RE Finance Report

INDIA

Partnership to Advance Clean Energy - Deployment (PACE - D)Technical Assistance Program

Financing Renewable Energy in India:A review of current status and recommendations for innovative mechanisms

October 2013

This report is made possible by the support of the American People through the United States Agency for International

Development (USAID). The contents of this report are the sole responsibility of Nexant, Inc. and do not necessarily reflect the views

of USAID or the United States Government. This report was prepared under Contract Number AID-386-C-12-00001.

October 2013






INDIA

October 2013






INDIA

Table of Contents

Executive Summary......................................................................................................1

1. Potential for RE in India ........................................................................................5

1.1 Current Scenario ............................................................................................5

1.2 RE Potential ...................................................................................................5

1.3 Drivers of RE..................................................................................................7

2. Policy Support for RE in India ..................................................................................9

2.1 Tax Incentives ..............................................................................................10

2.2 Feed-in Tariffs ...............................................................................................12

2.3. Renewable Energy Purchase Obligations ....................................................13

2.4 Renewable Energy Certificates (RECs) ........................................................14

2.5 Subsidies......................................................................................................15

2.6 Generation Based Incentives .......................................................................18

2.7 Including Off-grid RE Projects in Priority Sector Lending.............................18

3. Business Models for RE Projects In India..........................................................19

3.1 Grid Connected RE ......................................................................................19

3.2 Rural Electrification Projects ........................................................................23

3.3 Commercial and Industrial Off-grid RE Projects...........................................23

4. Commercial Financing Instruments for RE in India .........................................25

4.1 Debt Instruments.........................................................................................25

4.2 Equity Finance .............................................................................................34

4.3 Mezzanine Finance ......................................................................................36

4.4 Partial Risk Guarantee Facilities ...................................................................37

4.5 Rural Off-grid Financing ...............................................................................40

5. Barriers to Renewable Energy Finance in India ................................................43

5.1 Policy Level Barriers.....................................................................................43

5.2 Market Based Barriers .................................................................................46

Table of Contents

Executive Summary......................................................................................................1

1. Potential for RE in India ........................................................................................5

1.1 Current Scenario ............................................................................................5

1.2 RE Potential ...................................................................................................5

1.3 Drivers of RE..................................................................................................7

2. Policy Support for RE in India ..................................................................................9

2.1 Tax Incentives ..............................................................................................10

2.2 Feed-in Tariffs ...............................................................................................12

2.3. Renewable Energy Purchase Obligations ....................................................13

2.4 Renewable Energy Certificates (RECs) ........................................................14

2.5 Subsidies......................................................................................................15

2.6 Generation Based Incentives .......................................................................18

2.7 Including Off-grid RE Projects in Priority Sector Lending.............................18

3. Business Models for RE Projects In India..........................................................19

3.1 Grid Connected RE ......................................................................................19

3.2 Rural Electrification Projects ........................................................................23

3.3 Commercial and Industrial Off-grid RE Projects...........................................23

4. Commercial Financing Instruments for RE in India .........................................25

4.1 Debt Instruments.........................................................................................25

4.2 Equity Finance .............................................................................................34

4.3 Mezzanine Finance ......................................................................................36

4.4 Partial Risk Guarantee Facilities ...................................................................37

4.5 Rural Off-grid Financing ...............................................................................40

5. Barriers to Renewable Energy Finance in India ................................................43

5.1 Policy Level Barriers.....................................................................................43

5.2 Market Based Barriers .................................................................................46

5.3 Barriers to Rural Off-grid Projects ................................................................47

5.4 Barriers to Commercial Off-grid Projects .....................................................47

5.5 Gaps and Needs in RE Financing.................................................................50

6. Suggestions for Innovative Financing Mechanisms for

Renewable Energy in India.................................................................................53

6.1 Fiscal Mechanisms ......................................................................................54

6.2 Policy Mechanisms ......................................................................................59

6.3 Financing Mechanisms ................................................................................65

Acronyms .....................................................................................................................73

References....................................................................................................................77

Annex A: Summary of Solar Reverse Bidding Programs...............................................83

Annex B: Capital Subsidy for Grid Connected Biomass Power Projects

and Bagasse Cogeneration Projects .............................................................................84

Annex C: Capital Subsidy for Grid Connected Gasifier Projects....................................85

Annex D: Capital Subsidy for Biomass Gasifier for Industrial Use ................................86

Annex E: Capital Subsidy for Grid Connected Biogas Projects .....................................87

Annex F: Capital Subsidy for Off-grid Watermills and Micro Hydro Projects .................88

Annex G: Capital Subsidy for Off-Grid Solar PV Applications ........................................88

Annex H: Renewable Purchase Obligation Targets........................................................88

Annex I: Examples of Investments in Grid Connected RE Projects

Using Commercial Instruments ....................................................................................92

Annex J: Funding for Husk Power Systems ..................................................................95

Annex K: Tax Efficient Structures...................................................................................96

Annex L: Companies Adopting Singapore Trust Route ..................................................98

Annex M: Examples of Green Bond Issuances.............................................................99

List of Tables

Table 1: IPP Business Models for Grid-Connected RE Projects.............................. 21

Table 2: FIs Providing Rupee Term Loans to RE Projects ......................................... 26

Table 3: Mutual Benefits of Lease Financing to FI and Project Developer............. 33

Table 4: Characteristics of Infrastructure Debt Funds in India ................................ 61

5.3 Barriers to Rural Off-grid Projects ................................................................47

5.4 Barriers to Commercial Off-grid Projects .....................................................47

5.5 Gaps and Needs in RE Financing.................................................................50

6. Suggestions for Innovative Financing Mechanisms for

Renewable Energy in India.................................................................................53

6.1 Fiscal Mechanisms ......................................................................................54

6.2 Policy Mechanisms ......................................................................................59

6.3 Financing Mechanisms ................................................................................65

Acronyms .....................................................................................................................73

References....................................................................................................................77

Annex A: Summary of Solar Reverse Bidding Programs...............................................83

Annex B: Capital Subsidy for Grid Connected Biomass Power Projects

and Bagasse Cogeneration Projects .............................................................................84

Annex C: Capital Subsidy for Grid Connected Gasifier Projects....................................85

Annex D: Capital Subsidy for Biomass Gasifier for Industrial Use ................................86

Annex E: Capital Subsidy for Grid Connected Biogas Projects .....................................87

Annex F: Capital Subsidy for Off-grid Watermills and Micro Hydro Projects .................88

Annex G: Capital Subsidy for Off-Grid Solar PV Applications ........................................88

Annex H: Renewable Purchase Obligation Targets........................................................88

Annex I: Examples of Investments in Grid Connected RE Projects

Using Commercial Instruments ....................................................................................92

Annex J: Funding for Husk Power Systems ..................................................................95

Annex K: Tax Efficient Structures...................................................................................96

Annex L: Companies Adopting Singapore Trust Route ..................................................98

Annex M: Examples of Green Bond Issuances.............................................................99

List of Tables

Table 1: IPP Business Models for Grid-Connected RE Projects.............................. 21

Table 2: FIs Providing Rupee Term Loans to RE Projects ......................................... 26

Table 3: Mutual Benefits of Lease Financing to FI and Project Developer............. 33

Table 4: Characteristics of Infrastructure Debt Funds in India ................................ 61

This report was prepared by a team of consultants including

Nexant, Inc., Emergent Ventures India (EVI) and SRC Global Inc.

(SRC), under the Partnership to Advance Clean Energy -

Deployment (PACE - D) Technical Assistance Program, which is

funded by the United States Agency for International

Development (USAID). The principal authors of this report were

Aseem Varma and Ranjit Chandra of EVI, and Dilip R. Limaye of

SRC. Technical input and comments were provided by Aloke

Barnwal and Vinod K. Kala of EVI. The report was prepared under

the direction of Sanjay Dube, Nexant's Chief of Party, along with

a Nexant team comprising Ronnie Khanna, Kavita Kaur, Peter du

Pont, Jem Porcaro and Aalok Awalikar. The report was edited by

Nidhi Jamwal.

The PACE-D Technical Assistance Program would like to express

its sincere appreciation and gratitude to the numerous experts in

India who were interviewed by the program and who provided

useful information on their experience and insights on

renewable energy financing in India. Additionally, we would like

to thank members of the Advisory Team for Renewable Energy

Finance, who provided valuable input during the design of the

report, and suggestions to guide the research.

We would like to thank Alok Srivasta, Joint Secretary, Ministry

of New and Renewable Energy and his team for their valuable

inputs.

Finally, we would like to thank Monali Zeya Hazra, Anurag

Mishra, Apurva Chaturvedi, and S. Padmanaban of USAID/India,

who provided extensive input throughout the report preparation

period. Their thoughtful feedback helped shape the report and

focus it on the design of innovative financing mechanisms that

could be useful in the Indian context.

AcknowledgementsList of Figures

Figure 1: Potential vs. Installed Capacity of RE in India................................................ 6

Figure 2: Structure of Lease Financing in India ........................................................... 33

Figure 3: Structure of Partial Risk Guarantee Facilities............................................... 38

Figure 4: Suggested Financial Mechanisms................................................................. 51

Figure 5: Typical Structure of a Business Trust ............................................................. 55

Figure 6: Structure of IDF-NBFC.................................................................................... 63

Figure 7: Structure of IDF-MF ........................................................................................ 64

Figure 8: Climate Themed Bonds .................................................................................. 68

Figure 9: Insurable Risks for RE Projects...................................................................... 71

This report was prepared by a team of consultants including

Nexant, Inc., Emergent Ventures India (EVI) and SRC Global Inc.

(SRC), under the Partnership to Advance Clean Energy -

Deployment (PACE - D) Technical Assistance Program, which is

funded by the United States Agency for International

Development (USAID). The principal authors of this report were

Aseem Varma and Ranjit Chandra of EVI, and Dilip R. Limaye of

SRC. Technical input and comments were provided by Aloke

Barnwal and Vinod K. Kala of EVI. The report was prepared under

the direction of Sanjay Dube, Nexant's Chief of Party, along with

a Nexant team comprising Ronnie Khanna, Kavita Kaur, Peter du

Pont, Jem Porcaro and Aalok Awalikar. The report was edited by

Nidhi Jamwal.

The PACE-D Technical Assistance Program would like to express

its sincere appreciation and gratitude to the numerous experts in

India who were interviewed by the program and who provided

useful information on their experience and insights on

renewable energy financing in India. Additionally, we would like

to thank members of the Advisory Team for Renewable Energy

Finance, who provided valuable input during the design of the

report, and suggestions to guide the research.

We would like to thank Alok Srivasta, Joint Secretary, Ministry

of New and Renewable Energy and his team for their valuable

inputs.

Finally, we would like to thank Monali Zeya Hazra, Anurag

Mishra, Apurva Chaturvedi, and S. Padmanaban of USAID/India,

who provided extensive input throughout the report preparation

period. Their thoughtful feedback helped shape the report and

focus it on the design of innovative financing mechanisms that

could be useful in the Indian context.

AcknowledgementsList of Figures

Figure 1: Potential vs. Installed Capacity of RE in India................................................ 6

Figure 2: Structure of Lease Financing in India ........................................................... 33

Figure 3: Structure of Partial Risk Guarantee Facilities............................................... 38

Figure 4: Suggested Financial Mechanisms................................................................. 51

Figure 5: Typical Structure of a Business Trust ............................................................. 55

Figure 6: Structure of IDF-NBFC.................................................................................... 63

Figure 7: Structure of IDF-MF ........................................................................................ 64

Figure 8: Climate Themed Bonds .................................................................................. 68

Figure 9: Insurable Risks for RE Projects...................................................................... 71

India's renewable energy (RE) potential is estimated to be more than 3,000 GW based on existing

identified resources. While RE sources have been harnessed for electricity generation in India for

the last three decades, only 29.8 GW – which is less than one percent of the total potential has

been tapped so far.

Over the past 10-15 years, both the central and the state governments have developed favorable

policy frameworks to facilitate development of RE projects in the country. These include

mechanisms such as feed-in-tariffs (FiTs), capital subsidies, and tax benefits. These mechanisms

have been successful in attracting significant investments and adding RE capacity. New policy

instruments such as Generation-Based Incentives (GBIs), Renewable Purchase Obligations (RPOs),

RE certificates (RECs) and open access (wheeling and banking) have provided further stimulus to

the sector in the last few years. This has led to an annual growth rate of over 19 percent in RE

capacity over the last five years (2007-2012).

The Government of India (GOI) views RE as critical to the country's sustainable growth. RE is also a 1 2key resource for the nation's energy security and energy access . The GOI has set a target for 15

percent of power consumption to be generated from RE sources by 2022, up from the current share thof five percent. To meet this target, the 12 Five-Year Plan of the Planning Commission includes an

3ambitious target to add 30 GW of RE between 2012 and 2017 . In monetary terms, this means an

additional capital requirement of INR 2.134 trillion (USD 39 billion), calculated based on the prevailing

market costs. In addition to this, United Nations' Sustainable Energy for All Initiative estimates that

India shall need an investment of USD five to seven billion annually till 2030 for facilitating energy

access. Hence, finance will play a key role in the development of India's RE sector.

In the area of off-grid energy, financing of RE projects is currently driven more by “impact investors”

than “financial investors”. There are also several risks associated with off-grid projects, such as

unpredictable power consumption patterns; low creditworthiness of off-takers; and a lack of scalable

business models. Most off-grid RE projects are small in size and fail to attract the attention of

financial institutions (FIs). These barriers are exacerbated by the presence of policy and regulatory

hurdles, which need to be addressed. In short, there is a need for policy and regulatory reforms, as

1 India energy imports are projected to be 53 percent of energy consumption by 2030. 2 Over 43 percent rural population and seven percent of urban population does not have access to electricity as

per census of India, 2011.3 Over and above the cumulative capacity of 29.8 GW so far.

Executive Summary

1Financing Renewable Energy in India

India's renewable energy (RE) potential is estimated to be more than 3,000 GW based on existing

identified resources. While RE sources have been harnessed for electricity generation in India for

the last three decades, only 29.8 GW – which is less than one percent of the total potential has

been tapped so far.

Over the past 10-15 years, both the central and the state governments have developed favorable

policy frameworks to facilitate development of RE projects in the country. These include

mechanisms such as feed-in-tariffs (FiTs), capital subsidies, and tax benefits. These mechanisms

have been successful in attracting significant investments and adding RE capacity. New policy

instruments such as Generation-Based Incentives (GBIs), Renewable Purchase Obligations (RPOs),

RE certificates (RECs) and open access (wheeling and banking) have provided further stimulus to

the sector in the last few years. This has led to an annual growth rate of over 19 percent in RE

capacity over the last five years (2007-2012).

The Government of India (GOI) views RE as critical to the country's sustainable growth. RE is also a 1 2key resource for the nation's energy security and energy access . The GOI has set a target for 15

percent of power consumption to be generated from RE sources by 2022, up from the current share thof five percent. To meet this target, the 12 Five-Year Plan of the Planning Commission includes an

3ambitious target to add 30 GW of RE between 2012 and 2017 . In monetary terms, this means an

additional capital requirement of INR 2.134 trillion (USD 39 billion), calculated based on the prevailing

market costs. In addition to this, United Nations' Sustainable Energy for All Initiative estimates that

India shall need an investment of USD five to seven billion annually till 2030 for facilitating energy

access. Hence, finance will play a key role in the development of India's RE sector.

In the area of off-grid energy, financing of RE projects is currently driven more by “impact investors”

than “financial investors”. There are also several risks associated with off-grid projects, such as

unpredictable power consumption patterns; low creditworthiness of off-takers; and a lack of scalable

business models. Most off-grid RE projects are small in size and fail to attract the attention of

financial institutions (FIs). These barriers are exacerbated by the presence of policy and regulatory

hurdles, which need to be addressed. In short, there is a need for policy and regulatory reforms, as

1 India energy imports are projected to be 53 percent of energy consumption by 2030. 2 Over 43 percent rural population and seven percent of urban population does not have access to electricity as

per census of India, 2011.3 Over and above the cumulative capacity of 29.8 GW so far.

Executive Summary


• Tax efficient trusts (e.g. MLPs, REITs, Business Trusts)

• Tradable AD Tax Credits

• REC Market Maker

• Infrastructure Debt Funds

• Green Bonds

• HNI/CSR Off Grid Fund

• Risk Insurance

New financing

instruments

Fiscal

Policy Financial

Seven Innovative Financing Mechanisms Recommended in this Report

Fiscal Instruments

• Tax Efficient Trusts: Tax efficient trusts provide pass-through tax benefits for investors in RE

projects, and can be traded publicly. They enhance capital market liquidity and provide

access to individual, retail and institutional investors. Such trusts have been used very

successfully in the U.S., Singapore and other developed financial markets to access capital

for sectors such as oil and gas and real estate; and are now proposed for RE.

• Tradable Tax Credits: These are tradable tax-saving certificates that can be used by RE

projects. For example they can be used by IPPs to avail the benefit of accelerated

depreciation. Such credits can help raise additional project finance and can reduce the


well as new financing approaches, in order to ramp-up off-grid RE investments in India.

In the area of grid-connected energy, private financing instruments, such as debt, equity, mezzanine,

and partial risk guarantees are being used in India. Despite the need to scale up, several gaps are

emerging. For example, a number of large financing sources are not participating in RE Investments

yet; tax benefits are not uniformly accessible; capital market access has been limited; and private

equity is tapering off as there are limited exit opportunities. Banks are facing an asset liability

mismatch, because long tenure debt is required for lending to RE projects. Banks are also reaching

their lending limits for RE, which is considered a part of the power sector.

Based on research and inputs from stakeholders, the key needs identified to help scale up RE

financing in India are as follows:

• New financial approaches that can help independent power producers (IPPs) scale up

development of RE projects, including some of the following:

o new sources of funds, for example:

, large investors such as pension funds, insurance companies, sovereign wealth

funds, family funds, and sources of Islamic finance;

, access to capital markets;

, participation by individual investors;

o participation by international investors to meet the large investment needs of the future;

o mainstream debt financing options that allow longer-term, low-cost debt to be available

at higher leverage ratios.

• Increased availability of financial products suitable to each stage of a project's development

(e.g. pre-construction, construction, post commissioning, etc.) This eases migration from one

type of financing to the next as risks are reduced.

• Appropriate policies, so that all classes of investors can benefit from incentives such as

accelerated depreciation, tax holidays, RECs, and subsidies.

• Institutional arrangements and policies to help RE services companies (RESCOs) access

capital from new sources and scale up operations.

• Mechanisms and products to reduce risks of RE investments.

This report reviews recent experience with RE financing in India. Based on this research, as well as

interviews with a range of practitioners involved in the sector (including project developers, project

sponsors, banks, investors, and state and national energy officials), the report presents

recommendations on seven innovative financing mechanisms that can help India meet its future RE

financing needs. The mechanisms fall into three general categories of instruments: fiscal, policy, and

PACE-D Technical Assistance Program2

• Tax efficient trusts (e.g. MLPs, REITs, Business Trusts)

• Tradable AD Tax Credits

• REC Market Maker

• Infrastructure Debt Funds

• Green Bonds

• HNI/CSR Off Grid Fund

• Risk Insurance

New financing

instruments

Fiscal

Policy Financial

Seven Innovative Financing Mechanisms Recommended in this Report

Fiscal Instruments

• Tax Efficient Trusts: Tax efficient trusts provide pass-through tax benefits for investors in RE

projects, and can be traded publicly. They enhance capital market liquidity and provide

access to individual, retail and institutional investors. Such trusts have been used very

successfully in the U.S., Singapore and other developed financial markets to access capital

for sectors such as oil and gas and real estate; and are now proposed for RE.

• Tradable Tax Credits: These are tradable tax-saving certificates that can be used by RE

projects. For example they can be used by IPPs to avail the benefit of accelerated

depreciation. Such credits can help raise additional project finance and can reduce the


well as new financing approaches, in order to ramp-up off-grid RE investments in India.

In the area of grid-connected energy, private financing instruments, such as debt, equity, mezzanine,

and partial risk guarantees are being used in India. Despite the need to scale up, several gaps are

emerging. For example, a number of large financing sources are not participating in RE Investments

yet; tax benefits are not uniformly accessible; capital market access has been limited; and private

equity is tapering off as there are limited exit opportunities. Banks are facing an asset liability

mismatch, because long tenure debt is required for lending to RE projects. Banks are also reaching

their lending limits for RE, which is considered a part of the power sector.

Based on research and inputs from stakeholders, the key needs identified to help scale up RE

financing in India are as follows:

• New financial approaches that can help independent power producers (IPPs) scale up

development of RE projects, including some of the following:

o new sources of funds, for example:

, large investors such as pension funds, insurance companies, sovereign wealth

funds, family funds, and sources of Islamic finance;

, access to capital markets;

, participation by individual investors;

o participation by international investors to meet the large investment needs of the future;

o mainstream debt financing options that allow longer-term, low-cost debt to be available

at higher leverage ratios.

• Increased availability of financial products suitable to each stage of a project's development

(e.g. pre-construction, construction, post commissioning, etc.) This eases migration from one

type of financing to the next as risks are reduced.

• Appropriate policies, so that all classes of investors can benefit from incentives such as

accelerated depreciation, tax holidays, RECs, and subsidies.

• Institutional arrangements and policies to help RE services companies (RESCOs) access

capital from new sources and scale up operations.

• Mechanisms and products to reduce risks of RE investments.

This report reviews recent experience with RE financing in India. Based on this research, as well as

interviews with a range of practitioners involved in the sector (including project developers, project

sponsors, banks, investors, and state and national energy officials), the report presents

recommendations on seven innovative financing mechanisms that can help India meet its future RE

financing needs. The mechanisms fall into three general categories of instruments: fiscal, policy, and


4burden of payments for GBI on the government. The U.S. has a long track record in tradable

certificates. India also had tradable duty-free import credits, which were very popular with

exporters.

• The establishment of an “REC Market Maker” would address the

current lack of “bankability” of RECs. It would be a government-sponsored body that would

act as a buyer and seller of last resort, in case of either over supply or shortage of RECs in

the market.

• Infrastructure Debt Funds: Infrastructure Debt Funds (IDF) allow tapping of long-term, low-

cost debt from insurance and pension funds (both domestic and foreign) to refinance bank

debt of infrastructure projects. This structure, introduced in India in 2011, has so far not been

used for RE projects.

• Green Bonds: Green bonds, or climate bonds, are asset-backed bonds that allow refinancing

of RE projects and thus increase liquidity. While they are popular in developed markets,

especially Europe, the U.S. and China, they have not yet been used in India.

• Off-Grid Fund: An off-grid fund financed by high-net-worth individuals (HNIs) and corporate

social responsibility (CSR) sources could be used to support competent RESCOs for the

development of commercial and rural off-grid projects, with a dual focus on financial returns

and social impact.

• Risk Insurance Instruments: Insurance instruments can be designed to cover the various

risks faced by RE projects, such as resource, technology, off-taker, power purchase

agreement, and project development risks. These instruments can attract large-scale, risk-

averse, investors and lenders to the sector.

These seven financial mechanisms can spur RE investment by catalyzing new sources of financing

such as pension funds, sovereign wealth funds, insurance companies, CSR and HNI funds. They can

also facilitate refinancing of debt with longer tenure and lower-cost funds; provide wider access to

tax benefits, thereby expanding the pool of investors; and reduce project risks through insurance

products. This report describes in more detail how each of these instruments operate and how they

can could be adapted and implemented in order to help address the current barriers to RE finance in

India.

Policy Instruments

Financial Instruments

REC Market Maker:

4 GBI was introduced as an alternative incentive mechanism to accelerated depreciation for IPPs, because IPPs

were unable to generate adequate profits to take advantage of the entire accelerated depreciation benefit. If

tradable tax credits are introduced, IPPs can use these credits thereby removing the need for a separate

incentive mechanism like GBI.


Potential for RE in India

5 http://www.mnre.gov.in/mission-and-vision-2/achievements/ accessed on September 13, 2013.6 http://planningcommission.nic.in/plans/planrel/12thplan/pdf/12fyp_vol2.pdf7 http://planningcommission.nic.in/plans/planrel/12thplan/pdf/12fyp_vol2.pdf8 http://www.mnre.gov.in/solar-mission/jnnsm/introduction-2/ accessed on September 13, 2013.

11.1 Current Scenario

1.2 RE POTENTIAL

5India's current installed capacity of RE stands at 29,812 MW. This includes 28,905 MW of grid-thconnected RE and 96.8 MW of off-grid capacity. According to the 12 Five Year Plan of the Planning

6 th Commission, the country aims to add 30,000 MW of RE capacity during the 12 Five Year Plan 7 thPeriod (2012 - 2017) and about 45,000 MW of RE capacity during the 13 Five Year Plan Period (2017

- 2022). The Jawaharlal Nehru National Solar Mission (JNNSM) under the National Action Plan on 8Climate Change (NAPCC) targets addition of more than 20,000 MW of solar capacity by 2022 .

India has abundant RE resources (wind, solar, biomass and hydro) that can be harnessed to generate

substantial amounts of electricity (See Figure 1: Potential vs. Installed Capacity of RE in India) across

various geographical regions of the country.


4burden of payments for GBI on the government. The U.S. has a long track record in tradable

certificates. India also had tradable duty-free import credits, which were very popular with

exporters.

• The establishment of an “REC Market Maker” would address the

current lack of “bankability” of RECs. It would be a government-sponsored body that would

act as a buyer and seller of last resort, in case of either over supply or shortage of RECs in

the market.

• Infrastructure Debt Funds: Infrastructure Debt Funds (IDF) allow tapping of long-term, low-

cost debt from insurance and pension funds (both domestic and foreign) to refinance bank

debt of infrastructure projects. This structure, introduced in India in 2011, has so far not been

used for RE projects.

• Green Bonds: Green bonds, or climate bonds, are asset-backed bonds that allow refinancing

of RE projects and thus increase liquidity. While they are popular in developed markets,

especially Europe, the U.S. and China, they have not yet been used in India.

• Off-Grid Fund: An off-grid fund financed by high-net-worth individuals (HNIs) and corporate

social responsibility (CSR) sources could be used to support competent RESCOs for the

development of commercial and rural off-grid projects, with a dual focus on financial returns

and social impact.

• Risk Insurance Instruments: Insurance instruments can be designed to cover the various

risks faced by RE projects, such as resource, technology, off-taker, power purchase

agreement, and project development risks. These instruments can attract large-scale, risk-

averse, investors and lenders to the sector.

These seven financial mechanisms can spur RE investment by catalyzing new sources of financing

such as pension funds, sovereign wealth funds, insurance companies, CSR and HNI funds. They can

also facilitate refinancing of debt with longer tenure and lower-cost funds; provide wider access to

tax benefits, thereby expanding the pool of investors; and reduce project risks through insurance

products. This report describes in more detail how each of these instruments operate and how they

can could be adapted and implemented in order to help address the current barriers to RE finance in

India.

Policy Instruments

Financial Instruments

REC Market Maker:

4 GBI was introduced as an alternative incentive mechanism to accelerated depreciation for IPPs, because IPPs

were unable to generate adequate profits to take advantage of the entire accelerated depreciation benefit. If

tradable tax credits are introduced, IPPs can use these credits thereby removing the need for a separate

incentive mechanism like GBI.


Potential for RE in India

5 http://www.mnre.gov.in/mission-and-vision-2/achievements/ accessed on September 13, 2013.6 http://planningcommission.nic.in/plans/planrel/12thplan/pdf/12fyp_vol2.pdf7 http://planningcommission.nic.in/plans/planrel/12thplan/pdf/12fyp_vol2.pdf8 http://www.mnre.gov.in/solar-mission/jnnsm/introduction-2/ accessed on September 13, 2013.

11.1 Current Scenario

1.2 RE POTENTIAL

5India's current installed capacity of RE stands at 29,812 MW. This includes 28,905 MW of grid-thconnected RE and 96.8 MW of off-grid capacity. According to the 12 Five Year Plan of the Planning

6 th Commission, the country aims to add 30,000 MW of RE capacity during the 12 Five Year Plan 7 thPeriod (2012 - 2017) and about 45,000 MW of RE capacity during the 13 Five Year Plan Period (2017

- 2022). The Jawaharlal Nehru National Solar Mission (JNNSM) under the National Action Plan on 8Climate Change (NAPCC) targets addition of more than 20,000 MW of solar capacity by 2022 .

India has abundant RE resources (wind, solar, biomass and hydro) that can be harnessed to generate

substantial amounts of electricity (See Figure 1: Potential vs. Installed Capacity of RE in India) across

various geographical regions of the country.


Solar and wind are the largest RE resources available in India. India receives high solar radiation and

has on an average 300 sunny days per year. The Bangalore based Indian Institute of Science (IISc)

estimates that nearly 58 percent of the country's total area receives more than 5 kWh/sq m/day of 9annual average Global Horizontal Irradiance (GHI). At this level of solar radiation, solar photovoltaic

(PV) plants can achieve capacity utilization factors between 17 and 22 percent. If even one percent

of the land area were to be used for solar projects; nearly 1,460 GW of solar PV capacity could be

installed.

9 Global Horizontal Irradiance (GHI) is the amount of terrestrial irradiance falling on a surface horizontal to the

surface of the earth.10 Source: Installed Capacity: MNRE estimates, Potential Capacity: IISc estimates for solar, Lawrence Berkeley

National Laboratory for wind, MNRE for biomass and small hydro.11 Reassessing Wind Potential Estimates for India, Lawrence Berkeley National Laboratory, 201112 At higher hub heights, land area receiving over 200 m/sec wind speed increases. 13 percent of land area

receives over 200 m/sec wind speed at 120 m hub height.

10Figure 1: Potential vs. Installed Capacity of RE in India

Solar Wind Biomass Small Hydro

3.7

14

4.2

2319.6

1.9

Potential (GW)

InstalledCapacity (GW)

The Centre for Wind Energy Technology, an autonomous Research and Development Institution

under MNRE, has estimated India's wind potential at 102.8 GW (at 80m hub height). However, a

number of other estimates made in the recent past feel that the potential is higher. For example, 11U.S.-based Lawrence Berkeley National Laboratory , under a recent study estimated that about

seven percent of land area in India (i.e., 281,432 sq km) has over 200 W/sq m of wind power density

(at 80m hub height). At this density, about 2,000 GW of wind capacity could be developed across

the states of Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu and Gujarat.

The Ministry of New and Renewable Energy (MNRE) estimates surplus biomass availability of about

120-150 million metric tons per annum from agricultural and forestry residues in India with which

about 18 GW of electrical and/or thermal capacity can be developed. An additional 5 GW of biomass

capacity can also be harnessed from bagasse generated in nearly 550 sugar mills across the

country.

MNRE has identified 5,415 potential sites for small and mini hydro projects, which have a potential

of 14 GW. However, the actual potential could be much higher as the potential site identification

process is still on-going across the country.

The main drivers of RE investment in India include:

• Technology: Technological advancements have led to improved conversion efficiency and

lowered capital costs for RE technologies (RET). These advancements will continue to move 13RE technologies closer towards grid parity . Hence, they are one of the main drivers for

investment in this sector. Key RETs, such as small hydro, wind and biomass are already

close to grid parity. It is expected that RE technologies are likely to achieve grid parity and

become more competitive vis-à-vis conventional power technologies due to increasing

supply constraints for key fossil fuels and their escalating costs.

• Energy Scarcity: In spite of being among the top five global countries in terms of power

generation and installed capacity, India has average and peak energy deficits as high as 8.7

percent and 9.0 percent respectively for 2012-13 as per Central Electricity Authority

estimates. One of the key factors for such high energy deficits is the enormous bottlenecks

in the coal supply chain. Most power plants in India today are running below their expected

Plant Load Factors (PLF) due to limited access to coal supplies. Energy scarcity is not only

reflected in poor access to electricity for rural areas but also in regular power outages in

urban and semi urban areas and commercial and industrial (C&I) units. C&I units in turn are 14increasingly using diesel as an alternative source of energy to overcome energy scarcity.

This is both un-economical and creates significant environmental challenges. India's

abundant RE resources, therefore, offer an alternative source of clean energy that can help

overcome the country's energy scarcity.

1.3 DRIVERS OF RE

13 Grid parity is the point at which alternative means of generating electricity are equal in cost to, or cheaper

than grid power.14 For 2010-11, while 339,878 GWh of the electricity consumed by commercial sector consumption of electricity

were supplies by utilities and captive generation units, commercial sector has used diesel for generating over

51,000 GWh which is of considerable amount to meet energy scarcity.

7Financing Renewable Energy in IndiaPACE-D Technical Assistance Program6

1460 2000

Solar and wind are the largest RE resources available in India. India receives high solar radiation and

has on an average 300 sunny days per year. The Bangalore based Indian Institute of Science (IISc)

estimates that nearly 58 percent of the country's total area receives more than 5 kWh/sq m/day of 9annual average Global Horizontal Irradiance (GHI). At this level of solar radiation, solar photovoltaic

(PV) plants can achieve capacity utilization factors between 17 and 22 percent. If even one percent

of the land area were to be used for solar projects; nearly 1,460 GW of solar PV capacity could be

installed.

9 Global Horizontal Irradiance (GHI) is the amount of terrestrial irradiance falling on a surface horizontal to the

surface of the earth.10 Source: Installed Capacity: MNRE estimates, Potential Capacity: IISc estimates for solar, Lawrence Berkeley

National Laboratory for wind, MNRE for biomass and small hydro.11 Reassessing Wind Potential Estimates for India, Lawrence Berkeley National Laboratory, 201112 At higher hub heights, land area receiving over 200 m/sec wind speed increases. 13 percent of land area

receives over 200 m/sec wind speed at 120 m hub height.

10Figure 1: Potential vs. Installed Capacity of RE in India

Solar Wind Biomass Small Hydro

3.7

14

4.2

2319.6

1.9

Potential (GW)

InstalledCapacity (GW)

The Centre for Wind Energy Technology, an autonomous Research and Development Institution

under MNRE, has estimated India's wind potential at 102.8 GW (at 80m hub height). However, a

number of other estimates made in the recent past feel that the potential is higher. For example, 11U.S.-based Lawrence Berkeley National Laboratory , under a recent study estimated that about

seven percent of land area in India (i.e., 281,432 sq km) has over 200 W/sq m of wind power density

(at 80m hub height). At this density, about 2,000 GW of wind capacity could be developed across

the states of Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu and Gujarat.

The Ministry of New and Renewable Energy (MNRE) estimates surplus biomass availability of about

120-150 million metric tons per annum from agricultural and forestry residues in India with which

about 18 GW of electrical and/or thermal capacity can be developed. An additional 5 GW of biomass

capacity can also be harnessed from bagasse generated in nearly 550 sugar mills across the

country.

MNRE has identified 5,415 potential sites for small and mini hydro projects, which have a potential

of 14 GW. However, the actual potential could be much higher as the potential site identification

process is still on-going across the country.

The main drivers of RE investment in India include:

• Technology: Technological advancements have led to improved conversion efficiency and

lowered capital costs for RE technologies (RET). These advancements will continue to move 13RE technologies closer towards grid parity . Hence, they are one of the main drivers for

investment in this sector. Key RETs, such as small hydro, wind and biomass are already

close to grid parity. It is expected that RE technologies are likely to achieve grid parity and

become more competitive vis-à-vis conventional power technologies due to increasing

supply constraints for key fossil fuels and their escalating costs.

• Energy Scarcity: In spite of being among the top five global countries in terms of power

generation and installed capacity, India has average and peak energy deficits as high as 8.7

percent and 9.0 percent respectively for 2012-13 as per Central Electricity Authority

estimates. One of the key factors for such high energy deficits is the enormous bottlenecks

in the coal supply chain. Most power plants in India today are running below their expected

Plant Load Factors (PLF) due to limited access to coal supplies. Energy scarcity is not only

reflected in poor access to electricity for rural areas but also in regular power outages in

urban and semi urban areas and commercial and industrial (C&I) units. C&I units in turn are 14increasingly using diesel as an alternative source of energy to overcome energy scarcity.

This is both un-economical and creates significant environmental challenges. India's

abundant RE resources, therefore, offer an alternative source of clean energy that can help

overcome the country's energy scarcity.

1.3 DRIVERS OF RE

13 Grid parity is the point at which alternative means of generating electricity are equal in cost to, or cheaper

than grid power.14 For 2010-11, while 339,878 GWh of the electricity consumed by commercial sector consumption of electricity

were supplies by utilities and captive generation units, commercial sector has used diesel for generating over

51,000 GWh which is of considerable amount to meet energy scarcity.


1460 2000

• Energy Security: Nearly 70 percent of India's electricity generation comes from fossil fuels, with

coal being the mainstay of India's energy generation. A significant increase in energy demand is

projected with economic growth and social development, which in turn will increase the demand

for coal. Indigenous coal is not adequate to meet the country's increasing demands so coal is

being imported in large quantities. In spite of being the third largest steam coal producer in the

world (producing 509 MMT of coal in 2011), India is also the fourth largest importer of steam coal.

The dependence on steam coal imports for electricity generation has grown at an alarming rate

from 22 MMT in 2006 (five percent of the total requirement) to 86 MMT in 2011 (15 percent of

the total requirement). The demand and supply gap for coal is expected to rise to 434 MMT in the

next five years, which is likely to have a significant impact on the availability and pricing of

international coal apart from the current account deficit problems in India. To counter the potential

adverse impacts from the import of large quantities of coal, the GOI is strategically moving the

country's energy mix to RE and nuclear energy for improved energy security in the future.

• Climate Change: Concern about climate change mitigation is growing across the globe. Low

emission development strategies and related policy measures are being developed by large

number of countries. For its part, India has adopted the NAPCC in 2008. The NAPCC is being

implemented through eight National Missions which aim at achieving sustainable development,

by integrating the need for economic growth with the need to address environmental concerns.

The National Solar Mission, one of the key missions under the NAPCC, aims to add 20 GW of

solar power capacity by 2022 and facilitate the development of an eco-system for solar energy

development in India.

• Energy Access: India is still quite far from achieving universal access to electricity. The GOI's

targets of providing rural electricity access to all villages by 2009 and universal household access 15by 2012 have not been met. As of 2011 , 57 percent of rural households used electricity as their

16main source of lighting (up from 45 percent in 2001 ). Off-grid RE technologies (RET) offer one of

the most reliable and cost effective options for the delivery of clean energy services, especially

for rural areas. The Smart Grid Vision and Roadmap for India sets a target of achieving universal

access to electricity by 2017.

• RE Purchase Obligations (RPOs): NAPCC targets 15 percent RE adoption by FY 2021 - 22.

RPOs have been mandated by the Electricity Act 2003 as a mechanism to ensure greater

adoption of RE. To comply with this, each State Electricity Regulatory Commission (SERC) has

mandated a RPO target for distribution companies and other obligated entities in the state. These

targets vary across states (between 0.5 to 10 percent of the total energy distributed by these

utilities) and are meant to increase over time. The National Tariff Policy of 2011 has also

announced specific targets for solar power consumption – starting from 0.25 percent in FY 2012-

13 and going up to three percent in FY 2021-22. The national, state and the solar RPO targets

shall drive demand for RE technologies over the next decade in the country.

15 Census of India, 2011.16 Census of India, 2001.

Government interventions remain the backbone of RE market development across the globe. A

review of policies and regulatory frameworks across countries indicates that commercialization of

RE technologies remains dependent on government support, be it in the form of fiscal support or

other support like favourable access to the grid. International experience is replete with successful

examples of governments leveraging these instruments to scale up RE deployment. Some of the

most successful examples are Germany (soft loans for residential solar photovoltaic systems and

feed-in tariffs for wind and solar), Japan (net metering, grants for demonstration projects and

subsidy for de-centralized residential solar photovoltaic systems), California, U.S. (production and

investments tax credits, net metering, renewable portfolio standard for states, and feed-in tariffs for

all RE technologies), Texas, U.S. (RE purchase targets) and Spain (high feed-in tariffs for solar).

Availability of suitable policy instruments provides the right incentives for the development of RE

with the view of ensuring greater long term adoption and global cost competitiveness.

India has been at the forefront of RE development due to its proactive policy and regulatory

frameworks. India has successfully designed and launched a number of policy instruments which

have enhanced the viability and bank ability of RE projects. The use of these instruments at the state

and the central levels has allowed large scale deployment of RE and development of new, business

models across the country. The key policy instruments for promotion of RE include: tax incentives,

FiTs, subsidies, RECs, and GBI. However, India's experience with such instruments has not been

Policy Support for RE in India2


• Energy Security: Nearly 70 percent of India's electricity generation comes from fossil fuels, with

coal being the mainstay of India's energy generation. A significant increase in energy demand is

projected with economic growth and social development, which in turn will increase the demand

for coal. Indigenous coal is not adequate to meet the country's increasing demands so coal is

being imported in large quantities. In spite of being the third largest steam coal producer in the

world (producing 509 MMT of coal in 2011), India is also the fourth largest importer of steam coal.

The dependence on steam coal imports for electricity generation has grown at an alarming rate

from 22 MMT in 2006 (five percent of the total requirement) to 86 MMT in 2011 (15 percent of

the total requirement). The demand and supply gap for coal is expected to rise to 434 MMT in the

next five years, which is likely to have a significant impact on the availability and pricing of

international coal apart from the current account deficit problems in India. To counter the potential

adverse impacts from the import of large quantities of coal, the GOI is strategically moving the

country's energy mix to RE and nuclear energy for improved energy security in the future.

• Climate Change: Concern about climate change mitigation is growing across the globe. Low

emission development strategies and related policy measures are being developed by large

number of countries. For its part, India has adopted the NAPCC in 2008. The NAPCC is being

implemented through eight National Missions which aim at achieving sustainable development,

by integrating the need for economic growth with the need to address environmental concerns.

The National Solar Mission, one of the key missions under the NAPCC, aims to add 20 GW of

solar power capacity by 2022 and facilitate the development of an eco-system for solar energy

development in India.

• Energy Access: India is still quite far from achieving universal access to electricity. The GOI's

targets of providing rural electricity access to all villages by 2009 and universal household access 15by 2012 have not been met. As of 2011 , 57 percent of rural households used electricity as their

16main source of lighting (up from 45 percent in 2001 ). Off-grid RE technologies (RET) offer one of

the most reliable and cost effective options for the delivery of clean energy services, especially

for rural areas. The Smart Grid Vision and Roadmap for India sets a target of achieving universal

access to electricity by 2017.

