Setting the context Investment Opportunities on Solar for PSUs Consultation Workshop: 15-Sep 2015 Accelerating Solar Energy Deployment in Public Sector

Setting the context Investment Opportunities on Solar for PSUs

Consultation Workshop: 15-Sep 2015Accelerating Solar Energy Deployment in

Public Sector Undertakings

Presented by Vinod Kala (EVI)Lead consultant RE Deployment and Financing

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

Mainstreaming EE in Corporate Loans

Contents

· Investment Opportunities for PSUs

· Large RE projects

· Roof Tops

· Financing constructs

INVESTMENT OPPORTUNITIES FOR PSUS


• Tax incentives– Accelerated depreciation benefits as an operating entity

• Business Portfolio benefits– RE assets are stable cash flow generators– Diversification of cash-flow mix

• Energy Security– Self consumption- cost lock-in– Energy access/security for distributed infrastructure

• Aligned with Green priorities and Sustainable Development.– RE-INVEST Commitments– Greening of energy mix used in operations– Projects can be designed to yield ESG benefits for community – CSR Commitments

• Solar park development can be an attractive business opportunity in itself– Many PSUs have commitments– Need development support

• Large PSU’s competitive advantage in setting up RE– Competitive Financing of large scale projects– Access to GW scale sites – Attractive for high quality suppliers– Ability to create large scale programs

Rationale for PSUs to invest in RE


Areas to Invest

• Can be a few MW to GW scale projects. Grid Connected

• Wind, Solar, Hybrids, most likely choices

• Plants• Distributed Infrastructure

(e,g platforms, petrol pumps, mobile towers, post and telegraph centers, e-governance kiosks, bank ATMs etc

• Solar PV, Wind-Solar Hybrids

• Industrial Processes may use solar thermal cost competitively for

- HVAC systems- Supplementing thermal

energy inputs- Process steam generation

. Potential use for bio-fuels, Agri/MSW waste etc.

• Micro Grid, Irrigation, Drinking Water RE enables rural infrastructure in communities near plant operation

• Company’s infrastructure can serve as anchor load (e.g platform, petrol pumps or mobile towers)

80 GW+ 40 GW+

2 GW+

LARGE RE PROJECTS


• Solar Park: a designated land for concentrated solar power generation• GOI is targeting 25 solar parks, each with a capacity of 500 to 1000 MW; totaling around

20000 MW in the coming 5 years– INR 25 lacs support for feasibility assessment– Up to 20 lacs/MW of 30% of development cost as support for build infrastructure for SECi/State Anchored parks

• Key features– Fully developed land along with transmission facilities, provision for water,, roads, drainage– Land approved for installation of solar power plants and necessary permissions including change of land use etc. – Road connectivity to each plot of land – Water availability for construction as well as running of power plants and demineralization plant – Flood mitigation measures like flood discharge, internal drainage etc. – Availability of Construction power and Telecommunication facilities – Provision for transmission facility consisting pooling station (with 400/220, 220/66 KV switchyard and respective

transformers)– A minimum of 5 Acre per MW land will be made available

• Solar Park development structures envisaged– State Nodal Agency (SNA)– SECI– SEC+SNA– PPP of the three types of Govt entities, with a private party

Solar Park Policy of GoI


• Even with utilizing 3% wasteland for solar, states have huge solar potential– The table below showcases Solar potential calculated by NISE (all figures in GW)

• New RE Act– New RE Act aims to have same RPO obligations across the country.– Tough penal provisions; violation of law will not be tolerated.– Renewable Generation Obligation (RGO) will be imposed- mandating the conventional electricity producers to

generate RE

• The revised Electricity Act– OA will be available to all consumers with load of more than 1 MW– Penalty for non-compliance of any provision of the act has been raised to Rs 1 cr. Penlty for RE generators will be INR 10 lakhs

State Commitments

AP GJ KA MP MH RJ TN DL

38 35 25 61 64 142 17 2


Business models- General

Net/ Gross Metering (roof

tops, irrigation,

micro grids)

