Bridge to India_india Solar Decision Brief_the Rec Mechanism

The REC Mechanism

Viability of solar projects in India

ASSOCIATE SPONSORS

LEAD SPONSOR

The REC Mechanism

Viability of solar projects in India

BRIDGE TO INDIA, 2012Original illustration by Dwarka Nath Sinha

INDIA SOLARDECISION BRIEF

BRIDGE TO INDIA, 2012

LEAD SPONSOR

Enerparc is an internationally successful specialist in the whole value chain of large-scale photovoltaic power plants in the megawatt segment. The company was founded beginning 2009 and has offices in Germany, United States and India. As pioneers of this industry, the Enerparc team is specialized in project development, installation as well as in the investment and operation of solar power plants. The service ranges from the technical planning (EPCm) to the turn-key delivery (EPC) and finally to the operation (O&M) of the power plant. In the last 24 months the Enerparc Group successfully connected more than 700 MW to the grid and it operates 300MW of own PV power plants.

Telephone: +91 011 4060 1442Fax: +91 011 4060 1235Email: [email protected]

ASSOCIATE SPONSORS

Canadian Solar, one of the largest solar module manufacturers in the world, was founded in Canada in 2001 and successfully listed on NASDAQ Exchange (symbol: CSIQ) in 2006. To date, Canadian Solar has successfully established seven wholly-owned manufacturing subsidiaries in China, with a module capacity of 2.05 GW in 2011. In the last 10 years, Canadian Solar has deployed over 3.5 GW of solar modules in over 50 countries. Canadian Solar is headquartered in Ontario, Canada, with subsidiaries in USA, Germany, Spain, Italy, Japan, Korea, Australia, Singapore, HongKong and China.

Telephone: +1 519 837 1881Email: [email protected] [email protected]

GIZ is a federal enterprise, which supports the German Government in achieving its objectives in the field of international cooperation for sustainable development.

GIZ operates in many fields: economic development and employment promotion; governance and democracy; security, reconstruction, peace building and civil conflict transformation; food security, health and basic education; and environmental protection, resource conservation and climate change mitigation. We support our partners with management and logistical services, and act as an intermediary, balancing diverse interests in sensitive contexts.

Telephone: +49 61 96 79-0Fax: +49 61 96 79-11 15Email: [email protected]


Established in 1982 in Bad Staffelstein, Germany, IBC SOLAR is one of the worlds leading photovoltaic systems integrator. Globally, IBC SOLAR has already implemented more than 120,000 ready-to-use photovoltaic installations with a total power of more than 2GWp. Its scope of services ranges from large scale power plants solutions upto to smaller on- and off-grid systems. Complete engineering services, delivery of all key components and following construction (EPC) of turnkey power plants is regarded as its core competencies. Furthermore, IBC SOLAR is developing and constructing own large scale installations in selected markets. Key components used are manufactured under an OEM regime with IBC branding and quality commitment. In addition, comprehensive consultancy services as well as operation and maintenance of the installations are key services. Since 2008, IBC SOLAR has constructed several multi megawatt power plants under the NSM Policies for leading Indian multinational enterprises such as the Videocon and Aditya Birla Group.

Telephone: +49 95 73 92 24 0Fax: +49 95 73 92 24 111Email: [email protected]

The opinions and analyses expressed in this report are those of BRIDGE TO INDIA, and do not, in any way, unless specifically mentioned, convey or include the opinions of the sponsors of this report.


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1. Overview 01

2. The Renewable Energy Certificate (REC) Mechanism

02

2.1. Background 02

2.2. Solar RECs 02

2.3. Lessons from the non-solar REC market 03

2.4. Procedures and timelines 06

3. Is the solar RECs market viable? 09

4. Solar REC business models 124.1. Business Model 1: APPC + REC 12

4.2. Business Model 2: RESCO + REC 13

4.3. Business Model 3: Captive + REC 15

5. Regulations under discussion 17

6. Conclusions and recommendations 18

7. Annexure 197.1. State-wise RPO Quotas (2012-2013)7.2. Status of non-solar RPO compliance across different states (2012-2013)

1919

7.3. Glossary of terms 20

8. Guest ArticleSetting up large scale PV: Lessons from new markets by Mr. Santosh KM, Managing Director, ENERPARC India

21

9. Interviews 24Mr. Stefan Mueller, COO, Enerparc 24

Mr. Vinay Shetty, Country Manager Indian Subcontinent, Canadian Solar

26

Mr. Jens Burgtorf, CSO, Director, Indo-German Energy Program, GIZ

28

Mr. Jan Marc-Raitz, Director, Commercial Department, PV Projects, IBC Solar

30

CONTENTS

BRIDGE TO INDIA, 2012 6

Figure 2-1 RPO requirements of selected states in India 02

Figure 2-2-1 Floor and forbearance prices 02

Figure 2-2-2 Projects registered under the REC mechanism 03

Figure 2-3-1 Registered REC projects by renewable energy resource 03

Figure 2-3-2 Historical non-solar REC demand by consumer category 04

Figure 2-3-3 History of demand-supply of non-solar RECs 04

Figure 2-3-4 Historical price discovery of non-solar REC prices 05

Figure 2-4-1 Process for the issuance of solar RECs 06

Figure 2-4-2 Solar REC eligibility 06

Figure 2-4-3 Details of the accreditation fees payable to the SLDC 08

Figure 2-4-4 Details of the registration fees payable to the NLDC 08

Figure 2-4-5 Details of the issuance fees payable to the NLDC 08

Figure 3-1 Expected solar PV capacity based on the REC mechanism 09

Figure 3-2 Derivation of expected solar PV capacity based on the REC mechanism (year-on-year)

10

Figure 3-3 India solar and grid price projections 11

Figure 3-4 Assumptions for the projection of solar and grid prices 11

Figure 3-5 Solar REC price projections 11

Figure 4-1-1 State-wise APPC prices (2012) 12

Figure 4-1-2 Assumptions for determining EIRR APPC + REC 12

Figure 4-1-3 Financial viability of APPC+REC projects 13

Figure 4-2-1 Assumptions for determining EIRR RESCO + REC 14

Figure 4-2-2 Financial viability of RESCO+REC projects 14

Figure 4-3-1 Assumptions for determining EIRR Captive + REC 16

Figure 4-3-2 Financial viability of Captive + REC projects 16

LIST OF FIGURES


1. OVERVIEWThe Indian government has decided to incentivize the installation of solar PV in order to increase the energy supply of India, provide more energy security, offer de-central power solutions and create a future industry. The policy initially focused on supply side measures. It started with capital subsidies. Then, with the National Solar Mission (NSM) and the Gujarat solar policy, solar PV was supported through preferential feed-in-tariffs (FiTs). Now, solar Renewable Purchase Obligations (RPOs) for utilities as well as direct power customers (through Open Access) and large captive power consumers are supposed to create a demand side pull to complement the supply side push.

So-called obligated entities, who have to fulfill RPO quotas have four options. They can avoid fulfilling their obligations, in which case they could be penalized. Alternatively, they can purchase solar power from the market or generate their own solar power. The fourth option is to buy Renewable Energy Certificates (RECs) to meet the quota. Solar plant owners, who sell their power outside of preferential FiTs

to the grid, generate these certificates. This offers a new type of project to solar project developers. They can find an off-take for their power under market conditions and simultaneously generate RECs.

The REC mechanism comes with the risk of uncertainty of REC pricing. While there is a fixed REC floor price of `9,300 (143)* per REC (equivalent to 1MWh), there is some uncertainty on the pricing post 2017. BRIDGE TO INDIA estimates that REC prices will be in the band of `2,200 (34) per REC to `4,000 (62) per REC between 2017 and 2022. The most significant risk, is of the lack of enforcement of RPOs. This is allayed to a certain extent from the market data for non-solar RECs. Judging by the performance of the non-solar REC market and indications from the regulatory bodies, BRIDGE TO INDIA predicts that there will be a strong move by states to fulfill their RPOs.

* All values are at 1 = `65 (long-term average rate)

Indian solar policies initially focussed on

supply side measures.

Now, solar RPOs are supposed to create a

demand side pull.