• RE Purchase Obligations (RPOs): NAPCC targets 15 percent RE adoption by FY 2021 - 22.

RPOs have been mandated by the Electricity Act 2003 as a mechanism to ensure greater

adoption of RE. To comply with this, each State Electricity Regulatory Commission (SERC) has

mandated a RPO target for distribution companies and other obligated entities in the state. These

targets vary across states (between 0.5 to 10 percent of the total energy distributed by these

utilities) and are meant to increase over time. The National Tariff Policy of 2011 has also

announced specific targets for solar power consumption – starting from 0.25 percent in FY 2012-

13 and going up to three percent in FY 2021-22. The national, state and the solar RPO targets

shall drive demand for RE technologies over the next decade in the country.

15 Census of India, 2011.16 Census of India, 2001.

Government interventions remain the backbone of RE market development across the globe. A

review of policies and regulatory frameworks across countries indicates that commercialization of

RE technologies remains dependent on government support, be it in the form of fiscal support or

other support like favourable access to the grid. International experience is replete with successful

examples of governments leveraging these instruments to scale up RE deployment. Some of the

most successful examples are Germany (soft loans for residential solar photovoltaic systems and

feed-in tariffs for wind and solar), Japan (net metering, grants for demonstration projects and

subsidy for de-centralized residential solar photovoltaic systems), California, U.S. (production and

investments tax credits, net metering, renewable portfolio standard for states, and feed-in tariffs for

all RE technologies), Texas, U.S. (RE purchase targets) and Spain (high feed-in tariffs for solar).

Availability of suitable policy instruments provides the right incentives for the development of RE

with the view of ensuring greater long term adoption and global cost competitiveness.

India has been at the forefront of RE development due to its proactive policy and regulatory

frameworks. India has successfully designed and launched a number of policy instruments which

have enhanced the viability and bank ability of RE projects. The use of these instruments at the state

and the central levels has allowed large scale deployment of RE and development of new, business

models across the country. The key policy instruments for promotion of RE include: tax incentives,

FiTs, subsidies, RECs, and GBI. However, India's experience with such instruments has not been

Policy Support for RE in India2


without challenges: the design and implementation of these instruments has often been hampered

by uncertainty on continuity and frequent revisions. This section of the report identifies some of

these instruments, describes their design, use and the constraints which have been limiting their

effectiveness.

All companies in India are required to pay taxes on their profits. At present, the corporate tax rate is 17 1832.45 percent for income below INR 100 million (USD 1.6 million ) and 33.99 percent for incomes

above INR 100 million (USD 1.6 million). The GOI, under Section 80-IA of Income Tax Law Act, 1961

(IT Law), exempts all infrastructure assets (this includes RE generators) from income tax for a block

of any 10 consecutive years out of the first fifteen years of operation.

In order to promote RE, the GOI provides a higher depreciation rate (80 percent for plant and

machinery) for non-wind RE projects vis-a-vis 7.84 percent for thermal power plants and 15 percent

for other power equipment. An additional 20 percent depreciation is available for all manufacturing

and production companies in the first year of operation. Thus, non-wind RE assets and wind assets

can be depreciated 100 percent and 35 percent respectively in the first year.

2.1 TAX INCENTIVES

2.1.1 Income Tax Exemption

2.1.2 Accelerated Depreciation

17 Income tax rate 30 percent + Surcharge 5 percent + Education Cess 3 percent. As per Income Tax Law

available at http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=FINA&schT=FIN&csId=30d194ca-

afe8-4ed5-afc6-f7c6d83451eb&&pId=9c845744-9bd9-4c83-aa3a-f3cb1dcd62f7&sch=&title=Taxmann20-

20Direct20Tax20Laws18Exchange rate, as on September 29, 2013, INR 62.58/ USD is considered.19 MAT Rate 18.5 + Surcharge 5 + Education Cess 3. As per Income Tax Law available at

http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITAC&schT=&csId=6f08213f-bec8-4d1c-b232-

45979fb9093a&rdb=sec&yr=a56ea192-3ca8-433a-a515-ed68a062eac7&sec=&sch=&title=Taxmann20-

20Direct20Tax20Laws

Box 1: Challenges in the Implementation of Income Tax Exemptions

During the income tax exemption period, companies have to pay a minimum alternate tax (MAT) of 1920.01 percent on profits if their income is below INR 100 million (USD 1.6 million) and 20.96 percent

if their income is above INR 100 million (USD 1.6 million). Thus, infrastructure assets do not get a

clean “exemption” on income tax, but only a discount (as they have to bear the lower MAT rate

instead of the corporate tax rate) or deferment. The amount of MAT paid during a year of exemption

contributes towards MAT credits which may be used for setting off income tax liabilities in the

subsequent 10 years.

The accelerated depreciation benefit has been a very effective tool for mobilizing funds for RE

technologies like wind. The accelerated depreciation benefit was initially available for wind energy

projects and was the key driver for capacity addition in the country's wind sector. However, the

benefit was withdrawn in April 2012. This withdrawal negatively impacted the growth of wind

capacity. For instance, during the FY 2012-13, only 1,700 MW of wind power capacity was added as

compared to 3,164 MW in the previous financial year.

For a long time, wind energy was the preferred RE technology to avail tax benefits due to its

simplicity in operation, no fuel requirement; mature technology; end-to-end turnkey project

development by equipment suppliers; low operations and maintenance (O&M) costs; encouraging

policy framework; short implementation period (within one year); and ease of capacity expansion.

Unlike wind, the other three RET types (biomass, hydro and solar) suffer from a number of issues

which make them unattractive to investors for tax saving purposes:

• Biomass projects have significant fuel availability and price risks

• Small hydro projects have difficulties in obtaining clearances, and require long development

time (two-three years) and implementation time (three years)

• Solar projects lack attractive FiTs, however of all the three technologies, solar has the

highest potential to leverage this tax benefit.

Tax savings due to accelerated depreciation are 32.45 percent (if income is below INR 100 million) or

33.99 percent (if income is above INR 100 million) of the capital cost during the first year.


Box 2: Limitations of Accelerated Depreciation

RE projects are capital intensive, with low taxable profits in the initial years due to high depreciation.

Hence, the benefit of accelerated depreciation can only be utilized when the company owning the

RE asset generates enough profits from other businesses. Independent Power Producers (IPPs),

which are the key drivers of investments in RE, suffer as a result because they invest via SPVs in

each project. SPVs have low profitability in the initial years and cannot absorb high depreciation

levels. Thus captive generators, with high profitability in their parent businesses enjoy significant

advantage while investing in RE, vis-à-vis IPPs. These tax benefits are not transferable in any form.

without challenges: the design and implementation of these instruments has often been hampered

by uncertainty on continuity and frequent revisions. This section of the report identifies some of

these instruments, describes their design, use and the constraints which have been limiting their

effectiveness.

All companies in India are required to pay taxes on their profits. At present, the corporate tax rate is 17 1832.45 percent for income below INR 100 million (USD 1.6 million ) and 33.99 percent for incomes

above INR 100 million (USD 1.6 million). The GOI, under Section 80-IA of Income Tax Law Act, 1961

(IT Law), exempts all infrastructure assets (this includes RE generators) from income tax for a block

of any 10 consecutive years out of the first fifteen years of operation.

In order to promote RE, the GOI provides a higher depreciation rate (80 percent for plant and

machinery) for non-wind RE projects vis-a-vis 7.84 percent for thermal power plants and 15 percent

for other power equipment. An additional 20 percent depreciation is available for all manufacturing

and production companies in the first year of operation. Thus, non-wind RE assets and wind assets

can be depreciated 100 percent and 35 percent respectively in the first year.

2.1 TAX INCENTIVES

2.1.1 Income Tax Exemption

2.1.2 Accelerated Depreciation

17 Income tax rate 30 percent + Surcharge 5 percent + Education Cess 3 percent. As per Income Tax Law

available at http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=FINA&schT=FIN&csId=30d194ca-

afe8-4ed5-afc6-f7c6d83451eb&&pId=9c845744-9bd9-4c83-aa3a-f3cb1dcd62f7&sch=&title=Taxmann20-

20Direct20Tax20Laws18Exchange rate, as on September 29, 2013, INR 62.58/ USD is considered.19 MAT Rate 18.5 + Surcharge 5 + Education Cess 3. As per Income Tax Law available at

http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITAC&schT=&csId=6f08213f-bec8-4d1c-b232-

45979fb9093a&rdb=sec&yr=a56ea192-3ca8-433a-a515-ed68a062eac7&sec=&sch=&title=Taxmann20-

20Direct20Tax20Laws

Box 1: Challenges in the Implementation of Income Tax Exemptions

During the income tax exemption period, companies have to pay a minimum alternate tax (MAT) of 1920.01 percent on profits if their income is below INR 100 million (USD 1.6 million) and 20.96 percent

if their income is above INR 100 million (USD 1.6 million). Thus, infrastructure assets do not get a

clean “exemption” on income tax, but only a discount (as they have to bear the lower MAT rate

instead of the corporate tax rate) or deferment. The amount of MAT paid during a year of exemption

contributes towards MAT credits which may be used for setting off income tax liabilities in the

subsequent 10 years.

The accelerated depreciation benefit has been a very effective tool for mobilizing funds for RE

technologies like wind. The accelerated depreciation benefit was initially available for wind energy

projects and was the key driver for capacity addition in the country's wind sector. However, the

benefit was withdrawn in April 2012. This withdrawal negatively impacted the growth of wind

capacity. For instance, during the FY 2012-13, only 1,700 MW of wind power capacity was added as

compared to 3,164 MW in the previous financial year.

For a long time, wind energy was the preferred RE technology to avail tax benefits due to its

simplicity in operation, no fuel requirement; mature technology; end-to-end turnkey project

development by equipment suppliers; low operations and maintenance (O&M) costs; encouraging

policy framework; short implementation period (within one year); and ease of capacity expansion.

Unlike wind, the other three RET types (biomass, hydro and solar) suffer from a number of issues

which make them unattractive to investors for tax saving purposes:

• Biomass projects have significant fuel availability and price risks

• Small hydro projects have difficulties in obtaining clearances, and require long development

time (two-three years) and implementation time (three years)

• Solar projects lack attractive FiTs, however of all the three technologies, solar has the

highest potential to leverage this tax benefit.

Tax savings due to accelerated depreciation are 32.45 percent (if income is below INR 100 million) or

33.99 percent (if income is above INR 100 million) of the capital cost during the first year.


Box 2: Limitations of Accelerated Depreciation

RE projects are capital intensive, with low taxable profits in the initial years due to high depreciation.

Hence, the benefit of accelerated depreciation can only be utilized when the company owning the

RE asset generates enough profits from other businesses. Independent Power Producers (IPPs),

which are the key drivers of investments in RE, suffer as a result because they invest via SPVs in

each project. SPVs have low profitability in the initial years and cannot absorb high depreciation

levels. Thus captive generators, with high profitability in their parent businesses enjoy significant

advantage while investing in RE, vis-à-vis IPPs. These tax benefits are not transferable in any form.

2.2 FEED-IN TARIFFS

Reverse Bidding

One of the most successful policy instruments for promoting RE has been the FiTs. State

governments across the country have been providing long term support to RE through FiTs, also

known as preferential tariffs. Under the FiT framework, RE power is procured by Distribution

Companies (DISCOMs) at the FiT specified by SERCs. FiTs, applicable over a period of 10 to 25

years, ensure predictable financial returns over the life of the project. The SERCs determine FiTs for

each RE technology (separately) using a cost plus approach based on following factors:

• Achievable capacity utilization factors based on the availability of fuel/resource;

• Operating costs (cost of fuel, O&M expenses, capital replacement);

• Capital expenditure (project cost);

• Share of debt and the cost of debt; and

• Expected return on equity.

For established technologies, such as solar, wind, hydro and biomass, SERCs benchmark costs

associated with setting up and operating a project. They hold consultation with various stakeholders 20and then notify tariffs for each RE technology based on the benchmarked costs. Based on the

21nature of the technology, FiTs may have fixed and variable components .

JNNSM Phase 1, in 2010, was the first solar program to use reverse bidding process for tariff

discovery and project allotment. In a reverse bidding process, projects are allocated to developers

who either quote the lowest tariff, or provide the maximum discount on the benchmark tariff. The

reverse bidding process has resulted in a reduction of solar tariff from INR 17.91 per kWh (U.S. cent

28.6 per kWh) to INR 10.95 per kWh (U.S. cent 17.5 per kWh). The reverse bidding process benefited

from falling technology costs. The success of JNNSM Phase I, in reducing solar tariffs, encouraged

several other state solar programs to adopt this process and resulted in further reduction of tariffs to

INR 5.51 per kWh (U.S. cent 8.8 per kWh) by 2013. These programs are summarized in Annex A.

20Tariffs differ for developers that avail accelerated depreciation benefit and those who do not avail such a

benefit.21The fixed component, which is based on capital expenditure and other fixed costs, remains constant for the

entire life of the project. For technologies like solar, wind, small hydro where there are no variable operating

expenses, the tariff includes the fixed component only. The variable component, which is based on operating

expenses like fuel, is revised on a regular basis.

Box 3: Limitations of Feed-in-Tariffs

The Feed-in Tariff is one of the most successful and effective instruments, used across the globe for

promoting RE generation. However, feed-in tariffs have to be designed carefully keeping in

perspective the prevailing market conditions. If the FiT is too high it leads to huge unwarranted

profits for the developers and high costs for consumers, while if it is too low, it can lead to very low

financial returns leading to low investments in the sector. The other challenge lies in adjusting the

FiTs, as experience is gained, technology improves and costs fall. This instrument may also lead to

concentration of projects in regions with better FiTs.

In India, the FiTs are determined by the SERCs on a year-by-year basis. SERCs sometimes do not

have the appropriate analytical tools, databases and sector experts needed to undertake an

appropriate market analysis and capture prevailing market costs or adjust FiTs based on resource

quality. For example, the state of Tamil Nadu announced a preferential tariff of INR 3.51 per kWh

(U.S. cent 5.6 per kWh) for wind energy projects across wind zones. Projects availing this tariff and

selling it to the state distribution company are only able to generate low equity returns in the range

of 10 to 12 percent. On the other hand the state of Madhya Pradesh has attracted lot of investors

due to its attractive FiT at INR 5.92 per kWh (U.S. cent 9.5 per kWh).

There is a need for a consistent approach to determining FiTs across states based on up-to-date

investment and operating costs, the maturity of technology and quality of RE resource.


2.3. RENEWABLE ENERGY PURCHASE OBLIGATIONS

RPOs stimulate demand for RE by providing a guaranteed market for RE power. RPOs in India have

been mandated by the Electricity Act, 2003 and the National Tariff Policy, 2011. RPO targets are

defined as a percentage of the total power consumed or distributed by the obligated entities, which

include any of the following groups of entities:

• Distribution companies

• Captive power consumers

• Open access consumers

These obligated entities can meet their RPO targets either by generating renewable power from

captive sources; purchasing renewable power; and/or purchasing RECs. If obligated entities are

unable to meet their RPO targets through either of the above mentioned means, they face a penalty 22for non-compliance equivalent to the forbearance price of RECs . The obligated entities need to

meet their RPO targets before the end of each financial year.

22Forbearance price means the ceiling price as determined by CERC (Terms and Conditions for recognition and

issuance of Renewable energy Certificate for Renewable Energy Generation) Regulations 2010. Forbearance

price for solar RECs and non solar RECs is INR 13,400 per MWh (USD 214.1 per MWh) and INR 3,300 per

MWh (USD 53.7 per MWh) respectively.

2.2 FEED-IN TARIFFS

Reverse Bidding

One of the most successful policy instruments for promoting RE has been the FiTs. State

governments across the country have been providing long term support to RE through FiTs, also

known as preferential tariffs. Under the FiT framework, RE power is procured by Distribution

Companies (DISCOMs) at the FiT specified by SERCs. FiTs, applicable over a period of 10 to 25

years, ensure predictable financial returns over the life of the project. The SERCs determine FiTs for

each RE technology (separately) using a cost plus approach based on following factors:

• Achievable capacity utilization factors based on the availability of fuel/resource;

• Operating costs (cost of fuel, O&M expenses, capital replacement);

• Capital expenditure (project cost);

• Share of debt and the cost of debt; and

• Expected return on equity.

For established technologies, such as solar, wind, hydro and biomass, SERCs benchmark costs

associated with setting up and operating a project. They hold consultation with various stakeholders 20and then notify tariffs for each RE technology based on the benchmarked costs. Based on the

21nature of the technology, FiTs may have fixed and variable components .

JNNSM Phase 1, in 2010, was the first solar program to use reverse bidding process for tariff

discovery and project allotment. In a reverse bidding process, projects are allocated to developers

who either quote the lowest tariff, or provide the maximum discount on the benchmark tariff. The

reverse bidding process has resulted in a reduction of solar tariff from INR 17.91 per kWh (U.S. cent

28.6 per kWh) to INR 10.95 per kWh (U.S. cent 17.5 per kWh). The reverse bidding process benefited

from falling technology costs. The success of JNNSM Phase I, in reducing solar tariffs, encouraged

several other state solar programs to adopt this process and resulted in further reduction of tariffs to

INR 5.51 per kWh (U.S. cent 8.8 per kWh) by 2013. These programs are summarized in Annex A.

20Tariffs differ for developers that avail accelerated depreciation benefit and those who do not avail such a

benefit.21The fixed component, which is based on capital expenditure and other fixed costs, remains constant for the

entire life of the project. For technologies like solar, wind, small hydro where there are no variable operating

expenses, the tariff includes the fixed component only. The variable component, which is based on operating

expenses like fuel, is revised on a regular basis.

Box 3: Limitations of Feed-in-Tariffs

The Feed-in Tariff is one of the most successful and effective instruments, used across the globe for

promoting RE generation. However, feed-in tariffs have to be designed carefully keeping in

perspective the prevailing market conditions. If the FiT is too high it leads to huge unwarranted

profits for the developers and high costs for consumers, while if it is too low, it can lead to very low

financial returns leading to low investments in the sector. The other challenge lies in adjusting the

FiTs, as experience is gained, technology improves and costs fall. This instrument may also lead to

concentration of projects in regions with better FiTs.

In India, the FiTs are determined by the SERCs on a year-by-year basis. SERCs sometimes do not

have the appropriate analytical tools, databases and sector experts needed to undertake an

appropriate market analysis and capture prevailing market costs or adjust FiTs based on resource

quality. For example, the state of Tamil Nadu announced a preferential tariff of INR 3.51 per kWh

(U.S. cent 5.6 per kWh) for wind energy projects across wind zones. Projects availing this tariff and

selling it to the state distribution company are only able to generate low equity returns in the range

of 10 to 12 percent. On the other hand the state of Madhya Pradesh has attracted lot of investors

due to its attractive FiT at INR 5.92 per kWh (U.S. cent 9.5 per kWh).

There is a need for a consistent approach to determining FiTs across states based on up-to-date

investment and operating costs, the maturity of technology and quality of RE resource.


2.3. RENEWABLE ENERGY PURCHASE OBLIGATIONS

RPOs stimulate demand for RE by providing a guaranteed market for RE power. RPOs in India have

been mandated by the Electricity Act, 2003 and the National Tariff Policy, 2011. RPO targets are

defined as a percentage of the total power consumed or distributed by the obligated entities, which

include any of the following groups of entities:

• Distribution companies

• Captive power consumers

• Open access consumers

These obligated entities can meet their RPO targets either by generating renewable power from

captive sources; purchasing renewable power; and/or purchasing RECs. If obligated entities are

unable to meet their RPO targets through either of the above mentioned means, they face a penalty 22for non-compliance equivalent to the forbearance price of RECs . The obligated entities need to

meet their RPO targets before the end of each financial year.

22Forbearance price means the ceiling price as determined by CERC (Terms and Conditions for recognition and

issuance of Renewable energy Certificate for Renewable Energy Generation) Regulations 2010. Forbearance

price for solar RECs and non solar RECs is INR 13,400 per MWh (USD 214.1 per MWh) and INR 3,300 per

MWh (USD 53.7 per MWh) respectively.

However there is a lack of consistency in the methodology used for determining RPO targets for a

state. As a result, the RPO targets set by the states vary substantially, ranging, from one percent in

Tripura to 10.25 percent in Himachal Pradesh. RPO targets have been adopted by most states but

met by the obligated entities in only a handful of states. Penalty enforcement has been hindered

because state utilities have poor financial health. So far, none of these entities have been penalized

for non-compliance also, a proper monitoring system for tracking achievement vis-a-vis the RPO

target has not been established.

The Central Electricity Regulatory Commission (CERC) has included the purchase of RECs as one of 23the ways of meeting the RPOs . The REC program aims to provide market based incentives for RE

developers and distribute the marginal cost of RE deployment nationwide. The REC program has

two objectives: to facilitate achievement of RPO targets for obligated entities not able to invest in

RE; and to facilitate creation of RE capacities in regions with the least cost of generation and

abundant RE resources.

CERC, through the REC framework, has bifurcated the electricity and renewable components of RE.

Power generators can sell electricity and RECs to two distinct users. Projects availing REC benefits

cannot take advantage of any of the preferential benefits (concessional wheeling charges, banking

facility, electricity waiver or sale of power to DISCOM at FiTs). The projects availing RECs can sell

power under open access to third party or group captive customers or sell power to distribution

companies at the average pooled purchase cost (APPC).

Projects must also be connected to the grid in order to be eligible for RECs. One REC is equivalent 24to 1 MWh of renewable power generated, and is valid for a period of two years from the date of

issuance. These certificates can be bought and sold through two designated exchanges, i.e., India

Energy Exchange and Power Exchange of India. Only eligible generating entities are allowed to sell

and purchase RECs. The RECs cannot be resold and, once traded, can only be used by the buyer for

meeting its RPO target. CERC has established a trading range for solar and non-solar RECs by 25setting a floor price and a forbearance price. These prices are determined based on the difference

between the marginal cost of generation from RE and conventional sources.

2.4 RENEWABLE ENERGY CERTIFICATES (RECs)

23Regulations for the development of market in power from Non Conventional Energy Sources by issuance of

transferable and saleable credit certificates by Central Electricity Regulatory Authority, January 2010. Available

at

https://www.recregistryindia.nic.in/pdf/REC_Regulation/2(a)CERC_Regulation_on_Renewable_Energy_Certific

ates_REC.pdf24Shelf life revised to two years in February 2013.25Floor price for solar RECs and non solar RECs is INR 9,300 per MWhr (USD 148.6 per MWhr) and INR 1,500

per MWhr (USD 23.9 per MWhr) respectively.

Box 4: Limitations of RECs

Poor enforcement of RPOs: The lack of enforcement is leading to low REC price and over supply. The

build-up of unsold RECs in the last few months is a big cause of concern for both generators and

banks.

Unpredictable cash flows to generators: Obligated entities are mandated to meet their annual RPO

targets by the end of each financial year. Thus, most obligated entities defer the purchase of RECs

towards the end of the year. This delay significantly impacts the predictability and uniformity of cash

flows for the generators, and thus, their ability to raise finance on attractive terms. This can also lead

to working capital problems for the generators.

High price for solar RECs: In August 2011, CERC announced floor prices and forbearance prices for

solar and non-solar RECs for the trading period April 2012 to March 2017. Since then, the capital cost

of solar projects has decreased dramatically due to a global oversupply for solar modules. For

instance, in the recently concluded solar capacity allotment through reverse bidding process in

Karnataka, the lowest bid was INR 5.51 per kWh (US cent 8.8 per kWh). Thus, the floor price for

solar RECs at INR 9,300 per MWh (USD 148.6 per MWh), is higher than the tariff discovered through

competitive bidding. This mismatch has led to uncertainty regarding the continuation of the floor and

forbearance price, thereby, making it difficult for projects based on solar RECs to raise finance.

No price certainty post 2017: The CERC has announced floor prices and forbearance prices for RECs

only until 2017. This has led to uncertainty regarding revenues from RECs beyond this time frame.

This makes it difficult for FIs to lend to projects based on RECs because such loans normally extend

beyond 10 years.

RECs not available for off-grid projects: As per the current guidelines, RECs are only allowed for grid-

connected plants. There are no alternate guidelines for small RE capacities developed under the REC

mechanism for off-grid rural or onsite captive consumption.

Design constraints for RECs: A number of design constraints have also limited the tradability of

RECs. These include disallowing forward contracting/bilateral trades of RECs; lack of an over-the-

counter market (intermediaries are not allowed to trade RECs); and expiry of unsold RECs after two

years.


2.5 SUBSIDIES

2.5.1 Grid-connected RE

MNRE and several state governments, support the development of grid-connected RE through the

provision of subsidies. For example, for biomass based RE projects, MNRE provides a subsidy of up

to INR 2.5 million per MW (USD 40,000 per MW) to special category states, and up to INR 2 million

However there is a lack of consistency in the methodology used for determining RPO targets for a

state. As a result, the RPO targets set by the states vary substantially, ranging, from one percent in

Tripura to 10.25 percent in Himachal Pradesh. RPO targets have been adopted by most states but

met by the obligated entities in only a handful of states. Penalty enforcement has been hindered

because state utilities have poor financial health. So far, none of these entities have been penalized

for non-compliance also, a proper monitoring system for tracking achievement vis-a-vis the RPO

target has not been established.

The Central Electricity Regulatory Commission (CERC) has included the purchase of RECs as one of 23the ways of meeting the RPOs . The REC program aims to provide market based incentives for RE

developers and distribute the marginal cost of RE deployment nationwide. The REC program has

two objectives: to facilitate achievement of RPO targets for obligated entities not able to invest in

RE; and to facilitate creation of RE capacities in regions with the least cost of generation and

abundant RE resources.

CERC, through the REC framework, has bifurcated the electricity and renewable components of RE.

Power generators can sell electricity and RECs to two distinct users. Projects availing REC benefits

cannot take advantage of any of the preferential benefits (concessional wheeling charges, banking

facility, electricity waiver or sale of power to DISCOM at FiTs). The projects availing RECs can sell

power under open access to third party or group captive customers or sell power to distribution

companies at the average pooled purchase cost (APPC).

Projects must also be connected to the grid in order to be eligible for RECs. One REC is equivalent 24to 1 MWh of renewable power generated, and is valid for a period of two years from the date of

issuance. These certificates can be bought and sold through two designated exchanges, i.e., India

Energy Exchange and Power Exchange of India. Only eligible generating entities are allowed to sell

and purchase RECs. The RECs cannot be resold and, once traded, can only be used by the buyer for

meeting its RPO target. CERC has established a trading range for solar and non-solar RECs by 25setting a floor price and a forbearance price. These prices are determined based on the difference

between the marginal cost of generation from RE and conventional sources.

2.4 RENEWABLE ENERGY CERTIFICATES (RECs)

23Regulations for the development of market in power from Non Conventional Energy Sources by issuance of

transferable and saleable credit certificates by Central Electricity Regulatory Authority, January 2010. Available

at

https://www.recregistryindia.nic.in/pdf/REC_Regulation/2(a)CERC_Regulation_on_Renewable_Energy_Certific

ates_REC.pdf24Shelf life revised to two years in February 2013.25Floor price for solar RECs and non solar RECs is INR 9,300 per MWhr (USD 148.6 per MWhr) and INR 1,500

per MWhr (USD 23.9 per MWhr) respectively.

Box 4: Limitations of RECs

Poor enforcement of RPOs: The lack of enforcement is leading to low REC price and over supply. The

build-up of unsold RECs in the last few months is a big cause of concern for both generators and

banks.

Unpredictable cash flows to generators: Obligated entities are mandated to meet their annual RPO

targets by the end of each financial year. Thus, most obligated entities defer the purchase of RECs

towards the end of the year. This delay significantly impacts the predictability and uniformity of cash

flows for the generators, and thus, their ability to raise finance on attractive terms. This can also lead

to working capital problems for the generators.

High price for solar RECs: In August 2011, CERC announced floor prices and forbearance prices for

solar and non-solar RECs for the trading period April 2012 to March 2017. Since then, the capital cost

of solar projects has decreased dramatically due to a global oversupply for solar modules. For

instance, in the recently concluded solar capacity allotment through reverse bidding process in

Karnataka, the lowest bid was INR 5.51 per kWh (US cent 8.8 per kWh). Thus, the floor price for

solar RECs at INR 9,300 per MWh (USD 148.6 per MWh), is higher than the tariff discovered through

competitive bidding. This mismatch has led to uncertainty regarding the continuation of the floor and

forbearance price, thereby, making it difficult for projects based on solar RECs to raise finance.

No price certainty post 2017: The CERC has announced floor prices and forbearance prices for RECs

only until 2017. This has led to uncertainty regarding revenues from RECs beyond this time frame.

This makes it difficult for FIs to lend to projects based on RECs because such loans normally extend

beyond 10 years.

RECs not available for off-grid projects: As per the current guidelines, RECs are only allowed for grid-

connected plants. There are no alternate guidelines for small RE capacities developed under the REC

mechanism for off-grid rural or onsite captive consumption.

Design constraints for RECs: A number of design constraints have also limited the tradability of

RECs. These include disallowing forward contracting/bilateral trades of RECs; lack of an over-the-

counter market (intermediaries are not allowed to trade RECs); and expiry of unsold RECs after two

years.


2.5 SUBSIDIES

2.5.1 Grid-connected RE

MNRE and several state governments, support the development of grid-connected RE through the

provision of subsidies. For example, for biomass based RE projects, MNRE provides a subsidy of up

to INR 2.5 million per MW (USD 40,000 per MW) to special category states, and up to INR 2 million

26per MW (USD 32,000 per MW) in the rest of India . Some states, such as Bihar, also provide a capital

subsidy equivalent to 60 percent of the total project cost for biomass-based RE projects. More details

of subsidies are mentioned in Annex B.

MNRE also provides subsidies to encourage rural electrification based on RE resources. However,

most of these subsidies are restricted to state implementation agencies and not-for-profit

organizations. The subsidies provided through these programs include:

• Decentralized Distributed Generation (DDG) scheme under Rajiv Gandhi Grameen Vidyutikaran

Yojana, 2005 (RGGVY): The DDG scheme covers all un-electrified villages and hamlets with

little or no electricity access. The scheme promotes a Build Operate Maintain and Transfer

(BOMT) model. Under this scheme, the government provides a capital subsidy of 90 percent

and pays eight percent of the total project cost as a service charge to the implementing

agencies. Projects can only be implemented by government enterprises under this program.

• Remote Village Electrification Model: This is MNRE's flagship scheme and was started almost

a decade ago (2002-03). This scheme covers villages that are not covered under the RGGVY

program and have been designated as being remote by GOI. The RVE program also uses the

BOMT model. The program provides a 90 percent capital subsidy, while the remaining 10

percent is funded by the state government or consumer contributions. Projects can only be

implemented by government enterprises under this program.

• Jawaharlal Nehru National Solar Mission (JNNSM): One of the key components of the JNNSM

is the development of small and off-grid solar PV applications which include DDG-based power

plants. Under this program, MNRE supports village electrification projects that use solar 27energy with capacities up to 250 kWp through capital subsidies . The support also includes

soft loans from Micro Finance Institutions (MFIs)/Banks which can be refinanced by Indian

Renewable Energy Development Agency (IREDA) and/or National Bank for Agriculture and

Rural Development (NABARD) at a two percent interest rate.The remaining 20 percent of the

investment must be arranged by the project manager or the RESCOs themselves. This scheme

is available for private developers.

• Interest Subsidy for Off-grid Projects through IREDA: MNRE also provides subsidised debt at a

five percent interest rate for off-grid solar applications through IREDA. Most of these projects

are developed by local developers, who approach local banks for debt financing. However, the

subsidized debt is only available through IREDA and is not accessible to local banks.

2.5.2 Rural Electrification Programs

26Refer Annex A.27Subsidy is capped at INR 90 per Wp (USD 1.4 per Wp).

2.5.3 Commercial Off-grid Projects

Biomass Projects

MNRE provides capital subsidies for the industrial use of biomass for both combustion and

gasification projects. For biomass combustion projects, the subsidy amount is the same as that

provided to grid-connected projects.

For biomass gasification projects, MNRE provides subsidies for capacities up to 5 MW for both 28electrical and thermal applications . These subsidies are up to INR 1 million per 100 kW (USD

16,000 per 100 kW) for dual gas systems and INR 1.5 million per 100 kW (USD 24,000 per 100 kW)

for 100 percent producer gas systems. An additional subsidy of 20 percent of the capital cost is

available for special category states.

28Refer Annex C29Refer Annex D


The effectiveness of the existing subsidy programs is limited by the following reasons:

• Subsidies only guarantee capacity addition, while most financers would rather have an

instrument that stimulates generation, as debt payback is dependent on generation.

• Most subsidies are available only after successful commissioning of the project, thus forcing

the developer to raise full finance for the project's construction.

• The application processing time taken by the MNRE and other state bodies for subsidies is

generally long (up to six months). Furthermore, the time required for disbursement of the

subsidy ranges from six months to one year. The cumbersome and long process for subsidy

approval reduces the attractiveness of these incentives.

Box 5: Limitations of Subsidy Schemes

Solar Projects

Under JNNSM, MNRE provides capital subsidies for solar plants used for captive consumption (up

to a capacity of 100 kWp). Up to 30 percent of the capital cost is provided as subsidy, with a cap of

INR 30 per Wp (USD 0.48 per Wp) for projects without batteries and INR 63 per Wp (USD 1 per Wp) 29for projects with batteries .

Subsidies available for off-grid renewable energy projects are described in Annexes C to F.

26per MW (USD 32,000 per MW) in the rest of India . Some states, such as Bihar, also provide a capital

subsidy equivalent to 60 percent of the total project cost for biomass-based RE projects. More details

of subsidies are mentioned in Annex B.

MNRE also provides subsidies to encourage rural electrification based on RE resources. However,

most of these subsidies are restricted to state implementation agencies and not-for-profit

organizations. The subsidies provided through these programs include:

• Decentralized Distributed Generation (DDG) scheme under Rajiv Gandhi Grameen Vidyutikaran

Yojana, 2005 (RGGVY): The DDG scheme covers all un-electrified villages and hamlets with

little or no electricity access. The scheme promotes a Build Operate Maintain and Transfer

(BOMT) model. Under this scheme, the government provides a capital subsidy of 90 percent

and pays eight percent of the total project cost as a service charge to the implementing

agencies. Projects can only be implemented by government enterprises under this program.

• Remote Village Electrification Model: This is MNRE's flagship scheme and was started almost

a decade ago (2002-03). This scheme covers villages that are not covered under the RGGVY

program and have been designated as being remote by GOI. The RVE program also uses the

BOMT model. The program provides a 90 percent capital subsidy, while the remaining 10

percent is funded by the state government or consumer contributions. Projects can only be

implemented by government enterprises under this program.

• Jawaharlal Nehru National Solar Mission (JNNSM): One of the key components of the JNNSM

is the development of small and off-grid solar PV applications which include DDG-based power

plants. Under this program, MNRE supports village electrification projects that use solar 27energy with capacities up to 250 kWp through capital subsidies . The support also includes

soft loans from Micro Finance Institutions (MFIs)/Banks which can be refinanced by Indian

Renewable Energy Development Agency (IREDA) and/or National Bank for Agriculture and

Rural Development (NABARD) at a two percent interest rate.The remaining 20 percent of the

investment must be arranged by the project manager or the RESCOs themselves. This scheme

is available for private developers.

• Interest Subsidy for Off-grid Projects through IREDA: MNRE also provides subsidised debt at a

five percent interest rate for off-grid solar applications through IREDA. Most of these projects

are developed by local developers, who approach local banks for debt financing. However, the

subsidized debt is only available through IREDA and is not accessible to local banks.

2.5.2 Rural Electrification Programs

26Refer Annex A.27Subsidy is capped at INR 90 per Wp (USD 1.4 per Wp).

2.5.3 Commercial Off-grid Projects

Biomass Projects

MNRE provides capital subsidies for the industrial use of biomass for both combustion and

gasification projects. For biomass combustion projects, the subsidy amount is the same as that

provided to grid-connected projects.

For biomass gasification projects, MNRE provides subsidies for capacities up to 5 MW for both 28electrical and thermal applications . These subsidies are up to INR 1 million per 100 kW (USD

16,000 per 100 kW) for dual gas systems and INR 1.5 million per 100 kW (USD 24,000 per 100 kW)

for 100 percent producer gas systems. An additional subsidy of 20 percent of the capital cost is

available for special category states.

28Refer Annex C29Refer Annex D


The effectiveness of the existing subsidy programs is limited by the following reasons:

• Subsidies only guarantee capacity addition, while most financers would rather have an

instrument that stimulates generation, as debt payback is dependent on generation.

• Most subsidies are available only after successful commissioning of the project, thus forcing

the developer to raise full finance for the project's construction.

• The application processing time taken by the MNRE and other state bodies for subsidies is

generally long (up to six months). Furthermore, the time required for disbursement of the

subsidy ranges from six months to one year. The cumbersome and long process for subsidy

approval reduces the attractiveness of these incentives.

Box 5: Limitations of Subsidy Schemes

Solar Projects

Under JNNSM, MNRE provides capital subsidies for solar plants used for captive consumption (up

to a capacity of 100 kWp). Up to 30 percent of the capital cost is provided as subsidy, with a cap of

INR 30 per Wp (USD 0.48 per Wp) for projects without batteries and INR 63 per Wp (USD 1 per Wp) 29for projects with batteries .

Subsidies available for off-grid renewable energy projects are described in Annexes C to F.

2.6 GENERATION BASED INCENTIVES (GBI)

2.6.1 Wind Projects

2.6.2 Solar Projects

2.7 INCLUDING OFF-GRID RE PROJECTS IN PRIORITY SECTOR LENDING

In December 2009, MNRE introduced the GBI scheme for wind energy projects to facilitate the

entry of large IPPs. This scheme was available only to those developers who did not avail

themselves of accelerated depreciation benefits and sold power to the state distribution companies.

Under the GBI scheme, IREDA provided an incentive of INR 0.50 per kWh (U.S. cent 0.8 per kWh) of 30wind power fed into the grid, with a total project lifecycle cap of INR 6.25 million per MW (USD 0.1

million per MW) and an annual cap of INR 1.55 million per MW (USD 24,700 per MW). While the

target was to develop 4,000 MW through GBI, the scheme was discontinued in March, 2012, even

though a only 2,247 MW of wind capacity had been installed under the scheme.

GBIs are provided to state utilities for the solar projects developed under the JNNSM's Rooftop PV

and Small Solar Power Generation Program (RPSSGP). About 100 MW of solar capacity was allotted

under this scheme in 2010, of which 98 MW has been developed across 78 projects. Under

RPSSGP, state utilities purchased electricity from generators at the benchmark tariff of INR 17.91 per 31kWh (USD 0.29 per kWh) . Of this amount IREDA refunded them all but a reference tariff of INR 5.5

per kWh (U.S. cent 8.8 per kWh), which increases at three percent annually.

In its revised guidelines, the RBI has recently included loans made to off-grid RE applications as part

of priority sector lending for banks. This new classification provides benefits to off-grid RE projects,

as outlined below:

• The RBI mandates banks to have 40 percent of their exposure to priority sectors (as defined

by the RBI), but banks often find it difficult to achieve this target. Thus, the recent inclusion

of off-grid RE projects to this target will enable such projects to receive more attention from

banks.

• Loans covered under banks' priority sector targets are provided at concessional rates, which

are one to two percent lower than normal commercial lending rates.

30Revised to INR 10 million/MW in the policy announced in Sep 2013.31Tariff declared by CERC in 2010.


3.1 GRID-CONNECTED RE

The business models for grid-connected RE projects are based mainly on three variables – power

sales (or power off-take arrangements), resources (the type of resource used and their availability),

and technology (type and maturity of technology used). These three variables define returns, key

risks and the overall bankability of a project (See Table 1: Business Models for Grid-Connected RE

Projects). They are further explained below:

• Power Off-take Arrangements: The revenue model for the project is defined by power off-

take arrangement and depends largely on central and state government policies and

regulations such as open access, FiTs and RPOs; industrial and commercial tariffs in the

states, and the creditworthiness of off-takers such as DISCOMs and open access

consumers.

• Resource: A key driver of the cost of generation for RE projects is the availability of

resources, which has a significant impact on the costs, risks, energy generation, profitability

and bankability of the project. For example, biomass-based projects face significant

feedstock supply risks; their costs and capacity utilization are also highly dependent on the

type of biomass used.

Business Models for REProjects In India

3


2.6 GENERATION BASED INCENTIVES (GBI)

2.6.1 Wind Projects

2.6.2 Solar Projects

2.7 INCLUDING OFF-GRID RE PROJECTS IN PRIORITY SECTOR LENDING

In December 2009, MNRE introduced the GBI scheme for wind energy projects to facilitate the

entry of large IPPs. This scheme was available only to those developers who did not avail

themselves of accelerated depreciation benefits and sold power to the state distribution companies.

Under the GBI scheme, IREDA provided an incentive of INR 0.50 per kWh (U.S. cent 0.8 per kWh) of 30wind power fed into the grid, with a total project lifecycle cap of INR 6.25 million per MW (USD 0.1

million per MW) and an annual cap of INR 1.55 million per MW (USD 24,700 per MW). While the

target was to develop 4,000 MW through GBI, the scheme was discontinued in March, 2012, even

though a only 2,247 MW of wind capacity had been installed under the scheme.

GBIs are provided to state utilities for the solar projects developed under the JNNSM's Rooftop PV

and Small Solar Power Generation Program (RPSSGP). About 100 MW of solar capacity was allotted

under this scheme in 2010, of which 98 MW has been developed across 78 projects. Under

RPSSGP, state utilities purchased electricity from generators at the benchmark tariff of INR 17.91 per 31kWh (USD 0.29 per kWh) . Of this amount IREDA refunded them all but a reference tariff of INR 5.5

per kWh (U.S. cent 8.8 per kWh), which increases at three percent annually.

In its revised guidelines, the RBI has recently included loans made to off-grid RE applications as part

of priority sector lending for banks. This new classification provides benefits to off-grid RE projects,

as outlined below:

• The RBI mandates banks to have 40 percent of their exposure to priority sectors (as defined

by the RBI), but banks often find it difficult to achieve this target. Thus, the recent inclusion

of off-grid RE projects to this target will enable such projects to receive more attention from

banks.

• Loans covered under banks' priority sector targets are provided at concessional rates, which

are one to two percent lower than normal commercial lending rates.

30Revised to INR 10 million/MW in the policy announced in Sep 2013.31Tariff declared by CERC in 2010.


