Discussion on Solar Power With the World Bank

8/3/2019 Discussion on Solar Power With the World Bank

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Solar Power in India –

Discussion on cost trends and

implementation road map

Confidential and For Limted Circulation

March, 2011



© 2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rig hts reserved. KPMG and the KPMGlogo are registered trademarks of KPMG International, a Swiss cooperative.

DISCLAIMER

2

The information provided in the presentation is based on preliminary analysis and further refinement

may be required

The reference to ‘KPMG Analysis’; indicates only that we have (where specified) undertaken certain

analytical activities on the underlying data to arrive at the information presented; we do not accept

responsibility for the underlying data.

Collection of data for assessment has been limited to such information as can be collected from

resources on the published public domain and meetings with market participants Wherever information was not available in the public domain, suitable assumptions were made to

extrapolate values for the same

ConfidentialThis report contains analysis and intellectual property of KPMG. Circulation is restricted and only

with prior consent of KPMG.




Agenda

3

• Cost Reduction Potential for Solar Power In India Solar PV technology - Innovation and Scale

Solar CSP technology – Localisation and Scale

• Implementation Roadmap

Possible steps by Governments to support market creation




Cost Reduction potential – What aspects of solar power lead tocost reduction possibilities?

2. Localization 4. Competitive Intensity

We believe multiple levers for cost reduction exist – the pace of cost reduction would largely dependon the pace of capacity addition

3. Govt Incentives

1. Technology innovation

4

• Banker education/ incentivization for fair costfinancing

• Sustained momentum –

accelerates Indianindustry; aligns

international markets toIndian landscape

5. Other Enablers

• Tariff competition - percolationto suppliers leading to margin

reductions on key high valueimports

• Cost reduction of EPC ‘wraps’

through innovative contractingmodels

• Aggregation initiatives (SolarParks) for scale economies

• Reduction of locationsensitive charges – wheeling/ Tx to encourage Sun basedsiting

• Ongoing R&D – costreduction/ efficiencyimprovement

• India suited technology -leveraging of India

advantages

• Localization of multiplecomponents possible

• Indigenous manpower forengineering design

CostReduction

Levers




Solar PVCost Reduction Potential – Manufacturing Innovations

5

Polysilicon

$ 0.30 per Wp 27%

Ingots/Wafers

$ 0.25 per Wp 23%

Cell

$ 0.22 per Wp 21%

Modules

$ 0.30 per Wp 29%

Drivers forcost reduction

Potential forcostreduction

● Costs of Si-FBRprocesses are around $20 per Kg

● Cost reduction potentialby 35-40%

● Polysilicon usage isexpected to come downfrom ~ 7-6.5g/W to ~ 3g/Wwithin the next decade

● Cost reduction potential by45-50%

● Cell efficiencies expected toincrease from 16-17% to 18-19% andthen later on towards 22-23%

● Cost reduction potential per kWh by15-20%

Reduction in polysiliconfeedstock prices -Deployment of FluidizedBed Reactor (FBR)process

Technology improvements -Usage of innovations like:Diamond wire wafering,Ultra thin kerfless wafersetc.

Improvement of cell efficiency -Increasing light absorption layers,Usage of better absorption materialetc

Source – DOE – USA Estimates, Other Analyst Reports, KPMG Analysis

Cost Structure

Module Costs: $1.1-1.2 per Wp

http://www.google.co.in/imgres?imgurl=http://dynamicpatents.com/blog/wp-content/uploads/solar_panels.jpg&imgrefurl=http://www.dynamicpatents.com/2008/12/no-shortage-of-activity-in-solar-panel-market/&usg=__oNIvKWxUyndH7jPrdiFnJr835Sw=&h=960&w=1280&sz=457&hl=en&start=6&zoom=1&tbnid=s0PyGF4NoiO8dM:&tbnh=113&tbnw=150&ei=fxR_TYuyBcfKrAfi6_mlBw&prev=/images?q=solar+panels&um=1&hl=en&sa=N&tbs=isch:1&um=1&itbs=1

http://www.google.co.in/imgres?imgurl=http://cdn.physorg.com/newman/gfx/news/2007/solarcell.png&imgrefurl=http://www.physorg.com/news99904887.html&usg=__TTD9QmMAa9NJE7qqDBU16ex3QJE=&h=250&w=280&sz=142&hl=en&start=1&zoom=1&tbnid=OIl8xqtMI-3N7M:&tbnh=102&tbnw=114&ei=OhR_Tf3VF5CqrAe0-PC1Bw&prev=/images?q=solar+cell&um=1&hl=en&sa=N&tbs=isch:1&um=1&itbs=1