User owned- Captive

IPP/ RESCO

Financier owned

Fixed FITBilateral

PPAs- dis-coms states

Third Party Sale

Sale on exchanges

Surplus power

Surplus power

Tariff Bidding

Surplus power

Significant wind, bio-mass and

hydro; some solar

Large solar plants,

JNNSM, states

Large Wind, Bio-mass projects, (AP, KA,

TN)

Ultra Mega Projects-

Solar, Wind, Hydro

Small % sold;

Mostly coal projects,

little renewable

NM concepts- irrigation, roof tops

Can become big with

re-financing

Early days- large scale

projects may use

Lease financing

potential- AD benefits


Solar cost competitiveness v/s grid- solar competitive in most states – Large Projects

Cost of Generation of Solar (W/o AD)Cost of Generation of Solar (With AD)

5.0-5.6

4.5-5.1


Type of Customers for power from large parks

• Tariff Lock-in• Long term cost saving• Meeting RPO• Meeting green

commitments

They may prefer meeting commitments from another PSU• Railways• Defense• Ports• PSU Operations/ Plants• Self consumption

Have customer/corporate pressures to go green

Can buy in $ linked PPAs and benefit from reduced costs

To meet power needsMeet RPOReduce Long Term Costs

ROOF TOP PROJECTS

13

Customer Owned

RESCO Owned

Utility Owned

Gross Metered

Net Metered

Grid Tied

• All benefits can flow to customers, incl. depreciation

• Not all customers want to invest

• Rural micro grids, large complexes could follow this model

• Leasing models to get depreciation benefits

• Utilities can anchor large scale programs reducing costs, risks; including collection risks

• Utilities need to be strongly aligned if scale up is targeted

Models where work is happening

Customers get FIT, some state policies

support

Most on site RE programs currently follow this model

Customers get roof top rental: e.g Gandhi Nagar; utility meets RPO

Urban, commercial and industrial complexes, SEZs.

No Programs as yet

Solar city programs; large complexes. DSM + RE type programs

Customers with ability to pay-- industrial, commercial

All customer segments; incl. residential, commercial, industrial

Utilities likely to find it difficult to

serve

Model to which we need to transition to scale up

Legend

Off Gird

Business models- roof top

Sample LCOE Calculations- Roof Top Diesel – Rs 18-30/KWhr

• Capital subsidy value

• If grid cost inflation is accounted for, even with no benefits solar PV is competitive with grid in most states

• Vis-a-vis diesel solar power is competitive everywhere, even if storage required is 6 hrs

Capital Cost ~ Rs 65/W assuming programmatic approach; 16% ROE (post tax); Tariffs in Jan 2014

NEW FINANCING INSTRUMENTS FOR RE


Reduced risk profiles of operating RE Assets

Resource assessment risks

Site acquisition risks, delays, costs, non availability

Evacuation access risks

Other permits and consents related risks e.g environment, local community etc.

Project execution risks, costs; delays

Technology performance risk

Credit Risk

LA

RA

EA

PC

PE

TP

CR

FM Force MajeureEvent risks

Development

RA

EA

TP

CR

FM

Operating Asset

Equity Discounting

rates

18-22%

10%-14%

Depending on tax efficiency and residual risk for equity investors


Clean Energy is becoming increasingly attractive for investors, due to long term economics

⏏*R(C )- R(RE)

* R (C): return on conventional power; R(RE) – return on RE without subsidies

Time ---

Inflation, as fossil fuel run out their availability

Environmental costs

Falling costs of RE; repowering at the same sites


Solutions which are Scalable, Liquid will attract wide participation (including domestic and foreign investors)

– Green Bonds – debt with lower cost (by 2%-3%/a), long tenures (15 yrs+), flexible structure (allowing better leveraging depending on cash flow from assets)

– Investment Trusts – for equity investors seeking low risk-low return investments

With – Appropriate tax provisions, – Simplification of investment rules – Availability of Risk mitigation/management products

Can lower the Cost of Finance significantly to reduce/eliminate subsidies (capital subsidy, VGF, GBI) and accelerate achievement of grid parity

Summary Ideas


Green Bonds

Renewable Energy is one of top priority areas for Green Investments.