3.1 GRID-CONNECTED RE

The business models for grid-connected RE projects are based mainly on three variables – power

sales (or power off-take arrangements), resources (the type of resource used and their availability),

and technology (type and maturity of technology used). These three variables define returns, key

risks and the overall bankability of a project (See Table 1: Business Models for Grid-Connected RE

Projects). They are further explained below:

• Power Off-take Arrangements: The revenue model for the project is defined by power off-

take arrangement and depends largely on central and state government policies and

regulations such as open access, FiTs and RPOs; industrial and commercial tariffs in the

states, and the creditworthiness of off-takers such as DISCOMs and open access

consumers.

• Resource: A key driver of the cost of generation for RE projects is the availability of

resources, which has a significant impact on the costs, risks, energy generation, profitability

and bankability of the project. For example, biomass-based projects face significant

feedstock supply risks; their costs and capacity utilization are also highly dependent on the

type of biomass used.

Business Models for REProjects In India

3


32Emergent Ventures Research

The basic characteristics of the IPP model as applied to the different types of RE are outlined below.

Parameters Small hydroSolar Biomass

Power Off-

take (Revenue

Model)

(i) Sale to Distribution

Companies / other

designated

entities such as

NTPC Vidyut

Vyapar Nigam at

FiT

(ii) Sale to

Distribution

Companies at

APPC with RECs

(iii) Sale to captive /

open access

consumers with

RECs (less

common)

(i) Sale to Distribution Companies at

(a) FiT

(b) APPC with RECs)

(ii) Sale to captive / open access consumers with RECs.

32Table 1: IPP Business Models for Grid-Connected Renewable Energy Projects

Wind

Resource

(Cost of

generation and

profitability)

Accurate resource estimation has a significant impact on the profitability of a solar project. Accurate ground level radiation assessment is available only for a maximum of two year period. In absence of this data, developers use satellite data for making projections for generation from projects. There can be errors in such estimation, which may be unacceptably high for CSPs. More accurate measurements are needed.

Assessment

methodologies for

wind resource

assessment are well

established and

accepted.

However scale up

access to appropriate

sites remains an

issue.

Assessment

methodologies for

mapping hydrological

resources are well

established.

Development risks

along with long and

complex permitting

process remain

critical issues.

Assessment

methodologies well

established,

however alternate

resource usage/

collection poses a

challenge. Woody

biomass, rice husk,

cotton and maize

stocks used as

fuels.

Need third party

collection and bio-

mass processing

companies who

have the ability to

assure quality and

quantity of bio-

mass.

•

projects. Predictability depends upon the maturity of the technology, and the project design,

implementation and operation of its application. New and emerging technologies usually

carry a higher risk relative to older technologies that are more mature and have considerable

market experience in their design, implementation and operation. Thus new technologies

often fail to garner interest from developers and financers.

The business models that have been used in India for renewable generation include:

• Captive Model – An industry or the energy user, invests in, develops and operates a RE

project to meet its own electricity needs. Investment is mostly driven by the need to gain

access to power, depreciation tax benefits and subsidies. Debt for these projects is provided

by the user's existing lenders, often with recourse to the user's balance sheet. Lenders

consider these projects to be relatively less risky.

• Managed Asset Model – Under this model, investors finance the project to benefit from tax

savings such as accelerated depreciation. RE assets developed under this model are

managed by third parties, mostly the Original Equipment Manufacturers. This model was

very popular for wind project development and was the primary reason for the growth of

wind sector in the early 2000s. Investments in wind projects declined after the withdrawal

of depreciation benefits. Investments in solar projects are starting to increase under this

model. Lender financing is mostly based on the creditworthiness of the project developer,

the asset manager or the Original Equipment Manufacturers who will manage the asset.

Lenders are now increasingly realizing that there is a higher risk of an asset's non-

performance when the manager of the asset is an Original Equipment Manufacturer,

because the Original Equipment Manufacturer has no financial interest in ensuring the

sustenance and efficient operation of the project after the equipment has been sold.

• Independent Power Producers (IPPs) – The investors in such models are large strategic or

financial investors who invest, own and operate the assets efficiently to maximize cash

flows. This model is gaining prominence in India and will require scale up in non-recourse

finance.

IPPs focus on resource availability, site selection, mode of electricity sale, technology

selection, EPC contractor' selection, mode of financing, and management of benefits (e.g.

RECs, carbon credits, subsidies, etc.). The advent of IPPs has also resulted in the

introduction of many new means of financing including capital markets, supplier financing

(e.g. Export-Import financing), and External Commercial Borrowings (ECBs). IPPs are critical

for the future scale up of RE investments.

Technology: The predictability of electricity generation by a technology is a key risk for RE

PACE-D Technical Assistance Program20 21Financing Renewable Energy in India

32Emergent Ventures Research

The basic characteristics of the IPP model as applied to the different types of RE are outlined below.


Power Off-

take (Revenue

Model)

(i) Sale to Distribution

Companies / other

designated

entities such as

NTPC Vidyut

Vyapar Nigam at

FiT

(ii) Sale to

Distribution

Companies at

APPC with RECs

(iii) Sale to captive /

open access

consumers with

RECs (less

common)

(i) Sale to Distribution Companies at

(a) FiT

(b) APPC with RECs)

(ii) Sale to captive / open access consumers with RECs.

32Table 1: IPP Business Models for Grid-Connected Renewable Energy Projects

Wind

Resource

(Cost of

generation and

profitability)

Accurate resource estimation has a significant impact on the profitability of a solar project. Accurate ground level radiation assessment is available only for a maximum of two year period. In absence of this data, developers use satellite data for making projections for generation from projects. There can be errors in such estimation, which may be unacceptably high for CSPs. More accurate measurements are needed.

Assessment

methodologies for

wind resource

assessment are well

established and

accepted.

However scale up

access to appropriate

sites remains an

issue.

Assessment

methodologies for

mapping hydrological

resources are well

established.

Development risks

along with long and

complex permitting

process remain

critical issues.

Assessment

methodologies well

established,

however alternate

resource usage/

collection poses a

challenge. Woody

biomass, rice husk,

cotton and maize

stocks used as

fuels.

Need third party

collection and bio-

mass processing

companies who

have the ability to

assure quality and

quantity of bio-

mass.

•

projects. Predictability depends upon the maturity of the technology, and the project design,

implementation and operation of its application. New and emerging technologies usually

carry a higher risk relative to older technologies that are more mature and have considerable

market experience in their design, implementation and operation. Thus new technologies

often fail to garner interest from developers and financers.

The business models that have been used in India for renewable generation include:

• Captive Model – An industry or the energy user, invests in, develops and operates a RE

project to meet its own electricity needs. Investment is mostly driven by the need to gain

access to power, depreciation tax benefits and subsidies. Debt for these projects is provided

by the user's existing lenders, often with recourse to the user's balance sheet. Lenders

consider these projects to be relatively less risky.

• Managed Asset Model – Under this model, investors finance the project to benefit from tax

savings such as accelerated depreciation. RE assets developed under this model are

managed by third parties, mostly the Original Equipment Manufacturers. This model was

very popular for wind project development and was the primary reason for the growth of

wind sector in the early 2000s. Investments in wind projects declined after the withdrawal

of depreciation benefits. Investments in solar projects are starting to increase under this

model. Lender financing is mostly based on the creditworthiness of the project developer,

the asset manager or the Original Equipment Manufacturers who will manage the asset.

Lenders are now increasingly realizing that there is a higher risk of an asset's non-

performance when the manager of the asset is an Original Equipment Manufacturer,

because the Original Equipment Manufacturer has no financial interest in ensuring the

sustenance and efficient operation of the project after the equipment has been sold.

• Independent Power Producers (IPPs) – The investors in such models are large strategic or

financial investors who invest, own and operate the assets efficiently to maximize cash

flows. This model is gaining prominence in India and will require scale up in non-recourse

finance.

IPPs focus on resource availability, site selection, mode of electricity sale, technology

selection, EPC contractor' selection, mode of financing, and management of benefits (e.g.

RECs, carbon credits, subsidies, etc.). The advent of IPPs has also resulted in the

introduction of many new means of financing including capital markets, supplier financing

(e.g. Export-Import financing), and External Commercial Borrowings (ECBs). IPPs are critical

for the future scale up of RE investments.

Technology: The predictability of electricity generation by a technology is a key risk for RE


3.2 RURAL ELECTRIFICATION PROJECTS

3.3 COMMERCIAL AND INDUSTRIAL OFF-GRID RE PROJECTS

33The business models used for rural electrification projects are similar to those used for grid

connected projects except for the power off-take arrangements. For grid-connected projects, the

power off-takers are DISCOMs and bulk consumers while for rural electrification projects, the off-

takers are retail consumers in rural areas. Off-taker risk is higher in rural electrification projects due

to the low paying capacity of many energy users in rural areas. The size of rural electrification

projects is usually small, in the order of a few kWs and as a result, solar PV and biomass gasification 34are preferred technologies due to their commercial feasibility at small capacities . Moreover these

two technologies are modular and hence easier to scale up.

Many micro-grid operators have emerged, playing the role of both generators as well as distributors

of electricity. These operators find raising debt finance challenging due to the small ticket size and

the perception that rural consumers have poor creditworthiness.

Off-grid C&I applications of RE include all on-site captive energy needs. These include:

• Electrical and thermal energy (heating, cooling, and steam);

• Applications where diesel generators, captive gas, or coal based power plants currently

supply power (supplemented by the grid), which can be replaced, partly or fully by

on-site RE;

• Captive RE to offset grid power.

The type of users covered in C&I off-grid applications are:

• Large aggregated users such as residential complexes, shopping malls, and industries within

a Special Economic Zone;

• Utility service providers such as municipal corporations (e.g. street lights, and water and

waste management);

• Service providers such as railways, airports, petrol pumps, hotels, hospitals, schools,

universities, government offices, entertainment centres, and exhibition halls;

• Industries requiring on-site power generation to face shortages in grid power and the need

to shift to RE due to RPO.

The RESCO model is gaining popularity for developing off-grid systems for C&I users. Under this

model, a RESCO develops an off-grid system within the consumer's premises and sells the energy

generated to the consumer.


Technology

(Generation

Risk)

Solar PV is a well-

established

technology

worldwide. However

risks exist in terms

of technology

performance,

business continuity

of vendors,

performance of EPC

contractors etc.

CSP is a developing

technology, not well

established in India.

Risks of resource

assessment and

technology

performance remain.

Technologies are well

established.

Wind


established.

Biomass

combustion and

gasification

technologies are

well established

for certain fuel

types. However

multi-fuel

capabilities, quality

of equipment and

design for bio-

mass processing

remain critical

issues.

Equity

Sources

A number of private equity investors are active in

the market. The investors have not been able to

make exits through capital markets, due to

market conditions, low profitability and lack of

scale.

Sources of investments are limited to

specialized funds of strategic investors.

Very few players are interested due to the

high risks of the sector and low scalability.

Debt Finance Debt financing is available from Indian FIs with

tenure of 8 to 12 years with recourse at an

interest rate of 12 to 15 percent.

Debt financing for longer tenure with no

recourse and a lower interest rate is needed to

scale up investments.

FIs consider these projects to have high

risks. So lending to these projects has been

low. However, debt financing for fully

developed projects is relatively easier.


3.2 RURAL ELECTRIFICATION PROJECTS

3.3 COMMERCIAL AND INDUSTRIAL OFF-GRID RE PROJECTS

33The business models used for rural electrification projects are similar to those used for grid

connected projects except for the power off-take arrangements. For grid-connected projects, the

power off-takers are DISCOMs and bulk consumers while for rural electrification projects, the off-

takers are retail consumers in rural areas. Off-taker risk is higher in rural electrification projects due

to the low paying capacity of many energy users in rural areas. The size of rural electrification

projects is usually small, in the order of a few kWs and as a result, solar PV and biomass gasification 34are preferred technologies due to their commercial feasibility at small capacities . Moreover these

two technologies are modular and hence easier to scale up.

Many micro-grid operators have emerged, playing the role of both generators as well as distributors

of electricity. These operators find raising debt finance challenging due to the small ticket size and

the perception that rural consumers have poor creditworthiness.

Off-grid C&I applications of RE include all on-site captive energy needs. These include:

• Electrical and thermal energy (heating, cooling, and steam);

• Applications where diesel generators, captive gas, or coal based power plants currently

supply power (supplemented by the grid), which can be replaced, partly or fully by

on-site RE;

• Captive RE to offset grid power.

The type of users covered in C&I off-grid applications are:

• Large aggregated users such as residential complexes, shopping malls, and industries within

a Special Economic Zone;

• Utility service providers such as municipal corporations (e.g. street lights, and water and

waste management);

• Service providers such as railways, airports, petrol pumps, hotels, hospitals, schools,

universities, government offices, entertainment centres, and exhibition halls;

• Industries requiring on-site power generation to face shortages in grid power and the need

to shift to RE due to RPO.

The RESCO model is gaining popularity for developing off-grid systems for C&I users. Under this

model, a RESCO develops an off-grid system within the consumer's premises and sells the energy

generated to the consumer.


Technology

(Generation

Risk)

Solar PV is a well-

established

technology

worldwide. However

risks exist in terms

of technology

performance,

business continuity

of vendors,

performance of EPC

contractors etc.

CSP is a developing

technology, not well

established in India.

Risks of resource

assessment and

technology

performance remain.


established.

Wind


established.

Biomass

combustion and

gasification

technologies are

well established

for certain fuel

types. However

multi-fuel

capabilities, quality

of equipment and

design for bio-

mass processing

remain critical

issues.

Equity

Sources

A number of private equity investors are active in

the market. The investors have not been able to

make exits through capital markets, due to

market conditions, low profitability and lack of

scale.

Sources of investments are limited to

specialized funds of strategic investors.

Very few players are interested due to the

high risks of the sector and low scalability.

Debt Finance Debt financing is available from Indian FIs with

tenure of 8 to 12 years with recourse at an

interest rate of 12 to 15 percent.

Debt financing for longer tenure with no

recourse and a lower interest rate is needed to

scale up investments.

FIs consider these projects to have high

risks. So lending to these projects has been

low. However, debt financing for fully

developed projects is relatively easier.


The business models for off-grid commercial applications are the same as those for rural off-grid

rural projects except for power off-take arrangements. In this case, power off-takers are commercial

consumers. The risk of power off-take depends on the credit rating of the consumers. The size of

commercial off-grid projects vary from few kWs to several MWs. Solar PV and biomass gasification

are preferred technologies. However the RESCO approach has not been successful for off-grid C&I

projects due to significant effort need for identifying viable projects, persuading customers to invest

in these projects (as customers consider these projects as non-core) and small ticket size of

transaction.

4.1 DEBT INSTRUMENTS

4.1.1 Local Currency Loans

Debt is an important means to reduce cost of capital as the cost of debt is lower than equity. In

India, generally 70 percent of project costs are funded through conventional term loans. Domestic 35banks and Non-Banking Finance Companies (NBFCs) are the major sources of debt in India.

International development banks fund RE in India but mostly through credit lines to banks and

NBFCs. Several RE projects are funded by foreign currency loans which aim to promote specific

technologies. This section identifies and describes some of the most common debt instruments

used for RE financing in India.

Debt financing for RE projects in

India is predominantly provided

through local currency term loans

by FIs. Developers typically

approach banks for debt financing

during the development stage of

the project after which PPAs are

signed. A majority of these loans

are with recourse to the borrower

(i.e., the borrowers guarantee the

loan repayments by providing a full

or partial guarantee from their

existing asset base). FIs also use

other assets like property and fixed

deposits as collateral if a sufficiently

strong balance sheet is not

available. (See Table 2: Few

Prominent FIs Providing Rupee

Term Loans to RE Projects

Commercial Financing Instrumentsfor RE in India4


35 (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank,

i.e. one that does not hold a banking license and, thus, is not allowed to take deposits from the public.

The business models for off-grid commercial applications are the same as those for rural off-grid

rural projects except for power off-take arrangements. In this case, power off-takers are commercial

consumers. The risk of power off-take depends on the credit rating of the consumers. The size of

commercial off-grid projects vary from few kWs to several MWs. Solar PV and biomass gasification

are preferred technologies. However the RESCO approach has not been successful for off-grid C&I

projects due to significant effort need for identifying viable projects, persuading customers to invest

in these projects (as customers consider these projects as non-core) and small ticket size of

transaction.

4.1 DEBT INSTRUMENTS

4.1.1 Local Currency Loans

Debt is an important means to reduce cost of capital as the cost of debt is lower than equity. In

India, generally 70 percent of project costs are funded through conventional term loans. Domestic 35banks and Non-Banking Finance Companies (NBFCs) are the major sources of debt in India.

International development banks fund RE in India but mostly through credit lines to banks and

NBFCs. Several RE projects are funded by foreign currency loans which aim to promote specific

technologies. This section identifies and describes some of the most common debt instruments

used for RE financing in India.

Debt financing for RE projects in

India is predominantly provided

through local currency term loans

by FIs. Developers typically

approach banks for debt financing

during the development stage of

the project after which PPAs are

signed. A majority of these loans

are with recourse to the borrower

(i.e., the borrowers guarantee the

loan repayments by providing a full

or partial guarantee from their

existing asset base). FIs also use

other assets like property and fixed

deposits as collateral if a sufficiently

strong balance sheet is not

available. (See Table 2: Few

Prominent FIs Providing Rupee

Term Loans to RE Projects

Commercial Financing Instrumentsfor RE in India4


35 (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank,

i.e. one that does not hold a banking license and, thus, is not allowed to take deposits from the public.

IREDA is a public limited government company established in 1987, under the administrative control

of MNRE, to promote, develop and extend financial assistance for the development of RE and

energy efficiency (EE)/conservation. IREDA has played a critical role in catalyzing RE deployment in

India and has funded (as of March 31, 2012) a cumulative commissioned capacity of over 3 GW.

IREDA is also the preferred vehicle for international development banks for channeling funds to RE in

India. It has received substantial funding - nearly INR 23.7 billion (USD 379 million) from

development banks, such as KfW, ADB, World Bank, AFD, JICA, IDA and the Nordic Investment Bank

in the form of low cost credit lines guaranteed by the GOI. IREDA also sources funds from the

domestic financial market and has raised INR 7.4 billion (USD 117 million) through domestic bond

placements (both taxable and tax free) and INR 4.7 billion (USD 75 million) loans through domestic

commercial banks.

PFC, a GOI-sponsored NBFC dedicated to power sector financing, is also one of the leading FIs

financing RE projects in the country. As of March 2012, PFC has funded over 1 GW of RE through its

subsidiary PFC Green Energy Ltd.

Box 6: IREDA and PFC

Government-backed NBFCs

IREDA and Power Finance Corporation (PFC), two GOI-backed NBFCs, lead debt financing of RE

projects in India. As of March, 2012, IREDA and PFC have financed over 4 GW, which represents

roughly 15 percent of the total 29.8 GW RE capacity installed in the country.

The interest rates for loans provided to RE projects by IREDA and PFC range between 12 and 14

percent, with tenure around 10 years. Most loans provided by these institutions have a partial or full

recourse to the parent entity.

Table 2: Few Prominent FIs Providing Rupee Term Loans to RE Projects

Government Backed NBFCs Private sector banks

Indian Renewable Energy

Development Agency (IREDA)State Bank of India

Public sector banks Private NBFCs

ICICI Bank L&T Infrastructure

Finance

Power Finance Corporation Canara Bank Axis Bank Tata Capital

Power Trading Corporation Central Bank of India HDFC Bank

Rural Electrification Corporation Punjab National Bank IDFC Bank

India Infrastructure Finance

Company Ltd.

Andhra Bank Standard Chartered Bank

Commercial Banks

Public Sector Banks

Infrastructure financing for private sector projects in India has been led by commercial banks.

Commercial banks have also been at the forefront of lending to the power sector with a

compounded annual growth of 42 percent over a six year period from FY 2007 to FY 2012.

36While public sector banks dominate commercial lending in India, their presence in the power

sector, under which lending to RE projects classified, is limited. The exposure of public sector banks

to the power sector varies from bank to bank, based on sector limits defined by each bank. For

instance, Canara Bank has 13 percent of its loan portfolio exposed to the power sector, while for the 37exposure for Bank of Baroda is only 2.6 percent . However, most public sector banks have now

started scaling back their exposure to the power sector due to deteriorating financial health of the

state owned utilities. Banks are now using stricter norms for lending to the sector, especially to

projects entering into financial contracts with state owned utilities. This has impacted the availability

of debt to RE project developers as they usually enter into PPAs with these utilities. (See Box 7:

Public Sector Bank Lending for First Time RE Developers.)

Most RE projects being funded by public sector banks are based on existing relationships that the

banks have with project promoters. These banks do not have a loan portfolio that exclusively deals

with RE projects. First time developers without existing banking relationships find it very difficult to

get a project financed from public sector bank. Moreover, public sector banks are more stringent in

project evaluation and thus, end up lending to fewer RE projects. Interest rates on loans for RE

projects range between 12 and 14 percent with tenures ranging from 8 to 12 years. Loans are

provided to fund 60 to 70 percent of the project cost.

Box 7: Public Sector Bank Lending for First Time RE Developers

Private Sector Banks

Indian private sector banks, such as ICICI Bank and HDFC Bank, are relatively less active in the

power sector. The loan portfolios of these banks have an exposure of about one percent to the

power sector, as compared to public sector banks whose average exposure is about seven percent.

Private sector banks lend to RE projects mostly on the basis of their relationship with promoters and

guarantees provided by them. Interest rates on loans range between 13 and 15 percent with

tenures between 5 and 10 years.

36Public Sector Banks are banks where at least 50 percent of the shares are held by the government.37Which Banks need to worry the most if power sector defaults? First Post Investing, Oct 31, 2011. Available at

http://www.firstpost.com/investing/which-banks-need-to-worry-the-most-if-the-power-sector-defaults-

119455.html


IREDA is a public limited government company established in 1987, under the administrative control

of MNRE, to promote, develop and extend financial assistance for the development of RE and

energy efficiency (EE)/conservation. IREDA has played a critical role in catalyzing RE deployment in

India and has funded (as of March 31, 2012) a cumulative commissioned capacity of over 3 GW.

IREDA is also the preferred vehicle for international development banks for channeling funds to RE in

India. It has received substantial funding - nearly INR 23.7 billion (USD 379 million) from

development banks, such as KfW, ADB, World Bank, AFD, JICA, IDA and the Nordic Investment Bank

in the form of low cost credit lines guaranteed by the GOI. IREDA also sources funds from the

domestic financial market and has raised INR 7.4 billion (USD 117 million) through domestic bond

placements (both taxable and tax free) and INR 4.7 billion (USD 75 million) loans through domestic

commercial banks.

PFC, a GOI-sponsored NBFC dedicated to power sector financing, is also one of the leading FIs

financing RE projects in the country. As of March 2012, PFC has funded over 1 GW of RE through its

subsidiary PFC Green Energy Ltd.

Box 6: IREDA and PFC

Government-backed NBFCs

IREDA and Power Finance Corporation (PFC), two GOI-backed NBFCs, lead debt financing of RE

projects in India. As of March, 2012, IREDA and PFC have financed over 4 GW, which represents

roughly 15 percent of the total 29.8 GW RE capacity installed in the country.

The interest rates for loans provided to RE projects by IREDA and PFC range between 12 and 14

percent, with tenure around 10 years. Most loans provided by these institutions have a partial or full

recourse to the parent entity.

Table 2: Few Prominent FIs Providing Rupee Term Loans to RE Projects

Government Backed NBFCs Private sector banks

Indian Renewable Energy

Development Agency (IREDA)State Bank of India

Public sector banks Private NBFCs

ICICI Bank L&T Infrastructure

Finance

Power Finance Corporation Canara Bank Axis Bank Tata Capital

Power Trading Corporation Central Bank of India HDFC Bank

Rural Electrification Corporation Punjab National Bank IDFC Bank

India Infrastructure Finance

Company Ltd.

Andhra Bank Standard Chartered Bank

Commercial Banks

Public Sector Banks

Infrastructure financing for private sector projects in India has been led by commercial banks.

Commercial banks have also been at the forefront of lending to the power sector with a

compounded annual growth of 42 percent over a six year period from FY 2007 to FY 2012.

36While public sector banks dominate commercial lending in India, their presence in the power

sector, under which lending to RE projects classified, is limited. The exposure of public sector banks

to the power sector varies from bank to bank, based on sector limits defined by each bank. For

instance, Canara Bank has 13 percent of its loan portfolio exposed to the power sector, while for the 37exposure for Bank of Baroda is only 2.6 percent . However, most public sector banks have now

started scaling back their exposure to the power sector due to deteriorating financial health of the

state owned utilities. Banks are now using stricter norms for lending to the sector, especially to

projects entering into financial contracts with state owned utilities. This has impacted the availability

of debt to RE project developers as they usually enter into PPAs with these utilities. (See Box 7:

Public Sector Bank Lending for First Time RE Developers.)

Most RE projects being funded by public sector banks are based on existing relationships that the

banks have with project promoters. These banks do not have a loan portfolio that exclusively deals

with RE projects. First time developers without existing banking relationships find it very difficult to

get a project financed from public sector bank. Moreover, public sector banks are more stringent in

project evaluation and thus, end up lending to fewer RE projects. Interest rates on loans for RE

projects range between 12 and 14 percent with tenures ranging from 8 to 12 years. Loans are

provided to fund 60 to 70 percent of the project cost.

Box 7: Public Sector Bank Lending for First Time RE Developers

Private Sector Banks

Indian private sector banks, such as ICICI Bank and HDFC Bank, are relatively less active in the

power sector. The loan portfolios of these banks have an exposure of about one percent to the

power sector, as compared to public sector banks whose average exposure is about seven percent.

Private sector banks lend to RE projects mostly on the basis of their relationship with promoters and

guarantees provided by them. Interest rates on loans range between 13 and 15 percent with

tenures between 5 and 10 years.

36Public Sector Banks are banks where at least 50 percent of the shares are held by the government.37Which Banks need to worry the most if power sector defaults? First Post Investing, Oct 31, 2011. Available at

http://www.firstpost.com/investing/which-banks-need-to-worry-the-most-if-the-power-sector-defaults-

119455.html


Private NBFCs

Private NBFCs such as L&T Infrastructure Finance and Tata Capital are more receptive to financing

RE projects and have been active in the solar and wind energy space. These NBFCs process loans

faster (in one to two months, as compared to three to four months by public sector banks), and

charge higher interest rates (ranging between 13 and 15 percent) but provide longer tenures

(between 10 and 15 years). Most private NBFCs provide loans on a non-recourse or limited recourse

basis without substantial guarantees from the parent company, with lien on the assets being

financed. A sample list of RE projects which have been financed through local currency loans has

been highlighted in Annex H.

Although local debt financing provides a majority of the lending to RE, the sector still suffers from a

number of limitations which further constrain the flow of funds. (See Box 8 : Limitations of Debt

Financing with Local Currency Loans).

1. The high interest rates (interest rates between 12 and15 percent) in India has led to an increase

in the cost of debt for RE projects.

2. Long tenure debt of over 10 to 15 years is usually unavailable for rupee term loans, thus

stressing the cash flows from the projects in the initial years and impacting their financial

attractiveness.

3. Fixed interest rate debt for rupee term loans is quite rare, with most FIs providing floating

interest rates. This reduces the predictability of cash flows and exposes the projects to interest

rate fluctuations.

4. Debt funding of RE projects by FIs in India needs to be guaranteed partially or fully by the parent

entity; only a few private FIs provide debt to projects without a guarantee from the parent entity.

5. Banks internally define sector limits and RE is covered under the power sector limits. As most

banks are approaching their power sector limits, they are often not able to provide financing to

RE projects.

6. Some banks do not lend to RE projects due to unfamiliarity with RETs, markets and related

government policies.

7. State level policies, along with the poor financial condition of state utilities, restrict lending to

only a few states.

Box 8 : Limitations of Debt Financing with Local Currency Loans

4.1.2 Foreign Currency Loans

External Commercial Borrowing (ECB) Regulations

Limits on Amount of ECB and Interest Rate

End-use Restrictions

Project Finance from Development Banks

Foreign currency loans are provided to RE projects by development banks, export-import (EXIM)

banks and international banks. These loans carry low interest rates ranging between three and six

percent, with tenures between 10 and 18 years. However, all foreign currency loans carry an

exchange rate fluctuation risk. Annex H highlights some of the foreign currency loans for RE projects

in India.

A number of debt instruments used to raise funds from international markets are called ECB. The

Reserve Bank of India (RBI) monitors and regulates the flow of ECBs into India.

RBI regulations allow up to USD 750 million per ECB transaction with a minimum maturity of five

years under the automatic route (wherein no separate RBI approval is required). Higher amounts

require prior approval by the RBI. The RBI also permits supplier's and buyer's credits with tenure

lower than three years, up to USD 20 million per transaction under the automatic route. Also a

ceiling on the interest rates for ECBs has been set to 300 basis points above London Inter-bank 38Offered Rate (LIBOR) for the automatic approval route for tenures between three to five years and

500 basis points above LIBOR for the automatic and approval route for tenures above five years.

The RBI prohibits companies from using funds raised through ECBs for the following purposes:

• On-lending, investment in capital markets, acquisition of companies, or part thereof:

Developers cannot raise funds through their parent company and lend it to a SPV. Each SPV

needs to have separate ECB funding.

• Purchase of land

• Working capital: Developers cannot fund working capital from ECB. Biomass projects have a

considerable working capital requirement, which cannot be met through ECB.

Development finance institutions, such as the International Finance Corporation (IFC), Deutsche

Investitions-und Entwicklungsgesellschaft (DEG), and Asian Development Bank (ADB) have been

funding RE projects in India through foreign currency loans either in U.S. Dollars or Euros. The

386 month Libor


Private NBFCs

Private NBFCs such as L&T Infrastructure Finance and Tata Capital are more receptive to financing

RE projects and have been active in the solar and wind energy space. These NBFCs process loans

faster (in one to two months, as compared to three to four months by public sector banks), and

charge higher interest rates (ranging between 13 and 15 percent) but provide longer tenures

(between 10 and 15 years). Most private NBFCs provide loans on a non-recourse or limited recourse

basis without substantial guarantees from the parent company, with lien on the assets being

financed. A sample list of RE projects which have been financed through local currency loans has

been highlighted in Annex H.

Although local debt financing provides a majority of the lending to RE, the sector still suffers from a

number of limitations which further constrain the flow of funds. (See Box 8 : Limitations of Debt

Financing with Local Currency Loans).

1. The high interest rates (interest rates between 12 and15 percent) in India has led to an increase

in the cost of debt for RE projects.

2. Long tenure debt of over 10 to 15 years is usually unavailable for rupee term loans, thus

stressing the cash flows from the projects in the initial years and impacting their financial

attractiveness.

3. Fixed interest rate debt for rupee term loans is quite rare, with most FIs providing floating

interest rates. This reduces the predictability of cash flows and exposes the projects to interest

rate fluctuations.

4. Debt funding of RE projects by FIs in India needs to be guaranteed partially or fully by the parent

entity; only a few private FIs provide debt to projects without a guarantee from the parent entity.

5. Banks internally define sector limits and RE is covered under the power sector limits. As most

banks are approaching their power sector limits, they are often not able to provide financing to

RE projects.

6. Some banks do not lend to RE projects due to unfamiliarity with RETs, markets and related

government policies.

7. State level policies, along with the poor financial condition of state utilities, restrict lending to

only a few states.

Box 8 : Limitations of Debt Financing with Local Currency Loans

4.1.2 Foreign Currency Loans

External Commercial Borrowing (ECB) Regulations

Limits on Amount of ECB and Interest Rate

End-use Restrictions

Project Finance from Development Banks

Foreign currency loans are provided to RE projects by development banks, export-import (EXIM)

banks and international banks. These loans carry low interest rates ranging between three and six

percent, with tenures between 10 and 18 years. However, all foreign currency loans carry an

exchange rate fluctuation risk. Annex H highlights some of the foreign currency loans for RE projects

in India.

A number of debt instruments used to raise funds from international markets are called ECB. The

Reserve Bank of India (RBI) monitors and regulates the flow of ECBs into India.

RBI regulations allow up to USD 750 million per ECB transaction with a minimum maturity of five

years under the automatic route (wherein no separate RBI approval is required). Higher amounts

require prior approval by the RBI. The RBI also permits supplier's and buyer's credits with tenure

lower than three years, up to USD 20 million per transaction under the automatic route. Also a

ceiling on the interest rates for ECBs has been set to 300 basis points above London Inter-bank 38Offered Rate (LIBOR) for the automatic approval route for tenures between three to five years and

500 basis points above LIBOR for the automatic and approval route for tenures above five years.

The RBI prohibits companies from using funds raised through ECBs for the following purposes:

• On-lending, investment in capital markets, acquisition of companies, or part thereof:

Developers cannot raise funds through their parent company and lend it to a SPV. Each SPV

needs to have separate ECB funding.

• Purchase of land

• Working capital: Developers cannot fund working capital from ECB. Biomass projects have a

considerable working capital requirement, which cannot be met through ECB.

Development finance institutions, such as the International Finance Corporation (IFC), Deutsche

Investitions-und Entwicklungsgesellschaft (DEG), and Asian Development Bank (ADB) have been

funding RE projects in India through foreign currency loans either in U.S. Dollars or Euros. The

386 month Libor


interest rate for such loans ranges between four and six percent, with tenures between 10 to 15

years with limited or no recourse.

EXIM Banks are credit agencies set up by governments to support export of locally manufactured

goods to international markets through working capital finance (pre-export financing), post shipment

credits (short term), long term supplier finance, export credit insurance, loan guarantees, and direct

loans (buyer financing). The EXIM Banks of U.S., and China, and the Japan Bank for International

Cooperation (JBIC) are a few examples.

For long term financing, EXIM banks provide loan guarantees and direct loans to the developers.

These loans and guarantees can be based either on the entire project cost or just restricted to the

cost of the imports and associated local costs from the EXIM bank's country. The interest rate for

EXIM long-term finance ranges between three and five percent (without currency hedge) with

tenures above 15 years.

Since 2007, the EXIM Bank of the U.S. (U.S. EXIM) has provided funding of USD 1.5 billion for RET

exports from the U.S. to global markets. U.S. EXIM funds up to 85 percent of the total value of

technology exported from U.S. for a tenure of up to 18 years with limited or no recourse. Interest

rates are based on the project risk and the minimum interest rate, which is the average of the U.S.

Treasury rates for the preceding month plus one percent (for example the minimum interest rate for 40the month July 15, 2013 to August 14, 2013 for an 18 year loan was 3.5 percent ). The interest rates

on U.S. EXIM loans to Indian RE projects range between four to six percent. The bank has funded a

number of solar projects in India developed by IPPs, such as Reliance Power, Azure Power, and Kiran

Energy.

Other major exporting countries, like Japan and China, also provide loans for RE projects on

favorable terms. JBIC has formed a USD 200 million fund with ICICI Bank to provide loans to clean

energy projects in India. (See Box 9: Limitations of Debt Financing with Foreign Currency Loans in

India).

EXIM Finance

EXIM Bank of the U.S.

Other EXIM Banks

39Annual Report 2012, EXIM Bank, USA. Available at

http://www.exim.gov/about/library/reports/annualreports/2012/renewable.html40Commercial Reference Rates for Nuclear Power and Renewable Energies and Water, EXIM Bank, USA,

Available at http://www.exim.gov/tools/commercialinterestreferencerates/index.cfm

4.1.3 Supplier Credit

4.1.4 Construction Finance/Bridge Finance

4.1.5 Take-out Finance/Refinance

Some suppliers extend credit to RE projects, limited to the value of the material supplied by them.

These can be local currency or foreign currency denominated, and may or may not carry interest,

depending on the negotiation between the borrower and the supplier. Supplier credit is extended for

a period of one to three years, normally the construction period. On commissioning the project,

developers substitute the supplier credit with a term loan. Suppliers normally require a letter of

credit from the project owner for the value and term of the credit.

The construction phase of a project is associated with the highest risk in the entire lifecycle of the

project. Therefore, term loans raised during pre-construction phase entail higher interest rates

reflecting the higher risks. Term loans raised post commissioning are raised on a lower risk profile.

Project developers use short term loans to fund projects during the construction period, and then

refinance the loans with cheaper term loans post commissioning. These loans are provided by

private NBFCs and commercial banks in India. In some cases, construction loans convert into term

loans once the project achieves commercial operations.

41Take-out finance or refinance is a common method of financing operating assets. The majority of

FIs provide take-out financing for infrastructure projects. When the project commences operations

For foreign currency loans, the interest and debt repayment have to be made in foreign currency,

whereas the revenue from RE projects in India is generated in Indian Rupees. The required foreign

currency payments carry a risk of exchange rate fluctuations. Further, some lenders mandate partial

or full hedging of the debt component. Hedging costs add another three to six percent to the cost of

the loan. Debt from international commercial banks is more expensive (as compared to EXIM), as it

is adjusted for country risk. Even with the sovereign risk and hedging costs, foreign currency loans

may cost about two percent lower than domestic loans. However, their major attractiveness lies in

longer tenures. The challenge is in being able to get long-term hedges for the currency risk.

RBI has set interest rate ceilings for ECBs. This limits the lenders' flexibility to price-in applicable risk

in interest rates. Some lenders may be unwilling to provide finance to Indian RE projects because of

these restrictions.

Box 9: Limitations of Debt Financing with Foreign Currency Loans in India


41Take-out Finance or re-finance means the replacement of existing sources of finance with newer ones,

usually at better terms.

interest rate for such loans ranges between four and six percent, with tenures between 10 to 15

years with limited or no recourse.

EXIM Banks are credit agencies set up by governments to support export of locally manufactured

goods to international markets through working capital finance (pre-export financing), post shipment

credits (short term), long term supplier finance, export credit insurance, loan guarantees, and direct

loans (buyer financing). The EXIM Banks of U.S., and China, and the Japan Bank for International

Cooperation (JBIC) are a few examples.

For long term financing, EXIM banks provide loan guarantees and direct loans to the developers.

These loans and guarantees can be based either on the entire project cost or just restricted to the

cost of the imports and associated local costs from the EXIM bank's country. The interest rate for

EXIM long-term finance ranges between three and five percent (without currency hedge) with

tenures above 15 years.

Since 2007, the EXIM Bank of the U.S. (U.S. EXIM) has provided funding of USD 1.5 billion for RET

exports from the U.S. to global markets. U.S. EXIM funds up to 85 percent of the total value of

technology exported from U.S. for a tenure of up to 18 years with limited or no recourse. Interest

rates are based on the project risk and the minimum interest rate, which is the average of the U.S.

Treasury rates for the preceding month plus one percent (for example the minimum interest rate for 40the month July 15, 2013 to August 14, 2013 for an 18 year loan was 3.5 percent ). The interest rates

on U.S. EXIM loans to Indian RE projects range between four to six percent. The bank has funded a

number of solar projects in India developed by IPPs, such as Reliance Power, Azure Power, and Kiran

Energy.

Other major exporting countries, like Japan and China, also provide loans for RE projects on

favorable terms. JBIC has formed a USD 200 million fund with ICICI Bank to provide loans to clean

energy projects in India. (See Box 9: Limitations of Debt Financing with Foreign Currency Loans in

India).

EXIM Finance

EXIM Bank of the U.S.

Other EXIM Banks

39Annual Report 2012, EXIM Bank, USA. Available at

http://www.exim.gov/about/library/reports/annualreports/2012/renewable.html40Commercial Reference Rates for Nuclear Power and Renewable Energies and Water, EXIM Bank, USA,

Available at http://www.exim.gov/tools/commercialinterestreferencerates/index.cfm

4.1.3 Supplier Credit

4.1.4 Construction Finance/Bridge Finance

4.1.5 Take-out Finance/Refinance

Some suppliers extend credit to RE projects, limited to the value of the material supplied by them.

These can be local currency or foreign currency denominated, and may or may not carry interest,

depending on the negotiation between the borrower and the supplier. Supplier credit is extended for

a period of one to three years, normally the construction period. On commissioning the project,

developers substitute the supplier credit with a term loan. Suppliers normally require a letter of

credit from the project owner for the value and term of the credit.

The construction phase of a project is associated with the highest risk in the entire lifecycle of the

project. Therefore, term loans raised during pre-construction phase entail higher interest rates

reflecting the higher risks. Term loans raised post commissioning are raised on a lower risk profile.

Project developers use short term loans to fund projects during the construction period, and then

refinance the loans with cheaper term loans post commissioning. These loans are provided by

private NBFCs and commercial banks in India. In some cases, construction loans convert into term

loans once the project achieves commercial operations.

41Take-out finance or refinance is a common method of financing operating assets. The majority of

FIs provide take-out financing for infrastructure projects. When the project commences operations

For foreign currency loans, the interest and debt repayment have to be made in foreign currency,

whereas the revenue from RE projects in India is generated in Indian Rupees. The required foreign

currency payments carry a risk of exchange rate fluctuations. Further, some lenders mandate partial

or full hedging of the debt component. Hedging costs add another three to six percent to the cost of

the loan. Debt from international commercial banks is more expensive (as compared to EXIM), as it

is adjusted for country risk. Even with the sovereign risk and hedging costs, foreign currency loans

may cost about two percent lower than domestic loans. However, their major attractiveness lies in

longer tenures. The challenge is in being able to get long-term hedges for the currency risk.

RBI has set interest rate ceilings for ECBs. This limits the lenders' flexibility to price-in applicable risk

in interest rates. Some lenders may be unwilling to provide finance to Indian RE projects because of

these restrictions.

Box 9: Limitations of Debt Financing with Foreign Currency Loans in India


41Take-out Finance or re-finance means the replacement of existing sources of finance with newer ones,

usually at better terms.

and cash flows becomes stable, the operational risk is reduced considerably. Hence, developers

refinance these loans to get better terms, such as higher debt-equity ratio, lower interest rate, and

longer loan tenure. With refinancing, part of the cash invested by the developer can also be released

making it possible to develop more borrowing capacity.

RBI allows infrastructure projects, including RE projects, to refinance rupee debt using ECBs, but

with prior RBI approval. Eligibility criteria for ECB refinancing include: (I) Take-out finance must be

within the first three years of commercial operation; (ii) Loans provided through ECBs must have a

minimum maturity of seven years; and (iii) Other conditions on end user, loan amount and interest

are applicable.