2. THE RENEWABLE

ENERGY CERTIFICATE MECHANISM

2.1 BACKGROUNDRECs are a market mechanism to facilitate the compliance of RPOs. RPOs are enforced on three categories of power consumers distribution licensees, Open Access consumers and captive consumers. The obligations are driven by the National Action Plan on Climate Change (NAPCC) that aims at 15% renewable energy in the overall energy mix of India by 20201. There are two categories of RPOs solar and non-solar. States in India are free to set their own RPOs in line with the recommendations from their State Electricity Regulatory Commissions (SERCs). The table below lists the major states with solar-RPO quotas2.

Figure 2-1: RPO requirements of selected states in IndiaState Solar RPO

(2012-2013)Andhra Pradesh 0.25%Gujarat 1.00%Haryana 0.50%Himachal Pradesh 0.25%Karnataka 0.25%Kerala 0.25%Madhya Pradesh 0.60%Maharashtra 0.25%Punjab 0.07%Tamil Nadu 0.05%Uttar Pradesh 1.00%Uttarakhand 0.25%

Renewable energy resources are distributed differently across each state in India. The RECs are aimed at addressing this mismatch between the availability of renewable energy resources in states and their RPO requirements. Obligated entities have the option of purchasing RECs to fulfil their RPOs.

2.2 SOLAR RECSIn line with RPOs, there are two categories of RECs solar and non-solar. Solar RECs include both PV and CSP technologies. Non-solar RECs include a basket of renewable energy technologies such as wind, biomass, biofuel cogeneration and small-hydro. RECs are traded on the Indian Energy Exchange (IEX) and the Power Exchange of India Ltd. (PXIL). The IEX currently has a leading market share of 91%.

1 REC = 1MWh

Every MWh of solar energy produced generates one REC. Solar RECs are traded once, on the last Wednesday of every month. The trade price is discovered based on their demand and supply. In addition, and in order to provide a minimum of certainty on REC prices, the Central Electricity Regulatory Commission (CERC) has fixed a floor and forbearance price for the period 2012 to 2017 between which the RECs can be traded.

Figure 2-2-1: Floor and forbearance prices3

Floor Price `9,300 (155)Forbearance Price `13,400 (223)

Although the REC market was established on February 2011, the solar REC market has been largely inactive. The first trading of solar RECs was in the session of May 2012. The demand for solar RECs was 1,637, far greater than a total of 149 available on the supply side.

1 Government of India, The Prime Ministers Council on Climate Change, National Action Plan on Climate Change 2 State Electricity Regulatory Commission Orders. For a complete list, see Annexure 13 REC Registry



Source: BRIDGE TO INDIA


Every MWh of solar energy produced

generates one REC.

RECs are traded on the Indian Energy

Exchange (IEX) and the Power Exchange of

India Ltd. (PXIL).

http://bit.ly/Nw01lL


None the less, there were only five RECs traded at a price of `13,000 (200), indicating that the selling price bid was far too high. The lack of activity on the solar REC market can be attributed to the lack of solar REC projects supplying the certificates. Indias first solar REC project to start trading is a 2MW project in Madhya Pradesh developed by M&B Switchgears Limited.

Going ahead, the supply of solar RECs is likely to be bolstered by six additional projects that are currently registered.

4 REC Registry5 105 KW6 The REC Registry lists this project as 1.055MW7 REC Registry8 REC Registry

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Figure 2-2-2: Projects registered under the REC Mechanism (August 2012)4Project State Capacity (MW)Jaibalaji Business Corporation Pvt.Ltd. Maharashtra 1.0Omega Renk Bearings Pvt.Ltd. Madhya Pradesh 0.15 M/S Gupta Sons Madhya Pradesh 0.5Jain Irrigation Systems Ltd. Maharashtra 8.5Kanoria Chemical & Industries Ltd. Rajasthan 5.0Numeric Power Systems Ltd. Tamil Nadu 1.16

M&B Switchgears Ltd. Madhya Pradesh 2.0

2.3 LESSONS FROM THE NON-SOLAR REC MARKETWhile the solar REC market has just taken off, the non-solar REC market has been active since May 2011. On the supply side, the non-solar REC market is primarily driven by wind energy projects (50% at 1,332MW), followed by bio-fuel cogeneration (23% at 622.5MW) and biomass (20% at 542MW)7 .

Figure 2-3-1: Registered REC projects by renewable energy resource8

BRIDGE TO INDIA, 2012Source: BRIDGE TO INDIA

50%

6%

20%

23%

1%

Wind

Small Hydro

Biomass

Bio-fuel Cogeneration

Solar PV

While the solar REC market has just taken off, the non-solar REC

market has been active since May 2011.

The lack of activity on the solar REC market

can be attributed to the lack of solar REC

projects supplying the certificates.


Figure 2-3-3: History of demand-supply of non-solar RECs11

Figure 2-3-2: Historical non-solar REC demand by consumer category10



On the demand side, distribution companies (DISCOMs) contributed to nearly 76% of the demand for the financial year 2011-2012 followed by captive power producers at 13% and open access consumers at 11%9.

The maximum demand for non-solar RECs occurred towards the end of the financial year between the months of January and March 2012. This suggests that there would be a rush to fulfill the RPOs at the year-end to prevent being penalized. The penalty equals the forbearance price for

solar or non-solar RECs. DISCOMs, driving the demand for RECs currently, are uncertain with regards to the enforcement of the RPOs by their SERCs. Compliance is mandated annually and DISCOMs prefer to weigh their options until the very end of the year. As a result, there is a year-end spike in the demand for RECs by DISCOMs looking to make a rush to fulfill their RPOs. The months of June and July saw demand falling below supply for the first time with relatively lower demand from the DISCOMs early in the financial year.

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0

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9 Indian Energy Exchange10 Indian Energy Exchange11 Indian Energy Exchange

The maximum demand for non-solar RECs

occurred towards the end of the financial

year between the months of January and

March 2012.

The months of June and July saw demand

falling below supply for the first time.

http://www.iexindia.com/index.htmhttp://www.iexindia.com/index.htmhttp://www.iexindia.com/index.htm


While strong demand in the initial stages of the market is encouraging, some concerns remain. An analysis of the RPO compliance through the purchase of RECs indicates that only 2.49% of the required non-solar RPO is being met (See Annexure 7.2)12 . This indicates that a negligible portion of the obligated entities are currently fulfilling their RPOs. It remains to be seen if this trend continues into the future. Moreover, the urgency to fulfill their RPOs is least at the beginning of the financial year. Non-solar RECs demand fell sharply by 24% by the beginning of the current financial year leading to a consequent fall in prices. For project developers, this leads to a significant cash-flow problem. The CERC is looking to amend the RPO regulations to make the RPO fulfillment mandatory on a quarterly basis rather than annual.

Figure 2-3-4: Historical price discovery of non-solar REC prices13



Judging by the performance of the non-solar REC market, one can draw parallels to the solar REC market. On the demand side, there is an indication of a possible push to fulfill the RPOs from all the three categories of obligated entities.

The supply, which has hitherto been the bottleneck, is likely to correct itself with the registration of Indias first solar REC project. Six other projects are registered and are likely to start active trading in the next 6-9 months. In addition to these factors and

the financial attractiveness of REC projects, one can expect the solar REC market to gain momentum in the next six to nine months. There is a likelihood that DISCOMs will purchase solar power or rely on their corresponding generation arms to meet their solar RPOs. Purchasing solar power will ensure that RPOs are met and more importantly that the DISCOMs receive much needed power. Tata Power and MAHAGENCO in Maharashtra have already shown an indication to put up their own power plants to help meet their corresponding DISCOMs RPOs. However, most states might not have adequate solar resource to incentivize power producers to set up solar projects. Further, setting up solar capacity requires considerable policy support from state governments that is

currently lacking in many states. Many DISCOMs would have to rely on the RECs to meet their RPOs. Captive and open access consumers are relatively smaller players with little or no experience in solar power generation. They would have liquidity concerns since investing in solar plants would mean directing liquidity away from their core businesses. They too would prefer buying RECs.

-500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Feb-11 May-11A ug-11 Nov-11F eb-12 May-12 Aug-12

PriceFloor PriceForbearance Price

12 There is insufficient data from the solar REC market to draw conclusion on solar RPO compliance. However parallels can be drawn 13 Indian Energy Exchange

The lack of supply in the REC market is

likely to correct itself with the registration of

Indias first solar REC project.