Green investing becoming significant for very large investors

Borrowers get benefits of lower cost, fixed interest (v/s variable for bank loans), longer tenure, and non recourse options of financing.

Corporates issuances are increasing rapidly.

• Can be listed on Alternate Investment Markets in London or Luxembourg or other similar exchanges

• Can be traded bilaterally as well, as they use risk mitigated, ring fenced structures

• Raise long term debt for new projects

• Re-finance long term loans• Re-finance construction

loans


Renewable Energy Investment TrustsAttracts large, low risk investors such as Pension Funds, Insurance Companies, HNIs, Soverign Wealth Funds etc. Also Sharia Compliant- meets Islamic Finance requirements

Maximises cash distribution – usually 75%-90% of distributable cash needs to be distributed, by law.

In most domains globally , the structure offers tax efficient ways of investingAsset acquisition strategy maximizes availability of tax shelters/ credits.

Examples- Singapore Business TrustsMaster Limited Partnerships (USA)

• Listed on stock exchanges• Norms to ensure wide public

participation. • Considered better than investing in

utilities, because it isolates development risk

• Re-finances operating RE assets- lower risk

• Limits on investing in non operating or financial assets; limited leverage

• Diversifies risks through the asset portfolio

• High standards of governance


Investment Trust- the structure

Inv. Trust

Project 1

Sponsor

Inv1

Inv2

Inv n

Trustee

InvestmentManager

Project Manager

Sponsor Transfers Assets/ majority SPV stock to the TrustInvestors invest in the Trust based on independent valuation; receive units from the Trust, which are listed on a stock exchangeTrust pays in cash and in ‘units’ (shares) to the sponsor. Sponsor needs to hold a minimum stock in the Trust

Investment Manager – manages asset acquisitions, divestments, investor related processes (incl. listing and trading, distribution of cash/dividends, legal compliances, valuation accounting, audits and reporting) etc.

Project Manager – operates and manages assets for efficient performance

Trustee- ensure that investor interests are protected.

THANK YOU

CONTACT: [email protected]


Challenges of RE financing and the new approach needed

$250 bn+ new debt and equity needed by 2022

Long term investors

Investors need exit options

low interest costs; low discounting rates for equity

Low interest rates and low discounting rates are possible with risk mitigated, diversified ring fenced, project portfolios with no development risks

Large investors with long tenor, low risk, low cost capital – pension funds, sovereign wealth funds, insurance co etc

Liquidity of instruments, helps attract large scale investors.

High level of tax efficiency helps reduce the cost of debt/ equity

Market Needs New Approach


• State-wise wise Solar Parks• 10 Solar Parks/ Ultra Mega Solar Power Projects are being proposed in the following states who have communicated

their interest for setting up of Solar Parks/ Ultra Mega Solar Power Projects• ILFS, Essar, Adani, World Bank supprted solar parks in Odisha, MP

• State Government in which the solar park is developed will sell ~ 20%+ of the power produced through its DISCOM

Solar Park Policy of GoI

S. No. State Solar Park Proposed Capacity (MW)

Area

1 Madhya Pradesh Ultra Mega Solar Power Plant, Rewa 750 3750

2 Andhra Pradesh

Anantapur Solar Park 1500 9000

3 Kurnool Solar Park 1000 5000

4Rajasthan

Bhadla Phase II Solar Park 700 4500

5 Bhadla Phase III Solar Park 1000 5000

6 Jaisalmer Solar Park 1000 30525

7 Uttar Pradesh UP Solar Park 600 3038

8 Gujarat Banaskantta Solar Park 700 3500

9 Telangana Mahabubnagar Solar Park 1000 5408

10 Karnataka Karnataka Solar Park 1600 8000

Documents

Setting the context Investment Opportunities on Solar for PSUs Consultation Workshop: 15-Sep 2015 Accelerating Solar Energy Deployment in Public Sector