However, take-out finance through ECBs has limitations. For instance, according to RBI guidelines,

such mechanisms require a tripartite agreement between the developer, the domestic bank and the

foreign bank. This can be challenging as both foreign and domestic banks are often uncomfortable

with their counterpart's jurisdiction.

In 2011-12, the GOI allowed the setting up of IDFs to ease and accelerate the flow of funds into

infrastructure development projects. IDFs allow tapping long-term, low-cost debt from insurance and

pension funds, and other long-term domestic and foreign investors.

NBFCs and commercial banks are the main source of debt in India. However, they typically face

difficulties in providing long-term funding for infrastructure projects due to an asset-liability 42mismatch . In addition, banks have to deal with internally set sector limits . IDFs are allowed to

refinance bank debt of operating infrastructure projects, thereby releasing capacity of banks to lend

again.

NBFCs have shown a substantial interest in IDFs but IDFs are yet to be used for refinancing RE

projects. Recently IIFCL has registered IDFs for road projects. IDFs have been discussed in detail

under section 6.

Take-out Finance through ECBs

Infrastructure Debt Fund (IDF)

43

42An asset-liability mismatch occurs in a situation where the bank has substantial long-term assets (such term

loans) but short-term liabilities, such as deposits.43 In order to diversify their risk across sectors, banks internally set lending limits for each sector.

4.1.6 Lease Financing

In the past, FIs and IPPs, especially those focused on wind energy, worked together to use lease

financing to benefit from accelerated depreciation. Lease financing is a commercial arrangement

between an FI and the project developer, where the former purchases the generating equipment

and other components (usually equivalent to 70 to 80 percent of the project cost) and leases them

to the latter (See Figure 2: Structure of Lease Financing in India). Project developers traditionally hold

power projects in SPVs and are thus unable to claim accelerated depreciation on such projects. A

capital lease allows the project to benefit from accelerated depreciation and is mutually beneficial to

both the FI and the project developer - while working as a proxy for debt in the capital structure of

the project (See Table 3: Mutual Benefits of Lease Financing to FI and Project Developer).

Table 3: Mutual Benefits of Lease Financing to FI and Project Developer

Benefits to FI

Generates business by providing debt in the form of

lease to the project developer.

Benefits to project developer

The project developer is able to get access to debt,

but in the form of lease.

Since the assets are purchased on the balance sheet of

the FI, latter can claim accelerated depreciation benefits

applicable for RE projects under the IT Act, 1961.

The terms a project developer gets under leasing

finance arrangement are usually better than those of

a term loan, as some benefits from the accelerated

depreciation are passed on to the developer by the FI.

In India, the leasing industry is dominated by NBFCs. Though the banks are allowed to perform

leasing activities, they do not have significant presence in this sector.


Figure 2: Structure of Lease Financing in India

Developer

Project Company (SPV or IPP)

Asset

Financial Institution(Lender)

Down payment for leasing equipment

(Equivalent to equity)

Pays lease rent (Equivalent to Debt repayment)

Buys and leases Asset

Tax benefits due to Accelerated Depreciation

Equity & management

and cash flows becomes stable, the operational risk is reduced considerably. Hence, developers

refinance these loans to get better terms, such as higher debt-equity ratio, lower interest rate, and

longer loan tenure. With refinancing, part of the cash invested by the developer can also be released

making it possible to develop more borrowing capacity.

RBI allows infrastructure projects, including RE projects, to refinance rupee debt using ECBs, but

with prior RBI approval. Eligibility criteria for ECB refinancing include: (I) Take-out finance must be

within the first three years of commercial operation; (ii) Loans provided through ECBs must have a

minimum maturity of seven years; and (iii) Other conditions on end user, loan amount and interest

are applicable.

However, take-out finance through ECBs has limitations. For instance, according to RBI guidelines,

such mechanisms require a tripartite agreement between the developer, the domestic bank and the

foreign bank. This can be challenging as both foreign and domestic banks are often uncomfortable

with their counterpart's jurisdiction.

In 2011-12, the GOI allowed the setting up of IDFs to ease and accelerate the flow of funds into

infrastructure development projects. IDFs allow tapping long-term, low-cost debt from insurance and

pension funds, and other long-term domestic and foreign investors.


difficulties in providing long-term funding for infrastructure projects due to an asset-liability 42mismatch . In addition, banks have to deal with internally set sector limits . IDFs are allowed to

refinance bank debt of operating infrastructure projects, thereby releasing capacity of banks to lend

again.

NBFCs have shown a substantial interest in IDFs but IDFs are yet to be used for refinancing RE

projects. Recently IIFCL has registered IDFs for road projects. IDFs have been discussed in detail

under section 6.

Take-out Finance through ECBs

Infrastructure Debt Fund (IDF)

43

42An asset-liability mismatch occurs in a situation where the bank has substantial long-term assets (such term

loans) but short-term liabilities, such as deposits.43 In order to diversify their risk across sectors, banks internally set lending limits for each sector.

4.1.6 Lease Financing

In the past, FIs and IPPs, especially those focused on wind energy, worked together to use lease

financing to benefit from accelerated depreciation. Lease financing is a commercial arrangement

between an FI and the project developer, where the former purchases the generating equipment

and other components (usually equivalent to 70 to 80 percent of the project cost) and leases them

to the latter (See Figure 2: Structure of Lease Financing in India). Project developers traditionally hold

power projects in SPVs and are thus unable to claim accelerated depreciation on such projects. A

capital lease allows the project to benefit from accelerated depreciation and is mutually beneficial to

both the FI and the project developer - while working as a proxy for debt in the capital structure of

the project (See Table 3: Mutual Benefits of Lease Financing to FI and Project Developer).

Table 3: Mutual Benefits of Lease Financing to FI and Project Developer

Benefits to FI

Generates business by providing debt in the form of

lease to the project developer.

Benefits to project developer

The project developer is able to get access to debt,

but in the form of lease.

Since the assets are purchased on the balance sheet of

the FI, latter can claim accelerated depreciation benefits

applicable for RE projects under the IT Act, 1961.

The terms a project developer gets under leasing

finance arrangement are usually better than those of

a term loan, as some benefits from the accelerated

depreciation are passed on to the developer by the FI.

In India, the leasing industry is dominated by NBFCs. Though the banks are allowed to perform

leasing activities, they do not have significant presence in this sector.


Figure 2: Structure of Lease Financing in India

Developer

Project Company (SPV or IPP)

Asset

Financial Institution(Lender)

Down payment for leasing equipment

(Equivalent to equity)

Pays lease rent (Equivalent to Debt repayment)

Buys and leases Asset

Tax benefits due to Accelerated Depreciation

Equity & management

4.2 EQUITY FINANCE

4.2.1 Structure of Private Equity Investments

Equity typically comprises 30 to 40 percent of the total project cost, while the rest is financed 44through debt. Strategic investors, venture capital, private equity, tax equity investors , are the key

45providers of equity to RE projects. In India, the hurdle rates for direct equity investments range

between 16 and 20 percent, and are dependent on factors, such as the size of the project, the

background of sponsor, the technology risk, the stage of maturity, and geographic and policy risks.

The key focus of developers and equity investors is on commercial scale RE projects especially large

scale wind and solar projects. Private equity funds have dominated the equity investment scene..

Most investments are in Indian Rupees and the funds stay invested for a period of five to seven 46years in the companies . Recently, some equity investments have been made in companies

developing small-scale RE applications and projects.

Private equity funds have been actively investing in RE projects in India since 2008. They have

supported IPPs. In many cases, these funds invested in majority-owned RE aggregation vehicles.

Such vehicles include Green Infra Private Limited (99 percent owned by IDFC Private Equity), Renew

Power Ventures Private Ltd. (99 percent owned by Goldman Sachs Private Equity), and Continuum

Wind Energy (majority owned by Morgan Stanley Infrastructure Partners). Most equity investments

in Indian RE companies have been made at the parent company level, and not at the project level.

This approach provides various exit options, such as initial public offering route, or sale to a strategic

investor (Refer Annex H: Examples of Investments in Grid Connected RE Projects Using Commercial

Instruments).

Due to the nascent stage of the Indian RE sector, most IPPs do not have significant implementation

and operational experience. In order to limit their risk, private equity investors structure transactions

with low upfront valuations for projects under development with “earn-outs”, which are provided to

the promoters based on meeting pre-agreed milestones and asset performance. An example is the

Goldman Sachs' USD 200 million funding for Renew Power Ventures. (See Box 10: Earn-out Based

Equity Investment).

44Tax equity investors are those who invest in projects for tax benefits i.e. to avail accelerated depreciation45Hurdle rate is the required rate of return for equity investors. This required rate is risk adjusted for various

risks, such as the country risk, technology risk, policy risk, etc.46 In general, the life of a fund raised by a private equity is 10 years. In this period, they need to repay capital

along with the return made to investors.

Let us take an example of an investor who has to invest USD 100 million in construction of a project

where pre- development activity has been carried out by the project promoter. Project pre-

development activities are valued at USD 50 million. This would make the value of the entire project

USD 150 million, out of which promoter will ideally have a share of 33 percent (USD 50 million of

USD 150 million). Due to the significant implementation and performance risks associated with the

project, the investor may decide to provide an upfront value of only USD 10 million to the promoter

instead of USD 50 million, with the balance value of USD 40 million as an “earn-out” linked to

achievement of certain project milestones. In this case, the promoter's shareholding at the time of

the investment would be Nine percent calculated as 10/ (100+10). However, if in future the promoter

is able to achieve the pre-determined milestones, the promoter's shareholding would get readjusted

to 33 percent calculated as 50 / (100+50).

Box 10: Earn-out based Equity Investment

4.2.2 Other Equity Investors

Recently, development finance institutions, such as IFC, have started providing equity funds to large

and small-scale RE projects. IFC has also provided funds to private equity funds like Nereus Capital

(a RE-focused private equity fund) and SBI Macquarie Infrastructure Trust. Both these equity funds

are active investors in India's RE sector.

Pension funds have also invested in RE in India through private equity funds, such as the SBI

Macquarie Infrastructure Trust.

Sovereign wealth funds, namely Khazanah Nasional (Malaysia) and Temasek (Singapore) which have

international exposure to the RE sector, are now actively looking for investment opportunities in

India's RE space. However, several limitations exist with equity finance in the country (See Box 11:

Limitations of Equity Finance for RE projects in India).


The availability of equity is heavily skewed towards companies implementing less risky technologies,

such as wind and solar. Equity is also restricted to states with good policy regimes and attractive

business environments.

The hurdle rates of equity investors for RE projects in India are high (16 to 20 percent), compared to 47the hurdle rates of 10 to 15 percent for similar projects in the U.S. and Europe. This means Indian

developers face higher cost of equity and lower valuations.

A substantial portion of private equity investments in the Indian RE space is approaching five years,

the normal time for making exits. Investors have not been able to find exits due to the limited

opportunities in the capital markets. Raising new funds is proving difficult for these organizations, as

they have not been able to provide exits, and thus, returns on existing investments to their

organizations. This limits the ability of such investors to scale and fund new projects.

Box 11: Limitations of Equity Finance for RE Projects in India

47Hurdle rate is the required rate of return for equity investors. This required rate is risk adjusted for the various

risks such as the country risk, technology risk, policy risk etc.

4.2 EQUITY FINANCE

4.2.1 Structure of Private Equity Investments

Equity typically comprises 30 to 40 percent of the total project cost, while the rest is financed 44through debt. Strategic investors, venture capital, private equity, tax equity investors , are the key

45providers of equity to RE projects. In India, the hurdle rates for direct equity investments range

between 16 and 20 percent, and are dependent on factors, such as the size of the project, the

background of sponsor, the technology risk, the stage of maturity, and geographic and policy risks.

The key focus of developers and equity investors is on commercial scale RE projects especially large

scale wind and solar projects. Private equity funds have dominated the equity investment scene..

Most investments are in Indian Rupees and the funds stay invested for a period of five to seven 46years in the companies . Recently, some equity investments have been made in companies

developing small-scale RE applications and projects.

Private equity funds have been actively investing in RE projects in India since 2008. They have

supported IPPs. In many cases, these funds invested in majority-owned RE aggregation vehicles.

Such vehicles include Green Infra Private Limited (99 percent owned by IDFC Private Equity), Renew

Power Ventures Private Ltd. (99 percent owned by Goldman Sachs Private Equity), and Continuum

Wind Energy (majority owned by Morgan Stanley Infrastructure Partners). Most equity investments

in Indian RE companies have been made at the parent company level, and not at the project level.

This approach provides various exit options, such as initial public offering route, or sale to a strategic

investor (Refer Annex H: Examples of Investments in Grid Connected RE Projects Using Commercial

Instruments).

Due to the nascent stage of the Indian RE sector, most IPPs do not have significant implementation

and operational experience. In order to limit their risk, private equity investors structure transactions

with low upfront valuations for projects under development with “earn-outs”, which are provided to

the promoters based on meeting pre-agreed milestones and asset performance. An example is the

Goldman Sachs' USD 200 million funding for Renew Power Ventures. (See Box 10: Earn-out Based

Equity Investment).

44Tax equity investors are those who invest in projects for tax benefits i.e. to avail accelerated depreciation45Hurdle rate is the required rate of return for equity investors. This required rate is risk adjusted for various

risks, such as the country risk, technology risk, policy risk, etc.46 In general, the life of a fund raised by a private equity is 10 years. In this period, they need to repay capital

along with the return made to investors.

Let us take an example of an investor who has to invest USD 100 million in construction of a project

where pre- development activity has been carried out by the project promoter. Project pre-

development activities are valued at USD 50 million. This would make the value of the entire project

USD 150 million, out of which promoter will ideally have a share of 33 percent (USD 50 million of

USD 150 million). Due to the significant implementation and performance risks associated with the

project, the investor may decide to provide an upfront value of only USD 10 million to the promoter

instead of USD 50 million, with the balance value of USD 40 million as an “earn-out” linked to

achievement of certain project milestones. In this case, the promoter's shareholding at the time of

the investment would be Nine percent calculated as 10/ (100+10). However, if in future the promoter

is able to achieve the pre-determined milestones, the promoter's shareholding would get readjusted

to 33 percent calculated as 50 / (100+50).

Box 10: Earn-out based Equity Investment

4.2.2 Other Equity Investors

Recently, development finance institutions, such as IFC, have started providing equity funds to large

and small-scale RE projects. IFC has also provided funds to private equity funds like Nereus Capital

(a RE-focused private equity fund) and SBI Macquarie Infrastructure Trust. Both these equity funds

are active investors in India's RE sector.

Pension funds have also invested in RE in India through private equity funds, such as the SBI

Macquarie Infrastructure Trust.

Sovereign wealth funds, namely Khazanah Nasional (Malaysia) and Temasek (Singapore) which have

international exposure to the RE sector, are now actively looking for investment opportunities in

India's RE space. However, several limitations exist with equity finance in the country (See Box 11:

Limitations of Equity Finance for RE projects in India).


The availability of equity is heavily skewed towards companies implementing less risky technologies,

such as wind and solar. Equity is also restricted to states with good policy regimes and attractive

business environments.

The hurdle rates of equity investors for RE projects in India are high (16 to 20 percent), compared to 47the hurdle rates of 10 to 15 percent for similar projects in the U.S. and Europe. This means Indian

developers face higher cost of equity and lower valuations.






Box 11: Limitations of Equity Finance for RE Projects in India

47Hurdle rate is the required rate of return for equity investors. This required rate is risk adjusted for the various

risks such as the country risk, technology risk, policy risk etc.

4.3 MEZZANINE FINANCE

Mezzanine finance is a structured debt-like instrument which often bridges the financing gap in a

company's capital structure, and occupies a place between senior debt and equity, both in security

and total returns. It offers flexibility to meet both the investor's and the company's requirements,

and also provides medium term capital without significant ownership dilution. Mezzanine finance is

mostly provided in the form of convertible debentures, bonds or preference shares.

Mezzanine finance is less risky than equity for investors, as it provides fixed interest along with

principal repayment and minimum guaranteed returns to investors. It is used in situations where the

company is generating adequate cash flows to service coupon payments; the promoters are

unwilling to dilute their equity stake in the company; the short term conversion options are valuable

(e.g. when the company is close to initial public offering or there is a clear exit path); or where the

investors deem equity investment risky.

There are three noteworthy transactions in which mezzanine finance instruments were used to fund 48RE companies in India. In the first case, the Alternate Investment Market (AIM) listed wind IPP,

Mytrah Energy, raised USD 78.5 million from IDFC Project Equity. This was followed by

USD 19 million from PTC Financial Services. And, lastly, solar IPP Azure Power raised USD 13.6

million from Germany's DEG.

48AIM is a London Stock Exchange's International market for smaller growing companies.

Mezzanine finance instruments work like debt instruments with fixed coupon payments that last 49until a liquidity event , at which point these coupons are converted into equity; thereby providing the

investor an upside. Base returns (minimum guaranteed returns) range between 16 and 18 percent

on capital invested, and coupon rates are between four and six percent for finance provided by

international investors and 8 to 11 percent for finance provided by Indian investors. The Indian RE

market has seen very few mezzanine finance transactions because of several hurdles (See Box 12:

Limitations of Mezzanine Finance).

There are regulatory restrictions on international finance using these instruments:

Changes in the foreign direct investments (FDI) policy, introduced in 2011, prohibit the use of

associated put options (option to sell to the promoters in certain pre-defined scenarios) that

normally form an inherent part of the mezzanine structures to secure repayment.

Pledging of promoter shares (also the norm for such instruments) to foreign mezzanine investors

categorizes such instruments as ECB, thus, posing restrictions on the use of mezzanine

instruments.

•·

•·

Box 12: Limitations of Mezzanine Finance

4.4 PARTIAL RISK GUARANTEE FACILITIES

Partial risk guarantee facilities assume the lenders' default risk on a part amount of the debt

provided to the project. Such facilities are usually provided for a fee charged by the organization

providing the guarantee, and this fee is borne by the lender. Partial risk guarantees improve a

project's credit rating and reduce the perceived investment risk. They are used to encourage lending

to projects that otherwise would not have been funded by FIs due to various reasons, such as the

use of new technologies, counterparty risk, or a lack of understanding among lenders regarding a

new sector. As banks increase exposure to such projects, they gain more confidence, and slowly

reduce their dependence on the partial risk guarantee program.

Guarantee providers can be government bodies, development banks, and government backed FIs.

The decision of lenders to finance projects that are backed by partial risk guarantees is determined

by the:

•· Creditworthiness of the guarantee provider for the part of the loan guaranteed.

•· Creditworthiness of the developer/project for the portion of loan not guaranteed.


49 In corporate finance, a liquidity event is an umbrella term that describes one of several events, typically a

purchase of a corporation or an initial public offering.

4.3 MEZZANINE FINANCE

Mezzanine finance is a structured debt-like instrument which often bridges the financing gap in a

company's capital structure, and occupies a place between senior debt and equity, both in security

and total returns. It offers flexibility to meet both the investor's and the company's requirements,

and also provides medium term capital without significant ownership dilution. Mezzanine finance is

mostly provided in the form of convertible debentures, bonds or preference shares.

Mezzanine finance is less risky than equity for investors, as it provides fixed interest along with

principal repayment and minimum guaranteed returns to investors. It is used in situations where the

company is generating adequate cash flows to service coupon payments; the promoters are

unwilling to dilute their equity stake in the company; the short term conversion options are valuable

(e.g. when the company is close to initial public offering or there is a clear exit path); or where the

investors deem equity investment risky.

There are three noteworthy transactions in which mezzanine finance instruments were used to fund 48RE companies in India. In the first case, the Alternate Investment Market (AIM) listed wind IPP,

Mytrah Energy, raised USD 78.5 million from IDFC Project Equity. This was followed by

USD 19 million from PTC Financial Services. And, lastly, solar IPP Azure Power raised USD 13.6

million from Germany's DEG.

48AIM is a London Stock Exchange's International market for smaller growing companies.

Mezzanine finance instruments work like debt instruments with fixed coupon payments that last 49until a liquidity event , at which point these coupons are converted into equity; thereby providing the

investor an upside. Base returns (minimum guaranteed returns) range between 16 and 18 percent

on capital invested, and coupon rates are between four and six percent for finance provided by

international investors and 8 to 11 percent for finance provided by Indian investors. The Indian RE

market has seen very few mezzanine finance transactions because of several hurdles (See Box 12:

Limitations of Mezzanine Finance).

There are regulatory restrictions on international finance using these instruments:

Changes in the foreign direct investments (FDI) policy, introduced in 2011, prohibit the use of

associated put options (option to sell to the promoters in certain pre-defined scenarios) that

normally form an inherent part of the mezzanine structures to secure repayment.

Pledging of promoter shares (also the norm for such instruments) to foreign mezzanine investors

categorizes such instruments as ECB, thus, posing restrictions on the use of mezzanine

instruments.

•·

•·

Box 12: Limitations of Mezzanine Finance

4.4 PARTIAL RISK GUARANTEE FACILITIES

Partial risk guarantee facilities assume the lenders' default risk on a part amount of the debt

provided to the project. Such facilities are usually provided for a fee charged by the organization

providing the guarantee, and this fee is borne by the lender. Partial risk guarantees improve a

project's credit rating and reduce the perceived investment risk. They are used to encourage lending

to projects that otherwise would not have been funded by FIs due to various reasons, such as the

use of new technologies, counterparty risk, or a lack of understanding among lenders regarding a

new sector. As banks increase exposure to such projects, they gain more confidence, and slowly

reduce their dependence on the partial risk guarantee program.

Guarantee providers can be government bodies, development banks, and government backed FIs.

The decision of lenders to finance projects that are backed by partial risk guarantees is determined

by the:

•· Creditworthiness of the guarantee provider for the part of the loan guaranteed.

•· Creditworthiness of the developer/project for the portion of loan not guaranteed.


49 In corporate finance, a liquidity event is an umbrella term that describes one of several events, typically a

purchase of a corporation or an initial public offering.

Partial risk guarantees also act as tools for credit enhancement. The enhanced creditworthiness

provides the following benefits:

• Improves the ability of the project/developer to raise debt.

• Improves terms of lending, such longer tenure, lower interest rate, and/or less collateral.

While partial risk guarantees can be effective tools to incentivize large-scale deployment and

financing of RE, very few such programs are available to developers in India.

Under a partial risk guarantee program, the project developer borrows funds from a FI to construct

the project. The organization providing the partial risk guarantee, gives a guarantee to the FI for

repayment of a portion or full amount of the debt. It charges a fee on the amount guaranteed. In

case the project developer is unable to service the interest and principal repayment, the guarantee

is invoked and the obligation to the FI is fulfilled by the guaranteeing organization (See Figure 3:

Structure of Partial Risk Guarantee Facilities).

4.4.1 Structure of Partial Risk Guarantee Facilities

Figure 3: Structure of Partial Risk Guarantee Facilities

Interest Payment + Debt Repayment

Debt

Developer

EquityCredit

guarantee fee

Provide Credit Guarantee (Services portion of debt incase of default by the

project company)

Financial Institution (Lender)

Credit Guaranteing

Agency

Project Compamy

4.4.2 Partial Risk Guarantee Programs

ADB's India Solar Generation Guarantee Facility

World Bank Group's Partial Risk Sharing Program

EXIM Banks

In India, risk guarantee programs for RE projects are limited. Those that do exist are described

below:

ADB has a USD 150 million partial risk guarantee program for solar projects with government backed

PPAs. FIs can avail of this facility until April 2014. Under this facility, ADB provides risk guarantees

under these two options:

• 50 percent of the payment default risk for entire tenure of loan.

• Zero percent of payment default risk for the first seven years, and 95 percent to 100 percent

of default risk during the remaining tenure of the loan.

ADB has partnered with L&T Infrastructure Finance (L&T Infra) and Singapore-based Norddeutsche

Landesbank (NORD/LB) to fund solar projects with capacities below 25 MW in India. Under this

arrangement, L&T Infra and NORD/LB will provide loans to solar projects, and ADB will provide a

partial risk guarantee to L&T Infra and NORD/LB. ADB in turn collects a guarantee fee (ranges

between 1.5 and 2.5 percent) from L&T Infra and NORD/LB.

As of June 2012, two solar projects with capacities of 25 MW and 10 MW have been funded using

ADB's guarantee facility. The facility has had limited success and has been constrained by the lack of

partner FIs.

50The World Bank Group (WBG ) provides partial risk and credit guarantee products to support

projects taken up by governments and private investors in developing countries. The objective of

these products is to promote capital inflow into infrastructure development. WBG has also provided

support internationally for clean energy projects through these guarantee instruments. However, this

facility has not been used by Indian FIs.

In some cases, EXIM banks provide loan guarantees for projects using equipment manufactured in

their country. The guarantees cover commercial and political risk; the extent of risk coverage

depends on the particular agency. For example, 100 percent of the commercial and political risks are

50World Bank, International Finance Corporation (IFC), International Bank for Reconstruction and Development

(IBRD), International Development Association (IDA), Multilateral Investment Guarantee Agency (MIGA).


Partial risk guarantees also act as tools for credit enhancement. The enhanced creditworthiness

provides the following benefits:

• Improves the ability of the project/developer to raise debt.

• Improves terms of lending, such longer tenure, lower interest rate, and/or less collateral.

While partial risk guarantees can be effective tools to incentivize large-scale deployment and

financing of RE, very few such programs are available to developers in India.

Under a partial risk guarantee program, the project developer borrows funds from a FI to construct

the project. The organization providing the partial risk guarantee, gives a guarantee to the FI for

repayment of a portion or full amount of the debt. It charges a fee on the amount guaranteed. In

case the project developer is unable to service the interest and principal repayment, the guarantee

is invoked and the obligation to the FI is fulfilled by the guaranteeing organization (See Figure 3:

Structure of Partial Risk Guarantee Facilities).

4.4.1 Structure of Partial Risk Guarantee Facilities

Figure 3: Structure of Partial Risk Guarantee Facilities

Interest Payment + Debt Repayment

Debt

Developer

EquityCredit

guarantee fee

Provide Credit Guarantee (Services portion of debt incase of default by the

project company)

Financial Institution (Lender)

Credit Guaranteing

Agency

Project Compamy

4.4.2 Partial Risk Guarantee Programs

ADB's India Solar Generation Guarantee Facility

World Bank Group's Partial Risk Sharing Program

EXIM Banks

In India, risk guarantee programs for RE projects are limited. Those that do exist are described

below:

ADB has a USD 150 million partial risk guarantee program for solar projects with government backed

PPAs. FIs can avail of this facility until April 2014. Under this facility, ADB provides risk guarantees

under these two options:

• 50 percent of the payment default risk for entire tenure of loan.

• Zero percent of payment default risk for the first seven years, and 95 percent to 100 percent

of default risk during the remaining tenure of the loan.

ADB has partnered with L&T Infrastructure Finance (L&T Infra) and Singapore-based Norddeutsche

Landesbank (NORD/LB) to fund solar projects with capacities below 25 MW in India. Under this

arrangement, L&T Infra and NORD/LB will provide loans to solar projects, and ADB will provide a

partial risk guarantee to L&T Infra and NORD/LB. ADB in turn collects a guarantee fee (ranges

between 1.5 and 2.5 percent) from L&T Infra and NORD/LB.

As of June 2012, two solar projects with capacities of 25 MW and 10 MW have been funded using

ADB's guarantee facility. The facility has had limited success and has been constrained by the lack of

partner FIs.

50The World Bank Group (WBG ) provides partial risk and credit guarantee products to support

projects taken up by governments and private investors in developing countries. The objective of

these products is to promote capital inflow into infrastructure development. WBG has also provided

support internationally for clean energy projects through these guarantee instruments. However, this

facility has not been used by Indian FIs.

In some cases, EXIM banks provide loan guarantees for projects using equipment manufactured in

their country. The guarantees cover commercial and political risk; the extent of risk coverage

depends on the particular agency. For example, 100 percent of the commercial and political risks are

50World Bank, International Finance Corporation (IFC), International Bank for Reconstruction and Development

(IBRD), International Development Association (IDA), Multilateral Investment Guarantee Agency (MIGA).


51covered by U.S. EXIM, whereas Garanti-instituttet for eksportkreditt (GIEK ) covers 90 percent of

the commercial risk and 100 percent of the political risk.

The extent of guarantee is mostly restricted to the value of exported material. However, in some

cases where the value of the exported material forms a major part (over 60 percent) of the project,

these banks may provide the guarantee on the full debt component of the project. Such guarantees

are usually provided to domestic banks (in the country of the EXIM bank), or international banks with

presence in the EXIM bank's country. For instance, ACME Solar Technology raised USD 19 million in

the form of a fixed interest rate loan with tenure of 12 years from PNC Bank (based in Pittsburgh,

U.S.). It was meant for the implementation of a 15 MW solar project in the state of Gujarat in India

using solar modules manufactured by First Solar, a U.S.-based solar module manufacturer. The U.S.

EXIM provided a loan guarantee on the full debt provided by PNC Bank to the project. Though

capable of supporting investments in the nascent stages of a sector, the partial risk guarantee

programs have some limitations (See Box 13: Limitations of Partial Risk Guarantee Programs in

India).

While partial risk guarantee programs cover (in part or full) the risk associated with a developer

defaulting on part or full of the outstanding loan to FIs, RBI guidelines classify such defaults as non-52performing assets of banks. This reflects negatively on the performance of the banks as well as the

credit managers.

Box 13: Limitations of Partial Risk Guarantee Programs in India

Partial Guarantee for Investment

4.5 RURAL OFF-GRID FINANCING

USAID's Development Credit Authority has partnered with a U.S.-based institutional investor

Northern Lights Capital Group to facilitate a USD 100 million investment in India's clean energy

sector via Nereus Capital. USAID will provide a 40 percent credit guarantee for a USD 100 million

Alternative Energy Fund managed by Northern Lights Capital Group. The partnership is the first such

guarantee facility with a private investment fund to facilitate targeted investment.

Rural off-grid RE projects are typically set up using a combination of government subsidies,

grants/investments from impact investors, and in some cases small loans (about 10 to 20 percent)

from FIs. Very few projects receive significant commercial-grade financing. Conventional source of

funds will become more prevalent to this sector as the sector matures. The following three case

studies illustrate different modalities for financing off-grid RE projects in India.

51Norwegian EXIM Bank.52A debt obligation where the borrower has not paid any previously agreed upon interest and principal

repayments to the designated lender for an extended period of time.

4.5.1 Case Study – 1: Husk Power Systems

4.5.2 Case Study – 2: Saran Renewable Energy

Husk Power Systems, a Patna-based rural empowerment enterprise, installs biomass gasification

based micro-grids with capacities ranging from 25 kW to 100 kW, mostly in the state of Bihar. Husk

Power's business model has transformed over time. From its initial focus on a BOOM (build-own-

operate-maintain) model, it graduated to a BOM (build-operate-maintain) model, and finally to a BM

(build-maintain) model. Although the main source of fuel for these projects is rice husk, multi-fuel

gasifiers are also being used. A typical plant serves two to four villages within a radius of 1.5

kilometres and employs local villagers for plant operations. The company employs a pre-paid system

to recover tariff from the villagers.

Husk Power has secured multiple rounds of financing; however, the common theme for financing

has been social impact rather than financial returns for the bulk of the investors (See Annex I:

Finance raised by Husk Power Systems). Impact investors consider social impacts as key to making

investment decisions and do not need exits quickly while having lower return expectations. Husk

Power also uses of the MNRE subsidy.

Saran Renewable Energy, a Saran-based company promoted by a group of agriculturalists and

entrepreneurs, generates electricity from renewable raw materials, such as agricultural waste

biomass. The company is in the process of setting up micro grids based on biomass gasification in

Bihar and Uttar Pradesh, totalling 3 MW.

The company set up its first plant of 120 kW in 2006 in Garkha village located in the Saran district of

Bihar. The total cost of the project was INR 8.3 million (USD 133,000), of which INR 2 million

(USD 32,000) was raised as a loan from ICICI Bank and INR 1.8 million (USD 29,000) was commited

by MNRE as capital subsidy. The balance was funded by the company through equity. However, only

INR 0.6 million (USD 96,000) out of the INR 1.8 million subsidy (USD 29,000) has been received by

the company so far. The Garkha project supplies electricity to rural consumers at a price of INR 7.50

per kWh (U.S. cent 12 per kWh).

Apart from the Garkha project, Saran Renewable Energy has set up two more plants with a capacity

of 80 kW in the Itwan and Bhatgain villages in district of Saran. The company attracted funding from

non-resident Indians (NRIs) who have roots in these villages. A domestic private equity (name

withheld) also invested INR 60 million (USD 960,000) in the firm in 2010 in exchange for a 46

percent ownership stake in the company.


51covered by U.S. EXIM, whereas Garanti-instituttet for eksportkreditt (GIEK ) covers 90 percent of

the commercial risk and 100 percent of the political risk.

The extent of guarantee is mostly restricted to the value of exported material. However, in some

cases where the value of the exported material forms a major part (over 60 percent) of the project,

these banks may provide the guarantee on the full debt component of the project. Such guarantees

are usually provided to domestic banks (in the country of the EXIM bank), or international banks with

presence in the EXIM bank's country. For instance, ACME Solar Technology raised USD 19 million in

the form of a fixed interest rate loan with tenure of 12 years from PNC Bank (based in Pittsburgh,

U.S.). It was meant for the implementation of a 15 MW solar project in the state of Gujarat in India

using solar modules manufactured by First Solar, a U.S.-based solar module manufacturer. The U.S.

EXIM provided a loan guarantee on the full debt provided by PNC Bank to the project. Though

capable of supporting investments in the nascent stages of a sector, the partial risk guarantee

programs have some limitations (See Box 13: Limitations of Partial Risk Guarantee Programs in

India).

While partial risk guarantee programs cover (in part or full) the risk associated with a developer

defaulting on part or full of the outstanding loan to FIs, RBI guidelines classify such defaults as non-52performing assets of banks. This reflects negatively on the performance of the banks as well as the

credit managers.

Box 13: Limitations of Partial Risk Guarantee Programs in India

Partial Guarantee for Investment

4.5 RURAL OFF-GRID FINANCING

USAID's Development Credit Authority has partnered with a U.S.-based institutional investor

Northern Lights Capital Group to facilitate a USD 100 million investment in India's clean energy

sector via Nereus Capital. USAID will provide a 40 percent credit guarantee for a USD 100 million

Alternative Energy Fund managed by Northern Lights Capital Group. The partnership is the first such

guarantee facility with a private investment fund to facilitate targeted investment.

Rural off-grid RE projects are typically set up using a combination of government subsidies,

grants/investments from impact investors, and in some cases small loans (about 10 to 20 percent)

from FIs. Very few projects receive significant commercial-grade financing. Conventional source of

funds will become more prevalent to this sector as the sector matures. The following three case

studies illustrate different modalities for financing off-grid RE projects in India.

51Norwegian EXIM Bank.52A debt obligation where the borrower has not paid any previously agreed upon interest and principal

repayments to the designated lender for an extended period of time.

4.5.1 Case Study – 1: Husk Power Systems

4.5.2 Case Study – 2: Saran Renewable Energy

Husk Power Systems, a Patna-based rural empowerment enterprise, installs biomass gasification

based micro-grids with capacities ranging from 25 kW to 100 kW, mostly in the state of Bihar. Husk

Power's business model has transformed over time. From its initial focus on a BOOM (build-own-

operate-maintain) model, it graduated to a BOM (build-operate-maintain) model, and finally to a BM

(build-maintain) model. Although the main source of fuel for these projects is rice husk, multi-fuel

gasifiers are also being used. A typical plant serves two to four villages within a radius of 1.5

kilometres and employs local villagers for plant operations. The company employs a pre-paid system

to recover tariff from the villagers.

Husk Power has secured multiple rounds of financing; however, the common theme for financing

has been social impact rather than financial returns for the bulk of the investors (See Annex I:

Finance raised by Husk Power Systems). Impact investors consider social impacts as key to making

investment decisions and do not need exits quickly while having lower return expectations. Husk

Power also uses of the MNRE subsidy.

Saran Renewable Energy, a Saran-based company promoted by a group of agriculturalists and

entrepreneurs, generates electricity from renewable raw materials, such as agricultural waste

biomass. The company is in the process of setting up micro grids based on biomass gasification in

Bihar and Uttar Pradesh, totalling 3 MW.

The company set up its first plant of 120 kW in 2006 in Garkha village located in the Saran district of

Bihar. The total cost of the project was INR 8.3 million (USD 133,000), of which INR 2 million

(USD 32,000) was raised as a loan from ICICI Bank and INR 1.8 million (USD 29,000) was commited

by MNRE as capital subsidy. The balance was funded by the company through equity. However, only

INR 0.6 million (USD 96,000) out of the INR 1.8 million subsidy (USD 29,000) has been received by

the company so far. The Garkha project supplies electricity to rural consumers at a price of INR 7.50

per kWh (U.S. cent 12 per kWh).

Apart from the Garkha project, Saran Renewable Energy has set up two more plants with a capacity

of 80 kW in the Itwan and Bhatgain villages in district of Saran. The company attracted funding from

non-resident Indians (NRIs) who have roots in these villages. A domestic private equity (name

withheld) also invested INR 60 million (USD 960,000) in the firm in 2010 in exchange for a 46

percent ownership stake in the company.


4.5.3 Case Study - 3: Mera Gao Power

Mera Gao Power builds, owns and operates low cost, energy efficient solar based micro-grids in

Uttar Pradesh. As of October, 2012, the firm has constructed lighting utilities in 103 villages of the

Reosa and Rampur Mathura blocks in the Sitapur district, Uttar Pradesh. It is currently serves 2,240

households.

Mera Gao Power is a for-profit organization and received a grant of USD 300,000 from USAID. In

addition to this, the two founders have brought in seed capital of USD 30,000. The company also

uses MNRE's 30 percent subsidy for rural solar off-grid projects.

India has set an ambitious RE targets of adding 30 GW to the existing 29 GW capacity by 2017.

Substantial amount of investments are required to meet these targets. To get these investments,

there is a need to create enabling framework that can attract substantial foreign and domestic

capital to the sector.

Though RE has been funded for past 20 years, several challenges still exist, which are limiting capital

inflow and the scale up of investments in RE. The remainder of this section summarizes the main

challenges confronting RE financing in India. The challenges are segregated into three categories: (i)

policy; (ii) business risk; and (iii) other sector specific challenges.

This section identifies the key policy-related barriers that have constrained the development of the

RE market in India. These barriers have emerged either as a result of the absence of appropriate

policies and regulations or the limited impact of existing ones.

5.1 POLICY LEVEL BARRIERS

Barriers to Renewable EnergyFinance in India5

43Financing Renewable Energy in IndiaPACE-D Technical Assistance Program42 Mera Gao Power

4.5.3 Case Study - 3: Mera Gao Power

Mera Gao Power builds, owns and operates low cost, energy efficient solar based micro-grids in

Uttar Pradesh. As of October, 2012, the firm has constructed lighting utilities in 103 villages of the

Reosa and Rampur Mathura blocks in the Sitapur district, Uttar Pradesh. It is currently serves 2,240

households.

Mera Gao Power is a for-profit organization and received a grant of USD 300,000 from USAID. In

addition to this, the two founders have brought in seed capital of USD 30,000. The company also

uses MNRE's 30 percent subsidy for rural solar off-grid projects.

India has set an ambitious RE targets of adding 30 GW to the existing 29 GW capacity by 2017.

Substantial amount of investments are required to meet these targets. To get these investments,

there is a need to create enabling framework that can attract substantial foreign and domestic

capital to the sector.

Though RE has been funded for past 20 years, several challenges still exist, which are limiting capital

inflow and the scale up of investments in RE. The remainder of this section summarizes the main

challenges confronting RE financing in India. The challenges are segregated into three categories: (i)

policy; (ii) business risk; and (iii) other sector specific challenges.

This section identifies the key policy-related barriers that have constrained the development of the

RE market in India. These barriers have emerged either as a result of the absence of appropriate

policies and regulations or the limited impact of existing ones.

5.1 POLICY LEVEL BARRIERS

Barriers to Renewable EnergyFinance in India5

43Financing Renewable Energy in IndiaPACE-D Technical Assistance Program42 Mera Gao Power

Feed-in Tariffs

Reverse Bidding

Renewable Purchase Obligations and Renewable Energy Certificates

FiTs are one of the most successful and effective policy instruments globally for promoting RE

generation. However, FiTs have to be designed carefully, keeping in view the prevailing market

conditions, state of technology development and availability of resources. If the FiT is too high, it

leads to unwarranted profits for developers, while if set too low, the FiT can lead to very low

financial returns leading to low investments in the sector.

Experience shows that the FiTs designed by certain SERCs have been unable to attract investments.

There is a need for adoption of more robust processes and methodologies for determining FiTs that

include detailed due diligence on costs and performance parameters of various technologies, so as

to make these attractive for both debt and equity investors.

Reverse bidding led to a significant decline in solar power procurement prices. However, this also

led to concerns about the long-term viability of projects that actually qualified. Almost half of the

projects that needed project financing from FIs were not able to get such financing. As a result,

these projects had to utilize either equity financing or balance sheet financing. For example, FIs

were extremely concerned about the bid out tariffs on several of the projects and were unwilling to

finance as they felt that they were unviable for commercial finance. Reverse bidding led to

competition in an environment where capital costs, technology performance and access to financing

was still infancy. Besides the issues around unviable bids, reverse bidding suffers from some other

disadvantages too:

Capacity addition becomes episodic, dependent on government auctions, and as a result

developers are unable to create project pipelines and leverage economies of scale.

Reverse bidding also reduces the interest of private equity investors, as ability to scale up

appears uncertain.

A number of states have been negotiating with the developers to match their tariffs with the

lowest tariff discovered through the reverse bidding process. This process has delayed the

project allocation and also made projects unviable for few developers.

The RPO and the REC regime were designed to provide market-based instruments to stimulate RE

investments. However lack of RPO enforcement has led to weak markets for RECs and a loss of

credibility for similar market-based mechanisms. The key limitations of the RPO and REC schemes

•

•

•


have been poor enforcement, uneven cash-flows for generators, irrational floor prices for solar

RECs, lack of price certainty post 2017, and constraints in trading and managing liquidity for RECs.

To encourage investments through the REC mechanism, there is a need to ensure enforcement of

RPOs and assure consistent demand and stable prices for RECs.

Given that accelerated depreciation can only be utilized by profit-making entities with appreciable tax

liabilities and cannot be transferred, it effectively excludes most IPPs and investors who plan on

using a SPV route for project development. This limits the impact of the instrument and constrains

the level of investment entering the sector.