http://www.google.co.in/imgres?imgurl=http://solarabb.com/images/ingot2.jpg&imgrefurl=http://solarabb.com/ingot_wafer.html&usg=__UJiTXECdixICecppetoanXQ3kjM=&h=189&w=224&sz=9&hl=en&start=16&zoom=1&tbnid=WK2HqXF4v1sQJM:&tbnh=91&tbnw=108&ei=FxR_TY3GDcexrAedrpSmBw&prev=/images?q=solar+ingot&um=1&hl=en&sa=N&tbs=isch:1&um=1&itbs=1

http://www.google.co.in/imgres?imgurl=http://www.schott.com/newsfiles/20071029151252_08_Polysilicon_solar_cell.jpg&imgrefurl=http://www.schott.com/english/news/press.html?NID=2172&usg=__Veq2ZPPFh_51llU-8P9X-5UwjWg=&h=1535&w=2126&sz=1592&hl=en&start=8&zoom=1&tbnid=FcsNboxTcQfk8M:&tbnh=108&tbnw=150&ei=3BN_TZefCcrtrQfP8_GzBw&prev=/images?q=polysilicon&um=1&hl=en&sa=N&tbs=isch:1&um=1&itbs=1




Solar PVCost Reduction Potential – Non module BOS Costs

6

Transformers,switch gearsand cables

Inverters

Potential forcost reduction

LOW

• Majority ofinverters areimported

currently

• Players arelooking atassembly ofinverters inIndia whichcould contributetowards cost

reduction

• Market andtechnologyalready

established• Driven by

prices ofcommoditieslike Copper andCRGP coil

Civil &GeneralWorks

Installation andCommissioning

IDC andFinancingCharges

• Driven bylocalized siteconditions

and lowlabour costs

• Availability ofmanpowerfor design

engineering

• Localsourcing ofmaterials

• Driven by lowcostinnovative

financingoptions

• Eximroute

• Tax freesolarbonds

LOW HIGH HIGH HIGH

Balance of System costs are likely to come down due to local sourcing and lower labor costs

KeyConsiderations

Balance of

System(~45- 50% oftotal solarsystem cost)


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Solar PVProjection of Cost Trends

7

SOLAR PV Units 2010-11 2015-16 2021-22

Module Costs $ per W 1.07 0.80 0.59

Non Module BOS Costs $ per W 1.03 0.70 0.60

TOTAL SYSTEM COSTS $ per W 2.10 1.51 1.19

TOTAL SYSTEM PRICE $ per W 2.73 1.88 1.48

Electricity Costs – (Without Margin)* Rs per Unit 9.69 7.20 5.90

Electricity Prices - (With Margin Estimates) Rs per Unit 12.30 8.77 7.10

Note: -

•*Interest rate – 11%; A 1% decrease in interest rate can result in tariff reduction by about 3%

•Polysilicon prices to drop from $ 45 per Kg to $ 35 per Kg by 2021-22

•Polysilicon usage: - reduce from around 6.5 g/W to 3.5 g/W by 2021-22 •Processing costs - 5% reduction year on year; •BOS ( Other than invertors) – 10% year on year reduction for next 5 years;

Source – KPMG Analysis




Solar CSPLocalization Potential – Key high value CSP components lendthemselves to high localization potential

8

Parabolic TroughMirrors

• High value item

• Most rawmaterialsavailable locally

• Manufacturerswith requiredcompetencepresent in India

Molten SaltStorage

Components

• Requires

fabrication ofpipes, tanks

• Manufacturerswith requiredcompetencepresent in India

• Pumps may stillbe imported

Power Block

• Turbines are

specialized butglobal suppliershave Indianpresence – canlocalize

• Heat exchangers – Local designsavailable

Trough Structures &Associated Works

• Most fabrication

requirements –welding, castingetc available

• Localizationpossible withdesign transfer andhand-holding

EngineeringDesign/ Execution

• Limited

capabilities withIndian vendorshowever,required CAD/ CAM facilitiesavailable

• Local manpoweravailable

• Most components can be localized readily or with limited assistance – pace would depend on industrywillingness based on market size visibility

• Certain complex items (e.g. Absorber tubes, Heat transfer fluid, C&I components, Specialized pumps)may take time due to limited suppliers and concentration of technology

11-15% 9-12% 5-7% 12-15% 7-9%




Solar CSPSolar Thermal Cost Reduction Potential translates into a saving ofabout USD 1Mn/ MW

9

Component Savingspossible

Reason

SOLAR FIELD(Mirror structure, Hydraulic

equipment, Swivel joints,Foundations for Mirror Structures)

30% - 40% Localization

SOLAR FIELD ASSEMBLY 30% - 40% Localization

SOLAR FIELD(Pipes and valves, Pipe Supports,Insulation, Civil works)

~30% Localization

POWER BLOCK

(Civil Works)