A negligible portion of the obligated entities

are currently fulfilling their RPOs.

http://www.iexindia.com/index.htm%0D



06

2.4 PROCEDURES AND TIMELINESThe process of registering a project under the REC scheme is divided into two distinct phases accreditation and registration. The entire process consists of four steps which can (almost completely) be undertaken online. The process of accreditation and registration takes a minimum of 45 days. The issuance of RECs is a recurring activity which takes a maximum of 15 days from the date of application.

Step 1: Fulfill Prerequisites

There are three categories of projects that are eligible for RECs:1. Projects for captive consumption

(self-use)2. Projects for third party sale

(RESCO)3. Projects with a Power Purchase

Agreement (PPA) with a DISCOM

Figure 2-4-2: Solar REC eligibility

Figure 2-4-1: Process of issuance of solar RECs

0 4530day days days

FULFILL PREREQUISITES

ACCREDITATION(SLDC)

REGISTRATION(NLDC)


In order for any of the three categories of projects to be eligible, the following pre-requisites must be fulfilled:1. The project does NOT have any

power purchase agreement to sell the electricity at a preferential tariff or FiT. For example, projects under solar policies, such as the National Solar Mission (NSM) or the Gujarat Solar Policy.

2. The project sells the electricity generated to either:a. The distribution licensee of that

area at a price NOT greater than the average pooled cost of power (APPC) of such a distribution license.

b. To any other licensee, an open access consumer or any other consumer at a mutually agreed price or through a power exchange

3. The project must be grid connected (in order to facilitate independent metering)

The NLDC has not fixed the minimum size for REC projects. It has allowed the state nodal agencies to decide on this. Only Maharashtra, Orissa and Jammu and Kashmir have set the minimum size as 250kW. All other states do not specify a minimum size for REC projects (for a full list please visit the BRIDGE TO INDIA blog).

Step 2: Accreditation with a State Load Dispatch Center

Application for accreditation must be submitted to the State Load Dispatch Center (SLDC). Every state has a designated SLDC which is responsible for scheduling the demand and supply of power in that state. Projects cannot apply earlier than six months prior

to commissioning. The accreditation is valid for five years after which the project must reapply. The process typically takes 30 days from the date of application provided all documents are in the correct order. The project receives a certificate of accreditation.

Step 3: Registration with the National Load Dispatch Centre

After successful accreditation, the project must be registered under the National Load Dispatch Center (NLDC). Projects cannot apply for registration prior to three months from the date of commissioning. The certificate of registration is valid for five years from the date of registration.

Step 3: Issuance of RECs

The NLDC is responsible for the issuance of RECs. Projects must apply for the issuance within three months of generation of the power. Applications for issuance can be made fortnightly i.e. the 1st and 15th of every month. The RECs must be sold within one year from the date of issuance, failing which the RECs will lapse.

The NLDC has not fixed the minimum

size for REC projects. It has allowed the

state nodal agencies to decide on this.

The NLDC is responsible for the

issuance of RECs.

http://www.bridgetoindia.com/blog/


Figure 2-4-4: Details of the registration fees payable to the NLDC

One time registration fees `5,000 (77)One time application processing fee `1,000 (15)Annual charge (to be paid by 1st April) `1,000 (15)Revalidation/Extension fees (End of 5 years) `5,000 (77)Taxes and duties 12.36%

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Figure 2-4-5: Details of the issuance fees payable to the NLDC

Application for issuance `10 per REC (0.15)Taxes and duties extra 12.36%


Figure 2-4-3: Details of the accreditation fees payable to the SLDC

One-time application processing fee (paid to state agency) `5,000 (77)One-time accreditation charge (paid to state agency) `30,000 (462)Annual charge (to be paid by April 10th) `10,000 (154)

Revalidation/Extension (end of 5 years) `15,000 (231)Taxes and duties 12.36%

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FEES AND CHARGES


3. IS THE SOLAR REC MARKET

VIABLE?The viability of the REC market is linked to three crucial factors: demand, supply and the price visibility for solar RECs.

The demand for solar RECs is driven by the enforcement of RPOs on the obligated entities. Although official data on RPO compliance is yet to be released, the performance of the non-solar REC market shows that demand is robust but limited. A few DISCOMs, for example those in the state of Punjab, have not met their RPOs for the financial year 2011-12. The Punjab Electricity Regulatory Commission (PERC) allowed the Punjab State Power Corporation Ltd to carry over the obligations to the Financial Year 2012-13 (April to March)14 .

The enforcement of RPOs remains the weak link in the REC mechanism. The

CERC has allayed concerns to suggest that RPOs will be enforced strictly. The RPOs stem from the NAPCCs target of generating 15% renewables in the overall energy mix by 2020. There is an ongoing effort by the CERC through the Forum of Regulators (FoR) to convince SERCs to comply with the regulation.

BRIDGE TO INDIAs analysis indicates that the total capacity of REC projects would be 868MW by 2016. It is assumed that only 25% of the RPO requirements will be fulfilled through the REC mechanism. The remaining 75% is assumed to be fulfilled by obligated entities through the direct purchase of solar power. This projection is based on the total solar RPO requirement of each state and a probability factor that obligated entities will achieve their RPO.

Figure 3-1: Expected solar PV capacity based on the REC mechanism (year-on-year)15

14 The Hindu - Punjab ERC allows state DISCOM to carry forward renewable purchase obligations. Dated 17th May 2012. 15 Source: BRIDGE TO INDIA analysis

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The enforcement of RPOs remains the

weak link in the REC mechanism.

BRIDGE TO INDIA's analysis indicates that

the total capacity of REC projects would be

868MW by 2016.

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http://bit.ly/LOqL1Vhttp://bit.ly/LOqL1V


Figure 3-2: Derivation of expected solar PV capacity based on the REC Mechanism (year-on-year)16Year 2012 2013 2014 2015 2016I. Total solar RPO requirement

2,027 2,985 3,944 4,788 5,964

II. Solar RPO fulfilled through policies17

928 1,728 2,558 3,533 4,543

III. Remaining solar RPO requirement (I-II)

1,099 1,257 1,386 1,255 1,421

IV. Solar RPO fulfilled through the direct purchase of solar power

824 943 1,040 941 1,066

V. Remaining solar RPO requirement (III-IV)

275 314 346 314 355

Probability Factor 18 10% 35% 50% 70% 95%Expected/required solar REC projects

27 110 173 220 337

BRIDGE TO INDIA expects that the total number of solar RECs traded is likely to touch 480m by the year 2016 based on the aforesaid assumptions.

On the supply side, the solar REC market has recently commenced trading and not enough data is available to draw conjecture. With seven solar REC projects already being registered, the supply issue should correct itself in the next six to nine months.

The financial viability of REC projects strongly hinges on the REC prices over the lifetime of the project. The CERC has provided some visibility on the REC prices by fixing the floor and forbearance price between 2012 and 2017. While this instils some confidence, investors and banks are still cautious.

REC prices (2017-2022)

Although the REC price range has been fixed until 2017 by the CERC, there is considerable concern over REC price visibility post 2017. The CERC is unlikely to announce solar

REC prices post 2017 until the current control period (2012-2017) comes to an end. In such a case, projecting REC prices becomes very important in order to estimate the financial viability of solar REC projects.

The REC price band is determined by CERC through the following formula:Floor price = LCOE of solar energy (at 0% ROE) minimum APPCForbearance price = LCOE of solar energy (at 16% ROE) minimum APPC

The floor price is calculated based on the difference between the cost of generating solar energy at 0% Return on Equity (RoE) and the state with the least APPC. The forbearance price is calculated based on the difference between the cost of generating solar energy at 16% ROE and the state with the lowest APPC.

In order to project REC prices post 2017, APPC and solar LCOE prices have been projected. BRIDGE TO INDIAs analysis shows that grid parity is likely to be achieved by 2022 across all the states in India.

16 Source: BRIDGE TO INDIA analysis17 Through the state policies and the National Solar Mission.18 It is assumed that only 10% of the obligated entities will fulfill their RPO in 2012 which will slowly ramp up to 95% by 2016.

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Source: BRIDGE TO INDIABRIDGE TO INDIA expects that the total

number of RECs traded is likely to touch 480m

by the year 2016.

The CERC is unlikely to announce solar REC

prices post 2017 until the current control period (2012-2017)

comes to an end.


