April 2000 – February 2013 were about USD 2.5 billion

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During 2006-09, India’s annual total renewable energy investment remained between USD 4 billion and USD 5 billion. Investment has risen rapidly since then, from USD 4.2 billion in 2009 to USD 12.3 billion in 2011-12. Higher rate of investments in these years corresponds to incentivization schemes by Government of India such as accelerated depreciation in wind sector. While wind continues to receive the majority of investment, solar has seen the highest growth, and the gap between the two is falling rapidly.

Financing Cost For RE Projects in India

Source : Investors Guide - Re-invest 2015 In view of recent development in solar technology, government of India plans to hasten the growth and looking at steep fall in the solar prices there could be possible addition of 1 lakh MW solar capacity in next 5 years and also in other renewable. If it is so, investment requirement for solar itself will be nearly 100 billion USD in next 5 years. To meet the financing requirement, more and more foreign investors are being attracted owing to potent natural resources, large-scale investment opportunities, and attractive Government incentives. Wind and solar sectors are expected to garner massive overseas investments in the coming years. All efforts are being made to attract FDI from investors and autonomous power producers internationally.

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OBJECTIVE OF THE STUDY . The present study is strategically aimed:

To help the investors in making right long term choice while selecting investment options from renewable energy sources like solar and wind

To find out the ROI and Payback period on investment made

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METHODOLOGY

Primary data has been collected through questioners/Interviews from senior management from Industries and subject matter experts with specific focus on Wind & Solar farm operations

Secondary data has been collected on Government Policies and incentives, issues pertaining to investment decision depending upon need and relevance.

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SCOPE OF THE STUDY

Area of study will be limited to Solar and Wind energy projects.

An effort will be made to identify strengths and issues in project selection.

A study will provide insight in financing pattern on investment made.

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LIMITATIONS OF THE STUDY

Study does not cover technology used in specific project & its impact on the efficiency of the output.

Study is limited to two states: Rajasthan & Maharashtra.

Calculations are based on certain assumptions & data received from companies.

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STATE GOVERNMENT POLICY FOR RENEWABLE

ENERGY PROJECT .

Rajasthan State: Incentives / Facilities for Solar Power Projects Incentives

1. Exemption from Electricity Duty: - Consumption of electricity generated by Eligible Power Producers for its captive use or for sale to a nominated third party will be exempted from Electricity Duty @ 50% for a period of 7 years from COD

2. Grant of incentives available to industries: - Generation of electricity from Non-conventional Energy Sources shall be treated as eligible industry under the schemes administered by Industries Department and incentives available to industrial units under such schemes shall also be available to the Power Producers.

3. Single Window Clearance: A State Level Empowered Committee consisting of following will

provide single window clearance on proposals received for developing the power plants based on Non-Conventional Energy Sources.

4. The Government land required for power projects based on non-conventional sources of energy

shall be allotted to Power Producer at concessional rates viz, 10% of DLC rates Rajasthan is likely to emerge as the power house of the country with the possibilities of setting up installed capacity exceeding 100,000 MW.

5. Generation of electricity from solar power plant shall be treated as eligible industry under the schemes administered by the industries department and incentives available to industrial units under Rajasthan development promotional scheme shall be available to the solar power projects.

Maharashtra State: Incentives/Facilities for Wind Power Projects Incentives

1. Average around 60 Lacs / WTG for Private Land, means cheaper than avg.market rate

2. Generation based incentives

3. Accelerated Tax benefit

4. Tax holidays for 10 years under income tax act.

5. Developer/Investor can be allotted Govt barren land (permissible for industrial use), at declared windy sites, on lease basis with 30 yrs agreement

6. Promotional Transmission charges for RE generators (Rs 0.29/kWh). Normal transmission loss (4.24%). Normal wheeling charges and losses applicable.

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FINANCING OPTIONS AVAILABLE FOR RENEWABLE

PROJECTS IN INDIA

A variety of investors finance renewable energy projects in India, including institutions, banks, and Registered companies. Institutional investors are either state-owned or bilateral and multilateral institutions. Among banks, both private sector and public sector banks are involved. In addition to registered companies, venture capital and private equity investors contribute equity investment. Development Banks-IREDA, continue to represent a key source of funds for RE investments, particularly in project finance, over the medium term.

Source : Investors Guide - Re-invest 2015

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FINANCIAL PATTERN AND FINANCIAL MODEL

Solar Energy Project:

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Wind Energy Project:

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FINDINGS OF THE STUDY .

Solar projects have IRR range between 12-17%

Wind Projects have IRR range between 27-32%

Sustainable revenue & return over longer period of time

Positive Contribution to climate change

Long Term Energy Security

Have control over life cycle cost of energy

Scalable to large capacity i.e. GW or more

Lenders are comfortable with such kind of less susceptible projects

Renewable projects are immune from escalation of energy prices

Solar project has more predictable energy output based on data than wind project

Solar projects have Better value for money in sites with average wind speeds less than 5 meters per second

Lightning & high wind damage less susceptible in solar projects

Wind energy is much cheaper then photo voltaic energy, and to manufacture solar panels requires huge amounts of electricity. Therefore the actual benefit to the environment from wind energy is around 3-4 times as much as from photo-voltaic energy.

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CONTACTED COMPANIES .

Suzlon Ltd. Suzlon House, 5, Shrimali Society, Behind Shree Krishna Complex, Mithakhali, Navrangpura, Ahmedabad, Gujarat 380009

Welspun Renewables

3rd Floor,

The Press Trust of India Building.