Wind, biomass and solar projects typically require fewer approvals than conventional energy

projects. Small hydro projects however require many government approvals, and long development

cycle times (more than 3 years). This leads to an escalation in costs. For example, obtaining

clearances and getting access to evacuation infrastructure has been reported to take over 60

percent of the time required to develop a project from its concept to its commissioning. Last year,

even solar and wind projects have faced challenges due to long permitting processes, land

acquisition issues and community tensions.

Under the IEGC 2010, RE projects will be required to forecast and schedule their power supply to

the grid and are subjected to pay additional charges in case of slippage. Since RE is infirm in nature

except for technologies such as biomass, significant capacity building and investments will be

required for forecasting and scheduling by developers and DISCOMs.

Third party power sales by RE projects are charged an open access levy, which includes a cross

subsidy surcharge and an electricity duty (except in states where these have been exempted). The

levy of these charges makes third party sales more expensive.

Accelerated Depreciation

Development Approvals and Risks

Indian Electricity Grid Code (IEGC) 2010

Open Access

53The term “evacuation” in the power system refers to the ability to connect a generator to the grid and send

the power from the project into to the grid transmission and distribution system.


Feed-in Tariffs

Reverse Bidding

Renewable Purchase Obligations and Renewable Energy Certificates

FiTs are one of the most successful and effective policy instruments globally for promoting RE

generation. However, FiTs have to be designed carefully, keeping in view the prevailing market

conditions, state of technology development and availability of resources. If the FiT is too high, it

leads to unwarranted profits for developers, while if set too low, the FiT can lead to very low

financial returns leading to low investments in the sector.

Experience shows that the FiTs designed by certain SERCs have been unable to attract investments.

There is a need for adoption of more robust processes and methodologies for determining FiTs that

include detailed due diligence on costs and performance parameters of various technologies, so as

to make these attractive for both debt and equity investors.

Reverse bidding led to a significant decline in solar power procurement prices. However, this also

led to concerns about the long-term viability of projects that actually qualified. Almost half of the

projects that needed project financing from FIs were not able to get such financing. As a result,

these projects had to utilize either equity financing or balance sheet financing. For example, FIs

were extremely concerned about the bid out tariffs on several of the projects and were unwilling to

finance as they felt that they were unviable for commercial finance. Reverse bidding led to

competition in an environment where capital costs, technology performance and access to financing

was still infancy. Besides the issues around unviable bids, reverse bidding suffers from some other

disadvantages too:

Capacity addition becomes episodic, dependent on government auctions, and as a result

developers are unable to create project pipelines and leverage economies of scale.

Reverse bidding also reduces the interest of private equity investors, as ability to scale up

appears uncertain.

A number of states have been negotiating with the developers to match their tariffs with the

lowest tariff discovered through the reverse bidding process. This process has delayed the

project allocation and also made projects unviable for few developers.

The RPO and the REC regime were designed to provide market-based instruments to stimulate RE

investments. However lack of RPO enforcement has led to weak markets for RECs and a loss of

credibility for similar market-based mechanisms. The key limitations of the RPO and REC schemes

•

•

•


have been poor enforcement, uneven cash-flows for generators, irrational floor prices for solar

RECs, lack of price certainty post 2017, and constraints in trading and managing liquidity for RECs.

To encourage investments through the REC mechanism, there is a need to ensure enforcement of

RPOs and assure consistent demand and stable prices for RECs.

Given that accelerated depreciation can only be utilized by profit-making entities with appreciable tax

liabilities and cannot be transferred, it effectively excludes most IPPs and investors who plan on

using a SPV route for project development. This limits the impact of the instrument and constrains

the level of investment entering the sector.

Wind, biomass and solar projects typically require fewer approvals than conventional energy

projects. Small hydro projects however require many government approvals, and long development

cycle times (more than 3 years). This leads to an escalation in costs. For example, obtaining

clearances and getting access to evacuation infrastructure has been reported to take over 60

percent of the time required to develop a project from its concept to its commissioning. Last year,

even solar and wind projects have faced challenges due to long permitting processes, land

acquisition issues and community tensions.

Under the IEGC 2010, RE projects will be required to forecast and schedule their power supply to

the grid and are subjected to pay additional charges in case of slippage. Since RE is infirm in nature

except for technologies such as biomass, significant capacity building and investments will be

required for forecasting and scheduling by developers and DISCOMs.

Third party power sales by RE projects are charged an open access levy, which includes a cross

subsidy surcharge and an electricity duty (except in states where these have been exempted). The

levy of these charges makes third party sales more expensive.

Accelerated Depreciation

Development Approvals and Risks

Indian Electricity Grid Code (IEGC) 2010

Open Access

53The term “evacuation” in the power system refers to the ability to connect a generator to the grid and send

the power from the project into to the grid transmission and distribution system.


5.2 MARKET BASED BARRIERS

Off-taker Risk

Fuel Risk

Technology Risks

Evacuation Risk

RE technologies face a number of market-based barriers. These include off-taker risks, technology

and resource risks, barriers in accessing evacuation infrastructure, and acceptance by local

communities where the projects are sited. Some of these have been described in the paragraphs

below:

The creditworthiness of the off-taker (the state distribution companies in the case of sales to the

state) plays a key role in determining the bankability of a PPA. Very few DISCOMs, such as those in

Gujarat and Maharashtra, are in good financial health. In other states, DISCOMs have poor financial

health, the risk of off-taker default and delayed payments is high (for example, developers have

receivables of up to 12 months in states like Rajasthan and Tamil Nadu).

Fuel risk is high for biomass projects (except for captive projects that use bi-products as fuel) as

these projects are competing for fuel with several alternative uses; and which has to be procured

from a variety of producers (who are reluctant to enter into long term supply agreements).

Banks consider relatively newer technologies riskier, especially those with high technology design

requirements such as CSP and biomass (using new feedstocks such as rice stalk, poultry litter). The

perception of risk is due to their unfamiliarity with the technology and poor performance of earlier

projects.

Evacuation is a generic problem afflicting wind, solar and the small hydro sector. Lack of adequate

evacuation facilities has led to scaling back the commissioning and partial commissioning of new

generation and the reduction of generation during peak periods. This issue is constraining the

development of small hydro projects across the northern and northeastern states (HP, Uttarakhand,

and North Eastern states), solar development in the remote areas of Rajasthan and wind in Tamil

Nadu. Banks and financial institutions are more cautious lending to RE projects given the poor state

of the evacuation networks. This risk is high where there is a lack of evacuation capacity such as

Tamil Nadu and Rajasthan, while the risk is low in states such as Gujarat.


Community Risk

Lack of Tax Efficient Structures for Renewable Energy Projects

Lack of Exit Options for Existing Investors

5.3 BARRIERS TO RURAL OFF-GRID PROJECTS

Small Ticket Size of Transaction

Limited Penetration of Financial Institutions in Rural Areas

Land acquisition is increasingly becoming a challenge for RE capacities. Land is typically procured

after the permitting process, which can take significant time. By this time, local communities get

aware that a project requires their land and can drive up its price, and delay land acquisition. Small

hydro projects have faced delays due to community protests, as the rivers in which these projects

are based or are nearby are considered sacred or due to problems with water diversion an important

resource in hilly areas.






A large portion of private equity investments in the Indian RE space are more than five years old as

investors have not been able to find exits due to the dull state of the capital markets. Raising new

funds is proving to be difficult for these investors as they have not been able to provide exits.

There are numerous barriers to financing off-grid rural RE projects in India. Challenges exist for both

debt and equity investors, and are discussed below:

Off-grid projects are mostly small in size, and thus, the capital requirement per project is also very

small. Unless there is a large corporate entity implementing a portfolio of such projects, the

investment size usually falls below the minimum size of investment required by most FIs. Such

projects find it hard to garner the interest of most lenders and equity investors.

Most FIs have limited presence in rural areas. They are not as well connected to local communities

and businesses in rural areas, which is crucial for establishing trust with local entrepreneurs.


5.2 MARKET BASED BARRIERS

Off-taker Risk

Fuel Risk

Technology Risks

Evacuation Risk

RE technologies face a number of market-based barriers. These include off-taker risks, technology

and resource risks, barriers in accessing evacuation infrastructure, and acceptance by local

communities where the projects are sited. Some of these have been described in the paragraphs

below:

The creditworthiness of the off-taker (the state distribution companies in the case of sales to the

state) plays a key role in determining the bankability of a PPA. Very few DISCOMs, such as those in

Gujarat and Maharashtra, are in good financial health. In other states, DISCOMs have poor financial

health, the risk of off-taker default and delayed payments is high (for example, developers have

receivables of up to 12 months in states like Rajasthan and Tamil Nadu).

Fuel risk is high for biomass projects (except for captive projects that use bi-products as fuel) as

these projects are competing for fuel with several alternative uses; and which has to be procured

from a variety of producers (who are reluctant to enter into long term supply agreements).

Banks consider relatively newer technologies riskier, especially those with high technology design

requirements such as CSP and biomass (using new feedstocks such as rice stalk, poultry litter). The

perception of risk is due to their unfamiliarity with the technology and poor performance of earlier

projects.

Evacuation is a generic problem afflicting wind, solar and the small hydro sector. Lack of adequate

evacuation facilities has led to scaling back the commissioning and partial commissioning of new

generation and the reduction of generation during peak periods. This issue is constraining the

development of small hydro projects across the northern and northeastern states (HP, Uttarakhand,

and North Eastern states), solar development in the remote areas of Rajasthan and wind in Tamil

Nadu. Banks and financial institutions are more cautious lending to RE projects given the poor state

of the evacuation networks. This risk is high where there is a lack of evacuation capacity such as

Tamil Nadu and Rajasthan, while the risk is low in states such as Gujarat.


Community Risk

Lack of Tax Efficient Structures for Renewable Energy Projects

Lack of Exit Options for Existing Investors

5.3 BARRIERS TO RURAL OFF-GRID PROJECTS


Limited Penetration of Financial Institutions in Rural Areas

Land acquisition is increasingly becoming a challenge for RE capacities. Land is typically procured

after the permitting process, which can take significant time. By this time, local communities get

aware that a project requires their land and can drive up its price, and delay land acquisition. Small

hydro projects have faced delays due to community protests, as the rivers in which these projects

are based or are nearby are considered sacred or due to problems with water diversion an important

resource in hilly areas.






A large portion of private equity investments in the Indian RE space are more than five years old as

investors have not been able to find exits due to the dull state of the capital markets. Raising new

funds is proving to be difficult for these investors as they have not been able to provide exits.

There are numerous barriers to financing off-grid rural RE projects in India. Challenges exist for both

debt and equity investors, and are discussed below:

Off-grid projects are mostly small in size, and thus, the capital requirement per project is also very

small. Unless there is a large corporate entity implementing a portfolio of such projects, the

investment size usually falls below the minimum size of investment required by most FIs. Such

projects find it hard to garner the interest of most lenders and equity investors.

Most FIs have limited presence in rural areas. They are not as well connected to local communities

and businesses in rural areas, which is crucial for establishing trust with local entrepreneurs.


Small Size of Projects makes it Difficult for Promoters to Exit

Lack of Successful Scalable, Replicable Business Models

Limited Understanding of Off-grid Projects among Financers and Investors

Viability Concerns due to High Upfront Costs

Long Gestation Period for Release of Capital Subsidy

Threat from Extension of the Grid

Companies that are into the business of owning and operating off-grid projects find it difficult to

scale-up operations due to the distributed nature of demand, the small size of projects and the

operational issues associated with each project. Equity investors find it difficult to exit through

traditional routes, such as an initial public offering (IPO) or a buyout from a strategic investor.

Only a few examples of successful business models for off-grid RE projects exist in India. For those

that do exist, the scope for replication is limited, as conditions relating to RE resource, off taker

risks, local support, differ from one area to another. Project operators, on their own find It difficult to

enter into or enforce long-term contracts with local communities for either procurement of fuel or

aggregation of demand

Most investors and lending institutions lack the understanding and ability to assess risks inherent to

off-grid projects. This makes it much more difficult to effectively analyze and prepare the project

proposal for review by potential investors or by a bank's credit committee.

The initial cost per kW of off-grid systems is much higher than grid connected projects due to their

small size and the additional investment required for distribution. This keeps the returns for such

projects low, and acts as a deterrent to financing.

The GOI does provide subsidies to off-grid projects, but it usually takes a long time for approval and

disbursement. This puts additional stress on off-grid RE projects, and significantly reduces the rate

of success, and extends the time for financial closure

There is a high degree of uncertainty around the future of off-grid RE projects once those areas get

electrified through grid. The likelihood of future grid-connection, its impact on an off-grid project, and

54These structures are discussed in detail in section 7 of this report titled 'Suggestions for Innovative Financing

Mechanisms for Renewable Energy in India'


alternative options once it does happen need to be address specifically by the project developer and

in discussions with investors.

Summing up, the key problem with off grid projects is small 'scale'. RESCOs with larger access to

demand and special funding support can attack this problem. We have proposed a special Off Grid

Fund to support RESCOs which is discussed in detail in chapter 6.

Commercial projects, like off-grid rural electrification projects face a number of barriers which impact

their bankability:

Commercial off-grid projects are small in size (normally a few 100 kWs), and do not gain much

attention from equity investors and lenders. They are not financed unless the user borrows directly

based on its balance sheet and existing relationship with a bank.

RESCOs that own and operate off-grid projects and sell power to consumers are small in size and

find it difficult to attract funding from banks because of their limited balance sheet.

Since these projects sell electricity directly to industrial and commercial customers, off-taker risk is

inherent and the creditworthiness of the off-taker plays a key role in determining the bankability of

these projects. Banks also find it difficult to look at these projects as a portfolio.

Current REC framework does not differentiate the projects developed for 100 percent on site (off-

grid) captive consumption from projects developed to inject electricity into the grid. To make these

eligible for RECs, these projects need to be connected to the grid. This leads to additional cost of

connecting to the grid such as additional infrastructure and open access charges. These additional

costs can be completely avoided with improving REC framework.

Policy regime needs to be developed to support creation of micro-grids serving a group of

customers.

5.4 BARRIERS TO COMMERCIAL OFF-GRID PROJECTS


Small Size of RESCO's Developing Commercial Projects

Off-taker Risk

Non Availability of RECs


Small Size of Projects makes it Difficult for Promoters to Exit

Lack of Successful Scalable, Replicable Business Models

Limited Understanding of Off-grid Projects among Financers and Investors

Viability Concerns due to High Upfront Costs

Long Gestation Period for Release of Capital Subsidy

Threat from Extension of the Grid

Companies that are into the business of owning and operating off-grid projects find it difficult to

scale-up operations due to the distributed nature of demand, the small size of projects and the

operational issues associated with each project. Equity investors find it difficult to exit through

traditional routes, such as an initial public offering (IPO) or a buyout from a strategic investor.

Only a few examples of successful business models for off-grid RE projects exist in India. For those

that do exist, the scope for replication is limited, as conditions relating to RE resource, off taker

risks, local support, differ from one area to another. Project operators, on their own find It difficult to

enter into or enforce long-term contracts with local communities for either procurement of fuel or

aggregation of demand

Most investors and lending institutions lack the understanding and ability to assess risks inherent to

off-grid projects. This makes it much more difficult to effectively analyze and prepare the project

proposal for review by potential investors or by a bank's credit committee.

The initial cost per kW of off-grid systems is much higher than grid connected projects due to their

small size and the additional investment required for distribution. This keeps the returns for such

projects low, and acts as a deterrent to financing.

The GOI does provide subsidies to off-grid projects, but it usually takes a long time for approval and

disbursement. This puts additional stress on off-grid RE projects, and significantly reduces the rate

of success, and extends the time for financial closure

There is a high degree of uncertainty around the future of off-grid RE projects once those areas get

electrified through grid. The likelihood of future grid-connection, its impact on an off-grid project, and

54These structures are discussed in detail in section 7 of this report titled 'Suggestions for Innovative Financing

Mechanisms for Renewable Energy in India'


alternative options once it does happen need to be address specifically by the project developer and

in discussions with investors.

Summing up, the key problem with off grid projects is small 'scale'. RESCOs with larger access to

demand and special funding support can attack this problem. We have proposed a special Off Grid

Fund to support RESCOs which is discussed in detail in chapter 6.

Commercial projects, like off-grid rural electrification projects face a number of barriers which impact

their bankability:

Commercial off-grid projects are small in size (normally a few 100 kWs), and do not gain much

attention from equity investors and lenders. They are not financed unless the user borrows directly

based on its balance sheet and existing relationship with a bank.

RESCOs that own and operate off-grid projects and sell power to consumers are small in size and

find it difficult to attract funding from banks because of their limited balance sheet.

Since these projects sell electricity directly to industrial and commercial customers, off-taker risk is

inherent and the creditworthiness of the off-taker plays a key role in determining the bankability of

these projects. Banks also find it difficult to look at these projects as a portfolio.

Current REC framework does not differentiate the projects developed for 100 percent on site (off-

grid) captive consumption from projects developed to inject electricity into the grid. To make these

eligible for RECs, these projects need to be connected to the grid. This leads to additional cost of

connecting to the grid such as additional infrastructure and open access charges. These additional

costs can be completely avoided with improving REC framework.

Policy regime needs to be developed to support creation of micro-grids serving a group of

customers.

5.4 BARRIERS TO COMMERCIAL OFF-GRID PROJECTS


Small Size of RESCO's Developing Commercial Projects

Off-taker Risk

Non Availability of RECs


5.5 GAPS AND NEEDS IN RE FINANCING

Based on discussions with developers, lenders, investors and experts in RE finance, including the

Advisory Team for RE Finance (ATREF) created by the PACE-D TA Program, the following key gaps in

RE financing have been identified:

• Growth of IPPs is an important development as IPPs can scale up RE investments. However

IPPs need new financial constructs to scale up

o New Sources of funds

, Large investors such as pension funds, insurance companies, sovereign wealth

funds, large family funds and Islamic finance.

, Access to capital markets.

, Participation by individual investors.

o Participation by International investors to meet larger investment needs of the future.

o Main stream debt financing options which allow longer term, low cost debt to be

available at higher leverage.

• Availability of finance products suitable to the stage of the project development (e.g. pre-

construction, construction, post commissioning). This eases migration from one type of

financing to the next as risks come down and improve the attractiveness of RE investments

as an asset class.

• Appropriate policies so that all classes of investors can benefit from incentives such as 55accelerated depreciation, tax holidays, RECs, and subsidies .

• Institutional arrangements and policies to help scale up of RESCOs

o Access to equity

o Access to debt

• · Mechanisms and products to reduce risks of RE investments.

The figure below depicts these needs and related measures.

55The minimum ticket size refers to the minimum project investment that a bank or investor will normally

examine to consider for financing.


Figure 4: Suggested Financial Mechanisms

• Risk insurance

• Re-Financing existing debts

• Supportive policy instruments-effective market mechanisms. Removal of direct subsidies

• Transferable benefits

• Pass through tax structures• Tenure~15yrs+

• Lower interest rates

• Higher D:E

• Pension funds

• HNIs, Corporate CSR Funds

• International capital for sustainability

Wider Access to

Tax Benefits

Financing needs

Reduce risks

~ Infra Financing

New Sources

5.5 GAPS AND NEEDS IN RE FINANCING

Based on discussions with developers, lenders, investors and experts in RE finance, including the

Advisory Team for RE Finance (ATREF) created by the PACE-D TA Program, the following key gaps in

RE financing have been identified:

• Growth of IPPs is an important development as IPPs can scale up RE investments. However

IPPs need new financial constructs to scale up

o New Sources of funds

, Large investors such as pension funds, insurance companies, sovereign wealth

funds, large family funds and Islamic finance.

, Access to capital markets.

, Participation by individual investors.

o Participation by International investors to meet larger investment needs of the future.

o Main stream debt financing options which allow longer term, low cost debt to be

available at higher leverage.

• Availability of finance products suitable to the stage of the project development (e.g. pre-

construction, construction, post commissioning). This eases migration from one type of

financing to the next as risks come down and improve the attractiveness of RE investments

as an asset class.

• Appropriate policies so that all classes of investors can benefit from incentives such as 55accelerated depreciation, tax holidays, RECs, and subsidies .

• Institutional arrangements and policies to help scale up of RESCOs

o Access to equity

o Access to debt

• · Mechanisms and products to reduce risks of RE investments.

The figure below depicts these needs and related measures.

55The minimum ticket size refers to the minimum project investment that a bank or investor will normally

examine to consider for financing.


Figure 4: Suggested Financial Mechanisms

• Risk insurance

• Re-Financing existing debts

• Supportive policy instruments-effective market mechanisms. Removal of direct subsidies

• Transferable benefits

• Pass through tax structures• Tenure~15yrs+

• Lower interest rates

• Higher D:E

• Pension funds

• HNIs, Corporate CSR Funds

• International capital for sustainability

Wider Access to

Tax Benefits

Financing needs

Reduce risks

~ Infra Financing

New Sources

To scale up its RE capacity, India will need significant financial investments. A number of large

financing sources still need to be tapped for RE. However, access to finance has been constrained

by a number of barriers such as tax benefits not uniformly accessible to potential investors; limited

access to capital markets; constrained private equity inflows; asset liability mismatch, etc.

Overcoming these barriers has the potential to facilitate the required inflow of investments to scale

up RE sector in India.

This report presents seven innovative financing mechanisms that can be adapted for implementation

in India to support scaling up of RE investments. The mechanisms can be classified as fiscal, policy

or financial mechanisms.

1. Fiscal

a. Tax efficient trusts like Master Limited Partnerships, Business Trusts, Real Estate

Investment Trusts

b. Tradable tax credits

Suggestions for Innovative FinancingMechanisms for RE in India6


To scale up its RE capacity, India will need significant financial investments. A number of large

financing sources still need to be tapped for RE. However, access to finance has been constrained

by a number of barriers such as tax benefits not uniformly accessible to potential investors; limited

access to capital markets; constrained private equity inflows; asset liability mismatch, etc.

Overcoming these barriers has the potential to facilitate the required inflow of investments to scale

up RE sector in India.

This report presents seven innovative financing mechanisms that can be adapted for implementation

in India to support scaling up of RE investments. The mechanisms can be classified as fiscal, policy

or financial mechanisms.

1. Fiscal

a. Tax efficient trusts like Master Limited Partnerships, Business Trusts, Real Estate

Investment Trusts

b. Tradable tax credits

Suggestions for Innovative FinancingMechanisms for RE in India6


2. Policy

a. REC Market Maker

b. Infrastructure Debt Fund

3. Financial

a. Green Bonds

b. HNI/CSR Off-Grid Fund

c. Risk Insurance

The above mechanisms have been identified after researching financing products used in developed

markets and analyzing their ability to address constraints. These have been presented to developers,

investors and lenders during round table conferences and one-on-one meetings and have been

reviewed by ATREF.

Trusts and Master Limited Partnerships (MLPs) have been successfully used across the globe to

enhance and attract investments in specific classes of assets. Trusts and MLPs are tax efficient

structures that can be traded publicly and thus have access to more capital market liquidity through

individual, retail and institutional investors. The use of such structures for RE financing (called

Renewable Energy Trusts) can be a very effective for attracting capital into the Indian RE market. A

number of examples of international tax efficient structures exist – one such example is the

Singapore Business Trust, which is further explained below. (Refer Annex J for other structures like

MLP, REIT).

A business trust is a corporate structure set up in Singapore under the Business Trust Act, 2004. At

present, there are nine business trusts listed on the SGX, one of which, i.e., the Hutchison Port

Holdings Trust, undertook the largest IPO in Singapore's history by raising approximately SGD 7

billion (USD 5.6 billion). Several companies have taken the Singapore Business Trust route for

attracting investments in RE (See Annex K: Companies adopting Singapore Business Trust Route).

A business trust is managed by a trustee-manager, who is the legal owner and manager of the

business trust's assets and receives remuneration for services provided (typically a fixed fee and an

incentive fee tied to the performance of the business trust) (See Figure 5: Typical Structure of a

Business Trust).

6.1 FISCAL MECHANISMS

6.1.1 Tax Efficient Trusts for RE

Singapore Business Trusts


A business trust structure offers a number of advantages for attracting more investments for RE

projects, a few of which are highlighted below:

• Efficient extraction of cash flows from assets: A business trust, unlike a company, is

permitted to make distributions from its cash flows (instead of profits), which allows

investors the option of taking out cash from cash generating assets like RE projects. The

Company Law of India allows dividends only up to net profits, while companies may

generate more free cash on account of non-cash expenses. This is especially true for RE

projects, such as solar and wind. With the business trust structure, investors would realize

better returns as the entire free cash generated by the projects can be distributed to the

investors.

• Continued control over trust assets: Sponsors typically own the trust manager and retain a

controlling stake in the business trust. Even post IPO, sponsors continue to hold more than

25 percent units in the business trust. This makes removal of trust managers difficult as it

requires approval of more than 75 percent of the unit holders, allowing better control over

the trust.

• Tax free distributions: Distributions from a business trust are tax free in Singapore. This tax

exemption is applicable to all unit holders in a business trust irrespective of their nationality,

identity or tax residence status.

Figure 5: Typical Structure of a Business Trust

Asset Asset Asset Asset

100% 100% 100% 100%

Business TrustTrustee

Manager

ru

distib

tions

itl

Cap

a apita

l

C

iri

uo

s

dst

bti

n

Sponsor Public

Trustee and Management Services

Trustee and Management Fee


2. Policy

a. REC Market Maker

b. Infrastructure Debt Fund

3. Financial

a. Green Bonds

b. HNI/CSR Off-Grid Fund

c. Risk Insurance

The above mechanisms have been identified after researching financing products used in developed

markets and analyzing their ability to address constraints. These have been presented to developers,

investors and lenders during round table conferences and one-on-one meetings and have been

reviewed by ATREF.

Trusts and Master Limited Partnerships (MLPs) have been successfully used across the globe to

enhance and attract investments in specific classes of assets. Trusts and MLPs are tax efficient

structures that can be traded publicly and thus have access to more capital market liquidity through

individual, retail and institutional investors. The use of such structures for RE financing (called

Renewable Energy Trusts) can be a very effective for attracting capital into the Indian RE market. A

number of examples of international tax efficient structures exist – one such example is the

Singapore Business Trust, which is further explained below. (Refer Annex J for other structures like

MLP, REIT).

A business trust is a corporate structure set up in Singapore under the Business Trust Act, 2004. At

present, there are nine business trusts listed on the SGX, one of which, i.e., the Hutchison Port

Holdings Trust, undertook the largest IPO in Singapore's history by raising approximately SGD 7

billion (USD 5.6 billion). Several companies have taken the Singapore Business Trust route for

attracting investments in RE (See Annex K: Companies adopting Singapore Business Trust Route).

A business trust is managed by a trustee-manager, who is the legal owner and manager of the

business trust's assets and receives remuneration for services provided (typically a fixed fee and an

incentive fee tied to the performance of the business trust) (See Figure 5: Typical Structure of a

Business Trust).

6.1 FISCAL MECHANISMS

6.1.1 Tax Efficient Trusts for RE

Singapore Business Trusts


A business trust structure offers a number of advantages for attracting more investments for RE

projects, a few of which are highlighted below:

• Efficient extraction of cash flows from assets: A business trust, unlike a company, is

permitted to make distributions from its cash flows (instead of profits), which allows

investors the option of taking out cash from cash generating assets like RE projects. The

Company Law of India allows dividends only up to net profits, while companies may

generate more free cash on account of non-cash expenses. This is especially true for RE

projects, such as solar and wind. With the business trust structure, investors would realize

better returns as the entire free cash generated by the projects can be distributed to the

investors.

• Continued control over trust assets: Sponsors typically own the trust manager and retain a

controlling stake in the business trust. Even post IPO, sponsors continue to hold more than

25 percent units in the business trust. This makes removal of trust managers difficult as it

requires approval of more than 75 percent of the unit holders, allowing better control over

the trust.

• Tax free distributions: Distributions from a business trust are tax free in Singapore. This tax

exemption is applicable to all unit holders in a business trust irrespective of their nationality,

identity or tax residence status.

Figure 5: Typical Structure of a Business Trust


100% 100% 100% 100%

Business TrustTrustee

Manager

distributiosn

tl

Capi a ap

ital

C

ir

uo

dst

ibti

ns

Sponsor Public

Trustee and Management Services

Trustee and Management Fee


•

liquidity from capital markets.

57• Gearing : There are no legal or regulatory restrictions on gearing of business trusts.

• Shariah law compliance for Islamic finance: The business trust structure is ideally suited to

attract Shariah compliant investors, as it provides stable annual returns without using any

debt-like instruments..

Benefits

Tax efficient trusts can address some of the important needs in RE financing by providing the

following benefits:

• They can attract new sources of financing because they offer stable cash-flows, and long

term investments for:

o Large institutional investors such as pension funds, insurance companies, sovereign

wealth funds, and Islamic financial institutions.

o High-net-worth Individuals

• They are very useful for aggregating operating assets, providing take-out finance and

releasing construction/development finance for further development work.

• Tax pass through benefits for investors shall attract many investors.

• More efficient cash utilization as these trusts distribute almost the entire cash generated by

projects. In normal financing mode for RE, SPVs are created and they are unable to

distribute cash to the parents without attracting tax penalties.

Challenges

The introduction of tax efficient trusts in India would require regulatory changes and some revisions

in laws by the Ministries of Finance, Corporate Affairs and New and Renewable Energy in areas such

as:

• Pass through status for tax benefits

• Channelizing international investments and their tax treatment

• Distribution of cash to investors; issue of dividend distribution tax, and capital gains tax

• Listing of such structures on local stock exchanges

• Regulations for investment managers, asset managers, and trustees

Liquidity through listing: These trusts can be listed on the SGX, and hence, provide access to

How can tax efficient trusts help?

57Gearing or financial leverage is the extent to which a company relies on borrowed funds for its operations


What needs to be done?

6.1.2 Tradable Accelerated Depreciation Tax Credits

Proposed Structure

•

trusts.

• Organize a knowledge exchange with the U.S. and/or Singapore regulators and the trusts

that have been listed there.

• If there is a buy in, develop details of regulatory changes needed to facilitate the launch of

such trusts in India.

Tradable accelerated depreciation tax credits are tax-saving certificates available to RE projects,

which are eligible for accelerated depreciation benefits. The value of these tax credits is equivalent

to the value of depreciation credit that the company holding the RE project is entitled to.

RE investments are capital intensive with low taxable profits in the initial years. The benefit of

accelerated depreciation can only be utilized when the company owning the RE asset has enough

profits from other businesses. Thus captive generation plants owned by existing profitable

businesses can take advantage of this benefit, whereas IPPs are unable to benefit because they

invest in new greenfield projects and always through SPV. This anomaly is partly addressed by

making GBI available to IPPs. However this approach has some disadvantages:

• GBI puts a financing burden directly on the government

• GBI payments get delayed.

• GBI is not available to all IPP projects.

• GBI is paid at the financial year end; this causes uneven cash-flows.

• GBI's can't be used to create additional debt financing as any securitization cuts down into

the overall debt limit.

• Tradable accelerated depreciation tax credits will be certificates available to generators

eligible for accelerated depreciation.

• The certificates will be freely tradable and could be used by entities to offset their income

tax liabilities using the depreciation equivalent available from the certificate.

• The selling price of these certificates will be market determined, but will mostly be at a 5 to

10 percent discount to the tax saving value of the certificate, so that there is an incentive for

the buyer of these certificates.

Discuss with policy makers and assess the benefits and challenges involved in adopting


•

liquidity from capital markets.

57• Gearing : There are no legal or regulatory restrictions on gearing of business trusts.

• Shariah law compliance for Islamic finance: The business trust structure is ideally suited to

attract Shariah compliant investors, as it provides stable annual returns without using any

debt-like instruments..

Benefits

Tax efficient trusts can address some of the important needs in RE financing by providing the

following benefits:

• They can attract new sources of financing because they offer stable cash-flows, and long

term investments for:

o Large institutional investors such as pension funds, insurance companies, sovereign

wealth funds, and Islamic financial institutions.

o High-net-worth Individuals

• They are very useful for aggregating operating assets, providing take-out finance and

releasing construction/development finance for further development work.

• Tax pass through benefits for investors shall attract many investors.

• More efficient cash utilization as these trusts distribute almost the entire cash generated by

projects. In normal financing mode for RE, SPVs are created and they are unable to

distribute cash to the parents without attracting tax penalties.

Challenges

The introduction of tax efficient trusts in India would require regulatory changes and some revisions

in laws by the Ministries of Finance, Corporate Affairs and New and Renewable Energy in areas such

as:

• Pass through status for tax benefits

• Channelizing international investments and their tax treatment

• Distribution of cash to investors; issue of dividend distribution tax, and capital gains tax

• Listing of such structures on local stock exchanges

• Regulations for investment managers, asset managers, and trustees

Liquidity through listing: These trusts can be listed on the SGX, and hence, provide access to

How can tax efficient trusts help?

57Gearing or financial leverage is the extent to which a company relies on borrowed funds for its operations



6.1.2 Tradable Accelerated Depreciation Tax Credits

Proposed Structure

•

trusts.

• Organize a knowledge exchange with the U.S. and/or Singapore regulators and the trusts

that have been listed there.

• If there is a buy in, develop details of regulatory changes needed to facilitate the launch of

such trusts in India.

Tradable accelerated depreciation tax credits are tax-saving certificates available to RE projects,

which are eligible for accelerated depreciation benefits. The value of these tax credits is equivalent

to the value of depreciation credit that the company holding the RE project is entitled to.

RE investments are capital intensive with low taxable profits in the initial years. The benefit of

accelerated depreciation can only be utilized when the company owning the RE asset has enough

profits from other businesses. Thus captive generation plants owned by existing profitable

businesses can take advantage of this benefit, whereas IPPs are unable to benefit because they

invest in new greenfield projects and always through SPV. This anomaly is partly addressed by

making GBI available to IPPs. However this approach has some disadvantages:

• GBI puts a financing burden directly on the government

• GBI payments get delayed.

• GBI is not available to all IPP projects.

• GBI is paid at the financial year end; this causes uneven cash-flows.

• GBI's can't be used to create additional debt financing as any securitization cuts down into

the overall debt limit.

• Tradable accelerated depreciation tax credits will be certificates available to generators

eligible for accelerated depreciation.

• The certificates will be freely tradable and could be used by entities to offset their income

tax liabilities using the depreciation equivalent available from the certificate.

• The selling price of these certificates will be market determined, but will mostly be at a 5 to

10 percent discount to the tax saving value of the certificate, so that there is an incentive for

the buyer of these certificates.

Discuss with policy makers and assess the benefits and challenges involved in adopting


India has experience with the trading of tax certificates. Exporters entitled to duty exempt imports

used to have the option of selling their entitlement to importers who needed duty free imports.

U.S. offers many transferable tax credits for investing or spending on RE. There is an online

exchange for trading such incentives too. The sellers use such trading instrument to raise capital for

their projects.

Benefits

• Credits will bring down the need for making investments, when the benefit of accelerated

depreciation is pursued. Such investors can buy the credit instead

• Qualified developers and operators can raise part of the project finance capital (equity) using

the trading of such credits. This can be very useful in accelerating investments

• Government can withdraw GBI and save on the budget burden

• Credits will also bring all investors at par and take away differential advantages available to

captive capacities. Since IPPs drive the bulk of investments, this benefit will remove a crucial

disadvantage for them and will be useful for scaling up RE investments

• Overall such instruments will improve 'capital efficiency'

Challenges

Accelerated depreciation benefits have been criticized by many as it leads to poor investment

decisions. This perception may be applicable to this scheme as well, although it is designed to take

care of the same issues by supporting qualified developers.

• Discuss with policy makers (MNRE, Ministry of Finance) and assess the benefits and

challenges involved in adopting tradable accelerated depreciation tax credits.

• Identify and detail regulatory provisions needed to support tradable accelerated depreciation

tax credits, covering issues such as who is qualified to receive them, when can they be

issued, and how will they be traded.

How can tradable tax credits help?



6.2 POLICY MECHANISMS

6.2.1 REC Market Maker

Structure of REC Market Maker

Other supportive roles for RMM include:

RECs are not factored-in by banks and other FIs in their evaluation of projects due to the risk of

unsold RECs. In the last twelve REC trading sessions, the number of “sell” bids was well in excess

of the “buy” bids, leading to a build-up of unsold stock. In such a situation, a market making

organization can provide a lot of confidence to both investors and lenders, and can significantly

improve the financial attractiveness of RE projects availing these benefits. The REC Market Maker

(RMM) will ensure liquidity in the market for RECs.

58• The RMM will be a government sponsored body that will act as a buyer and seller of last

resort in case of either unsold RECs in the market or a supply shortage in the market.

• The purchase price and sale price of RMM will be pre-established. While RMM will purchase

RECs at the floor price, the sale price will be at a marginal discount to the forbearance price.

• The spread in the sale and purchase price of RECs will enable the RMM to generate profits

and reduce its reliance on government funds for meeting its administrative expenses and

fund requirements.

• Entities eligible to sell or buy from RMM should submit valid un-cleared sale/purchase bids in

the REC trading session.

• RECs possessed by RMM may have an extended life.

• RMM may be authorised to buy RECs in forward transactions or develop other products to

improve liquidity.

• RMM may also play a role in bringing increased discipline and compliance in the market:

o Help State Nodal Agencies in setting up effective monitoring mechanisms for RPO

compliance.59o Develop linkages with other credits such as EE Certificates .

o As a part of its independent role for strengthening RPO mechanism, use legal means

such as appeals in Appellate Tribunal for Electricity (APTEL) for ensuring compliance by

Obligated Entities.

58May be in partnership with some DFIs, and structured with an independent corporate structure.59World Bank is working on a similar market maker scheme for ECERTs from PAT program. REC Market Maker

idea may be combined with ECERT market maker.


India has experience with the trading of tax certificates. Exporters entitled to duty exempt imports

used to have the option of selling their entitlement to importers who needed duty free imports.

U.S. offers many transferable tax credits for investing or spending on RE. There is an online

exchange for trading such incentives too. The sellers use such trading instrument to raise capital for

their projects.

Benefits

• Credits will bring down the need for making investments, when the benefit of accelerated

depreciation is pursued. Such investors can buy the credit instead

• Qualified developers and operators can raise part of the project finance capital (equity) using

the trading of such credits. This can be very useful in accelerating investments

• Government can withdraw GBI and save on the budget burden

• Credits will also bring all investors at par and take away differential advantages available to

captive capacities. Since IPPs drive the bulk of investments, this benefit will remove a crucial

disadvantage for them and will be useful for scaling up RE investments

• Overall such instruments will improve 'capital efficiency'

Challenges

Accelerated depreciation benefits have been criticized by many as it leads to poor investment

decisions. This perception may be applicable to this scheme as well, although it is designed to take

care of the same issues by supporting qualified developers.

• Discuss with policy makers (MNRE, Ministry of Finance) and assess the benefits and

challenges involved in adopting tradable accelerated depreciation tax credits.

• Identify and detail regulatory provisions needed to support tradable accelerated depreciation

tax credits, covering issues such as who is qualified to receive them, when can they be

issued, and how will they be traded.

How can tradable tax credits help?



6.2 POLICY MECHANISMS

6.2.1 REC Market Maker

Structure of REC Market Maker

Other supportive roles for RMM include:

RECs are not factored-in by banks and other FIs in their evaluation of projects due to the risk of

unsold RECs. In the last twelve REC trading sessions, the number of “sell” bids was well in excess

of the “buy” bids, leading to a build-up of unsold stock. In such a situation, a market making

organization can provide a lot of confidence to both investors and lenders, and can significantly

improve the financial attractiveness of RE projects availing these benefits. The REC Market Maker

(RMM) will ensure liquidity in the market for RECs.

58• The RMM will be a government sponsored body that will act as a buyer and seller of last

resort in case of either unsold RECs in the market or a supply shortage in the market.

• The purchase price and sale price of RMM will be pre-established. While RMM will purchase

RECs at the floor price, the sale price will be at a marginal discount to the forbearance price.

• The spread in the sale and purchase price of RECs will enable the RMM to generate profits

and reduce its reliance on government funds for meeting its administrative expenses and

fund requirements.

• Entities eligible to sell or buy from RMM should submit valid un-cleared sale/purchase bids in

the REC trading session.

• RECs possessed by RMM may have an extended life.

• RMM may be authorised to buy RECs in forward transactions or develop other products to

improve liquidity.

• RMM may also play a role in bringing increased discipline and compliance in the market:

o Help State Nodal Agencies in setting up effective monitoring mechanisms for RPO

compliance.59o Develop linkages with other credits such as EE Certificates .

o As a part of its independent role for strengthening RPO mechanism, use legal means

such as appeals in Appellate Tribunal for Electricity (APTEL) for ensuring compliance by

Obligated Entities.

58May be in partnership with some DFIs, and structured with an independent corporate structure.59World Bank is working on a similar market maker scheme for ECERTs from PAT program. REC Market Maker

idea may be combined with ECERT market maker.


o

RPO including processes for reviewing RPO targets (dynamic adjustments) and REC

floors and forbearance levels.

o Help develop schemes for weighted REC entitlements for new RE technologies or RPO

compliance weights for REC vintages to help initial investments in a new technology.

Benefits

RECs are a market based mechanism that can help finance RE projects if there is greater confidence

on liquidity and pricing of RECs. RMM will help create this confidence and may also help in:

• Strengthening the compliance mechanism as an independent player.

• Build markets for other environmental credits such ECERTs. Such market instruments can

help minimize or eliminate direct subsidies from the Government in a number of areas.

Challenges

Ensuring compliance with RPO and non-uniform RPO targets across states are two of the most

important challenges.

Experts feel that it is difficult to impose strict penalties on obligated entities (specifically state

DISCOMs) because they are state governed and are not financially sound. Many ideas have been

proposed such as devolving the RPO targets directly to users, linking performance on RPOs to SEB

performance rating.

60• Develop details of government sponsorship with CERC and MNRE, with which RMM can

be launched.

• Explore development of RMM in partnerships with development financial institutions such

as the World Bank and ADB.

• Develop overall RPO policy reforms needed to revive the long term market for RECs.


difficulties in providing long-term funding for infrastructure projects due to an asset-liability 61 62mismatch . In addition to this, banks also have to deal with internally set sector limits .

It may work with CERC and Forum of Regulators to improve the regulations relating to

How can a REC Market Maker help?