19 Source: BRIDGE TO INDIA analysis20 CERC. Petition number 142/2011. Determination of forbearance and floor price for REC framework.21 Average annual increase in APPC prices across India between the years 2001 2011.22 Terms and Conditions for CERC, Tariff determination from Renewable Energy Sources Regulations, 2012. Published 06.02.2012.23 McKinsey: Solar Power - Darkest Before Dawn; 201224 Source: BRIDGE TO INDIA analysis



0.001.002.003.004.005.006.007.008.009.00

10.00

2010 2012 2014 2016 2018 2020 2022 2024

INR/

kWh

APPC TariffLCOE of solar

Figure 3-3: India solar and grid price projections15

States like Tamil Nadu will see grid parity being achieved much earlier, around 2017 due to higher APPC prices of `3.38 (0.05)/kWh20. The state of Kerala will be the last state to achieve grid parity in 2022 based on the current APPC price of `1.9 (0.02)/kWh. Since the floor and forbearance price is based on the state with the lowest APPC, the REC prices are likely to be defined by the CERC until 2022.

Figure 3-4: Assumptions for the projection of solar and grid pricesAssumptionsAnnual APPC escalation 5.00%21 CERC solar tariff (`/kWh)22 15.39CERC CAPEX consideration (2012) (`m per MW)

100

CAPEX falls by 40% (2012 2015)CAPEX falls further by 30% (2015-2020)23

Figure 3-5: Solar REC price projections24

(2012-2017) (2017-2022) (2022- )Floor Forbearance Floor Forbearance Floor Forbearance`9,300 ( 155)

`13,400 (223)

`2,200(34)

`4,000(62)

0 0

Given the projection for solar REC prices, the financial viability of REC projects can be modelled over the lifetime of the project. The financial viability for different business models under the REC mechanism is explored in the next section.

BRIDGE TO INDIAs REC pricing model shows that projected REC floor and forbearance prices for the control period 2017-2022 are:

The state of Kerala will be the last state

to achieve grid parity in 2022 based on the

current APPC price of `1.9 (0.02)/kWh.


4.1 BUSINESS MODEL 1: APPC+RECIn this model, the project sells power to the DISCOM at the APPC and in addition avails RECs. The viability of such projects is strongly linked to the APPC in the state in which such a project is being considered. The APPC (2012) across major states is listed below.

Figure 4-1-1: State-wise APPC prices (2012)25

State APPC (`/kWh)Kerala 1.99Madhya Pradesh 2.09Himachal Pradesh 2.23Uttarakhand 2.34West Bengal 2.43Andhra Pradesh 2.50Rajasthan 2.60Maharashtra 2.62Uttar Pradesh 2.62Karnataka 2.66Punjab 2.71Haryana 2.77Gujarat 2.98Tamil Nadu 3.38

In order to arrive at the Equity IRR (EIRR), the following assumptions have been considered.

4. REC BUSINESS

MODELSFigure 4-1-2: Assumptions for determining EIRR APPC + RECAssumptions Annual APPC escalation

5.00%

REC prices2012-2017 `9,300 (155)2017-2022 `2,200 (223)2022-2027 `0 (grid parity

achieved by 2022)CAPEX (per MW)26

`88m (1.3m)

Debt interest rate 6.00%27

CUF 18.00%

The APPC escalation is in line with the average escalation of APPC prices across different states in India. The CAPEX is based on current price trends in the market and is conservative, leaving much room for discount. Debt interest rates are indicative of the financing options that can be availed from international banks that provide export finance. An average Capacity Utilization Factor (CUF) of 18% is considered, which is again conservative and lower than the national average CUF considered by CERC (19%)28 .

BRIDGE TO INDIAs analysis shows that this model is viable for the state of Tamil Nadu for a financial investor looking for a minimum of 15% EIRR. Other states such as Gujarat, Haryana, Punjab, Karnataka, Uttar Pradesh, Rajasthan, Maharashtra and Andhra Pradesh are all attractive to investors who are looking at solar energy strategically (EIRR expectation of 8 to 15%). This model proves unattractive in the states of Kerala, Madhya Pradesh, Himachal Pradesh, Uttarakhand and West Bengal (EIRR of less than 8%).

For a detailed viability analysis and project report contact BRIDGE TO INDIA.

25 CERC. Order on floor and forbearance price. 201226 CAPEX prices as of July 201227 Considering un-hedged loan from a foreign bank.28 CERC. Tariff Order for Renewable Energy. 2011





This model is viable for the state of Tamil Nadu for a financial investor looking for a minimum

of 15% EIRR.


Figure 4-1-3: Financial viability of APPC+REC projects29

Upsides - From a regulatory point-of-view, this business model is relatively easier when compared to the other business models. In general, most DISCOMs are faced with a genuine shortage of power and would be willing to purchase solar power at APPC. This is much lower than the price of solar power under the NSM and various state policies.

One of the key advantages of this business model is the scale of projects. Individual project sizes can be very large (5MW and above), which can bring significant cost advantages. BRIDGE TO INDIA believes that this business model will be popular with developers who have considerable leverage with the DISCOMs. This is critical in order to secure a long-term PPA with the DISCOM.

Risks - The major drawback in this model is the poor financial state of most DISCOMs in the country. This seriously jeopardizes the ability of the DISCOMs to adhere to the PPA and ensure timely payments.

4.2 BUSINESS MODEL 2: RESCO+RECIn this model, the project enters into an independent PPA with a third party (excluding DISCOMs) and, in addition,

RECs are availed. The third party can typically be an industrial, commercial or residential consumer of electricity. The project can either be set up on the customers premises (land or rooftop) or at another location. In both cases, the project must go through the open access route for a third party sale of power.

The viability of such projects is strongly linked to two factors:1. PPA price The negotiated price

of power hinges on the current price being paid by the third party. Commercial consumers pay the highest prices for electricity followed by industrial consumers and then residential consumers. The project developer must offer the third party a tariff that is lower than what the consumer pays currently in order for this solution to be attractive.

2. Strength of the third party to adhere to a long term PPA from a financing perspective, this is a key question.

To obtain the Equity IRR, the following assumptions and PPA prices have been considered. It must be underlined that the assumptions are fairly conservative. The REC prices considered post 2017 are from BRIDGE TO INDIAs REC price forecast (see previous section).

29 Source: BRIDGE TO INDIA analysis

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Equity IRR (%)

APPC

(IN

R/KW

h)

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

KLMP

HPUK WB

AP MHUP KA

PB HRGJ

TN

2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

One of the key advantages of this

business model is the scale of projects.

The major drawback in this model is the

poor financial state of most DISCOMs in the

country.


Figure 4-2-1 Assumptions for determining EIRR RESCO + RECAssumptions30 Tariff escalation 5.00%REC prices

2012-20172017-20222022-2027

`9,300 (155)`2,200 (223)`0 (grid parity achieved by 2022)

CAPEX (per MW) `88m (1.3m)Debt interest rate 12.00%31

CUF 18.00%

Figure 5-5: Financial viability of RESCO+REC projects32

Risks - From a regulatory standpoint, there are several bottlenecks in implementing this model currently. 1. Absence of a net metering policy

Since this model involves signing an independent PPA, it must be assured that the third party consumes 100% of the power generated. In practice, this is not feasible since demand varies with time and season and does not match the generation profile of a solar power plant. In such cases where supply exceeds demand, there must be an option of injecting the excess electricity onto the grid during times of peak demand. The regulations for net-metering are

under discussion with the CERC and will not be implemented before mid-2013.

2. Interconnection and open access The current regulations do not allow the connection of such REC projects at the consumer side (LT side) of the bus. Projects must be connected at the high voltage level at the DISCOM side. For projects that are connected at high voltage under current regulations, any third party sale of power must be registered under open access. However, open access is not an efficient solution when the point of generation and the point of consumption are the same

30 Source: BRIDGE TO INDIA analysis31 Considering debt from an Indian bank.32 Source: BRIDGE TO INDIA analysis

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In cases where supply exceeds demand, there must be an

option of injecting the excess electricity onto

the grid during times of peak demand.

The current regulations do not

allow the connection of such REC projects at

the consumer side of the bus.

15% 20% 25%0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

0% 5% 10

GRID

PRI

CE (I

NR/

kWh)

Equity IRR (%)

EIRR


(example: rooftop power projects). Open access involves wheeling charges, banking charges and grid losses for using the distribution network of the DISCOM. These additional costs reduce the viability of such models. The CERC is currently discussing the option of implementing such third party PPA models as off-grid or semi off-grid models, thereby circumventing the need to go through open access. But at the moment there is no clarity on when such regulation will be framed or implemented.