~30% Localization

Absorber Tubes ~20% Competitive intensity

Parabolic Mirrors 10% -15% Competitive intensity

EPCM Fees 20% - 30% Competitive intensity +Localization

Power

Block

12%

Solar Block

44%Salt Storage

15%

EPCM fees

8%

Land

1%

Others

12%

IDC

8%

Project Cost Break-up for a Solar Thermal

Plant

With Thermal storage

• Key components for solar thermal components (shown

below) lend themselves to savings through localization andcompetitive intensity – data based on KPMG local marketsurvey

Put together, these componentscan form about 40%-50% of asolar thermal plant with storage




1,690

1,308

1,065

824

476

368

300

269

194

150

122

110

10.49

8.37

7.29

5.9

0

1

2

3

4

5

6

7

8

9

10

11

12

0

500

1000

1500

2000

2500

3000

FY 2011 FY 2016 FY 2020 FY 2025

R s

./ k Wh

$

M n p e r K W

Potential reduction in LCOE till 2025

Solar Field Cost (Mirrors/Receivers/BoS of Solar field)

Power Block/ BoP

Others

LCOE

Solar CSPProjection of Cost Trends

Drivers for cost reduction in the next 15 years

● Economies of Scale: Scaling up plants

beyond 50 MW have a potential for cost

reduction by 21-30%.

● Deployment of new technologies: Expectedreduction in costs is 18-22%.

● Cost & Efficiency Improvements have a

potential cost reduction of 10-15%.

● LCOE has a potential reduction of 45%- 60%by 2025.

Source: Estela 2010

Source: KPMG CSP Financials




Competitive Intensity

11

• Stiff tariffs are evident in NSM bidding: State Tariff Orders lend economic viability at capital

costs of ~ USD 2.5 – 3 Mn/ MW (for CSP) – much lower than the global benchmarks of ~USD 3.5 - 4 Mn

• Similarly, for Solar PV the capital costs discovered in the competitive bidding process of ~USD 2.4-2.8 Mn/MW - much lower than global benchmarks of ~ 3-3.2 Mn/MW

• CSP - With India being seen as a strong candidate for solar power, global suppliers arekeen on entering the market; ongoing discussions with suppliers have sensitized them toIndian price requirements and we are seeing margin alignment in certain items

Post NSM Bidding:

Absorber tubes quotes have seen reduction of around 20%

Parabolic trough mirror quotes have also witnessed >10% reduction

• With Phase II of NSM mandatorily requiring indigenized cell to be used by players, theexisting cell manufacturers are looking at ramping up the capacity and modulemanufacturers integrating backward to cell manufacturing which can lead to furtherreduction in cost.




Other enablers for cost reduction

12

• Financing charges Nascence of sector makes banks apprehensive; potential viability boosting

measures (e.g. thermal storage) adds to apprehension

Financing plays a key role in viability determination due to capital intensivenature of projects (Table below)

Govt initiatives to create solar funds through agencies such as PFC canprovide funding avenues at reasonable costs as well as boost confidence ofprivate banks

Impact of financing on project financials (Illustrative for 25 MW CSP plant with storage)

Increase in interest rate by 1% Levelized tariff higher by19 P/KWh

Increase in tenure by 1 year Equity IRR higher by 0.4%




The landed cost of power to consumers in certain key states is expectedto reach closer to solar power cots within the coming decade….

Solar Power Costs (With & W/o Margin Estimates) Vs. Cost of Supply

12.30

8.778.47 8.17 7.89

7.627.10

6.30

6.526.746.967.20

9.69

5.906.45

6.27 6.10

5.94 5.79 5.15

6.84

5.23 5.03 4.84

4.65 4.47 3.68

5.66

-

2.0

4.0

6 .0

8 .0

10.0

12.0

14.0

2010-11 2011-12 2012-13 2013 -14 2014-15 2015 -16 2016 -17 2017-18 2018 -19 2019 -20 2020-21 2021-22

R s .

/ k W h

Landed Cost of

Power @ LT in2021-22

Rajasthan TN Gujarat Punjab WB Karnataka AP UP MP Maharashtra

In Rs. / kWh 8.40 6.62 6.50 6.46 6.25 6.24 5.57 5.46 5.13 4.85

38% of India Energy Requirement (ER) in 2021-22 34% of India ER in 2021-22

• Cost of Supply (On Energy Input) assumed to grow @ 4.0% (y-o-y) vis-à-vis CAGR of 4.7% (for 2001-02 to 2008-09)

• Landed Cost of Power projected at 4.0% (historical India growth) for states having loss levels less than India’s; at 2.0% for states withlimits greater than India’s but less than 50%; and at 1.0% for states with loss levels greater than 50%.