6.2.2 Use of Infrastructure Debt Fund for Renewable Energy

60For example, can RMM use National Clean Energy Fund for the initial corpus? 61An asset-liability mismatch occurs in a situation where the bank has substantial long-term assets (such term

loans) but short-term liabilities, such as deposits

In order to diversify their risk across sectors, banks internally set lending limits for each sector


IDFs allow tapping of long-term, low-cost debt from insurance, pension funds, and other long-term

investors, (both domestic and foreign), to refinance bank debt for infrastructure projects. By

refinancing, the IDFs can release a large capacity of banks to finance greenfield projects, which

seem to be constrained at present.

In 2011-12, the GOI allowed IDFs to be set to ease and accelerate the flow of funds into

infrastructure development projects in the country.

Such funds act as pass through vehicles, with no tax applicable on the income generated by the IDF.

To attract offshore funds into IDFs, the Finance Minister has announced a reduction in the

withholding tax on interest payments on the borrowings by IDFs from 20 percent to 5 percent.

IDFs can operate either as a trust or a company. An IDF formed as a trust is a mutual fund referred

as IDF-MF; whereas an IDF formed as a company is a NBFC, referred as IDF-NBFC. An IDF-MF is

allowed to invest at any stage of the project lifecycle, but an IDF-NBFC can use funds only to re-

finance a project's debt. Once formed, IDFs can raise funds from potential investors. (See Table 4:

Characteristics of Infrastructure Debt Funds in India)

Table 4: Characteristics of Infrastructure Debt Funds in India

Characteristic IDF as trust (IDF-MF)

Regulating authority Securities and Exchange Board of India

(SEBI)

Reserve Bank of India (RBI)

IDF as company (IDF-NBFC)

Sponsor - Any domestic entity regulated by SEBI

- Existing Mutual Funds can be the

sponsors for IDFs as clarified by SEBI.

- In case of NBFC sponsor, NBFC need

to

• Have existed for minimum 5 years

• Have net owned funds of Minimum

INR 3 billion

- Only NBFCs registered as

Infrastructure Finance Company

(NBFC-IFCs) are eligible for

sponsoring IDF-NBFCs

Minimum Fund size Firm commitment for at least INR 250 63million from strategic investors before

allotment of marketing scheme to

prospective investors

- Minimum Fund size is INR 3 billion.

- No firm commitments needed

from investors

Currency of

denomination

Rupee - Rupee or

- Dollar

Maturity Minimum of 5 years Minimum of 5 years

63Strategic investors includes an Infrastructure Finance Company registered with RBI as NBFC, a Scheduled Commercial Bank, International Multilateral Financial Institution


o

RPO including processes for reviewing RPO targets (dynamic adjustments) and REC

floors and forbearance levels.

o Help develop schemes for weighted REC entitlements for new RE technologies or RPO

compliance weights for REC vintages to help initial investments in a new technology.

Benefits

RECs are a market based mechanism that can help finance RE projects if there is greater confidence

on liquidity and pricing of RECs. RMM will help create this confidence and may also help in:

• Strengthening the compliance mechanism as an independent player.

• Build markets for other environmental credits such ECERTs. Such market instruments can

help minimize or eliminate direct subsidies from the Government in a number of areas.

Challenges

Ensuring compliance with RPO and non-uniform RPO targets across states are two of the most

important challenges.

Experts feel that it is difficult to impose strict penalties on obligated entities (specifically state

DISCOMs) because they are state governed and are not financially sound. Many ideas have been

proposed such as devolving the RPO targets directly to users, linking performance on RPOs to SEB

performance rating.

60• Develop details of government sponsorship with CERC and MNRE, with which RMM can

be launched.

• Explore development of RMM in partnerships with development financial institutions such

as the World Bank and ADB.

• Develop overall RPO policy reforms needed to revive the long term market for RECs.


difficulties in providing long-term funding for infrastructure projects due to an asset-liability 61 62mismatch . In addition to this, banks also have to deal with internally set sector limits .

It may work with CERC and Forum of Regulators to improve the regulations relating to

How can a REC Market Maker help?


6.2.2 Use of Infrastructure Debt Fund for Renewable Energy

60For example, can RMM use National Clean Energy Fund for the initial corpus? 61An asset-liability mismatch occurs in a situation where the bank has substantial long-term assets (such term

loans) but short-term liabilities, such as deposits

In order to diversify their risk across sectors, banks internally set lending limits for each sector


IDFs allow tapping of long-term, low-cost debt from insurance, pension funds, and other long-term

investors, (both domestic and foreign), to refinance bank debt for infrastructure projects. By

refinancing, the IDFs can release a large capacity of banks to finance greenfield projects, which

seem to be constrained at present.

In 2011-12, the GOI allowed IDFs to be set to ease and accelerate the flow of funds into

infrastructure development projects in the country.

Such funds act as pass through vehicles, with no tax applicable on the income generated by the IDF.

To attract offshore funds into IDFs, the Finance Minister has announced a reduction in the

withholding tax on interest payments on the borrowings by IDFs from 20 percent to 5 percent.

IDFs can operate either as a trust or a company. An IDF formed as a trust is a mutual fund referred

as IDF-MF; whereas an IDF formed as a company is a NBFC, referred as IDF-NBFC. An IDF-MF is

allowed to invest at any stage of the project lifecycle, but an IDF-NBFC can use funds only to re-

finance a project's debt. Once formed, IDFs can raise funds from potential investors. (See Table 4:

Characteristics of Infrastructure Debt Funds in India)

Table 4: Characteristics of Infrastructure Debt Funds in India

Characteristic IDF as trust (IDF-MF)

Regulating authority Securities and Exchange Board of India

(SEBI)

Reserve Bank of India (RBI)

IDF as company (IDF-NBFC)

Sponsor - Any domestic entity regulated by SEBI

- Existing Mutual Funds can be the

sponsors for IDFs as clarified by SEBI.

- In case of NBFC sponsor, NBFC need

to

• Have existed for minimum 5 years

• Have net owned funds of Minimum

INR 3 billion

- Only NBFCs registered as

Infrastructure Finance Company

(NBFC-IFCs) are eligible for

sponsoring IDF-NBFCs

Minimum Fund size Firm commitment for at least INR 250 63million from strategic investors before

allotment of marketing scheme to

prospective investors

- Minimum Fund size is INR 3 billion.

- No firm commitments needed

from investors

Currency of

denomination

Rupee - Rupee or

- Dollar

Maturity Minimum of 5 years Minimum of 5 years

63Strategic investors includes an Infrastructure Finance Company registered with RBI as NBFC, a Scheduled Commercial Bank, International Multilateral Financial Institution


Structure of IDF-NBFC

According to RBI guidelines, only NBFCs registered as Infrastructure Finance Companies can

sponsor an IDF-NBFC. Once formed, the IDF-NBFC can raise funds from investors in the form of

both debt and equity. Investors can be domestic investors (e.g. FIs and individuals) or/and foreign

investors. IDF-NBFCs can only refinance debt (up to 85 percent of existing debt) for projects which

have been in commercial operation for more than a year. All these projects need to be guaranteed

by the project authority for the IDF-NBFC to buyout the debt (See Figure 6: Structure of IDF-NBFC).

Characteristic IDF as trust (IDF-MF) IDF as company (IDF-NBFC)

Trade of IDF bonds Issues units listed on a recognized stock

exchange and tradable among domestic

and foreign investors

Issues bonds tradable among

domestic and foreign investors.

IDF Quality

Requirements

None Minimum 'A' rating from CRISIL or

equivalent ratings from FiTCH, CARE

and ICRA

Eligible

Projects/Companies

Infrastructure companies or SPVs across

all infrastructure sectors, project stages

and project types

Public Private Partnership (PPP)

projects which have a buyout

guarantee from project authority and

have completed at least one year of

commercial operation

Fund Deployment - At least 90 percent of its assets need

to be invested in debt instruments of

above stated projects/companies

- Up to 10 percent can be used for equity

and other investment purposes

- 100 percent of the assets need to

deployed in refinancing debt of

commercial operating projects

- Up to 85 percent of total debt of

project can be refinanced by IDF

Risk Bearers Investors in bonds IDF Company

Return on assets Pass through to the investors directly, less

the management fee

- Not specified by regulator.

- Sponsors can define sharing of

returns while forming IDFs

Limit on investors Not less than 5 investors with no investor

investing more than 50 percent of fund;

Minimum investment will be INR 10

million with INR 1 million as minimum size

of the unit

Not specified by regulator

Potential Investors less risk averse offshore institutional

investors

More risk averse offshore institutional

investors, offshore High Net worth

Individuals (HNIs), NRIs and domestic

institutional investors


Structure of IDF-MF

According to SEBI guidelines, an existing mutual fund or NBFC can sponsor an IDF-MF, which can

then raise funds from domestic investors (e.g. FIs and individuals) and/or foreign investors.

However, these funds need to be Indian Rupee denominated. IDF-MF are allowed to invest in

companies, SPVs or projects at any stage of development in the form of debt or equity, or any other

instrument; but at least 90 percent of the assets need to be invested in debt instruments. (See

Figure 7: Structure of IDF-MF).

Asset with

more than 1

yr of operation

Debt<85% Debt<85% Debt<85% Debt<85%

distriu

ios

bt

n

itl

Cap

a apta

l

Ci

istri

butio

ns

d

Investors

Asset with

more than 1

yr of operation

Asset with

more than 1

yr of operation

Asset with

more than 1

yr of operation

Banks/Fls Banks/Fls Banks/Fls

Project Authority IDF-NBFCBuyout Guarantee

Sponsor

(NBFC-IFC)

Debt<15%Debt<15%Debt<15%Debt<15%

Banks/Fls

Figure 6: Structure of IDF-NBFC

Under the IDF-NBFC route, a buyout guarantee from a project authority is required. In case of default

by the borrower, the Project Authority is expected to repay the loan of the lender and take over the

Project. Project authorities for RE projects are most likely to be state electricity boards, which have

provided PPAs for RE projects. There is no national body today, although Solar Energy Corporation of

India could play this role for solar projects under JNNSM.

Box 14: Limitation with IDF-NBFC


Structure of IDF-NBFC

According to RBI guidelines, only NBFCs registered as Infrastructure Finance Companies can

sponsor an IDF-NBFC. Once formed, the IDF-NBFC can raise funds from investors in the form of

both debt and equity. Investors can be domestic investors (e.g. FIs and individuals) or/and foreign

investors. IDF-NBFCs can only refinance debt (up to 85 percent of existing debt) for projects which

have been in commercial operation for more than a year. All these projects need to be guaranteed

by the project authority for the IDF-NBFC to buyout the debt (See Figure 6: Structure of IDF-NBFC).

Characteristic IDF as trust (IDF-MF) IDF as company (IDF-NBFC)

Trade of IDF bonds Issues units listed on a recognized stock

exchange and tradable among domestic

and foreign investors

Issues bonds tradable among

domestic and foreign investors.

IDF Quality

Requirements

None Minimum 'A' rating from CRISIL or

equivalent ratings from FiTCH, CARE

and ICRA

Eligible

Projects/Companies

Infrastructure companies or SPVs across

all infrastructure sectors, project stages

and project types

Public Private Partnership (PPP)

projects which have a buyout

guarantee from project authority and

have completed at least one year of

commercial operation

Fund Deployment - At least 90 percent of its assets need

to be invested in debt instruments of

above stated projects/companies

- Up to 10 percent can be used for equity

and other investment purposes

- 100 percent of the assets need to

deployed in refinancing debt of

commercial operating projects

- Up to 85 percent of total debt of

project can be refinanced by IDF

Risk Bearers Investors in bonds IDF Company

Return on assets Pass through to the investors directly, less

the management fee

- Not specified by regulator.

- Sponsors can define sharing of

returns while forming IDFs

Limit on investors Not less than 5 investors with no investor

investing more than 50 percent of fund;

Minimum investment will be INR 10

million with INR 1 million as minimum size

of the unit

Not specified by regulator

Potential Investors less risk averse offshore institutional

investors

More risk averse offshore institutional

investors, offshore High Net worth

Individuals (HNIs), NRIs and domestic

institutional investors


Structure of IDF-MF

According to SEBI guidelines, an existing mutual fund or NBFC can sponsor an IDF-MF, which can

then raise funds from domestic investors (e.g. FIs and individuals) and/or foreign investors.

However, these funds need to be Indian Rupee denominated. IDF-MF are allowed to invest in

companies, SPVs or projects at any stage of development in the form of debt or equity, or any other

instrument; but at least 90 percent of the assets need to be invested in debt instruments. (See

Figure 7: Structure of IDF-MF).

Asset with

more than 1

yr of operation

Debt<85% Debt<85% Debt<85% Debt<85%

distriu

ios

bt

n

itl

Cap

a

tap

i al

C

irib

uton

s

dst

i

Investors

Asset with

more than 1

yr of operation

Asset with

more than 1

yr of operation

Asset with

more than 1

yr of operation

Banks/Fls Banks/Fls Banks/Fls

Project Authority IDF-NBFCBuyout Guarantee

Sponsor

(NBFC-IFC)

Debt<15%Debt<15%Debt<15%Debt<15%

Banks/Fls

Figure 6: Structure of IDF-NBFC

Under the IDF-NBFC route, a buyout guarantee from a project authority is required. In case of default

by the borrower, the Project Authority is expected to repay the loan of the lender and take over the

Project. Project authorities for RE projects are most likely to be state electricity boards, which have

provided PPAs for RE projects. There is no national body today, although Solar Energy Corporation of

India could play this role for solar projects under JNNSM.

Box 14: Limitation with IDF-NBFC


64IDFs for RE projects need to be developed per the structures allowed by regulatory authorities .

Few IDFs have raised capital for the market from other infrastructure sectors but no IDF has been

set up so far for RE.

Benefits

• IDFs will enable flow of funds from long term investors (both domestic and foreign) at

favourable terms like lower interest rates and longer tenure. Lower withholding tax is an

important incentive for international investors.

• IDFs are tradable instruments and can be listed on exchanges. Liquidity can expand investor

base.

• Refinancing of operating assets will release capital for fresh development.

Challenges

The challenge is in identifying appropriate and financially sound authority to give buy-out guarantee

(needed in case of IDF-NBFC).

• State utilities can be a natural choice project authority providing the needed buyout

guarantee. This will be possible for projects supplying power under FiTs or bidding

mechanisms. However many state utilities do not have necessary financial strength to make

the guarantee credible.

How can IDFs help?

Figure 7: Structure of IDF-MF


Debt/Equity Debt/Equity Debt/Equity Debt/Equity

IDF-MFFund ManagerManagement Fee

disri

uio

s

tb

tn

Capit

la apt

Ci a

l

istri

butio

ns

d

Sponsor

(Mutual Fund)Investors

64SEBI and RBI are regulatory authorities for IDF-MF and IDF-NBFC respectively


•


• Identify appropriate project authorities for various PPA/ development models.

• Explore the possibility of developing a national authority to provide the buy-out guarantee,

with MNRE. These could also be for national institutions such as IREDA, IIFCL or for solar

projects such as SECI.

• Develop standard tripartite agreements and other supporting documents, using the

templates already available for other infrastructure projects.

• Identify potential anchor NBFC/MFs for raising IDFs.

• Identify a pilot portfolio of assets for deploying the IDF.

Equity investors, as well as lenders with exposure to infrastructure assets, including RE,

consistently try to "churn" their funds (exit existing assets and invest in new ones). NBFCs and

commercial banks in India are already facing difficulties in providing long term funding for

infrastructure projects due to an asset-liability mismatch. Moreover, banks also have to deal with

internally set sector limits. Most private equity funds are struggling to raise new funds due to their

inability to exit from existing investments, on account of the lackluster capital markets.

Green bonds can be effectively used to solve this problem. Green bonds or climate bonds are bonds

issued for financing projects or programs that directly contribute towards climate change mitigation,

adaptation, environmental protection, and related issues. However, in this section of the report,

green bonds are referred to as asset backed bonds that refinance operational cash flow from low

carbon infrastructure.

Green bonds can provide 'exits' to private equity investors as well as lenders in India by transferring

funds from green bond investors. This will provide fresh capital infusion to lenders for re-deployment

and will enable private equities to raise fresh funds from investors. These bonds would also work as

a means of gaining access to international capital pools to finance Indian RE projects and assets.

Globally, two main types of structures can be used for re-financing through green bond issuance: (i)

corporate bonds; and (ii) portfolio bonds.

For JNNSM projects, Solar Energy Corporation of India (SECI) could be the project authority.

6.3 FINANCING MECHANISMS

6.3.1 Green Bonds


64IDFs for RE projects need to be developed per the structures allowed by regulatory authorities .

Few IDFs have raised capital for the market from other infrastructure sectors but no IDF has been

set up so far for RE.

Benefits

• IDFs will enable flow of funds from long term investors (both domestic and foreign) at

favourable terms like lower interest rates and longer tenure. Lower withholding tax is an

important incentive for international investors.

• IDFs are tradable instruments and can be listed on exchanges. Liquidity can expand investor

base.

• Refinancing of operating assets will release capital for fresh development.

Challenges

The challenge is in identifying appropriate and financially sound authority to give buy-out guarantee

(needed in case of IDF-NBFC).

• State utilities can be a natural choice project authority providing the needed buyout

guarantee. This will be possible for projects supplying power under FiTs or bidding

mechanisms. However many state utilities do not have necessary financial strength to make

the guarantee credible.

How can IDFs help?

Figure 7: Structure of IDF-MF


Debt/Equity Debt/Equity Debt/Equity Debt/Equity

IDF-MFFund ManagerManagement Fee

riu

distb

tionsCapit

la

tap

i al

C

irib

uton

s

dst

i

Sponsor

(Mutual Fund)Investors

64SEBI and RBI are regulatory authorities for IDF-MF and IDF-NBFC respectively


•


• Identify appropriate project authorities for various PPA/ development models.

• Explore the possibility of developing a national authority to provide the buy-out guarantee,

with MNRE. These could also be for national institutions such as IREDA, IIFCL or for solar

projects such as SECI.

• Develop standard tripartite agreements and other supporting documents, using the

templates already available for other infrastructure projects.

• Identify potential anchor NBFC/MFs for raising IDFs.

• Identify a pilot portfolio of assets for deploying the IDF.

Equity investors, as well as lenders with exposure to infrastructure assets, including RE,

consistently try to "churn" their funds (exit existing assets and invest in new ones). NBFCs and

commercial banks in India are already facing difficulties in providing long term funding for

infrastructure projects due to an asset-liability mismatch. Moreover, banks also have to deal with

internally set sector limits. Most private equity funds are struggling to raise new funds due to their

inability to exit from existing investments, on account of the lackluster capital markets.

Green bonds can be effectively used to solve this problem. Green bonds or climate bonds are bonds

issued for financing projects or programs that directly contribute towards climate change mitigation,

adaptation, environmental protection, and related issues. However, in this section of the report,

green bonds are referred to as asset backed bonds that refinance operational cash flow from low

carbon infrastructure.

Green bonds can provide 'exits' to private equity investors as well as lenders in India by transferring

funds from green bond investors. This will provide fresh capital infusion to lenders for re-deployment

and will enable private equities to raise fresh funds from investors. These bonds would also work as

a means of gaining access to international capital pools to finance Indian RE projects and assets.

Globally, two main types of structures can be used for re-financing through green bond issuance: (i)

corporate bonds; and (ii) portfolio bonds.

For JNNSM projects, Solar Energy Corporation of India (SECI) could be the project authority.

6.3 FINANCING MECHANISMS

6.3.1 Green Bonds


Corporate Bonds

Portfolio Bonds

Corporate bonds are issued by the issuer, but verifiably linked to assets that qualify as green

investments. The key features of corporate bonds include:

• Bonds are issued against issuer's credit rating.

• Issuer may get a certification (e.g. from Climate Bond Standards Board) that the bond

proceeds are used for refinancing green infrastructure.

• At the time of issuance, the asset portfolio has to have a market value greater than bond

issuance value, so that there is enough incentive for buyers to purchase the bonds (the

same way as IPO issues are usually underpriced).

• As the coupon is paid by underlying projects, the issuers may issue bonds with a payout

lower than can generation from underlying projects to improve the credit quality of the

bonds.

• The asset related risks are still carried by the issuer and are not passed on to the bond

holders.

Under the portfolio bonds mechanism, a portfolio of assets is put into a special purpose vehicle

(SPV) and ring fenced. Bonds are issued on the loan portfolio. The cash flows from projects are used

to service the bond.

• The credit quality of the loan portfolio can be enhanced through risk mitigation measures

such as:

o Sector/technology diversification.

o Insurance against policy risks, exchange risk covers, country/political risk covers, and

operational risk.

o Credit risk enhancements (partial/full risk guarantees) organizations like ADB, World

Bank, IFC, and OPIC can provide.

o Cash flows from underlying assets being higher than those required to meet the

cash flow requirements of bond holders).

• · Portfolio bonds need to be credit rated.

The recourse for bondholders is mostly the underlying assets, however bond issuing corporates may

in some cases provide additional guarantee support (corporate or government or some other

financial institution).


Market for Green Bonds

There is an increasing awareness of the importance of green bonds to finance future investment in

clean energy. It is estimated that a debt of USD 6 trillion or more will be needed to finance low

carbon infrastructure across the globe between 2010 and 2020. Bonds are well suited to finance

such infrastructure projects, as bonds have a long life and low operating costs. In comparison, non-

green infrastructure options are dependent on non-renewable sources and subject to rapid inflation

and increasing environmental costs.

In 2011, London-based Climate Bonds Initiative, an international investor-focused non-for-profit

organization, conducted a survey to profile the issuance of green bonds. The survey revealed that

green bonds valuing nearly USD 174 billion were outstanding in 2011 (over 1,000 issuances, 207

issuers, 82 percent issued by corporates and 13 percent issued by development banks). The key

sectors covered by such bonds were energy (RE such as wind and solar); water; agriculture and

forestry (wood products, sustainable forestry, organic seeds and fertilizers); transport (including rail

transportation which is inherently low carbon); building and industrial EE (activities such as retrofits

and LED applications); waste and pollution control; and green finance (issued by multilateral

development banks to finance their investments in climate change mitigation and adaptation).

As per the 2011 survey, some key FIs who issued green bonds are the World Bank, IFC, European

Investment Bank (EIB), European Bank for Reconstruction and Development, ADB, and South

African Industrial Development Corporation (IDC). The UK institutions have issued the largest

amount of green bonds (23 percent), followed by France (17 percent). The EU in total has contributed

67 percent of the issuances (see figure 8: Climate themed bonds). Brazil is likely to be a large issuer


Corporate Bonds

Portfolio Bonds

Corporate bonds are issued by the issuer, but verifiably linked to assets that qualify as green

investments. The key features of corporate bonds include:

• Bonds are issued against issuer's credit rating.

• Issuer may get a certification (e.g. from Climate Bond Standards Board) that the bond

proceeds are used for refinancing green infrastructure.

• At the time of issuance, the asset portfolio has to have a market value greater than bond

issuance value, so that there is enough incentive for buyers to purchase the bonds (the

same way as IPO issues are usually underpriced).

• As the coupon is paid by underlying projects, the issuers may issue bonds with a payout

lower than can generation from underlying projects to improve the credit quality of the

bonds.

• The asset related risks are still carried by the issuer and are not passed on to the bond

holders.

Under the portfolio bonds mechanism, a portfolio of assets is put into a special purpose vehicle

(SPV) and ring fenced. Bonds are issued on the loan portfolio. The cash flows from projects are used

to service the bond.

• The credit quality of the loan portfolio can be enhanced through risk mitigation measures

such as:

o Sector/technology diversification.

o Insurance against policy risks, exchange risk covers, country/political risk covers, and

operational risk.

o Credit risk enhancements (partial/full risk guarantees) organizations like ADB, World

Bank, IFC, and OPIC can provide.

o Cash flows from underlying assets being higher than those required to meet the

cash flow requirements of bond holders).

• · Portfolio bonds need to be credit rated.

The recourse for bondholders is mostly the underlying assets, however bond issuing corporates may

in some cases provide additional guarantee support (corporate or government or some other

financial institution).


Market for Green Bonds

There is an increasing awareness of the importance of green bonds to finance future investment in

clean energy. It is estimated that a debt of USD 6 trillion or more will be needed to finance low

carbon infrastructure across the globe between 2010 and 2020. Bonds are well suited to finance

such infrastructure projects, as bonds have a long life and low operating costs. In comparison, non-

green infrastructure options are dependent on non-renewable sources and subject to rapid inflation

and increasing environmental costs.

In 2011, London-based Climate Bonds Initiative, an international investor-focused non-for-profit

organization, conducted a survey to profile the issuance of green bonds. The survey revealed that

green bonds valuing nearly USD 174 billion were outstanding in 2011 (over 1,000 issuances, 207

issuers, 82 percent issued by corporates and 13 percent issued by development banks). The key

sectors covered by such bonds were energy (RE such as wind and solar); water; agriculture and

forestry (wood products, sustainable forestry, organic seeds and fertilizers); transport (including rail

transportation which is inherently low carbon); building and industrial EE (activities such as retrofits

and LED applications); waste and pollution control; and green finance (issued by multilateral

development banks to finance their investments in climate change mitigation and adaptation).

As per the 2011 survey, some key FIs who issued green bonds are the World Bank, IFC, European

Investment Bank (EIB), European Bank for Reconstruction and Development, ADB, and South

African Industrial Development Corporation (IDC). The UK institutions have issued the largest

amount of green bonds (23 percent), followed by France (17 percent). The EU in total has contributed

67 percent of the issuances (see figure 8: Climate themed bonds). Brazil is likely to be a large issuer


in the future, as Brazil National Development Bank (BNDES) has issuance planned to support

renewable, transport, building and industrial energy efficiency, waste-to-energy, preventing

desertification, and reduced deforestation. Chinese green bond issuance is also accelerating with

issuances for efficient rail transport, issuances by municipalities, RE companies (solar, wind), and

EE. See Annex L for examples of green bonds.

Figure 8: Climate Themed Bonds

0

5

10

15

20

25

30

35

40

45

UK

Fran

ceni

te

Ute

d St

as

Swtz

ai

erl

nd

Ger

ma

yn

Rus

sia

Can

ada n

Chi

a

US

D B

illio

ns

Source: Bonds and Climate Change, The State of the Market in 2012, Climate Bonds Initiative

How can Green Bonds help?

Benefits

Green bonds can effectively tap new international sources of funds such as pension funds,

insurance companies, and sovereign wealth funds. These types of investors are used to investing in

green bonds globally. Almost 10 percent of the capital base of large investors is being allocated to

green and sustainable investing. Such capital can be attracted to a green bond issuance.

Green bonds will help improve the tenure and reduce the cost of funds. Green bonds will be

targeted towards refinancing of operating projects; thus they will help release capital for fresh green

field projects.

Bonds may be listed on specialized exchanges including AIM, London or Luxembourg to improve

liquidity.


Challenges

Risks such as long term currency risk or political or regulatory risks may be difficult to cover. Bonds 65will require strong risk covers .

It is important to identify anchor institutions or corporates who have a good operating asset portfolio

and who may benefit from green bond issuance. There are established guidelines on ECBs.

Regulatory hurdles are expected to be less, although this issue will be assessed in detail when a

pilot issuance is being conceptualized.

In addition to above there is a need to develop a method for obtaining long term hedge for INR to

USD transactions. RBI has recently announced a hedge for INR to USD at 3.5 percent per annum for

attracting FCNR deposits.

A majority of off-grid projects in India have been financed through government subsidies, grants,

investments from impact investors, and in some cases, with small portions loans from FIs (~10-20

percent). Due to the reasons discussed in Section 5, very few investors and FIs are open to lending

to off-grid projects. Thus, there is a need for a fund focused on the off-grid RE market in India.

The fund will have the following features:

• The objective of the fund would be to invest in off-grid rural projects as well as onsite energy

projects for C&I segments. The fund would invest in projects which generate RE, enhance

EE as well as support activities which generate demand for rural electricity.

• The fund will raise capital from HNIs, NRIs, corporate CSR budgets and impact investors.

• It will co-invest with RESCOs using a combination of equity and mezzanine equity.

• It will also support pre-finance activities to develop scalable programs for off-grid RE

implementation. Development expenses will be recovered when projects or programs are

financed.

• The fund will help the investee programs raise other types of capital as well as channel

government subsidies.


6.3.2 Off-Grid Renewable Energy Fund

Features of Off-grid Funds

65In this context, an interesting application for using green bonds could be a RE utility for SEZs where the PPAs with SEZ residents are established in USD (or USD linked).


in the future, as Brazil National Development Bank (BNDES) has issuance planned to support

renewable, transport, building and industrial energy efficiency, waste-to-energy, preventing

desertification, and reduced deforestation. Chinese green bond issuance is also accelerating with

issuances for efficient rail transport, issuances by municipalities, RE companies (solar, wind), and

EE. See Annex L for examples of green bonds.

Figure 8: Climate Themed Bonds

0

5

10

15

20

25

30

35

40

45

UK

Fran

ce e

Uni

ted

Stat

sS

za

wit

erl

dn

Ge

ma

y

rn ssia

Ru

Can

ada n

Chi

a

US

D B

illio

ns

Source: Bonds and Climate Change, The State of the Market in 2012, Climate Bonds Initiative

How can Green Bonds help?

Benefits

Green bonds can effectively tap new international sources of funds such as pension funds,

insurance companies, and sovereign wealth funds. These types of investors are used to investing in

green bonds globally. Almost 10 percent of the capital base of large investors is being allocated to

green and sustainable investing. Such capital can be attracted to a green bond issuance.

Green bonds will help improve the tenure and reduce the cost of funds. Green bonds will be

targeted towards refinancing of operating projects; thus they will help release capital for fresh green

field projects.

Bonds may be listed on specialized exchanges including AIM, London or Luxembourg to improve

liquidity.


Challenges

Risks such as long term currency risk or political or regulatory risks may be difficult to cover. Bonds 65will require strong risk covers .

It is important to identify anchor institutions or corporates who have a good operating asset portfolio

and who may benefit from green bond issuance. There are established guidelines on ECBs.

Regulatory hurdles are expected to be less, although this issue will be assessed in detail when a

pilot issuance is being conceptualized.

In addition to above there is a need to develop a method for obtaining long term hedge for INR to

USD transactions. RBI has recently announced a hedge for INR to USD at 3.5 percent per annum for

attracting FCNR deposits.

A majority of off-grid projects in India have been financed through government subsidies, grants,

investments from impact investors, and in some cases, with small portions loans from FIs (~10-20

percent). Due to the reasons discussed in Section 5, very few investors and FIs are open to lending

to off-grid projects. Thus, there is a need for a fund focused on the off-grid RE market in India.

The fund will have the following features:

• The objective of the fund would be to invest in off-grid rural projects as well as onsite energy

projects for C&I segments. The fund would invest in projects which generate RE, enhance

EE as well as support activities which generate demand for rural electricity.

• The fund will raise capital from HNIs, NRIs, corporate CSR budgets and impact investors.

• It will co-invest with RESCOs using a combination of equity and mezzanine equity.

• It will also support pre-finance activities to develop scalable programs for off-grid RE

implementation. Development expenses will be recovered when projects or programs are

financed.

• The fund will help the investee programs raise other types of capital as well as channel

government subsidies.


6.3.2 Off-Grid Renewable Energy Fund

Features of Off-grid Funds

65In this context, an interesting application for using green bonds could be a RE utility for SEZs where the PPAs with SEZ residents are established in USD (or USD linked).


•

make it even more attractive for investors.

The Fund will be structured like a private equity fund. However it may have a government or PSU

anchor to attract CSR funds and to catalyse the right kind of policy environment for off-grid RE.

The Sustainable Development Fund of Hong Kong (USD 100 million) and the New Zealand

Partnerships for International Development (USD 80 million) are funds with similar approaches.

Benefits

• The fund will support competent RESCOs to scale up.

Investment by the fund may be considered a validation

of the RESCOs capability, and therefore the RESCO

may be able to leverage debt sources as well.

• The Fund will focus on improving the scalability of off-

grid programs by catalyzing appropriate policy at the

state-level, helping aggregation of demand, being the

channel for government support/incentives, and support

in arranging project finance.

• Although new regulations from the Ministry of Corporate Affairs provide a clear push for CSR

activities, many corporates do not have effective investment vehicles for channeling CSR

resources. The proposed off-grid fund could be such a vehicle.

• NRIs and HNIs would also invest in this fund – driven by the appeal for building rural India. Such

investments could be supported by special capital protection measures and tax benefits to NRIs

and HNIs.

• The fund may also support the development of effective business models and standards for

scaling up off-grid RE capacity.

Challenges

India has enough experience and adequate policy regimes for establishing equity funds. No

significant challenges are anticipated except finding the right anchor for the fund.

• Identify an appropriate anchor organization.

• Design the fund objective and size, investing themes, target investors, fund management and

governance structure, investment instruments, and exit options.

The fund can be clubbed with a tax-efficient structure (as proposed in section 6.1.1), which will

How can Off-Grid funds help?



•

the fund concept and assess the investment potential.

As discussed in section 3 of the report, RE projects face from various risks including those

associated with fuel, technology, policy, and off-takers. The combination of one or more of these

risks leads to default risk on the loans provided to RE projects. While ADB and the World Bank have

partial risk guarantee schemes available for Indian RE projects, these have either not been used or

have not been implemented effectively. Also, RE focused bodies like IREDA, which has substantial

exposure to the sector, does not have any risk guarantee programmes. As such, there is a need to

work with insurers to develop products that mitigate some of these risks.

Pre-market the fund to a few large CSR investors, endowment funds, and DFIs to improve

6.3.3 Risk Insurance Schemes

Figure 9: InsurableRisks for RE Projects

Important risks are credit risk interest rate risks, currency risks

Risks against force majeure

events

Financial risks

Importantrisks are credit risk interest rate risks, currency risks

Insurance cover when costlycomponents of a machinesfailand they need to bereplaced. Ex: Blades of windturbines or gear box etc.Cost of spare, along withlabor cost is coveredMachine

Breakdown risks

Ex: this covers risks arising from unjust changes in regulatory policy, pre-mature termination of contracts, non fulfillment of FIT obligationsetc. OPIC, MIGA provides such covers

Ex: Contractor All Risk (CAR)cover-can cover limited postcommissioning period. Coversrisks to property, third party liability.Advanced Loss of Profit(ALOP) cover, Design liabilityinsurance etc.Performance

degrades below

performance

guarantee level, over

project life

- Revenue loss

;over project

life

- Cover against

equipment

supplier

nosurviving the

project life

Serial Loss covers

Ex: Windre source, solarresource: below a floor level:cover for revenue loss, for project life

Political risks, regulatory risksProject

implementationrisks

Technology risks

Insurable risks

Resource risks


•

make it even more attractive for investors.

The Fund will be structured like a private equity fund. However it may have a government or PSU

anchor to attract CSR funds and to catalyse the right kind of policy environment for off-grid RE.

The Sustainable Development Fund of Hong Kong (USD 100 million) and the New Zealand

Partnerships for International Development (USD 80 million) are funds with similar approaches.

Benefits

• The fund will support competent RESCOs to scale up.

Investment by the fund may be considered a validation

of the RESCOs capability, and therefore the RESCO

may be able to leverage debt sources as well.

• The Fund will focus on improving the scalability of off-

grid programs by catalyzing appropriate policy at the

state-level, helping aggregation of demand, being the

channel for government support/incentives, and support

in arranging project finance.

• Although new regulations from the Ministry of Corporate Affairs provide a clear push for CSR

activities, many corporates do not have effective investment vehicles for channeling CSR

resources. The proposed off-grid fund could be such a vehicle.

• NRIs and HNIs would also invest in this fund – driven by the appeal for building rural India. Such

investments could be supported by special capital protection measures and tax benefits to NRIs

and HNIs.

• The fund may also support the development of effective business models and standards for

scaling up off-grid RE capacity.

Challenges

India has enough experience and adequate policy regimes for establishing equity funds. No

significant challenges are anticipated except finding the right anchor for the fund.

• Identify an appropriate anchor organization.

• Design the fund objective and size, investing themes, target investors, fund management and

governance structure, investment instruments, and exit options.

The fund can be clubbed with a tax-efficient structure (as proposed in section 6.1.1), which will

How can Off-Grid funds help?



•

the fund concept and assess the investment potential.

As discussed in section 3 of the report, RE projects face from various risks including those

associated with fuel, technology, policy, and off-takers. The combination of one or more of these

risks leads to default risk on the loans provided to RE projects. While ADB and the World Bank have

partial risk guarantee schemes available for Indian RE projects, these have either not been used or

have not been implemented effectively. Also, RE focused bodies like IREDA, which has substantial

exposure to the sector, does not have any risk guarantee programmes. As such, there is a need to

work with insurers to develop products that mitigate some of these risks.

Pre-market the fund to a few large CSR investors, endowment funds, and DFIs to improve

6.3.3 Risk Insurance Schemes

Figure 9: InsurableRisks for RE Projects

Important risks are credit risk interest rate risks, currency risks

Risks against force majeure

events

Financial risks

Importantrisks are credit risk interest rate risks, currency risks

Insurance cover when costlycomponents of a machinesfailand they need to bereplaced. Ex: Blades of windturbines or gear box etc.Cost of spare, along withlabor cost is coveredMachine

Breakdown risks

Ex: this covers risks arising from unjust changes in regulatory policy, pre-mature termination of contracts, non fulfillment of FIT obligationsetc. OPIC, MIGA provides such covers

Ex: Contractor All Risk (CAR)cover-can cover limited postcommissioning period. Coversrisks to property, third party liability.Advanced Loss of Profit(ALOP) cover, Design liabilityinsurance etc.Performance

degrades below

performance

guarantee level, over

project life

- Revenue loss

;over project

life

- Cover against

equipment

supplier

nosurviving the

project life

Serial Loss covers

Ex: Windre source, solarresource: below a floor level:cover for revenue loss, for project life

Political risks, regulatory risksProject

implementationrisks

Technology risks

Insurable risks

Resource risks


Risk Insurance Available in India

How Can Risk Insurance Help?


The risks depicted in red in Figure 9 above are not yet well covered in the Indian market, although

they are used in most developed markets such as the U.S., EU, and Japan and provide significant

comfort to investors and lenders.

It is important to work with insurers, FIs, IREDA, and multilateral agencies like the World Bank and

ADB to develop risk insurance instruments for RE projects which are acceptable to lenders and

developers in India.

Benefits

• Reduces risks for a specific project, although at a cost (cost of insurance). Since RE projects

are capital intensive and can have significant components of resource, technology, political

and financial risks, this raises the cost of finance for projects, reduces flow of finance and

effectively excludes bulk investors as they are risk averse.

• Insurance covers require careful design of a project, use of high quality resources and high

quality vendors. Therefore availability of risk covers signals high quality of a project and

expedites lending and investing.

• Proper risk covers can help projects migrate from one stage of financing (e.g. construction

finance) to the other (re-finance through long term bonds). Any large scale investment

program would therefore critically depend on well-designed insurance products.

Challenges

One of the challenges in using risk insurance for RE projects in India is that insurance companies

perceive the Indian RE market to be small and not worth their attention. However, in a few 66preliminary discussions, national insurance players have shown interest in developing these

insurance products for the RE market.

67Global insurance companies have experience in insuring RE projects and some of them seem

interested to pilot insurance products for RE in India. There should be a dialogue between global and

Indian insurance companies, in order to determine whether and how a few pilot insurance products

can be developed.

66such as New India Insurance67Hanover, Munich RE

Acronyms

Acronyms Definition

ADB Asian Development Bank

AFD Agence Francaise de Developpement

AIM Alternative Investment Market

APPC Average Pool Purchase Cost

C&I commercial and industrial

CBGA Centre for Budget and Governance Accountability

CERC Central Electricity Regulatory Commission

CFA capital financial assistance

CSP Concentrated Solar Power

CSR Corporate Social Responsibility

DEG Deutsche Investitions-und Entwicklungsgesellschaft

DISCOM distribution company

DPR detailed project report

ECB External Commercial Borrowing

EE energy efficiency

EXIM Bank Export Import Bank

FiT Feed-in-Tariff

FY Financial Year (April to March)

FYP Five Year Plan

GBI Generation Based Incentives

GIEK Garanti-instituttet for eksportkreditt

GOI Government of India

GW gigawatt

GWh gigawatt hour

HNI high-net-worth individual

ICRA Limited Formerly Investment Information and Credit Rating Agency of India Limited


Risk Insurance Available in India

How Can Risk Insurance Help?


The risks depicted in red in Figure 9 above are not yet well covered in the Indian market, although

they are used in most developed markets such as the U.S., EU, and Japan and provide significant

comfort to investors and lenders.

It is important to work with insurers, FIs, IREDA, and multilateral agencies like the World Bank and

ADB to develop risk insurance instruments for RE projects which are acceptable to lenders and

developers in India.

Benefits

• Reduces risks for a specific project, although at a cost (cost of insurance). Since RE projects

are capital intensive and can have significant components of resource, technology, political

and financial risks, this raises the cost of finance for projects, reduces flow of finance and

effectively excludes bulk investors as they are risk averse.

• Insurance covers require careful design of a project, use of high quality resources and high

quality vendors. Therefore availability of risk covers signals high quality of a project and

expedites lending and investing.

• Proper risk covers can help projects migrate from one stage of financing (e.g. construction

finance) to the other (re-finance through long term bonds). Any large scale investment

program would therefore critically depend on well-designed insurance products.

Challenges

One of the challenges in using risk insurance for RE projects in India is that insurance companies

perceive the Indian RE market to be small and not worth their attention. However, in a few 66preliminary discussions, national insurance players have shown interest in developing these

insurance products for the RE market.

67Global insurance companies have experience in insuring RE projects and some of them seem

interested to pilot insurance products for RE in India. There should be a dialogue between global and

Indian insurance companies, in order to determine whether and how a few pilot insurance products

can be developed.