3. Cross Subsidy Surcharge (CSS) Electricity prices in India are not uniform. Commercial and Industrial consumers subsidize the residential and agricultural consumers by paying higher tariffs. When such high value consumers are lost to other electricity providers, the DISCOMs face disproportionate losses. In order to compensate for this, a CSS is levied. The CSS varies across DISCOMs and is typically in the range of `0.30 to `1.5 per unit. Although there is a strict mandate to reduce the CSS over time, in practice this has not happened and is unlikely to happen in the near future. For the CSS to be completely discarded, the DISCOMs expect an even pricing of power across all consumer categories. This is a politically sensitive matter and is unlikely to be implemented in the near future. In some cases, to promote the development of renewable energy technologies, the CSS can be waived. However, the regulations clearly state that all concessions must be waived off in order to be eligible for REC projects.

4. Wary DISCOMs Most DISCOMs are wary of losing their high value consumers. Since DISCOMs are authorized to approve such projects, most projects are delayed unnecessarily. This is one of the major barriers to the successful execution of this business model.

Upsides - One of the key advantages of this business model is the independence from the DISCOMs. The PPA risk now lies with the power consumer, which can be managed through strong financial diligence. Although the maximum project sizes will not likely be greater than 2MW, the model is scalable across the country. BRIDGE TO INDIA develops its own RESCO+REC based projects for industrial and commercial consumers of power. Investors looking to invest in such projects are invited to contact BRIDGE TO INDIA.

Risks - One of the key challenges for small to medium companies is to manage a geographically distributed portfolio of projects.

4.3 BUSINESS MODEL 3: CAPTIVE + RECIn this model, commercial or industrial consumers of grid electricity set up a solar REC project for the self-consumption of solar power. The amended regulations allow RECs for self-consumption projects. The following criteria must be satisfied as per the Electricity Act 2003, in order to be considered as a captive user:

1. Minimum of 26% stake in the project from the power consumer

2. Minimum of 51% of the electricity should be self-consumed

The financial viability of such projects is linked to the current grid tariff which the consumer pays to the DISCOM. The return on investment for such projects is based on the difference between the cost of generation of solar power and the grid price. In addition, RECs are the crucial trigger for the financial viability of such projects.

The following assumptions have been considered to estimate the financial viability of such models.

For the CSS to be completely discarded,

the DISCOMs expect an even pricing of power

across all consumer categories.

In the captive + REC model, commercial or industrial consumers of grid electricity set up a solar project for the self-consumption

of solar power.


Figure 4-3-1: Assumptions for determining EIRR Captive + REC33AssumptionsTariff escalation 5.00%REC prices (`)2012-2017 `9,3002017-2022 `2,2002022-2027 `0 (grid parity achieved by 2022)CAPEX (`m) 88Debt interest rate 12.00%CUF 18.00%

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Upsides - The key advantage of this model is that it significantly reduces the PPA risk since the power consumer is invested in the project. Tax incentives such as accelerated depreciation can be availed by such captive consumers which will drive this segment. Innovative business models with a group of investors (group captive) would also become feasible.

Risks - From a regulatory standpoint, this model is easier to implement compared to the RESCO+REC model. None the less, the following

Figure 4-3-2: Financial viability of Captive + REC projects

Investor Expectation Equity IRR (%)

GRID

PRI

CE (I

NR/

kWh)

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.00.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

challenges exist:1. Absence of a net metering policy

(as discussed in the previous section)

2. Inability to connect the plant at the consumer side of the low voltage (415V) means that the output from the solar plant will have to be stepped up to at least 11kV. This creates additional costs of transformers and switch-gears which would significantly reduce the viability of such models

33 Source: BRIDGE TO INDIA analysis34 Source: BRIDGE TO INDIA analysis


5. REGULATIONS UNDER

DISCUSSIONThe REC mechanism is relatively new in India and several regulatory loopholes remain. The CERC is considering several changes to the regulations which would be implemented in the coming months. Some of these are:1. Vintage based multiplier: One of

the major concerns is that REC prices over the lifetime of the project must reflect the current capital cost. REC prices would depreciate over time, reflecting the falling cost of capital of a solar plant. This would unfairly disadvantage REC projects since the capital costs are made upfront.

To circumvent this problem, the CERC is mulling a vintage based multiplier. In this mechanism the solar REC projects commissioned in the period 2012-2017 will be issued a multiplicative factor. This factor would be equal to the fall in CAPEX from 2012 to 2017. This factor would be used to issue additional RECs. Assuming that the capital cost falls by 50% in 2017, every REC issued in 2012 would be worth two RECs in 2017.

2. Quarterly fulfilment of RPO: In order to ensure a smoother cash-flow, the CERC is considering a quarterly implementation of the RPOs. This would distribute more evenly throughout the year and prevent year-end spikes in the REC prices. Such a regulation would be beneficial to both project developers (cash-flow) and the obligated entities (year-end high prices).

3. Net Metering: The net-metering scheme being considered by the CERC includes the following topics:a. Connection of renewable

energy source to the grid at lower voltages

b. Accounting and billing c. Safety standards and technical

requirementsd. Taxes and duties (or waivers)

for self-generated electricitye. An overarching policy

framework for distributed energy generation

These regulations would ensure that there is a well-defined policy framework for connecting small scale solar power projects onto the grid. This will reduce the likelihood of unnecessarily delays and complications in such projects.

Secondly, one of the major concerns for such REC projects is over-generation. Instances when the supply exceeds the demand (building is empty, holidays, exceptionally sunny days, etc.), the excess power can be fed into the grid and consumed at a later stage. Such banking regulations are also under discussion and would come as a boon to solar project developers under the REC mechanism.

4. REC for off-grid: Currently off-grid projects are excluded from the REC mechanism. However, with a comprehensive metering policy, the CERC intends to include off-grid projects under the REC mechanism. The main issue with off-grid projects is that responsibility cannot be assigned to the DISCOM for a periodic reading of the solar meter, accounting and reporting the power generated to the SLDC. The DISCOM is currently incentivized to carry out these functions only if the project is grid connected.

One of the major concerns is that REC

prices over the lifetime of the project must reflect the current

capital cost.

Currently off-grid projects are excluded

from the REC mechanism.


Going ahead, it remains to be seen if obligated entities will fulfill their RPOs through the REC mechanism or by directly purchasing solar power. Since DISCOMs have contributed to nearly 76% of the demand, there are questions raised if the demand for solar RECs will continue to remain. There is no clarity on this issue at the moment.

Enforcement of RPOs remains the weak link in the entire REC mechanism and must be addressed immediately by the CERC. There is definite resistance from the DISCOMs in meeting their RPOs due to the additional burden placed on them. A recent report released by the FoR concludes that the additional burden caused by the implementation of RPOs is less than `1.0 per unit35 which indicates that the resistance is purely notional.

REC based models will define the distributed solar landscape in India in the coming years. BRIDGE TO INDIA endorses the RESCO+REC model and is currently developing a pipeline of such projects across India. Investors, who are looking to engage with the REC model, are invited to contact BRIDGE TO INDIA.

The weakest link in executing this model currently is the absence of clear regulations on connectivity and metering. The CERC is actively tabling these regulations. However,

the window period (2012-2017) for the REC floor and forbearance prices is running out. This period of REC prices is guaranteed only until March 2017. Every months delay in announcing these regulations will seriously jeopardize the financial viability of REC projects. First movers in this space have a significant advantage since REC prices are surely going to reduce post 2017. For a detailed, time-bound and customized financial analysis of the three business models, contact BRIDGE TO INDIA for project development consulting services.

The financing of REC projects is another weak link as Indian banks remain wary of the REC mechanism. The market will start with smaller kilo-watt scale projects being fully leveraged (100% equity). Once sufficient data is available from the REC market and a proof of concept is established through working models, this situation is likely to change. Banks currently prefer a wait-and-watch approach to take a call on the REC mechanism.

Despite these challenges and risks, the REC mechanism remains an attractive off-take option for project developers in the medium term (2012 to 2022). The REC market remains a key off take-option as the market moves away from subsidies to commercially viable models.

35 Forum of Regulators. Assessment of achievable potential of new and renewable energy resources in different states during 12th plan period and determination of RPO trajectory and its impact on tariff. 2012.

Enforcement of RPOs remains the weak

link in the entire REC mechanism and

must be addressed immediately by the

CERC.