• India’s AT & C loss trajectory assumed to reduce at 4.5% y-o-y from actuals of ~ 30% in 2008-09 to 16.50% in 2021-22

WB

Punjab

Rajasthan(7.18)

Karnataka

TN

Gujarat

Gujarat (5.56)

TN (5.66)

Maharashtra(4.48)

AP (4.76)



© 2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rig hts reserved. KPMG and the KPMGlogo are registered trademarks of KPMG International, a Swiss cooperative. 14

IMPLEMENTATION ROADMAP




Implementation roadmap – How can the capacity addition measuresbeing taken by Govt be improved in subsequent phases?

15

Market Stability

• Program to be designed to provide long term market stability signals - Accelerate gridparity and ecosystem development

Can be done by enunciating the quantum of budgetary support for the sector andlinking capacity installation targets to price reduction achieved

Financing - Credible financing plan; Current system puts cost burden entirely onstates! Double whammy of coal cess & solar RPO!

• Centralized financing methods – federal guarantee/ solar bonds/ energy security cess

• Support through DFI – credit enhancement mechanisms, backstop facility, takeoutfinancing for banks. World bank can play a role here

• State potential to absorb solar power - Ability to absorb costlier solar power dependson the additional impact on utility’s power purchase cost and consumer tariff

Budgetary Support for solar power Rs 1750 Cr

Marginal Power Price – Conventional Rs 5/ KWH

Solar installed capacity that can be supportedat a price of Rs 15/ KWh*

1000 MW

At Rs 11/ KWh 1665 MW

At Rs 9/ KWh 2500 MW* At an average (PV + CSP) net PLF of around 20%

• Adjacent table shows the impact of price

reduction achieved on the solar installed

capacity (at a marginal conventional power price

of Rs 5/ KWh)




Implementation roadmap – How can the capacity addition measuresbeing taken by Govt be improved in subsequent phases?

16

Some of the other measures that can be considered are as follows:

• Eliminate 5 MW cap in solar PV to help build scale economies

• Reduce multiplicity of agencies – bring JNNSM entirely under MNRE. Anentity could be created under MNRE to be the nodal agency (like NVVN) thatimplements the NSM

• Higher budgetary allocation for MNRE from the General budget

• Capitalization of the escrow account to make PPAs bankable

• Mitigate development risks – clear policies on land/ water allocation, timelyavailability of evacuation infrastructure, installation of solar stations atradiation rich sites and data sharing with developers etc




Off-grid Applications – Need to provide stronger thrust

17

• The scale of off-grid sector can be larger than the utility scale sector in mediumterm

High Potential Applications – Telecom Towers, Solar Water Heaters, RemoteArea Lighting

• While capital subsidy programs exist, its administration is seen to be inefficiente.g. solar water heaters

• Consumer financing models would be required to give a fillip to the retailsegment to offset the high initial cost




Client How KPMG helped

Government of

Gujarat, India

Solar park strategy development

Business planning for solar park project

Assessment of the revenue models for the solar park

Development of implementation plan

A Leading Real

Estate and

InfrastructurePlayer

Strategy development for solar business opportunity

Market overview of solar opportunity and business model implications thereof for a new entrant

Developing the EOI strategy and assistance in preparing the EOI documents Development of detailed project report

AP Distribution

Utility

Business model options assessment

Overview of the solar PV market space

Best practices / Business Models followed by utilities in the solar developer space

Analysis of the capital implications along with power purchase impact for distribution utilities

A Leading South

Indian Player

Strategic assistance and feasibility study

Overview of the solar PV market opportunity

Demand supply analysis for solar PV value chain

Development of business strategy

Select Experiences in India ( 1/ 2)




Client How KPMG helped

New Entrants in

Solar Thin-film and

Crystalline

Manufacturing

Sector

Validation of the business plan and fund raising assistance

Independent assessment of the key assumptions and risks involved in the solar thin-film

business plan and solar crystalline market

Valuation of the project taking into account industry benchmarks

Negotiations with prospective investors for fund raising

New Entrant insolar power sector

Assistance in Setting up a Solar Thermal Plant Bankable DPR - Assistance in preparation of a Bankable DPR that addresses the concerns of

Bankers and potential Equity Investors

Plant Configuration - Assistance in defining plant configuration – with or w/out storage; hours

of storage

Tariff based Bidding - Assistance in tariff based bidding under the JNNSM Program

Procurement - Assistance in equipment procurement; market survey for localization potential

and vendor capability assessment

Assistance in Contracting, defining contractor qualification criteria, running the bid process

and evaluation of shortlisted bidders

Multiple Players CDM advisory for Solar PV and solar thermal projects up to 100 MW

Select Experiences in India ( 2/ 2)



© 2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rig hts reserved. KPMG and the KPMGl i d d k f KPMG I i l S i i

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Mo: +91 9967016369E-Mail: [email protected]

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Discussion on Solar Power With the World Bank