4 Parliament Street,

New Delhi - 110001. India

Swelect Energy System “Numeric House” 3 rdFloor, No, 5 Sir P S Sivasamy salai, Mylapore, Chennai

Indo solar Ltd. No 3C/1,

Udyog Vihar,

EcoTech-II,

Greater Noida,

Uttar Pradesh 201306

Inox wind Ltd. National Highway 8A, Rohika, Gujarat 382240

Topsun Energy Ltd. B-101, GIDC,

Electronic Zone,

Sector 25,

Gandinagar–382028,

Gujarat,India

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QUESTIONNAIRES .

Prepared by: Dhiren Patel & Purvang Shah Diploma in Financial Management Batch : Jan-2015 to July-2015 Ahmedabad Management Association

Note : Below details are required to prepare more realistic project report as

part of study of ‘Diploma in Financial Management’ at Ahmedabad

Management Association.

Company Name

Contact Person

Designation

Email Id

Contact No

QUESTIONS

1. What is the primary objective/s to go for doing business in renewable energy?

Primary Objective/s: a) ……………..

b) ……………..

c) ………………

d) ……………..

2. Which are the major reasons to go for Solar Power generation project than other

renewable energy sources?

a) ………………

b) ………………

c) ………………

d) …………….

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3. What is the total installed capacity of particular site?

Site: ………………… State: ……………………..

Total Installed Capacity: ……………………MW

4. Reason for choosing this site for this project.

Low land acquisition cost? Amount (INR): ……………………….. Direct sun light availability (Yes or No) More sun exposure time (Specify)……………. Any special state govt. incentives? Specify:

……………………..

………………………

………………………

Any Other Reason/s:

………………………..

………………………..

………………………….

5. What were the financing options of project that company has selected?

Total Project Cost (INR)

Debt

Percentage (%) of total Project Cost

Interest(%)

Exim Debt

Commercial Bank Debt

NBFC Debt

Equity

Investment

Why (Can you please explain company’s strategy while selecting the above options)? ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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6. What were the assumptions considered for this project?

a) ………………………

b) ………………………

c) ………………………

d) ……………………….

7. Please provide below data for our analysis and prepare Financial Model :

For Solar Projects:

Parameters Input Units

Baseload wholesale power tariff Rs/kWh

Peakload wholesale electricity tariff Rs/kWh

General Inflation rate per annum

Wholsesale Electricity Inflation rate per annum

Percent solar resource during peak period

No of PV array

PV plant array capacity (dc) MW

Total Installed capacity (dc) MW

PV plant array-to-system capacity (%)

PV plant array capacity (ac) MW

PV plant initial capacity factor (ac basis) (%)

Total PV Production (ac) MWh / year

PV plant annual capacity degradation (%) per annum

PV Module unit price INR/Wdc

PV Array Structure and Wiring unit price INR/Wdc

PV Power Inverters unit price INR/Wdc

PV Plant planning costs, fees, permits INR/Wdc

PV System Construction unit price INR/Wdc

PV plant cost (INR)

Government incentive production tarriff Rs/kWh

Term of Government incentive Years

Equity investment (INR) INR

Debt financing required

Comm/NBFC Debt Financing (INR) INR

Comm/NBFC Debt Interest Rate per annum

Comm/NBFC Debt Term Years

O&M Cost (percent of capital cost) INR per annum

Project Life / Return on Equity Investment Years

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For Wind Projects:

GENERAL DESCRIPTION

Electricity generation

Parameters Input Unit

Generation (without losses) MWh / year

Loss (medium voltage + auxiliary consumption etc.) (%)

Transformer losses

(%)

Net generation for sale MWh / year

Capacity Installed (MW) MW

Number of Towers

Capacity Generation per tower MW

Plant load factor (based on generation without losses)

(%)

Plant load factor (based on net generation)

(%)

Government incentive production tariff INR/kWh

Term of Government incentive

Years

INVESTMENT PARAMETERS AND TAXES

Investment costs

Turbines + construction INR

Administrative INR

Consultants INR

Studies INR

Land acquisition cost INR

Supervision INR

Contingencies INR

Total Capital Investment Costs INR

Taxes

Income Tax after exemption expires (%) (%)

Tax exemption up to 20XX

COSTS & EXPENSES

Maintenance

Balance of Plant INR/Year

Fee (O&M, Interim etc.) INR/Year

Total O&M Costs INR/Year

Regulatory Payments (% of gross revenues)

(%)

Depreciation

Depreciation (%)

Project Lifetime XX years

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8. What is the expected IRR Company has assumed for this Project?

IRR (%)……………….

9. What assumptions have been considered for Cash Inflow of this Project?

a) …………………………….

b) …………………………….

c) ……………………………

d) …………………………

10. Has the project aligned with above Cash Inflow assumptions? If No, please provide us

factors affected for this deviation from the assumptions.

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11. What challenges company faced for the Project start-up?

a) ……………………………..

b) ……………………………..

c) ……………………………..

d) ……………………………….

12. What efforts done to reduce cost of capital?

a) …………………………

b) …………………………

c) …………………………

d) …………………………

13. What strategic benefits company has gained from this Project?

a) ………………………….

b) ………………………..

c) ……………………….

d) ………………………

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REFERENCE WEBSITES .

http://www.rrecl.com/State.aspx

http://www.mahaurja.com/PG_WE_State.html

http://www.mnre.gov.in/

www.re-invest.in/Document/.../15.RE-Invest_2015_Investors_Guide.pdf

http://makeinindia.com/sector/renewable-energy/

http://www.business-standard.com/article/economy-policy/re-invest-2015-companies-commit-200-billion-to-clean-energy-115021400027_1.html

http://articles.economictimes.indiatimes.com/2015-02-16/news/59196954_1_solar-energy-renewable-energy-clean-energy-capacity

http://indianpowersector.com/home/renewable-energy/solar_new/solar-power/