The financing of REC projects is another weak link as Indian

banks remain wary of the REC mechanism.

6. CONCLUSIONS AND RECOM-MENDATIONS


7. ANNEXURE7.1 STATE-WISE RPO QUOTAS (2012-2013)36 State Non-Solar RPO Solar RPOAndhra Pradesh 4.75% 0.25%Arunachal Pradesh 4.10% 0.10%Assam 4.05% 0.15%Bihar 3.25% 0.75%Chhattisgarh 5.25% 0.50%Delhi 3.25% 0.15%Goa and Union Territories 2.60% 0.40%Gujarat 6.00% 1.00%Haryana 1.50% 0.50%Himachal Pradesh 10.00% 0.25%Jammu and Kashmir 4.75% 0.25%Jharkhand 3.00% 1.00%Karnataka37 10.00% 0.25%Kerala 3.35% 0.25%Madhya Pradesh 3.40% 0.60%Maharashtra 7.75% 0.25%Manipur 4.75% 0.25%Meghalaya 0.60% 0.40%Mizoram 6.75% 0.25%Nagaland 7.75% 0.25%Odisha 5.35% 0.15%Punjab 2.83% 0.07%Rajasthan 7.10% NA38 Tamil Nadu 8.95% 0.05%Tripura 0.90% 0.10%Uttar Pradesh 5.00% 1.00%Uttarakhand 4.50% 0.025%West Bengal 4.00% NA39

7.2 STATUS OF NON-SOLAR RPO COMPLIANCE ACROSS DIFFERENT STATES (2012-2013)40 State Non-solar RPO (million kWh) Andhra Pradesh 3,44041

Assam 137Bihar 172Chhattisgarh 276Gujarat 3,435

36 Source: National Load Dispatch Center. Renewable Purchase Obligations and its compliance (RPO Regulations) by SERC. 37 For BESOM, MESCOM and CHESCO. For other DISCOMs Non-solar: 7% and solar: 0.25%38 Satisfied through 100MW of PPA under the NSM39 West Bengal does not recognize RECs40 Source: National Load Dispatch Center. Renewable Purchase Obligations and its compliance (RPO Regulations) by SERC. 41 Based on the RPO quotas given in Annexure 7.1 and the total electricity demand of each state (CEA).

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http://nldc.in/REC.aspxhttp://nldc.in/REC.aspxhttp://nldc.in/REC.aspxhttp://nldc.in/REC.aspx


Haryana 929Himanchal Pradesh 741Karnataka 5,180Kerala 576Madhya Pradesh 888Maharashtra 7,477Punjab 319Rajasthan 2,089Tamil Nadu 2,433Uttar Pradesh 3,016Uttarakhand 404West Bengal 1,279Orissa 311Delhi 432Total non-solar RPO (MWh) 33,534,056Total non-solar REC traded on exchange

834,103

Percentage non-solar Achieved/Fullfilled through purchase of REC

2.49%

7.3 GLOSSARY OF TERMSAPPC Average Pooled Purchase CostCAPEX Capital ExpenditureCEA Central Electricity AuthorityCERC Central Electricity Regulatory CommissionCSP Concentrated Solar PowerCSS Cross Subsidy SurchargeCUF Capacity Utilization FactorDISCOM Distribution CompanyEIRR Equity Internal Rate of ReturnFiT Feed-in-TariffFoR Forum of RegulatorsIEX Indian Energy ExchangeLCOE Levelized Cost of ElectricityLT Low TensionNAPCC National Action Plan on Climate ChangeNLDC National Load Dispatch CenterPERC Punjab Electricity Regulatory CommissionPPA Power Purchase AgreementPXIL Power Exchange India Ltd.REC Renewable Energy CertificateRESCO Renewable Energy Service CompanyRoE Return on EquityRPO Renewable Purchase ObligationSERC State Electricity Regulatory CommissionSLDC State Load Dispatch Center

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8. GUEST ARTICLE SETTING UP LARGE

SCALE PV: LESSONS FROM NEW MARKETS

One of the most exciting phases for any business is when it enters a new country or market. Arguably, it is also the most challenging. When new business models are introduced in a new market or country, their success depends on a combination of factors unique to a businesss capabilities and the markets requirements.

Solar power businesses have propagated like a green wave across global markets in the past decade. The first mover markets in grid connected PV power were Germany, Japan, Australia, United Kingdom and some states in the USA (New Jersey and California). These markets have pioneered models involving different policies, regulations, revenue streams, businesses and delivery channels, providing a useful point of reference for newer markets.

There has been a significant and dramatic transition in the PV industry with the capital cost of PV power plants falling drastically in the last two years. This has been driven partly by overcapacity in certain parts of the value chain (cell and module manufacturing) and by organic capacity additions in others (polysilicon). As an example, the capital cost of setting up a PV power plant in 2010 in Europe was around `162.5 195 (2.5 - 3.0)/Wp. This value fell by half by the beginning of 2012. Coupled with this, there has been a significant shift in markets both in terms of size and geography.

The combination of these factors has pushed PV businesses to cross over from a technology focused, subsidy driven business to an application centric, market driven one. This has been a turbulent transition and one that is still underway. But, there are

clear signs that once the transition is completed, the PV business will slip into the mainstream energy business and be driven by demand and supply elasticity as opposed to subsidies. This has started to happen already. On the sunny Sunday of August 19th 2012, Germany had 18.6GW of PV power available in the grid, while the total demand was 50 GW.

In many ways, the emerging solar markets are building on the experiences of mature markets, avoiding pitfalls and learning from best practices. There is little sense in reinventing the wheel. Most of the learnings on PV technology, systems engineering and its application, field performance and operations from these pioneering markets can be applied to newer markets with some localization.

That said, there are some learnings that are unique to a given market and cannot be replicated from pioneering markets in totality. Chief among these are regulatory, statutory, investment, taxation, exchange volatility, receivables, project delivery and debt financing amongst others.

Compared to conventional energy projects, PV power plants are, from an engineering point of view, relatively less complex and can be developed and installed much faster a 10MW PV plant in eight to ten weeks is manageable in most mature PV markets. However, as opposed to conventional energy, where technology has matured and is not fast changing, PV witnesses fast changes in technology and hence increases the risk of technology obsolescence. Further, a new technology takes time to demonstrate performance fidelity. Lab test results and actual field performance in varying climatic conditions differ significantly in some cases. A decision on choosing PV technology needs to factor both, the risk of obsolescence and the track record in field performance.

21 BRIDGE TO INDIA, 2012

There has been a significant and

dramatic transition in the PV industry with

the capital cost of PV power plants falling

drastically in the last two years.

In many ways, the emerging solar

markets are building on the experiences of mature markets,

avoiding pitfalls and learning from best

practices.

Mr. Santosh KM, Managing Director,

ENERPARC India


Energy production from PV is a function of technology as well as local meteorology. Modules power degrades with time and the rate of this degradation is also dependent on the technology. An optimal way to select a technology will be to assess the cumulative energy generated over its useful life of 25 years factoring in annual degradation. When practical degradation rates are available, such field data needs to be used to ascertain the energy production. However, a degradation of maximum 0.25% per year is a standardized value for lenders in matured markets.

Another pitfall in technology selection relates to cost assessment. Module level costs alone are not a useful metric to compare project costs. For some module types, the balance of system costs like those of mounting structures, DC cables and land are higher for a given plant capacity. Further, in some countries, labor or land costs are high. As a result, even if a given modules costs are lower, overall project costs may skew in the other direction.

Choosing the right insolation data set and meteorological database for system design is also important. In many countries, real measured data for the proposed installation location may not exist. In such cases, one needs to depend on commercially available meteorological datasets. A range of such data sets exists, but the energy production estimated using them can vary by up to 5%. This can have a significant impact on the projects economics. A pragmatic choice of data is essential to ensure that the theoretical energy estimates are closer to reality. Simulation techniques used also have an impact on energy estimates and a right choice needs to be exercised here as well. Predicting nature remains more an art than a science and a wrong choice may look good on paper but has the potential to adversely affect real project economics.

In countries and markets where solar

energy policies are newly introduced, regulatory uncertainties are a norm in the initial period. Usually, there is a lag between the announcement of a policy and the clarity needed on the various aspects of its deployment. This delay needs to be factored into investment decisions.