66such as New India Insurance67Hanover, Munich RE

Acronyms

Acronyms Definition

ADB Asian Development Bank

AFD Agence Francaise de Developpement

AIM Alternative Investment Market

APPC Average Pool Purchase Cost

C&I commercial and industrial

CBGA Centre for Budget and Governance Accountability

CERC Central Electricity Regulatory Commission

CFA capital financial assistance

CSP Concentrated Solar Power

CSR Corporate Social Responsibility

DEG Deutsche Investitions-und Entwicklungsgesellschaft

DISCOM distribution company

DPR detailed project report

ECB External Commercial Borrowing

EE energy efficiency

EXIM Bank Export Import Bank

FiT Feed-in-Tariff

FY Financial Year (April to March)

FYP Five Year Plan

GBI Generation Based Incentives

GIEK Garanti-instituttet for eksportkreditt

GOI Government of India

GW gigawatt

GWh gigawatt hour

HNI high-net-worth individual

ICRA Limited Formerly Investment Information and Credit Rating Agency of India Limited


Acronyms Definition

IDA International Development Agency

IDF Infrastructure Debt Fund

IEGC Indian Electricity Grid Code

IFC International Finance Corporation

IIFCL India Infrastructure Finance Company Ltd.

IISc Indian Institute of Science, Bangalore

IMG Inter-Ministerial Group

INR Indian Rupee

IPO Initial Public Offering

IPP Independent Power Producer

IREDA Indian Renewable Energy Development Agency

IT Income Tax

J&K Jammu and Kashmir

JBIC Japan Bank for International Cooperation

JICA Japan International Corporation Agency

JNNSM Jawaharlal Nehru National Solar Mission

KfW Kreditanstalt für Wiederaufbau

KM kilometer

kV kilovolt

kW kilowatt

kWe kilowatt equivalent

kWh kilowatt hour

kWp kilowatt peak

kWth kilowatt thermal

LIBOR London Interbank Offered Rate

LIC Life Insurance Corporation

L&T Infra L&T Infrastructure Finance

M meter

Acronyms Definition

MAT Minimum Alternate Tax

MMT million metric ton

MNRE Ministry of New and Renewable Energy

MoEF Ministry of Environment and Forests

MoF Ministry of Finance

MoP Ministry of Power

MWe megawatt

MWh megawatt hour

NAPCC National Action Plan on Climate Change

NBFC Non-Banking Finance Company

NORD/LB NorddeutscheLandesbank Norddeutsche Landesbank

NRI Non Resident Indian

O&M operations and maintenance

OPIC Overseas Private Investment Corporation

PFC Power Finance Corporation

PPA Power Purchase Agreement

PTC Power Trading Corporation

PV solar photovoltaic

RBI Reserve Bank of India

REIT Real Estate Investment Trust

RE renewable energy

REC Renewable Energy Certificate

RESCO Renewable Energy Services Companies

RGGVY Rajiv Gandhi Grameen Vidyutikaran Yojana

RPO Renewable Purchase Obligation

RPSSGP Rooftop PV and Small Solar Power Generation Programme

SDA State Designated Agency

SEB State Electricity Board


Acronyms Definition

IDA International Development Agency

IDF Infrastructure Debt Fund

IEGC Indian Electricity Grid Code

IFC International Finance Corporation

IIFCL India Infrastructure Finance Company Ltd.

IISc Indian Institute of Science, Bangalore

IMG Inter-Ministerial Group

INR Indian Rupee

IPO Initial Public Offering

IPP Independent Power Producer

IREDA Indian Renewable Energy Development Agency

IT Income Tax

J&K Jammu and Kashmir

JBIC Japan Bank for International Cooperation

JICA Japan International Corporation Agency

JNNSM Jawaharlal Nehru National Solar Mission

KfW Kreditanstalt für Wiederaufbau

KM kilometer

kV kilovolt

kW kilowatt

kWe kilowatt equivalent

kWh kilowatt hour

kWp kilowatt peak

kWth kilowatt thermal

LIBOR London Interbank Offered Rate

LIC Life Insurance Corporation

L&T Infra L&T Infrastructure Finance

M meter

Acronyms Definition

MAT Minimum Alternate Tax

MMT million metric ton

MNRE Ministry of New and Renewable Energy

MoEF Ministry of Environment and Forests

MoF Ministry of Finance

MoP Ministry of Power

MWe megawatt

MWh megawatt hour

NAPCC National Action Plan on Climate Change

NBFC Non-Banking Finance Company

NORD/LB NorddeutscheLandesbank Norddeutsche Landesbank

NRI Non Resident Indian

O&M operations and maintenance

OPIC Overseas Private Investment Corporation

PFC Power Finance Corporation

PPA Power Purchase Agreement

PTC Power Trading Corporation

PV solar photovoltaic

RBI Reserve Bank of India

REIT Real Estate Investment Trust

RE renewable energy

REC Renewable Energy Certificate

RESCO Renewable Energy Services Companies

RGGVY Rajiv Gandhi Grameen Vidyutikaran Yojana

RPO Renewable Purchase Obligation

RPSSGP Rooftop PV and Small Solar Power Generation Programme

SDA State Designated Agency

SEB State Electricity Board


No. Reference

1 Twelfth Five Year Plan (2012-17), Planning Commission, Government of India, http://planningcommission.gov.in/plans/planrel/12thplan/pdf/vol_2.pdf

2 Central Electricity Authority (March 2013) and Ministry of Power (Feb 2013), http://www.cea.nic.in/reports/monthly/dpd_div_rep/village_electrification.pdf and http://pib.nic.in/newsite/PrintRelease.aspx?relid=92038

3 Power to the People - Investing in Clean Energy for the Base of the Pyramid in India, Centre for Development Finance, Institute for Financial Management and Research (CDF-IFMR) and the World Resources Institute's New Ventures Program, http://pdf.wri.org/power_to_the_people_front.pdf

4 T.V. Ramachandra et al 2011, Hotspots of solar potential in India, in Renewable and Sustainable Energy Reviews, http://www.ces.iisc.ernet.in/energy/paper/hotspots_solar_potential/RSER_hotspots.pdf

5 Lawrence Berkeley Lab Report, March 2012, http://ies.lbl.gov/drupal.files/ies.lbl.gov.sandbox/IndiaWindPotentialAssessmentRevisedFinal032020125B15D.pdf

6 Ministry for New and Renewable Energy, Government of India, http://www.mnre.gov.in/schemes/grid-connected/biomass-powercogen/

7 Ministry for New and Renewable Energy, Government of India, http://www.mnre.gov.in/schemes/grid-connected/small-hydro/

8 Load Generation Balance Report (2012-13), Central Electricity Authority, http://www.cea.nic.in/reports/yearly/lgbr_report.pdf

9 World Coal Association, http://www.worldcoal.org/resources/coal-statistics/


11 Section 80i (a) of Income Tax law, http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:5CWebSites5CDITTaxmann5CAct20105CDirectTaxLaws5CITACT5CHTMLFiles5C2010&DFile=section80ia.htm&tar=top

12 Depreciation Schedule as per Income Tax, http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITRU&schT=rul&csId=4a23cee1-1818-45d6-ab19-f155e08ed789&rNo=&sch=&title=Taxmann20-20Direct20Tax20Laws

13 http://www.thehindubusinessline.com/industry-and-economy/wind-industry-upbeat-over-restoration-of-accelerated-depreciation/article4064826.ece

14 Indian Wind Energy Association, http://www.inwea.org/installedcapacity.htm

ReferencesAcronyms Definition

SEBI Securities and Exchange Board of India

SERC State Electricity Regulatory Commission

SGD Singapore Dollar

SGX Singapore Exchange

SHP small hydro power

SNA State Nodal Agency

SPV Special Purpose Vehicle

sq km square kilometer

sq m square meter

U.S. United States of America

USD United States Dollar

V volt

W watt

Wp watt peak

WBG World Bank Group

WRA Wind Resource Assessment


No. Reference


2 Central Electricity Authority (March 2013) and Ministry of Power (Feb 2013), http://www.cea.nic.in/reports/monthly/dpd_div_rep/village_electrification.pdf and http://pib.nic.in/newsite/PrintRelease.aspx?relid=92038

3 Power to the People - Investing in Clean Energy for the Base of the Pyramid in India, Centre for Development Finance, Institute for Financial Management and Research (CDF-IFMR) and the World Resources Institute's New Ventures Program, http://pdf.wri.org/power_to_the_people_front.pdf

4 T.V. Ramachandra et al 2011, Hotspots of solar potential in India, in Renewable and Sustainable Energy Reviews, http://www.ces.iisc.ernet.in/energy/paper/hotspots_solar_potential/RSER_hotspots.pdf

5 Lawrence Berkeley Lab Report, March 2012, http://ies.lbl.gov/drupal.files/ies.lbl.gov.sandbox/IndiaWindPotentialAssessmentRevisedFinal032020125B15D.pdf

6 Ministry for New and Renewable Energy, Government of India, http://www.mnre.gov.in/schemes/grid-connected/biomass-powercogen/

7 Ministry for New and Renewable Energy, Government of India, http://www.mnre.gov.in/schemes/grid-connected/small-hydro/

8 Load Generation Balance Report (2012-13), Central Electricity Authority, http://www.cea.nic.in/reports/yearly/lgbr_report.pdf

9 World Coal Association, http://www.worldcoal.org/resources/coal-statistics/


11 Section 80i (a) of Income Tax law, http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:5CWebSites5CDITTaxmann5CAct20105CDirectTaxLaws5CITACT5CHTMLFiles5C2010&DFile=section80ia.htm&tar=top

12 Depreciation Schedule as per Income Tax, http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITRU&schT=rul&csId=4a23cee1-1818-45d6-ab19-f155e08ed789&rNo=&sch=&title=Taxmann20-20Direct20Tax20Laws

13 http://www.thehindubusinessline.com/industry-and-economy/wind-industry-upbeat-over-restoration-of-accelerated-depreciation/article4064826.ece

14 Indian Wind Energy Association, http://www.inwea.org/installedcapacity.htm

ReferencesAcronyms Definition

SEBI Securities and Exchange Board of India

SERC State Electricity Regulatory Commission

SGD Singapore Dollar

SGX Singapore Exchange

SHP small hydro power

SNA State Nodal Agency

SPV Special Purpose Vehicle

sq km square kilometer

sq m square meter

U.S. United States of America

USD United States Dollar

V volt

W watt

Wp watt peak

WBG World Bank Group

WRA Wind Resource Assessment


No. Reference

15 Comprehensive Tariff Order on Wind Energy, Tamil Nadu Electricity Regulatory Commission, July 2012, http://tnerc.tn.nic.in/orders/Tariff20Order202009/2012/T.R20No.620of20201220dated2031-07-2012-Wind.pdf

16 State Owned Electricity Distribution Companies: Some positives, though several concerns remain, ICRA, http://www.icra.in/Files/ticker/Power20Distribution20Note.pdf

17 Order for Determination of Forbearance and Floor Price for the REC framework to be stapplicable from 1 April 2012, Central Electricity Regulatory Authority, August 2011,

http://www.cercind.gov.in/2011/August/Order_on_Forbearnace_&_Floor_Price_23-8-2011.pdf

18 Order for Determination of generic levelised generation tariff, Central Electricity Regulatory Commission, March 2012, http://www.cercind.gov.in/2012/orders/RE_35_2012.pdf

19 Press Information Bureau, http://www.pib.nic.in/newsite/erelease.aspx?relid=78829

20 Framework & Performance of National Clean Energy Fund (NCEF), Centre for Budget and Governance Accountability (CBGA) and Shakti Sustainable Energy Foundation, http://www.cbgaindia.org/files/policy_briefs/Policy20Brief-Framework20&20Performance20of20National20Clean20Energy20Fund20(NCEF).pdf

21 Receipt Budget, 2012-2013, Ministry of Finance, India, http://indiabudget.nic.in/ub2012-13/rec/tr.pdf

22 Guidelines for appraisal and approval of projects/schemes eligible for financing under the National Clean Energy Fund, Ministry of Finance, April 2011, http://finmin.nic.in/the_ministry/dept_expenditure/plan_finance2/Guidelines_proj_NCEF.pdf

23 Annual Report 2011-12, IREDA, http://www.ireda.gov.in/pdf/Annual_Report2011-12Eng.pdf

24 http://www.ireda.gov.in/pdf/Lenders.pdf

25 Annual Report 2011-12, Power Finance Corporation, http://www.pfcindia.com/writereaddata/userfiles/file/Annual20reports/ann_rpt1112_27082012.pdf

26 Meeting India's Renewable Targets The Financing Challenge, CPI-ISB

27 S. Vishvanathan, Chief Executive Officer, SBI Capital Markets Ltd., http://www.bloomberg.com/news/2012-04-26/indian-banks-exposure-to-coal-limits-lending-to-solar-sbi-says.html

28 Annual Report 2012, EXIM Bank, U.S. http://www.exim.gov/about/library/reports/annualreports/2012/renewable.html

29 Commercial Reference Rates for Nuclear Power and Renewable Energies and Water, EXIM Bank, U.S., http://www.exim.gov/tools/commercialinterestreferencerates/index.cfm


No. Reference

30 T.N. Subramaniyan, COO, L&T Infra at National COO forum, February 2012 http://www.yesbank.in/ShowPropertyServlet?nodePath=2FYES+Bank+Repository2Fen2FCorporate+Banking2FYES+BANK-National+CFO+Forum2F24+sidenavigation+242FYES+-+CFO+Insights2FMain+Content2F2FBulletPointText5B05D.UploadFile

31 Press Release - Infrastructure Debt Fund, Ministry of Finance, http://finmin.nic.in/press_room/2011/infra_debt_fund.pdf

32 Proposed Amendments to SEBI (Mutual Funds) Regulations, 1996 to provide Framework for Infrastructure Debt Fund by Securities and Exchange Board of India, http://www.sebi.gov.in/boardmeetings/138/infradebt.pdf

33 Guidelines by Reserve Bank of India for IDF-NBFC, http://rbi.org.in/scripts/NotificationUser.aspx?Id=6830&Mode=0

34 India Solar Generation Facility by Asian Development Bank, http://www.adb.org/site/private-sector-financing/india-solar-generation-guarantee-facility

35 India Solar Generation Facility by Asian Development Bank, http://www.adb.org/site/private-sector-financing/india-solar-generation-guarantee-facility-orig

36 Key Terms and Conditions for the India Solar Power Generation Guarantee Facility by Asian Development Bank, http://www2.adb.org/Documents/Supplementary-Appendixes/44941/44941-01-IND-SA.pdf#page=8

37 Don Purka, Principal Investment Specialist (Climate Finance), http://www.scribd.com/doc/97619512/Don-Purka-Solar-Power-in-India-ADBE28099s-Guarantee-Facility-and-Technical-Assistance-Program

38 Treasury, World Bank Group, http://treasury.worldbank.org/bdm/pdf/Brochures/WBG_Guarantees_Matrix.pdf

39 Denis Griffin, Dir., Minneapolis Regional Office, EXIM Bank U.S., http://www.positivelyminnesota.com/Business/Exporting_Trade/Environmental_Energy_Programs/Smart_Grid_Assets/Ex-Im_Presentation.pdf

40 Revised guidelines of Priority Sector Lending Targets and Classification, Reserve Bank of India, July 20 2012, http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7460&Mode=0

41 http://www.huskpowersystems.com/

42 http://www.saranrenew.in/

43 Access to Clean Energy A Glimpse of Off-Grid Projects in India, MNRE, GOI.

44 Saran renewable energy is bringing power to the people in Bihar, Economic Times, Jul 23 2010, http://economictimes.indiatimes.com/opinion/india-emerging/saran-renewable-energy-is-bringing-power-to-the-people-in-bihar/articleshow/6203318.cms

45 http://meragaopower.com/


No. Reference

15 Comprehensive Tariff Order on Wind Energy, Tamil Nadu Electricity Regulatory Commission, July 2012, http://tnerc.tn.nic.in/orders/Tariff20Order202009/2012/T.R20No.620of20201220dated2031-07-2012-Wind.pdf

16 State Owned Electricity Distribution Companies: Some positives, though several concerns remain, ICRA, http://www.icra.in/Files/ticker/Power20Distribution20Note.pdf

17 Order for Determination of Forbearance and Floor Price for the REC framework to be stapplicable from 1 April 2012, Central Electricity Regulatory Authority, August 2011,

http://www.cercind.gov.in/2011/August/Order_on_Forbearnace_&_Floor_Price_23-8-2011.pdf

18 Order for Determination of generic levelised generation tariff, Central Electricity Regulatory Commission, March 2012, http://www.cercind.gov.in/2012/orders/RE_35_2012.pdf

19 Press Information Bureau, http://www.pib.nic.in/newsite/erelease.aspx?relid=78829

20 Framework & Performance of National Clean Energy Fund (NCEF), Centre for Budget and Governance Accountability (CBGA) and Shakti Sustainable Energy Foundation, http://www.cbgaindia.org/files/policy_briefs/Policy20Brief-Framework20&20Performance20of20National20Clean20Energy20Fund20(NCEF).pdf

21 Receipt Budget, 2012-2013, Ministry of Finance, India, http://indiabudget.nic.in/ub2012-13/rec/tr.pdf

22 Guidelines for appraisal and approval of projects/schemes eligible for financing under the National Clean Energy Fund, Ministry of Finance, April 2011, http://finmin.nic.in/the_ministry/dept_expenditure/plan_finance2/Guidelines_proj_NCEF.pdf

23 Annual Report 2011-12, IREDA, http://www.ireda.gov.in/pdf/Annual_Report2011-12Eng.pdf

24 http://www.ireda.gov.in/pdf/Lenders.pdf

25 Annual Report 2011-12, Power Finance Corporation, http://www.pfcindia.com/writereaddata/userfiles/file/Annual20reports/ann_rpt1112_27082012.pdf

26 Meeting India's Renewable Targets The Financing Challenge, CPI-ISB

27 S. Vishvanathan, Chief Executive Officer, SBI Capital Markets Ltd., http://www.bloomberg.com/news/2012-04-26/indian-banks-exposure-to-coal-limits-lending-to-solar-sbi-says.html

28 Annual Report 2012, EXIM Bank, U.S. http://www.exim.gov/about/library/reports/annualreports/2012/renewable.html

29 Commercial Reference Rates for Nuclear Power and Renewable Energies and Water, EXIM Bank, U.S., http://www.exim.gov/tools/commercialinterestreferencerates/index.cfm


No. Reference

30 T.N. Subramaniyan, COO, L&T Infra at National COO forum, February 2012 http://www.yesbank.in/ShowPropertyServlet?nodePath=2FYES+Bank+Repository2Fen2FCorporate+Banking2FYES+BANK-National+CFO+Forum2F24+sidenavigation+242FYES+-+CFO+Insights2FMain+Content2F2FBulletPointText5B05D.UploadFile

31 Press Release - Infrastructure Debt Fund, Ministry of Finance, http://finmin.nic.in/press_room/2011/infra_debt_fund.pdf

32 Proposed Amendments to SEBI (Mutual Funds) Regulations, 1996 to provide Framework for Infrastructure Debt Fund by Securities and Exchange Board of India, http://www.sebi.gov.in/boardmeetings/138/infradebt.pdf

33 Guidelines by Reserve Bank of India for IDF-NBFC, http://rbi.org.in/scripts/NotificationUser.aspx?Id=6830&Mode=0

34 India Solar Generation Facility by Asian Development Bank, http://www.adb.org/site/private-sector-financing/india-solar-generation-guarantee-facility

35 India Solar Generation Facility by Asian Development Bank, http://www.adb.org/site/private-sector-financing/india-solar-generation-guarantee-facility-orig

36 Key Terms and Conditions for the India Solar Power Generation Guarantee Facility by Asian Development Bank, http://www2.adb.org/Documents/Supplementary-Appendixes/44941/44941-01-IND-SA.pdf#page=8

37 Don Purka, Principal Investment Specialist (Climate Finance), http://www.scribd.com/doc/97619512/Don-Purka-Solar-Power-in-India-ADBE28099s-Guarantee-Facility-and-Technical-Assistance-Program

38 Treasury, World Bank Group, http://treasury.worldbank.org/bdm/pdf/Brochures/WBG_Guarantees_Matrix.pdf

39 Denis Griffin, Dir., Minneapolis Regional Office, EXIM Bank U.S., http://www.positivelyminnesota.com/Business/Exporting_Trade/Environmental_Energy_Programs/Smart_Grid_Assets/Ex-Im_Presentation.pdf

40 Revised guidelines of Priority Sector Lending Targets and Classification, Reserve Bank of India, July 20 2012, http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7460&Mode=0

41 http://www.huskpowersystems.com/

42 http://www.saranrenew.in/

43 Access to Clean Energy A Glimpse of Off-Grid Projects in India, MNRE, GOI.

44 Saran renewable energy is bringing power to the people in Bihar, Economic Times, Jul 23 2010, http://economictimes.indiatimes.com/opinion/india-emerging/saran-renewable-energy-is-bringing-power-to-the-people-in-bihar/articleshow/6203318.cms

45 http://meragaopower.com/


No. Reference

46 Indian villagers' lives transformed by new energy delivery system, The Guardian, Jan 16, 2012, http://www.guardian.co.uk/global-development/poverty-matters/2012/jan/16/india-solar-power-system

47 How MGP's solar micro grids are lighting up villages, Business Today, Aug 8, 2012, http://businesstoday.intoday.in/story/mgp-solar-microgrids/1/186818.html

48 Ministry of New and Renewable Energy, http://www.mnre.gov.in/mission-and-vision-2/achievements/

49 E Energy Financial Services, http://www.geenergyfinancialservices.com/press_room/press_releases/2008/Press20Release20RETA20ENG_1020Dec20Final.pdf

50 IFR-India's ILFS plans up to US$406m Singapore trust IPO, Reuters, Sept 26, 2012, http://in.reuters.com/article/2012/09/26/ilfs-india-ifr-idINL4E8KQ68020120926

51 K-Green Trust, http://www.kgreentrust.com/

52 Why Singapore business trusts are proving popular with Indian sponsors, Clifford Chance Publication, Sept 5, 2012, http://www.cliffordchance.com/publicationviews/publications/2012/09/why_singapore_businesstrustsareprovingpopula.html

53 Norton Rose, a leading international legal practice, http://www.nortonrose.com/knowledge/publications/29416/singapore-business-trusts

54 Master Limited Partnerships: Overview and Proposal to Include Clean Energy, Mintz Levin

55 http://en.wikipedia.org/wiki/Real_estate_investment_trust

56 Singapore Management University, http://smueye.wdfiles.com/local--files/archived-research-publications/Introduction20to20Singapore20REITs

57 Morning Star's Interactive Classroom, http://news.morningstar.com/classroom2/printlesson.asp?docId=145579&CN=COM

58 Bonds and Climate Change, The State of the Market in 2012, Climate Bonds Initiative, http://climatebonds.net/wp-content/uploads/2012/05/CB-HSBC_Final_30May12-Single.pdf

59 Treasury, World Bank, http://treasury.worldbank.org/cmd/htm/WorldBankGreenBonds.html

60 Climate Awareness bonds, European Investment Bank, http://www.eib.org/attachments/fi/eib-cab-newsletter-new.pdf

61 ADB Sells $339 Million Clean Energy Bonds to Fuel Asian Demand, Bloomberg, May 16, 2012, http://www.bloomberg.com/news/2012-05-16/adb-sells-339-million-clean-energy-bonds-to-fuel-asian-demand.html


No. Reference

62 Database of State Incentives for Renewables & Efficiency, http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US45F&re=1&ee=

63 Clean Renewable Energy Bonds (CREBs): A Tool for Renewable Energy Financing, West Central CERTs Meeting, Minnesota, April 29, 2008, http://www.cleanenergyresourceteams.org/files/WCSummary04-29-08.pdf.pdf

64 Kommunalbanken, Norway, http://www.kommunalbanken.no/kbn-uk/green-bond/green-funding-program/green-funding-program/

65 http://www.ecotricity.co.uk/about-ecotricity/ecobonds

66 Bloomberg NEF Global Trends in Renewable Energy Investment 2012

67 Indian corporate bond market still remains a mirage, Economic Times, Nov 28, 2012, http://articles.economictimes.indiatimes.com/2012-11-28/news/35409041_1_corporate-bond-market-loan-market-rh-patil


No. Reference

46 Indian villagers' lives transformed by new energy delivery system, The Guardian, Jan 16, 2012, http://www.guardian.co.uk/global-development/poverty-matters/2012/jan/16/india-solar-power-system

47 How MGP's solar micro grids are lighting up villages, Business Today, Aug 8, 2012, http://businesstoday.intoday.in/story/mgp-solar-microgrids/1/186818.html

48 Ministry of New and Renewable Energy, http://www.mnre.gov.in/mission-and-vision-2/achievements/

49 E Energy Financial Services, http://www.geenergyfinancialservices.com/press_room/press_releases/2008/Press20Release20RETA20ENG_1020Dec20Final.pdf

50 IFR-India's ILFS plans up to US$406m Singapore trust IPO, Reuters, Sept 26, 2012, http://in.reuters.com/article/2012/09/26/ilfs-india-ifr-idINL4E8KQ68020120926

51 K-Green Trust, http://www.kgreentrust.com/

52 Why Singapore business trusts are proving popular with Indian sponsors, Clifford Chance Publication, Sept 5, 2012, http://www.cliffordchance.com/publicationviews/publications/2012/09/why_singapore_businesstrustsareprovingpopula.html

53 Norton Rose, a leading international legal practice, http://www.nortonrose.com/knowledge/publications/29416/singapore-business-trusts

54 Master Limited Partnerships: Overview and Proposal to Include Clean Energy, Mintz Levin

55 http://en.wikipedia.org/wiki/Real_estate_investment_trust

56 Singapore Management University, http://smueye.wdfiles.com/local--files/archived-research-publications/Introduction20to20Singapore20REITs

57 Morning Star's Interactive Classroom, http://news.morningstar.com/classroom2/printlesson.asp?docId=145579&CN=COM

58 Bonds and Climate Change, The State of the Market in 2012, Climate Bonds Initiative, http://climatebonds.net/wp-content/uploads/2012/05/CB-HSBC_Final_30May12-Single.pdf

59 Treasury, World Bank, http://treasury.worldbank.org/cmd/htm/WorldBankGreenBonds.html

60 Climate Awareness bonds, European Investment Bank, http://www.eib.org/attachments/fi/eib-cab-newsletter-new.pdf

61 ADB Sells $339 Million Clean Energy Bonds to Fuel Asian Demand, Bloomberg, May 16, 2012, http://www.bloomberg.com/news/2012-05-16/adb-sells-339-million-clean-energy-bonds-to-fuel-asian-demand.html


No. Reference

62 Database of State Incentives for Renewables & Efficiency, http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US45F&re=1&ee=

63 Clean Renewable Energy Bonds (CREBs): A Tool for Renewable Energy Financing, West Central CERTs Meeting, Minnesota, April 29, 2008, http://www.cleanenergyresourceteams.org/files/WCSummary04-29-08.pdf.pdf

64 Kommunalbanken, Norway, http://www.kommunalbanken.no/kbn-uk/green-bond/green-funding-program/green-funding-program/

65 http://www.ecotricity.co.uk/about-ecotricity/ecobonds

66 Bloomberg NEF Global Trends in Renewable Energy Investment 2012

67 Indian corporate bond market still remains a mirage, Economic Times, Nov 28, 2012, http://articles.economictimes.indiatimes.com/2012-11-28/news/35409041_1_corporate-bond-market-loan-market-rh-patil


Annex

Program Year Capacity

allocated

(in MW)

Wining tariff in

INR/kWh

(US cent/kWh)

Benchmark tariff

in INR/kWh

(US cent/kWh)

Jawaharlal National Solar Mission

(JNNSM), Phase I, Batch I

2010 150 10.95 - 12.24

(17.5 – 19.6)

17.91

(28.6)


(JNNSM), Phase I, Batch II

2011 350 7.49 - 9.44

(12.0 – 15.1)

15.39

(24.6)

Madhya Pradesh Power Trading

Company

2012 200 7.90 - 8.05

(12.6 – 12.9)

15.35

(24.5)

Grid Corporation of Orissa 2012 25 7.28

(11.6)

*

Andhra Pradesh Transmission

Corporation

2013 416 so far and

ongoing

6.49

(10.4)

*

Tamil Nadu Generation & Distribution

Corporation

2013 690 6.48

(10.4)

(5 percent annual

escalation for 10

years)

*

Rajasthan Renewable Energy

Corporation Ltd.

2013 75 6.45

(10.3)

8.42

(13.5)

Karnataka Renewable Energy

Development Ltd.

2013 130 5.51 – 8.05

(8.8 – 12.9)

14.5

(23.2)

Note: * No benchmark tariff was provided, the lowest tariff in the bidding won

Annex A : Summary of solar reverse bidding programs


Annex

Program Year Capacity

allocated

(in MW)

Wining tariff in

INR/kWh

(US cent/kWh)

Benchmark tariff

in INR/kWh

(US cent/kWh)


(JNNSM), Phase I, Batch I

2010 150 10.95 - 12.24

(17.5 – 19.6)

17.91

(28.6)


(JNNSM), Phase I, Batch II

2011 350 7.49 - 9.44

(12.0 – 15.1)

15.39

(24.6)

Madhya Pradesh Power Trading

Company

2012 200 7.90 - 8.05

(12.6 – 12.9)

15.35

(24.5)

Grid Corporation of Orissa 2012 25 7.28

(11.6)

*

Andhra Pradesh Transmission

Corporation

2013 416 so far and

ongoing

6.49

(10.4)

*

Tamil Nadu Generation & Distribution

Corporation

2013 690 6.48

(10.4)

(5 percent annual

escalation for 10

years)

*

Rajasthan Renewable Energy

Corporation Ltd.

2013 75 6.45

(10.3)

8.42

(13.5)

Karnataka Renewable Energy

Development Ltd.

2013 130 5.51 – 8.05

(8.8 – 12.9)

14.5

(23.2)

Note: * No benchmark tariff was provided, the lowest tariff in the bidding won

Annex A : Summary of solar reverse bidding programs


Annex Bbagasse cogeneration projects

: Capital subsidy for grid connected biomass power projects and

Project type

Biomass power projects

Capital subsidy for

special category

states (North East

region, Sikkim,

J&K, HP &

Uttaranchal)

Capital subsidy for

other states

INR 2.5 million x

(C MW)^0.646

(USD 40,000)

INR 2 million x

(C MW)^0.646

(USD 32,000)

Bagasse cogeneration

by private sugar mills

INR 1.8 million x

(C MW)^0.646

(USD 28,800)

INR 1.5 million x

(C MW)^0.646

(USD 24,000)


projects by cooperative/

public sector sugar mills

40 bar & above

60 bar & above

80 bar & above

INR 4 million*

(USD 64,000)

INR 5 million*

(USD 80,000)

INR 6 million*

(USD 96,000)

INR 4 million*

(USD 64,000)

INR 5 million*

(USD 80,000)

INR 6 million*

(USD 96,000

* Per MW of surplus power injected into the grid capped at INR 80 million (USD 1.3 million) per

project

* For new sugar mills, which are yet to start production and existing sugar mills employing

backpressure route/seasonal/incidental cogeneration, which exports surplus power to the grid,

subsidies will be one-half of the level mentioned above.


Annex C 68 : Capital subsidy for grid connected gasifier projects

Project items Pattern of Capital Finance Assistance

Distributed / off-grid power projects in rural areas and

grid connected power projects with 100 percent

producer gas engines or biomass based combustion

projects.

Biomass gasifier systems retrofitted with duel fuel

mode engines

Captive power projects (captive power less than 50

percent) and / or feeding surplus power to grid in rice

mills (with 100 percent producer gas engines or biomass

based combustion projects).

Projects involving installation of 100 percent gas engines

with an existing gasifier.

Biomass gasifier projects for distributed / off-grid for

rural areas and grid connected power projects for

ensuring regular availability of biomass, provision of

collection, processing and storage and operation &

maintenance including compulsory AMC for five years

after the guarantee period.

Support towards lighting devices and distribution

network.

Support towards project formulation.

Service charges for verification and certification.

INR 2,500 per kW

(USD 40)

INR 2,500 per kW (USD 40)

INR 1 million per 100 kW

(USD 16,000)

INR 150,000 per 50 kW

(USD 2,400)

Financial support limited to a maximum

of 3 km, i.e., INR 300,000 per project

(USD 4,800)

Financial incentives of INR 5000 (USD

80) per project to the banks / FIs,

manufacturers, promoters, consultants

& service providers for developing

firmed up and bankable proposals for a

minimum of 10 projects or above.

INR 10,000 (USD 160) per 100 kW

subject to maximum of INR 100,000 for

a project of 1 MW capacity. A minimum

service charge will be INR 10,000 (USD

160) per site

68Source: Ministry for New and Renewable Energy. Available at http://www.mnre.gov.in/file-manager/grid-

biomass-gasification/biomass-gasifier-2010-11.pdf

INR 15,000 per kW

(USD 24)


Annex Bbagasse cogeneration projects

: Capital subsidy for grid connected biomass power projects and

Project type

Biomass power projects

Capital subsidy for

special category

states (North East

region, Sikkim,

J&K, HP &

Uttaranchal)

Capital subsidy for

other states

INR 2.5 million x

(C MW)^0.646

(USD 40,000)

INR 2 million x

(C MW)^0.646

(USD 32,000)


by private sugar mills

INR 1.8 million x

(C MW)^0.646

(USD 28,800)

INR 1.5 million x

(C MW)^0.646

(USD 24,000)


projects by cooperative/

public sector sugar mills

40 bar & above

60 bar & above

80 bar & above

INR 4 million*

(USD 64,000)

INR 5 million*

(USD 80,000)

INR 6 million*

(USD 96,000)

INR 4 million*

(USD 64,000)

INR 5 million*

(USD 80,000)

INR 6 million*

(USD 96,000

* Per MW of surplus power injected into the grid capped at INR 80 million (USD 1.3 million) per

project

* For new sugar mills, which are yet to start production and existing sugar mills employing

backpressure route/seasonal/incidental cogeneration, which exports surplus power to the grid,

subsidies will be one-half of the level mentioned above.


Annex C 68 : Capital subsidy for grid connected gasifier projects


Distributed / off-grid power projects in rural areas and

grid connected power projects with 100 percent

producer gas engines or biomass based combustion

projects.

Biomass gasifier systems retrofitted with duel fuel

mode engines

Captive power projects (captive power less than 50

percent) and / or feeding surplus power to grid in rice

mills (with 100 percent producer gas engines or biomass

based combustion projects).

Projects involving installation of 100 percent gas engines

with an existing gasifier.

Biomass gasifier projects for distributed / off-grid for

rural areas and grid connected power projects for

ensuring regular availability of biomass, provision of

collection, processing and storage and operation &

maintenance including compulsory AMC for five years

after the guarantee period.

Support towards lighting devices and distribution

network.

Support towards project formulation.

Service charges for verification and certification.

INR 2,500 per kW

(USD 40)

INR 2,500 per kW (USD 40)

INR 1 million per 100 kW

(USD 16,000)

INR 150,000 per 50 kW

(USD 2,400)

Financial support limited to a maximum

of 3 km, i.e., INR 300,000 per project

(USD 4,800)

Financial incentives of INR 5000 (USD

80) per project to the banks / FIs,

manufacturers, promoters, consultants

& service providers for developing

firmed up and bankable proposals for a

minimum of 10 projects or above.

INR 10,000 (USD 160) per 100 kW

subject to maximum of INR 100,000 for

a project of 1 MW capacity. A minimum

service charge will be INR 10,000 (USD

160) per site

68Source: Ministry for New and Renewable Energy. Available at http://www.mnre.gov.in/file-manager/grid-

biomass-gasification/biomass-gasifier-2010-11.pdf

INR 15,000 per kW

(USD 24)


69Annex D: Capital Subsidy for Biomass Gasifier for industrial use

Central Financial Assistance (CFA) Central Financial Assistance in the form of capital subsidy will be

provided to biomass gasifier projects in industries and other provisions are given below:

1. Capital subsidy for Biomass Gasifiers for thermal and electrical applications

(i) INR 200,000 (USD 3,200) / 300 kWth for thermal applications.

(ii) INR 250,000 (USD 4,000) / 100 kWe (for electrical applications through dual fuel engines.

(iii) INR 1 million (USD 16,000) / 100 kwe for 100 percent producer gas engines with gasifier

system.

(iv) INR 800,000 (USD 12,800) / 100 kwe for 100 percent producer gas engine alone.

2. Capital Subsidy for deployment of biomass Gasifiers with 100 percent producer gas engines

in Institutions for captive use:

(i) INR 1.5 million (USD 24,000) / 100 kwe for 100 percent producer gas engines with

gasifier system


Preparation of detailed project report (DPRs) for

centralized distributed / grid connected / captive power

generation project:

- Projects between 100-500 kW capacities

- Projects above 500 kW capacities

- DPR is not required for the projects below 100 kW

capacities

HRD & Training

- O&M technician's course

- Gasifier entrepreneur development course

- Awareness promotions such as organization of

seminars, business meets, workshops etc.

Support for gasifier manufacturers / suppliers for

establishing service centres in areas where cluster of

systems, minimum 10, have been set up in one district /

region

Special category states and Islands

INR 50,000 (USD 800)

INR 100,000 (USD 1,600)

INR 100,000

INR 200,000 per course (USD 3,200)


Maximum up to INR 300,000 (USD

4,800)

20 percent higher CFA

INR 500,000 (USD 8,000) one-time

funding

69Source: MNRE. Available at http://www.mnre.gov.in/file-manager/grid-biomass-gasification/biomass-gasifier-

industries.pdf


(ii) INR 1 million (USD 16,000)/ 100 kwe for 100 percent producer gas engines alone

3. Incentives / service charges to SNAs.

Incentives / service charges @ INR 100,000 (USD 1,600) / MWe (or equivalent) will be provided to

SNAs on pro-rata basis, subject to a ceiling of INR 500,000 (USD 8,000) / project, for their active

involvement in promoting Biomass Power projects.

The capital subsidy will be considered subject to the following:-

(i) The amount of capital subsidy will be calculated on the basis of installed capacity;

(ii) CFA will be limited to a maximum capacity of 5 MW, irrespective of the installed capacity of

the project.

(iii) In case of Special Category States (North Eastern Region, Sikkim, J&K, Himachal Pradesh

and Uttaranchal), 20 percent higher capital subsidy than that for General Category States

will be provided.

70Source: MNRE. Available at http://www.mnre.gov.in/file-manager/gridbiogas-2/biogaspower-2010-11.pdf

Power generating capacity

Biogas plant capacity

Maximum support for preparation of DPR

CFA/subsidy limited to the following ceiling or 40 percent of the cost of the system whichever is less

Administrative Charges to State Nodal Department / Agencies

>20kW up to

100kW

>100kW up to 250

kW

Any combination of

above plants or

approved alternate

capacity / design

Any combination of

above plants or

approved alternate

capacity / design

INR 100,000 per

plant above 100 kW

(USD 1,600)

15 percent of the

CFA (up to 20 kW

capacity for which

no assistance for

DPR is provided)

10 percent of the

CFA (> 20 kW - 250

kW)

3-20kW 25 Cu M to 85 Cu M No DPR required INR 40,000 per kW

(USD 640)

INR 20,000 per

plant (USD 320)

INR 35,000 per kW

(USD 560)

INR 30,000 per kW

(USD 480)

70Annex E: Capital Subsidy for Grid connected Biogas projects


69Annex D: Capital Subsidy for Biomass Gasifier for industrial use

Central Financial Assistance (CFA) Central Financial Assistance in the form of capital subsidy will be

provided to biomass gasifier projects in industries and other provisions are given below:

1. Capital subsidy for Biomass Gasifiers for thermal and electrical applications

(i) INR 200,000 (USD 3,200) / 300 kWth for thermal applications.

(ii) INR 250,000 (USD 4,000) / 100 kWe (for electrical applications through dual fuel engines.

(iii) INR 1 million (USD 16,000) / 100 kwe for 100 percent producer gas engines with gasifier

system.

(iv) INR 800,000 (USD 12,800) / 100 kwe for 100 percent producer gas engine alone.

2. Capital Subsidy for deployment of biomass Gasifiers with 100 percent producer gas engines

in Institutions for captive use:

(i) INR 1.5 million (USD 24,000) / 100 kwe for 100 percent producer gas engines with

gasifier system


Preparation of detailed project report (DPRs) for

centralized distributed / grid connected / captive power

generation project:

- Projects between 100-500 kW capacities

- Projects above 500 kW capacities

- DPR is not required for the projects below 100 kW

capacities

HRD & Training

- O&M technician's course

- Gasifier entrepreneur development course

- Awareness promotions such as organization of

seminars, business meets, workshops etc.

Support for gasifier manufacturers / suppliers for

establishing service centres in areas where cluster of

systems, minimum 10, have been set up in one district /

region

Special category states and Islands

INR 50,000 (USD 800)

INR 100,000 (USD 1,600)

INR 100,000



Maximum up to INR 300,000 (USD

4,800)

20 percent higher CFA

INR 500,000 (USD 8,000) one-time

funding

69Source: MNRE. Available at http://www.mnre.gov.in/file-manager/grid-biomass-gasification/biomass-gasifier-

industries.pdf


(ii) INR 1 million (USD 16,000)/ 100 kwe for 100 percent producer gas engines alone

3. Incentives / service charges to SNAs.

Incentives / service charges @ INR 100,000 (USD 1,600) / MWe (or equivalent) will be provided to

SNAs on pro-rata basis, subject to a ceiling of INR 500,000 (USD 8,000) / project, for their active

involvement in promoting Biomass Power projects.

The capital subsidy will be considered subject to the following:-

(i) The amount of capital subsidy will be calculated on the basis of installed capacity;

(ii) CFA will be limited to a maximum capacity of 5 MW, irrespective of the installed capacity of

the project.

(iii) In case of Special Category States (North Eastern Region, Sikkim, J&K, Himachal Pradesh

and Uttaranchal), 20 percent higher capital subsidy than that for General Category States

will be provided.

70Source: MNRE. Available at http://www.mnre.gov.in/file-manager/gridbiogas-2/biogaspower-2010-11.pdf

Power generating capacity

Biogas plant capacity

Maximum support for preparation of DPR

CFA/subsidy limited to the following ceiling or 40 percent of the cost of the system whichever is less

Administrative Charges to State Nodal Department / Agencies

>20kW up to

100kW

>100kW up to 250

kW

Any combination of

above plants or

approved alternate

capacity / design

Any combination of

above plants or

approved alternate

capacity / design

INR 100,000 per

plant above 100 kW

(USD 1,600)

15 percent of the

CFA (up to 20 kW

capacity for which

no assistance for

DPR is provided)

10 percent of the

CFA (> 20 kW - 250

kW)

3-20kW 25 Cu M to 85 Cu M No DPR required INR 40,000 per kW

(USD 640)

INR 20,000 per

plant (USD 320)

INR 35,000 per kW

(USD 560)

INR 30,000 per kW

(USD 480)

70Annex E: Capital Subsidy for Grid connected Biogas projects


S. No. Category of Watermill Amount of CFA

Mechanical output only

a) Electrical output (up to 5 kW) or,

b) Both mechanical and electrical output (up to 5 kW)

1. INR 35,000/- per Watermill

(USD 560)

(a) Watermills:

S. No. Areas Amount of CFA

International Border Districts (excluding Arunachal

Pradesh as it is already covered under the PM package)

North Eastern and Special category States (other than 1

above)

Other States (other than above)

1.