Financing is another area that needs focus in new markets. Here, manufacturers, investors and developers need to spend considerable effort and time in interacting with banks and lenders on the nuances of solar energy. This will help lenders understand the solar business. The time taken for a financially viable project to close debt financing tends to be in the order of four to six months in new markets. On the other hand, in matured markets, this can take only four to six weeks as the solar business is well understood and has a proven track record. Also, in certain countries where regulations do not permit foreign currency borrowing or limit the same, access to low cost debt becomes a problem. In countries where local currency is volatile, hedging the currency risk also needs to be factored in. Both of these factors, if not sufficiently understood, have a potential to adversely affect the viability of the investment.

Another risk in new and emerging solar markets is the financial health of end customers (utilities or open access customers) that buy solar energy. As tariffs for solar electricity normally are above the average pool price at which utilities have been historically procuring energy, a detailed assessment of receivable risks needs to be done and adequately factored in to assess the viability of the projects. Local manpower and contractors in such nascent markets will lack experience in executing solar projects.The pioneering risk of executing with local contractors and manpower can sometimes lead to delay in execution. It may also result in improper or ill engineered projects which may impact the projects energy delivery over its life time. On the other hand, having an


Energy production from PV is a function of

technology as well as local meteorology.

In countries and markets where

solar energy policies are newly

introduced, regulatory uncertainties are a

norm in the initial period.


experienced partner executing projects can de-risk these delays.

The mode of project execution in new and emerging markets tend to be lump-sum turnkey EPC contracts along with operations and maintenance contracts for a limited period. Such contracts are an advantage for the developers as it de-risks them from product performance and energy generation passing these risks to the EPC contractors. In markets where local currency is volatile, hedging risks also gets passed on to the EPC contractors in the turnkey EPC model. On the flip side, such contracts will also be expensive and also reduces the developers span of control on the project.

As developers gain experience in PV, there is a tendency in matured markets to move away from turnkey contracts to either an EPCM model or split packages with the system integration responsibility lying with an EPCM company or with the developer directly. There are some tangible financial benefits that the developers derive in an EPCM contracting model. Such contracts tend to drive down the cost of the solar installation by avoiding the cascading effects of the margins. In addition, they provide the developers with extended credit period benefits that OEMs offer and complete control over the selection of the sub-contractors and components. Lastly, they enable developers to derive the benefits of low cost debt financing or equity financing that some OEM suppliers, like module companies, offer.

Grid fidelity, its quality and uptime is another area that needs a detailed assessment in the conception stage of projects. Large megawatt scale solar projects normally are connected to high voltage grids whose quality and uptime will be good and predictable. However, as solar deployment gathers momentum, there is also a tendency for solar plants to be deployed in smaller capacities in a distributed decentralized model largely in

commercial establishments, offices and industries. Such small capacity solar plants may end up connecting to medium voltage or low voltage grids. Such grids in urban and rural areas in emerging markets tend to have a higher downtime due to scheduled and unscheduled power outages. Also, in markets where there is a net deficit of electricity in peak demand periods, the grid quality drops. Solar plants will not be able to export energy in such situations of grid non-availability and this risk needs to be factored into the projects financials.

History has shown that emerging technologies always go through a period of development, demonstration and deployment before entering in to the main stream, depending on the strength and scale of the demand for that technology. Energy is one of the prime needs of societies and the demand for energy is ever increasing, as the ability to support economic growth depends in large part on the availability of energy.

Over the last few years, there is also an increasing awareness to control and mitigate the potentially harmful effects to the environment arising from rapid economic growth. The initial skepticism on human contributed climate change has given way to an acceptance of this effect. Both, Governments and communities are becoming increasingly aware that economic progress should be accomplished without adversely impacting our environment.

Solar energy makes it possible to have the cake and eat it too; to cater to ever increasing energy needs without adversely affecting the environment. As solar energy enters the mainstream, some of the lessons from its growth and development cycle will be important to understand and learn from.


History has shown that emerging technologies

always go through a period of development,

demonstration and deployment before

entering in to the main stream.

As developers gain experience in PV,

there is a tendency in matured markets

to move away from turnkey contracts to

either an EPCM model or split packages.


9. INTERVIEWSHow do you rate the Indian solar market in the international context?

India has for long demonstrated its commitment to green and sustainable energy. Both off grid solar as well as contract manufacturing businesses have existed in India for a long time.

The National solar mission is a bold and proactive step by the Indian Government in enlarging the solar deployment. In a short span of 2 years, India has already commissioned projects in excess of 1 GW. India, as we know, is one of the fastest growing economies in the world and is the second most populous country. However over the last 50 years there has been a chronic shortfall of electrical energy supply over an ever increasing demand. The liberalization of the power generation sector has helped plug this to an extent but non availability of domestic coal and gas in sufficient volumes have resulted in most of the new private conventional energy plants operating below their optimal plant load factors.

India is blessed with more than 300 days of sunshine and solar energy is hence the right technology to plug the energy deficit. As a solar market, India has emerged into the sunshine and will continue to be attractive for many years to come.

What is Enerparcs strategy in India? Will Enerparc focus on projects outside of policy allocation, such as REC?

Generation based subsidy (GBI) projects and merchant energy and carbon trade based projects both have their attractions and in many ways synergies. The GBI route provides a committed revenue stream whereas merchant energy along with carbon trade investments provides a way for solar to be deployed outside the licensing mechanism and driven by market forces.

While we have a clear interest in GBI projects under the policy allocation umbrella, once REC trading stabilizes and one is able to witness its track record, there will be an increased interest from private enterprises to consider projects along merchant and carbon trade route. There are signs of this happening already. Enerparc views both GBI and merchant and carbon trade as two parallel tracks and will have an interest in both these vehicles.

Bankability has been the key challenge for solar projects and in particular REC based projects in India, how do you see this improving? Is it improving?

In India solar energy is categorized under power sector in debt parlance. Banks have already substantial exposure to power sector.

As close to 1 GW of solar projects are now commissioned in India, lenders can now start to get a real feel of asset performance and hence the risk perception would become more tangible and less speculative, thereby easing financing.

While the initial round of solar project bidding saw aggressive and sometimes very bullish energy tariff discounts offered by developers, if the recent Madhya Pradesh bidding result is anything to go by, there seems to be a rationalizing effect and a correction happening with developers getting more aware of real economics of investment. Bankability for such projects that have a workable tariff might not be a concern.

With REC based projects, as trading of solar REC has commenced, once price and volume discovery is done, bankability would improve.

What are the challenges as foreign company entering the Indian market?

India has opened to international investments and the processes are

Mr. Stefan Mueller COO,

Enerparc

For REC based projects, once price

and volume discovery is done, bankability

would improve.


getting progressively better and more transparent from the governmental point of view. The solar market is evolving and businesses need to build in flexibility and agility to enable changing and adopting with the market. Finding skilled manpower with the right entrepreneurial mindset is still a challenge and so is synergizing high performance expectations of the international investor with that of the local team.

How do you see EPC prices in 2013? Where do you see major cost saving potentials?

The big drop in module prices in 2011 was a result of oversupply and this is getting corrected across the solar industry. We do not expect sharp price reductions like the one in 2010 to continue in 2013. There are signs of prices plateauing in 2012. We could expect perhaps a 3-5% reduction in EPC prices driven by module prices in 2013. The main driver for Indian EPC prices are the timing and the efficiency of design and execution.

Other cost elements of EPC are however not seeing significant reduction, in fact there could be some potential upside in some cases, like the volatile rupee exchange rate which has a potential to offset the module price reduction gains.

What are the challenges for the PV industry at the moment and what can be done to overcome them?

Globally, oversupply has been the number one bane of PV industry in the last 2 years. This is getting corrected now to an extent. Upstream costs like those of polysilicon have also dropped significantly in recent years as more capacity addition has happened. This effect of upstream cost reduction is a more sustained one.

Overall the PV industry is still dependent on subsidies but when compared to 4-5 years ago, owing to the dual effects of PV cost and price reduction and increase in conventional electricity tariff, the point at which grid parity will be reached is very near. In fact in some geographies, grid parity is already reached.

How do you rate punitive tariff duties on modules in order to protect the local industry?