2.

3.

INR 100,000/- per kW (USD 1,600)

INR 80,000/- per kW (USD 1,280)

INR 40,000/- per kW (USD 640)

(b) Micro Hydro Projects up to 100 kW Capacity:

Note: A minimum contribution of 10 percent of project cost for North Eastern & special category States (S.

No. 2) and 20 percent for other states (S. No. 3) must be met by the beneficiaries/project owners.

Annex F 71 : Capital Subsidy for off-grid Watermills and Micro Hydro Projects


(USD 1,760)

71Source: MNRE. Available at http://www.mnre.gov.in/file-manager/hydro-scheme/scheme-shp-watermills.pdf

72Source: MNRE. Available at http://www.mnre.gov.in/file-manager/offgrid-solar-schemes/aa-jnnsm-2012-13.pdf

Annex G: Capital Subsidy for Off-Grid Solar PV Applications72

S. No. Category Capacity Limit Type of Subsidy

All applications except 1B



Pumps for irrigation and community

drinking water

1 kWp

100 kWp per site

100 kWp per site

5 kWpCapital Subsidy & Interest

Subsidy

Capital Subsidy & Interest

Subsidy

Capital Subsidy Or Interest

Subsidy

1. Individuals

2. Non- Commercial entities

3. Industrial/Commercial entities

A.

A.

A.

B.

Mini-grids for rural electrificationB. 250 kWp per site

Min-grid for rural electrification 250 kWp per siteB.


73Source: MNRE. Available at http://mnre.gov.in/file-manager/UserFiles/amendmends-benchmarkcost-aa-jnnsm-

2013-14.pdf

73Benchmark

Power plants/Packs (without battery)

Up to 100 kWp

> 100 kWp to 500 kWp

INR 100/Wp

(USD 1.6)

INR 90/Wp

(USD 1.4)

Minimum of 30 percent capital

subsidy of capital cost or 30

percent of benchmark cost

Soft loan @ 5

percent p.a.

On the amount of project cost

Less promoter's contribution

Less capital subsidy amount

Scale of Interest Subsidy

Power plants/Packs (with battery)

300 Wp to 1 kWp

> 1 kWp to 10 kWp

> 10 kWp to 100 kWp

INR 210/Wp

(USD 3.6)

INR 190/Wp

(USD 3.0)

INR 170/Wp (

USD 2.7)

Scale of Capital Subsidy


State

Andhra

Pradesh

Arunachal

Pradesh

Assam

Bihar

Chhattisgarh

RE

Technology

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

2011-

12

4.75

2.70

2.25

5.00

0.25

0.10

0.25

0.25

5.00

2.80

2.50

5.25

2012-

13

4.75

4.05

3.75

5.25

0.25

0.15

0.25

0.50

5.00

4.20

4.00

5.75

2013-

14

4.75

5.40

4.00

0.25

0.20

0.50

5.00

5.60

4.50

2014-

15

4.75

6.75

4.25

0.25

0.25

0.75 1.00 1.25 1.50 1.75 2.00 2.50 3.00

5.00

7.00

5.00

2015-

16

4.75

0.25

5.00

2016-

17

4.75

0.25

5.00

2017-

18

2018-

19

2019-

20

2020-

21

2021-

22

Has not declared RPO targets

Annex H: Renewable Purchase Obligation Targets


S. No. Category of Watermill Amount of CFA

Mechanical output only

a) Electrical output (up to 5 kW) or,

b) Both mechanical and electrical output (up to 5 kW)


(USD 560)

(a) Watermills:

S. No. Areas Amount of CFA

International Border Districts (excluding Arunachal

Pradesh as it is already covered under the PM package)

North Eastern and Special category States (other than 1

above)

Other States (other than above)

1.

2.

3.

INR 100,000/- per kW (USD 1,600)

INR 80,000/- per kW (USD 1,280)

INR 40,000/- per kW (USD 640)

(b) Micro Hydro Projects up to 100 kW Capacity:

Note: A minimum contribution of 10 percent of project cost for North Eastern & special category States (S.

No. 2) and 20 percent for other states (S. No. 3) must be met by the beneficiaries/project owners.

Annex F 71 : Capital Subsidy for off-grid Watermills and Micro Hydro Projects


(USD 1,760)

71Source: MNRE. Available at http://www.mnre.gov.in/file-manager/hydro-scheme/scheme-shp-watermills.pdf

72Source: MNRE. Available at http://www.mnre.gov.in/file-manager/offgrid-solar-schemes/aa-jnnsm-2012-13.pdf

Annex G: Capital Subsidy for Off-Grid Solar PV Applications72





Pumps for irrigation and community

drinking water

1 kWp

100 kWp per site

100 kWp per site

5 kWpCapital Subsidy & Interest

Subsidy

Capital Subsidy & Interest

Subsidy

Capital Subsidy Or Interest

Subsidy

1. Individuals

2. Non- Commercial entities

3. Industrial/Commercial entities

A.

A.

A.

B.

Mini-grids for rural electrificationB. 250 kWp per site

Min-grid for rural electrification 250 kWp per siteB.


73Source: MNRE. Available at http://mnre.gov.in/file-manager/UserFiles/amendmends-benchmarkcost-aa-jnnsm-

2013-14.pdf

73Benchmark

Power plants/Packs (without battery)

Up to 100 kWp

> 100 kWp to 500 kWp

INR 100/Wp

(USD 1.6)

INR 90/Wp

(USD 1.4)

Minimum of 30 percent capital

subsidy of capital cost or 30

percent of benchmark cost

Soft loan @ 5

percent p.a.

On the amount of project cost

Less promoter's contribution

Less capital subsidy amount

Scale of Interest Subsidy

Power plants/Packs (with battery)

300 Wp to 1 kWp

> 1 kWp to 10 kWp

> 10 kWp to 100 kWp

INR 210/Wp

(USD 3.6)

INR 190/Wp

(USD 3.0)

INR 170/Wp (

USD 2.7)

Scale of Capital Subsidy


State

Andhra

Pradesh

Arunachal

Pradesh

Assam

Bihar

Chhattisgarh

RE

Technology

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

2011-

12

4.75

2.70

2.25

5.00

0.25

0.10

0.25

0.25

5.00

2.80

2.50

5.25

2012-

13

4.75

4.05

3.75

5.25

0.25

0.15

0.25

0.50

5.00

4.20

4.00

5.75

2013-

14

4.75

5.40

4.00

0.25

0.20

0.50

5.00

5.60

4.50

2014-

15

4.75

6.75

4.25

0.25

0.25

0.75 1.00 1.25 1.50 1.75 2.00 2.50 3.00

5.00

7.00

5.00

2015-

16

4.75

0.25

5.00

2016-

17

4.75

0.25

5.00

2017-

18

2018-

19

2019-

20

2020-

21

2021-

22


Annex H: Renewable Purchase Obligation Targets


Delhi

JERC

(Goa & UT)

Gujarat

Haryana

Himachal

Pradesh

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

Total

1.90

1.70

5.50

1.50

10.00

0.01

10.01

0.10

0.30

0.50

0.00

2.00

2.00

6.00

1.50

3.40

2.60

6.00

2.00

10.00

0.25

10.25

3.00

10.00

0.25

10.25

10.00

0.25

10.25

11.00

0.25

11.25

12.00

0.25

12.25

13.00

0.50

13.50

14.00

0.75

14.75

15.00

1.00

16

15.50

2.00

17.50

16.00

3.00

19.00

4.80 6.20 7.60 9.00

0.15

0.40

1.00

0.05 0.10

0.20 0.25 0.30 0.35

3.55

3.00

7.00

2.05 3.10

5.00 6.45 7.90 9.35

StateRE

Technology2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

2019-

20

2020-

21

2021-

22

Jharkhand

Karnataka

Madhya

Pradesh

Maharashtra

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

2.50

10 & 7

2.10

6.75

0.50

0.25

0.40

0.25

3.00

10.25&

7.25

2.50

7.00

3.00

3.40

7.75

1.00

0.60

0.25

4.00

4.00

8.00

4.70

8.50

0.80

0.50

5.50

9.00

6.00

8.50

1.00

0.50

7.00

9.00

8.50

0.50

9.00

Kerala

Non-Solar

Solar

Total

3.35

0.25

3.60

3.65

0.25

3.90

3.95

0.25

4.20

4.25

0.25

4.50

4.55

0.25

4.80

4.85

0.25

5.10

5.15

0.25

5.40

5.45

0.25

5.70

5.75

0.25

6.00

6.05

0.25

6.30

6.35

0.25

6.60

Jammu and

Kashmir

Non-Solar

Solar

Total

2.90

0.10

3.00

4.75

0.25

5.00


Manipur

Mizoram

Meghalaya

Nagaland

Orissa

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

Total

2.75

5.75

0.45

6.75

4.90

0.25

0.25

0.30

0.25

0.10

3.00

6.00

0.75

7.00

5.00

4.75

6.75

0.60

7.75

5.35

0.25

0.25

0.40

0.25

0.15

5.00

7.00

1.00

8.00

5.50

5.80

0.20

6.00

6.25

0.25

6.50

6.70

0.30

7.00

Punjab

Rajasthan

Sikkim

Tamil Nadu

Tripura

Uttarakhand

Uttar

Pradesh

West Bengal

Non-Solar

Non-Solar


Non-Solar

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

Total

Total

Total

2.37

5.50

8.95

0.90

4.50

4.50

0.03

0.50

0.05

0.10

0.03

0.50

2.40

6.00

9.00

1.00

4.53

5.00

2.83

6.35

1.90

5.00

5.00

0.07

0.75

0.10

0.05

1.00

2.90

7.10

2.00

5.05

6.00

3.37

7.00

3.75

0.13

1.00

0.25

3.50

8.20

4.003.00 4.00

3.81

4.70

0.19

0.30

4.00

5.00

5.60

0.40

6.00

6.50

0.50

7.00

7.40

0.60

8.00

StateRE

Technology2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

2019-

20

2020-

21

2021-

22


Delhi

JERC

(Goa & UT)

Gujarat

Haryana

Himachal

Pradesh

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

Total

1.90

1.70

5.50

1.50

10.00

0.01

10.01

0.10

0.30

0.50

0.00

2.00

2.00

6.00

1.50

3.40

2.60

6.00

2.00

10.00

0.25

10.25

3.00

10.00

0.25

10.25

10.00

0.25

10.25

11.00

0.25

11.25

12.00

0.25

12.25

13.00

0.50

13.50

14.00

0.75

14.75

15.00

1.00

16

15.50

2.00

17.50

16.00

3.00

19.00

4.80 6.20 7.60 9.00

0.15

0.40

1.00

0.05 0.10

0.20 0.25 0.30 0.35

3.55

3.00

7.00

2.05 3.10

5.00 6.45 7.90 9.35

StateRE

Technology2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

2019-

20

2020-

21

2021-

22

Jharkhand

Karnataka

Madhya

Pradesh

Maharashtra

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

2.50

10 & 7

2.10

6.75

0.50

0.25

0.40

0.25

3.00

10.25&

7.25

2.50

7.00

3.00

3.40

7.75

1.00

0.60

0.25

4.00

4.00

8.00

4.70

8.50

0.80

0.50

5.50

9.00

6.00

8.50

1.00

0.50

7.00

9.00

8.50

0.50

9.00

Kerala

Non-Solar

Solar

Total

3.35

0.25

3.60

3.65

0.25

3.90

3.95

0.25

4.20

4.25

0.25

4.50

4.55

0.25

4.80

4.85

0.25

5.10

5.15

0.25

5.40

5.45

0.25

5.70

5.75

0.25

6.00

6.05

0.25

6.30

6.35

0.25

6.60

Jammu and

Kashmir

Non-Solar

Solar

Total

2.90

0.10

3.00

4.75

0.25

5.00


Manipur

Mizoram

Meghalaya

Nagaland

Orissa

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

Total

2.75

5.75

0.45

6.75

4.90

0.25

0.25

0.30

0.25

0.10

3.00

6.00

0.75

7.00

5.00

4.75

6.75

0.60

7.75

5.35

0.25

0.25

0.40

0.25

0.15

5.00

7.00

1.00

8.00

5.50

5.80

0.20

6.00

6.25

0.25

6.50

6.70

0.30

7.00

Punjab

Rajasthan

Sikkim

Tamil Nadu

Tripura

Uttarakhand

Uttar

Pradesh

West Bengal

Non-Solar

Non-Solar


Non-Solar

Non-Solar

Non-Solar

Non-Solar

Non-Solar

Solar

Solar

Solar

Solar

Solar

Solar

Solar

Total

Total

Total

Total

Total

Total

Total

2.37

5.50

8.95

0.90

4.50

4.50

0.03

0.50

0.05

0.10

0.03

0.50

2.40

6.00

9.00

1.00

4.53

5.00

2.83

6.35

1.90

5.00

5.00

0.07

0.75

0.10

0.05

1.00

2.90

7.10

2.00

5.05

6.00

3.37

7.00

3.75

0.13

1.00

0.25

3.50

8.20

4.003.00 4.00

3.81

4.70

0.19

0.30

4.00

5.00

5.60

0.40

6.00

6.50

0.50

7.00

7.40

0.60

8.00

StateRE

Technology2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

2019-

20

2020-

21

2021-

22


Annex Icommercial instruments

: Examples of investments in Grid connected RE projects using

Some local currency loans provided to RE projects in India

Company Financial

institution

Technology Project size Amount received

in INR million

(USD million)

Moser Baer (Solar

Projects)

IDBI Solar PV 5 MW 500

(8)

Astonfield SBI, PFC, EXIM India Solar PV 16 MW 1,500

(24)

Welspun HDFC Bank, ICICI Bank, Axis

Bank, Central Bank of India,

Union Bank of India, IIFCL,

Vijaya Bank

Solar PV 50 MW 3,550

(57)

SUN Group L&T Infra Solar PV 6 MW 600

(10)

NuPower Punjab National Bank Wind 150 MW 7,500

(120)

ReNew Power PTC Financial Services Wind 25 MW 1,000

(16)

Soham Renewable

Energy

Andhra Bank, Axis Bank Small Hydro 15 MW 550

(9)

Tata Power

Renewable Energy

SBI, EXIM Bank India Small Hydro 25 MW 1,250

(20)

Shalivahana Green

Energy

IREDA, IDBI Bank & UCO

Bank

Biomass 20 MW 630

(10)

Mytra Energy

IDFC Wind 340 MW 2,500

(40)

PFC 1,500

(24)

IREDA 2,500

(40)

Canara Bank 1,000

(16)

Central Bank 1,000

(16)

Punjab National Bank 1,000

(16)


(16)


Some foreign currency loans provided to RE projects in India

Company Financial

institution

Technology Capacity Amount received

(USD million)

Reliance Power Asian Development Bank Concentrated

Solar Power

(CSP)

100 MW 103

Dutch development bank

FMO, US EXIM and Axis Bank

200

Sun Edison OPIC, L&T Infrastructure

Finance and IDFC

Solar PV 50 MW 110

Azure Power US EXIM Bank Solar PV 35 MW 70

Kiran Energy US EXIM Bank Solar PV 50 MW 57

Tatith Energies US EXIM Bank Solar PV 5 19

Salivahana Green

Energy

IFC Biomass 2x23 15

Moser Baer IFC Solar PV 5 4

Green Infra Standard Chartered Solar PV 25 N/A

ACME Telepower PNC Bank (Loan Guaranteed

by US EXIM Bank)

Solar PV 15 19

Company Private equity investor Technology Amount raised

(million USD)

ReNew Power

Ventures

Goldman Sachs Private Equity Wind 200

Continuum Wind

Energy

Morgan Stanley Infrastructure Partners Wind 210

Orient Green Power

Limited

Olympus Capital, Bessemer Ventures Wind, Biomass 68

Green Infra Limited IDFC Private Equity Wind, solar, hydro,

biomass

100

Greenko Global Environment Fund, Aloe

Environment Fund, TPG Growth,

Standard Chartered PE,

GE Energy Financial Services

Wind, Biomass, Gas,

Hydro

155

Auro Mira Energy Baring Private EquityBiomass, Hydro,

Wind

50

Aureos South Asia Fund, IFC and

ePlanet Ventures

21

Key private equity investments in Indian renewable energy sector


Annex Icommercial instruments

: Examples of investments in Grid connected RE projects using

Some local currency loans provided to RE projects in India

Company Financial

institution

Technology Project size Amount received

in INR million

(USD million)

Moser Baer (Solar

Projects)

IDBI Solar PV 5 MW 500

(8)

Astonfield SBI, PFC, EXIM India Solar PV 16 MW 1,500

(24)

Welspun HDFC Bank, ICICI Bank, Axis

Bank, Central Bank of India,

Union Bank of India, IIFCL,

Vijaya Bank

Solar PV 50 MW 3,550

(57)

SUN Group L&T Infra Solar PV 6 MW 600

(10)

NuPower Punjab National Bank Wind 150 MW 7,500

(120)

ReNew Power PTC Financial Services Wind 25 MW 1,000

(16)

Soham Renewable

Energy

Andhra Bank, Axis Bank Small Hydro 15 MW 550

(9)

Tata Power

Renewable Energy

SBI, EXIM Bank India Small Hydro 25 MW 1,250

(20)

Shalivahana Green

Energy

IREDA, IDBI Bank & UCO

Bank

Biomass 20 MW 630

(10)

Mytra Energy

IDFC Wind 340 MW 2,500

(40)

PFC 1,500

(24)

IREDA 2,500

(40)

Canara Bank 1,000

(16)

Central Bank 1,000

(16)


(16)


(16)


Some foreign currency loans provided to RE projects in India

Company Financial

institution

Technology Capacity Amount received

(USD million)

Reliance Power Asian Development Bank Concentrated

Solar Power

(CSP)

100 MW 103

Dutch development bank

FMO, US EXIM and Axis Bank

200

Sun Edison OPIC, L&T Infrastructure

Finance and IDFC

Solar PV 50 MW 110

Azure Power US EXIM Bank Solar PV 35 MW 70

Kiran Energy US EXIM Bank Solar PV 50 MW 57

Tatith Energies US EXIM Bank Solar PV 5 19

Salivahana Green

Energy

IFC Biomass 2x23 15

Moser Baer IFC Solar PV 5 4

Green Infra Standard Chartered Solar PV 25 N/A

ACME Telepower PNC Bank (Loan Guaranteed

by US EXIM Bank)

Solar PV 15 19


(million USD)

ReNew Power

Ventures

Goldman Sachs Private Equity Wind 200

Continuum Wind

Energy

Morgan Stanley Infrastructure Partners Wind 210

Orient Green Power

Limited

Olympus Capital, Bessemer Ventures Wind, Biomass 68

Green Infra Limited IDFC Private Equity Wind, solar, hydro,

biomass

100

Greenko Global Environment Fund, Aloe

Environment Fund, TPG Growth,

Standard Chartered PE,

GE Energy Financial Services

Wind, Biomass, Gas,

Hydro

155

Auro Mira Energy Baring Private EquityBiomass, Hydro,

Wind

50

Aureos South Asia Fund, IFC and

ePlanet Ventures

21

Key private equity investments in Indian renewable energy sector


Shalivahana Green

Energy

Axis PE

IL&FS Financial Services Ltd

AMP Capital

International Finance Corporation (IFC)

Bharat Light & Power Draper Fisher Jurvetson, VenturEast

Kiran Energy New Silk Route

Bessemer Ventures

Argonaut Ventures

Trishe Developers New Enterprise Associates (NEA)

Soham Renewable

Energy

Macquarie SBI Infrastructure Fund

Moser Baer (Energy

Arm - Thermal +

Renewable)

Blackstone India

Leap Green Energy

Private Limited

JP Morgan Asset Management


(million USD)

Biomass, Hydro,

Wind

12

8

29

15

Wind Undisclosed

Solar30

30

30

Wind 14

Hydro, Wind 83

Solar 300

Wind 40


74Finance raised by Husk Power Systems

Sources of finance Type of finance

Social Innovation Competitions

sponsored by University of

Virginia and University of Texas.

Prize money USD 60,000

Amount received

Draper Fisher Jurvetson and

Cisco Systems

Equity (raised through global business

plan competition)

USD 250,000

Acumen Fund and Bamboo Finance Equity USD 5 million

Overseas Promotion Investment

Corporation (OPIC)

Debt USD 750,000

Intellecash Micro-finance Debt N.A.

Shell Foundation Equity + Grant N.A.

International Finance Corporation

(IFC)

Equity + Debt Equity USD 1 million +

Debt 0.25 million

LGT Venture Philanthropy +

undisclosed co-investors

Equity USD 5 million

Alstom Foundation Grant Euro 90,000

Annex J: Funding for Husk Power Systems

74Sources: a. University of Virginia, http://news.virginia.edu/node/5123?id=5123

b. Draper Fischer Jurvetson, http://www.dfj.com/bizplan/2009.html

c. Husk Power Systems raises $5M in Series A funding led by Acumen Fund and Bamboo Finance.

VC Circle, Oct 25, 2012, http://www.vccircle.com/news/urban-infra/2012/10/25/renewable-

energy-firm-husk-power-systems-raises-5m-funding

d. Overseas Promotion Investment Corporation, http://www.opic.gov/projects/husk-power-systems

e. http://archive.feedblitz.com/196730/~3988830

f. Husk Power Systems,

http://www.huskpowersystems.com/innerpagedata.php?pageT=Investors&page_id=76&pagesu

b_id=88

g. International Finance Corporation,

http://www.ifc.org/ifcext/spiwebsite1.nsf/0/798FE6330620548A852576FF005DC893

h. LGT Venture Philanthropy, http://www.lgtvp.com/NewsCollection/News/2012/Nov/Series-A-

equity-funding-for-Husk-Power-Systems.aspx?lang=en-US

i. Alstom Foundation, http://www.alstom.com/press-centre/2012/5/alstom-grants-90k-euros-inr-58-

millionto-husk-power-systems-project-aims-to-minimize-water-usage-by-over-80-and-save-150000-

tons-of-co2-by-2014-/


Shalivahana Green

Energy

Axis PE

IL&FS Financial Services Ltd

AMP Capital

International Finance Corporation (IFC)

Bharat Light & Power Draper Fisher Jurvetson, VenturEast

Kiran Energy New Silk Route

Bessemer Ventures

Argonaut Ventures

Trishe Developers New Enterprise Associates (NEA)

Soham Renewable

Energy

Macquarie SBI Infrastructure Fund

Moser Baer (Energy

Arm - Thermal +

Renewable)

Blackstone India

Leap Green Energy

Private Limited

JP Morgan Asset Management


(million USD)

Biomass, Hydro,

Wind

12

8

29

15

Wind Undisclosed

Solar30

30

30

Wind 14

Hydro, Wind 83

Solar 300

Wind 40


74Finance raised by Husk Power Systems

Sources of finance Type of finance

Social Innovation Competitions

sponsored by University of

Virginia and University of Texas.

Prize money USD 60,000

Amount received

Draper Fisher Jurvetson and

Cisco Systems

Equity (raised through global business

plan competition)

USD 250,000

Acumen Fund and Bamboo Finance Equity USD 5 million

Overseas Promotion Investment

Corporation (OPIC)

Debt USD 750,000

Intellecash Micro-finance Debt N.A.

Shell Foundation Equity + Grant N.A.

International Finance Corporation

(IFC)

Equity + Debt Equity USD 1 million +

Debt 0.25 million

LGT Venture Philanthropy +

undisclosed co-investors

Equity USD 5 million

Alstom Foundation Grant Euro 90,000

Annex J: Funding for Husk Power Systems

74Sources: a. University of Virginia, http://news.virginia.edu/node/5123?id=5123

b. Draper Fischer Jurvetson, http://www.dfj.com/bizplan/2009.html

c. Husk Power Systems raises $5M in Series A funding led by Acumen Fund and Bamboo Finance.

VC Circle, Oct 25, 2012, http://www.vccircle.com/news/urban-infra/2012/10/25/renewable-

energy-firm-husk-power-systems-raises-5m-funding

d. Overseas Promotion Investment Corporation, http://www.opic.gov/projects/husk-power-systems

e. http://archive.feedblitz.com/196730/~3988830

f. Husk Power Systems,

http://www.huskpowersystems.com/innerpagedata.php?pageT=Investors&page_id=76&pagesu

b_id=88

g. International Finance Corporation,

http://www.ifc.org/ifcext/spiwebsite1.nsf/0/798FE6330620548A852576FF005DC893

h. LGT Venture Philanthropy, http://www.lgtvp.com/NewsCollection/News/2012/Nov/Series-A-

equity-funding-for-Husk-Power-Systems.aspx?lang=en-US

i. Alstom Foundation, http://www.alstom.com/press-centre/2012/5/alstom-grants-90k-euros-inr-58-

millionto-husk-power-systems-project-aims-to-minimize-water-usage-by-over-80-and-save-150000-

tons-of-co2-by-2014-/


Annex K: Tax efficient Structures

Master Limited Partnerships

Master Limited Partnership (MLP) is a publicly traded partnership structure, which has been

predominantly used by the natural resources industry (particularly the oil and gas industry) as an

effective structure for raising finance. The MLP structure has not yet been used for financing RE

projects anywhere. However, in June 2012, the “Master Limited Partnerships Parity Act” Bill was

introduced in the U.S. Congress to extend the benefits of this structure to RE projects and is in the

discussion stage at present.

The structure of MLP combines the tax benefits of a limited partnership with the liquidity of publicly

traded companies (see figure 7: Typical structure of Master Limited Partnership). At present, 72

energy related businesses constitute 78 percent of all existing MLPs in the U.S. and together they

represent a market capitalization of over USD 220 billion.


100% 100% 100% 100%

Master Limited

Partnership

aof

%ge

dsi tributable

a

csh

flows

Mnag

me

t

a

en

apta

Ci

las

dtri

buio

s

Ch

is

tn

Prtn

erip

inco

me

a

sh

cdi

ts a

nd d

edct

ons

re

ui

General PartnersLimited Partner

(Investors)

100%

Operating

Company


The MLP structure offers a number of benefits and attracts both investors and project developers:

• Apart from retaining limited investor liability, MLPs offer consistent and above market

dividend income to investors, along with significant tax benefits.

• For project developers, MLPs are efficient structures for attracting finance due to the

amalgamation of corporate and partnership benefits, along with the access to capital market

liquidity.

• MLPs offer a tax efficient structure by working as “pass-through” entities and are thus not

taxed at the entity level and are only subject to taxation at the individual income level. This

differentiates MLPs from traditional corporate tax treatment, which is subject to both

corporate taxes as well as taxes on distribution (dividends) to individual shareholders.

However, taxes are applicable only on the distributed dividend portion and not the entire

cash flow realized by the investor. Annual dividend distributions represent only 20-30 percent

of an investor's realized returns. The balance 70-80 percent is in the form of minimum 75quarterly distributions (MQDs) representing all “available cash” not obligated for ongoing

expenditure or debt service. MQDs offer higher yields than corporate dividends and are

classified as capital gains in the hands of the investors. In the U.S., capital gains are deferred

till the owner decides to sell, and income tax rates on capital gains are lower than those on

ordinary income.

A real estate investment trust, or REIT, is a tax designation for a corporate entity that owns and

manages income producing real estate. The REIT structure was originally created in the U.S. in

1960s to provide investors with the opportunity to invest in large-scale, diversified portfolios of real

estate through the sale and purchase of securities. At present, more than 20 countries in the world

have established REIT regimes, and some others are working towards it.

REITs normally acquire properties using the capital generated from investors, and distribute the

income derived from rentals or assets sales back to the investors. These are known as unit holders.

Under the REIT structure, a trustee represents the interests of the unit holders, whereas an asset

manager is appointed to make investment decisions. Further, a property manager is selected to

manage all properties under the ownership of the REIT (see figure 8: Structure of Real Estate

Investment Trust).

So far, none of the REIT regimes in the world have extended the benefits of the REIT structure to

RE. However, the authors of this report believe that the REIT structure deserves a mention, as there

is a strong push in the U.S. and elsewhere to extend these benefits to RE projects

Real Estate Investment Trusts (REIT)

75This available cash is due to the non cash expenses like depreciation, amortization etc


Annex K: Tax efficient Structures

Master Limited Partnerships

Master Limited Partnership (MLP) is a publicly traded partnership structure, which has been

predominantly used by the natural resources industry (particularly the oil and gas industry) as an

effective structure for raising finance. The MLP structure has not yet been used for financing RE

projects anywhere. However, in June 2012, the “Master Limited Partnerships Parity Act” Bill was

introduced in the U.S. Congress to extend the benefits of this structure to RE projects and is in the

discussion stage at present.

The structure of MLP combines the tax benefits of a limited partnership with the liquidity of publicly

traded companies (see figure 7: Typical structure of Master Limited Partnership). At present, 72

energy related businesses constitute 78 percent of all existing MLPs in the U.S. and together they

represent a market capitalization of over USD 220 billion.


100% 100% 100% 100%

Master Limited

Partnership

%age of

distributable

cashf ow

sl

Manag

me

t

en

tap

i al

C

asd

triu

ios

Ch

isb

tn

rte

inco

me

Pan

rshi

p

cdi

snd

de

cton

s

ret

a

dui

General PartnersLimited Partner

(Investors)

100%

Operating

Company


The MLP structure offers a number of benefits and attracts both investors and project developers:

• Apart from retaining limited investor liability, MLPs offer consistent and above market

dividend income to investors, along with significant tax benefits.

• For project developers, MLPs are efficient structures for attracting finance due to the

amalgamation of corporate and partnership benefits, along with the access to capital market

liquidity.

• MLPs offer a tax efficient structure by working as “pass-through” entities and are thus not

taxed at the entity level and are only subject to taxation at the individual income level. This

differentiates MLPs from traditional corporate tax treatment, which is subject to both

corporate taxes as well as taxes on distribution (dividends) to individual shareholders.

However, taxes are applicable only on the distributed dividend portion and not the entire

cash flow realized by the investor. Annual dividend distributions represent only 20-30 percent

of an investor's realized returns. The balance 70-80 percent is in the form of minimum 75quarterly distributions (MQDs) representing all “available cash” not obligated for ongoing

expenditure or debt service. MQDs offer higher yields than corporate dividends and are

classified as capital gains in the hands of the investors. In the U.S., capital gains are deferred

till the owner decides to sell, and income tax rates on capital gains are lower than those on

ordinary income.

A real estate investment trust, or REIT, is a tax designation for a corporate entity that owns and

manages income producing real estate. The REIT structure was originally created in the U.S. in

1960s to provide investors with the opportunity to invest in large-scale, diversified portfolios of real

estate through the sale and purchase of securities. At present, more than 20 countries in the world

have established REIT regimes, and some others are working towards it.

REITs normally acquire properties using the capital generated from investors, and distribute the

income derived from rentals or assets sales back to the investors. These are known as unit holders.

Under the REIT structure, a trustee represents the interests of the unit holders, whereas an asset

manager is appointed to make investment decisions. Further, a property manager is selected to

manage all properties under the ownership of the REIT (see figure 8: Structure of Real Estate

Investment Trust).

So far, none of the REIT regimes in the world have extended the benefits of the REIT structure to

RE. However, the authors of this report believe that the REIT structure deserves a mention, as there

is a strong push in the U.S. and elsewhere to extend these benefits to RE projects

Real Estate Investment Trusts (REIT)

75This available cash is due to the non cash expenses like depreciation, amortization etc


There are following benefits of the REIT structure:

• REITs are similar to MLPs, and work as “pass through” structures, where the income is taxed in the hands of the investor and not at the corporate level. Also taxes are limited to distributions (dividends) out of the returns realized by the investor. The REITs are required to distribute at least 90 percent of their taxable income to shareholders each year as dividends.

• REITs offer consistent and above market dividend income to investors along with significant tax benefits, while retaining limited investor liability.

• REITs can be listed on stock exchanges, thereby, providing access to capital market liquidity for raising finance.

Annex L: Companies adopting Singapore Trust Route

K-Green Trust: Singapore's K-Green Trust is a publicly traded business trust with an investment focus on “green” infrastructure assets in Singapore, Asia, Europe and Middle East. At present, the trust holds three assets: two waste-to-energy projects and one wastewater recycling plant combined with a one MW solar PV project.

Renewable Energy Trust Asia: EPURON Pte. Ltd. Singapore, a regional subsidiary of the Conergy Group in Asia Pacific and GE Energy Financial Services (GE EFS), launched the first RE focused business trust in Singapore with a plan to invest USD 250 million in the Indian RE markets. The trust is currently privately held with GE EFS holding an 80 percent stake. In the near future, the trust plans to list on SGX.

IL&FS wind power business: In September 2012, Infrastructure Leasing and Financial Services (IL&FS) announced the plan to list its wind business through a SGD 400-SGD 500 million business trust IPO in Singapore in 2013.

Investment in

REIT

Asset Asset

100% 100%

Unit-Holders

Distribution

Asset-Manager

Management Services

Management FeesTrustee

Trustee's Fee

Represents the interestsof unit holders

REIT

Property Manager

PropertyManagement

Services

PropertyManagement

Fees


Annex M: Examples of green bond issuances

A listing of a few green bonds which have been issued in the recent past is captured below:

• World Bank Green Bonds: In the last four years, the World Bank has issued over USD 3.3

billion in green bonds through 51 transactions and 17 currencies. The issued green bonds

were AAA rated with tenure ranging from three to 10 years. The World Bank's subsidiaries,

International Bank for Reconstruction and Development (IBRD) and IFC, were the issuing

organizations for these bonds.

• European Investment Bank Climate Awareness Bonds: EIB launched its first climate

awareness bonds in 2007. Since then, it has raised the equivalent of EUR 1.55 billion through

11 transactions in six currencies. The proceeds from the issues are ring fenced from the

general funding portfolio of the bank and are exclusively used to finance projects supporting

climate protection. The bonds are AAA rated and have tenures ranging between three to

seven years.

• Asian Development Bank Green Bonds: ADB is the third largest issuer of green bonds after

the World Bank and the European Investment Bank. ADB has issued green bonds of more

that USD 1.2 billion so far.

• U.S. Clean Renewable Energy Bond program: The Clean Renewable Energy Bond (CREB)

program administered by the U.S. Internal Revenue Service (IRS) and provides bond

authorization for public entities on a competitive basis for renewable electricity projects. The

benefit of the CREB program is that public entities receive the bonds at “zero” percent

interest. Bonds issued under this program are tax credit bonds in which the bond holder

receives federal tax credits in lieu of the interest component. These bonds are more

attractive for investors compared to the traditional tax-exempt bonds, as green bond allows

the bond holder to offset the current year liability rather than just excluding interest from

gross income for tax computation. CREBs may be issued by electric cooperatives,

government entities and by certain lenders. The CREB program issued USD 800 million of

tax credit bonds for 610 projects between January 2006 and December 2007. Another USD

400 million on bonds for 312 projects were issued under the same program in 2008 and

2009. Since 2010, IRS is not accepting applications under CREB program.

• Kommunalbanken Norway (KBN) Green Bond Program: KBN has raised a total of USD 361

million via its green bond program across 14 issuances and six currencies.

• IREDA Bond Issuances: At present, IREDA is in the process of raising INR 3 billion through a

bond issuance with 10 years tenure.

• Other Corporate Green Bond Issuances: Apart from the above mentioned examples of green

bonds, there are some other corporate green bond issuances (see box 17: Corporate Green

Bond Issuances).


There are following benefits of the REIT structure:

• REITs are similar to MLPs, and work as “pass through” structures, where the income is taxed in the hands of the investor and not at the corporate level. Also taxes are limited to distributions (dividends) out of the returns realized by the investor. The REITs are required to distribute at least 90 percent of their taxable income to shareholders each year as dividends.

• REITs offer consistent and above market dividend income to investors along with significant tax benefits, while retaining limited investor liability.

• REITs can be listed on stock exchanges, thereby, providing access to capital market liquidity for raising finance.

Annex L: Companies adopting Singapore Trust Route

K-Green Trust: Singapore's K-Green Trust is a publicly traded business trust with an investment focus on “green” infrastructure assets in Singapore, Asia, Europe and Middle East. At present, the trust holds three assets: two waste-to-energy projects and one wastewater recycling plant combined with a one MW solar PV project.

Renewable Energy Trust Asia: EPURON Pte. Ltd. Singapore, a regional subsidiary of the Conergy Group in Asia Pacific and GE Energy Financial Services (GE EFS), launched the first RE focused business trust in Singapore with a plan to invest USD 250 million in the Indian RE markets. The trust is currently privately held with GE EFS holding an 80 percent stake. In the near future, the trust plans to list on SGX.

IL&FS wind power business: In September 2012, Infrastructure Leasing and Financial Services (IL&FS) announced the plan to list its wind business through a SGD 400-SGD 500 million business trust IPO in Singapore in 2013.

Investment in

REIT

Asset Asset

100% 100%

Unit-Holders

Distribution

Asset-Manager

Management Services

Management FeesTrustee

Trustee's Fee

Represents the interestsof unit holders

REIT

Property Manager

PropertyManagement

Services

PropertyManagement

Fees


Annex M: Examples of green bond issuances

A listing of a few green bonds which have been issued in the recent past is captured below:

• World Bank Green Bonds: In the last four years, the World Bank has issued over USD 3.3

billion in green bonds through 51 transactions and 17 currencies. The issued green bonds

were AAA rated with tenure ranging from three to 10 years. The World Bank's subsidiaries,

International Bank for Reconstruction and Development (IBRD) and IFC, were the issuing

organizations for these bonds.

• European Investment Bank Climate Awareness Bonds: EIB launched its first climate

awareness bonds in 2007. Since then, it has raised the equivalent of EUR 1.55 billion through

11 transactions in six currencies. The proceeds from the issues are ring fenced from the

general funding portfolio of the bank and are exclusively used to finance projects supporting

climate protection. The bonds are AAA rated and have tenures ranging between three to

seven years.

• Asian Development Bank Green Bonds: ADB is the third largest issuer of green bonds after

the World Bank and the European Investment Bank. ADB has issued green bonds of more

that USD 1.2 billion so far.

• U.S. Clean Renewable Energy Bond program: The Clean Renewable Energy Bond (CREB)

program administered by the U.S. Internal Revenue Service (IRS) and provides bond

authorization for public entities on a competitive basis for renewable electricity projects. The

benefit of the CREB program is that public entities receive the bonds at “zero” percent

interest. Bonds issued under this program are tax credit bonds in which the bond holder

receives federal tax credits in lieu of the interest component. These bonds are more

attractive for investors compared to the traditional tax-exempt bonds, as green bond allows

the bond holder to offset the current year liability rather than just excluding interest from

gross income for tax computation. CREBs may be issued by electric cooperatives,

government entities and by certain lenders. The CREB program issued USD 800 million of

tax credit bonds for 610 projects between January 2006 and December 2007. Another USD

400 million on bonds for 312 projects were issued under the same program in 2008 and

2009. Since 2010, IRS is not accepting applications under CREB program.

• Kommunalbanken Norway (KBN) Green Bond Program: KBN has raised a total of USD 361

million via its green bond program across 14 issuances and six currencies.

• IREDA Bond Issuances: At present, IREDA is in the process of raising INR 3 billion through a

bond issuance with 10 years tenure.

• Other Corporate Green Bond Issuances: Apart from the above mentioned examples of green

bonds, there are some other corporate green bond issuances (see box 17: Corporate Green

Bond Issuances).


Corporates especially from the U.S. and Europe have also raised capital through bonds for investing

in RE projects. Following are few examples

• Ecotricity's Ecobonds: Ecotricity, United Kingdom's largest RE company, raised two rounds

of GBP 10 million each from “ecobond” issuances in 2010 and 2011. The bonds were issued

with 7.5 percent (issued in 2010) and 6.5 percent (issued in 2011) fixed coupon rates with a

four year tenure.

• SunPower Green Bonds: In December 2010, SunPower issued a bond of EUR 195 million to

finance the 44 MW final phases of its Montalto di Castro PV plant in Italy.

• Topaz Solar Farm: In February 2012, MidAmerican Energy Holdings, a company controlled by

Warren Buffett's Berkshire Hathaway, sold USD 850 million worth of bonds for its 550 MW

Topaz PV project in California. The issue was originally set at USD 700 million, but it was

heavily over-subscribed. The 27.5 year bonds were priced at around 380 basis points over the

corresponding treasuries.

• Other large corporates whose businesses help mitigate climate change have raised capital

through bonds, including Sunpower, Solarworld, Goldwind, Sinovel and Suntech. These

companies have issued a cumulative of USD 1.5 billion in the past year.


Corporates especially from the U.S. and Europe have also raised capital through bonds for investing

in RE projects. Following are few examples

• Ecotricity's Ecobonds: Ecotricity, United Kingdom's largest RE company, raised two rounds

of GBP 10 million each from “ecobond” issuances in 2010 and 2011. The bonds were issued

with 7.5 percent (issued in 2010) and 6.5 percent (issued in 2011) fixed coupon rates with a

four year tenure.

• SunPower Green Bonds: In December 2010, SunPower issued a bond of EUR 195 million to

finance the 44 MW final phases of its Montalto di Castro PV plant in Italy.

• Topaz Solar Farm: In February 2012, MidAmerican Energy Holdings, a company controlled by

Warren Buffett's Berkshire Hathaway, sold USD 850 million worth of bonds for its 550 MW

Topaz PV project in California. The issue was originally set at USD 700 million, but it was

heavily over-subscribed. The 27.5 year bonds were priced at around 380 basis points over the

corresponding treasuries.

• Other large corporates whose businesses help mitigate climate change have raised capital

through bonds, including Sunpower, Solarworld, Goldwind, Sinovel and Suntech. These

companies have issued a cumulative of USD 1.5 billion in the past year.


U.S. Agency for International Development

1300 Pennsylvania Avenue, NW

Washington, DC 20523

Tel: (202) 712-0000

Fax: (202) 216-3524

www.usaid.gov