The drive to promote local manufacturing is certainly commendable. However in an increasingly globalized world, regulatory intervention in solar trade can have adverse effect on solar industries growth. The larger mission of solar energy is to provide an alternative to fossil fuel, to reduce greenhouse gas emissions and to do this economically. To achieve this end, competitive sourcing and consequently lower capex will lead to increased solar installations. Punitive tariffs will be counterproductive to achieve this end. The solar modules costs are decreasing in proportion to the overall project cost and modules are becoming commoditized. Already transport cost have a tangible effect and this commoditization will drive local production of modules sooner than later.

Finding skilled manpower with the

right entrepreneurial mindset is still a

challenge.

Globally, oversupply has been the number

one bane of PV industry in the last 2 years.


With the first solar RECs having been traded, the REC market seems to be taking off slowly. Do you think that the mechanism will create a robust market outside of NSM?

As opposed to the licensed and competitive tariff based subsidy models already in place in various states, the REC mechanism offers a market driven and a license free vehicle to deploy PV projects. Since RECs have been traded only very recently and in small volumes developers and bankers are not confident of the sustainability of the demand for Solar RECs going forward. The floor price of ` 9.3/ unit ends in 2017. The market is unable to forecast future outlook post 2017. However we are of the opinion that REC trading will not cease in 2017 but would continue and with lower floor prices from the current values. Even a very pessimistic view of prices post 2017 still offers good IRRs to the developer.

REC projects of 1 to 5MW scale are slowly coming up all over India. These are mostly being financed by developers themselves or through financial institutions. Banks have still not played a role here. If the policy makers, regulatory authorities and the ministry take necessary steps to make REC projects bankable, the market will open up dramatically. This will give an immense boost to the investors. In order to achieve this, RPOs needs to be enforced diligently in all the states across India.

Hence we are confident that REC trade enabled merchant power based solar projects will grow and will complement the GBI based solar investments with an equal or better installation base.

Financing is a key issue, especially so for REC projects. What can be done to improve the bankability and ensure availability of finance to such projects?

The concept of bankability in PV modules surfaced when new module

manufacturers started operations and banks were not willing to fund projects with these modules since they had no history in India. For the last two years, grid connect solar projects have existed in India, banks are progressively getting familiar with the business and confidence levels are improving. Banks prefer tier 1 suppliers who have a proven history with qualified management and leadership teams and a strong technology focus. Hence, bankability is nothing but providing assurance to the investors and bankers that the asset will perform through its life-time and provide the returns expected. When bankers see this happening on the ground, they will come forward. It is important that the regulators and the MNRE play a key role to provide confidence to bankers in India by having an approval mechanism for good quality materials and engineering. We already have a few projects in the REC mechanism which are working well. These investors could be good brand ambassadors for the REC mechanism. Projects with premium quality materials and engineering with Tier 1 suppliers from all over the world should be showcased as bankable REC projects. We hope that the banks find this as an attractive investment in the coming years.

India is a unique market requiring indigenous solutions. What can India learn from mature solar market and where does India need to find its own solutions?

India has over 1600 hrs of peak sun annually. We have an abundance of land and our climate is most suited to solar PV unlike the harsh winters in the west. Look at how Europe [Germany, Italy] with even less than 1000 hours /year of peak sun, made it extremely investor friendly to reach double digit GW installations in a matter of five to eight years. Their policies address large MW scale projects and also small rooftop

Mr. Vinay ShettyCountry Manager -

Indian Subcontinent, Canadian Solar

Projects with premium quality materials and

engineering with Tier 1 suppliers from all over

the world should be showcased as bankable

REC projects.


programs. With a well-informed banking system and open market policies these countries with low sun insolation rates are the worlds largest markets. There are a few areas where the Indian solar industry and policies can adopt and learn from other markets. These are 1) creating an investor friendly environment, 2) simplifying complex import duty and local tax structures 3) easing debt finance rates for the green energy sector 4) simplifying policy deployment between several policies NSM plus various state policies 5) facilitating faster land acquisition for solar projects 6) Building expertise in human resources technical, R&D are in tremendous shortage 7) improve grid quality and reliability 8) enforcing RPOs enlarge RPO applicability to a wider consumer base 9) support and promote open market policies and not create trade barriers [anti dumping duty, import duty, etc]. 10) Create a robust program for roof installations and look at options similar to net metering. 11) separate focus for rural electrification and offgrid.

We must learn from mature markets and understand that good quality installations with good quality materials and components only will survive the 25 year life time of PV projects.

The Indian government wants to promote domestic manufacturing through the projects under the NSM. What, according to you, would be the best way to promote high quality and low cost manufacturing in India?

The Indian PV manufacturers have been left far behind with respect to the top manufacturers in China, Taiwan and Korea on manufacturing cost, manufacturing scale, technology and manpower. Hence, several operations in India have shut down. The best way to salvage the situation from here is to 1)open doors for foreign investment

and technology. 2) promote JVs. 3) abolish import duties on raw materials and create an open market for top quality tier 1 PV players to look at India as an investor friendly place to expand their global operations. 4) rationalise the tax structure LST/CST/VAT etc 5)create training institutes for training young engineers 6) and most importantly, discourage monopolistic and unfair trade practices as antidumping duties on imported solar PV modules. These will only create trade barriers and will not help local manufacturing in any way. The dichotomy in current local current requirement prohibiting crystalline silicon module imports while permitting thin film ones also needs to be relooked.

Going forward, do you see sufficient visible domestic demand in the Indian market for Canadian Solar to look at manufacturing locally?

We do see a considerable demand for modules in the coming years. Several States like Madhya Pradesh, Andhra Pradesh and Uttar Pradesh have announced their solar policies. The PV projects based on the REC mechanism are picking up steam. The NSMs phase two offers a good opportunity for us to look at manufacturing options in India. Local manufacturing could also cater to the international markets of Europe and USA in the coming years.

A rationalisation of the Import duties would help. While there is no Import duty on finished modules, import duties are applicable for raw materials like wafers, Al paste, etc. This renders the local manufacturing to be expensive [0.076/Wp-0.114/Wp]than in China.

The other view is that ancilliary units for EVA, tedlar, frames, glass and other raw materials also needs to be available within India to build a strong supply chain.

The Indian PV manufacturers have been left far behind

with respect to the top manufacturers

in China, Taiwan and Korea.

The NSMs phase two offers a good

opportunity for us to look at manufacturing

options in India.


Do you see the REC projects segment meeting RPO demand, or the FiT policy based projects play a bigger role?

The announcement of a feed-in-tariff together with a Renewable Purchase Obligation (RPO) target encouraged renewable energy installations which stand at around 25GW, as on date. Later, as a tool to effectively comply with the RPO targets, the REC Mechanism was introduced. Since implemented in 2010, capacities of more than 3GW, almost 12% of the total renewable energy installations, have been registered to participate in the REC Mechanism.

The framework allows compliance with the RPO target by purchase of renewable energy at the feed-in-tariff rate specified by the appropriate electricity regulatory commission or by purchase of equivalent RECs or through a combination of both. In the medium term, obligated entities may rely primarily on the purchase of renewable energy under the feed-in-tariff route for complying with the targets, since they are tied up under power purchase agreements with the renewable energy generators. The purchase of RECs will essentially meet the incremental targets. However, the REC mechanism has provided a larger amount of flexibility to obligated entities for fulfilling their RPO targets and the purchase of RECs shall be the preferred choice, for complying with RPO targets, in the longer term.

What are your suggestions to make the RPO mechanism more enforceable?

Presently, the RPO compliance term for the obligated entities is on an annual basis. In order to create increasing enforceability of RPO targets, the compliance period may be reconsidered as quarterly or half yearly.

It has been observed that the Electricity Regulatory Commissions in spite of enforcement provisions

allowed the carry forward of shortfall units from one compliance year to another, on account of the non-availability of sufficient renewable energy or RECs. It is expected that this will impact the RPO enforcement clause and also the REC market. Such provisions should be discouraged in order to make the RPO mechanism more enforceable.

However, in order to safeguard the interests of the stakeholders, the electricity regulatory commissions may specify the carry-forward of the shortfall in energy units, for any compliance year, if it is less than the certain percentage specified by the appropriate electricity regulatory commission. Such provisions, for example, have been adopted by the Office of the Renewable Energy Regulator in Australia.

Further, in order to make RPO compliance more enforceable, the liable entities should be imposed shortfall charges which may be refundable in case the liable entities fulfil their RPO targets cumulatively in consecutive years, or any such term as permitted by the electricity regulatory commissions.

Indian PV projects have so far showed varied performance and quality of project execution. What can be done to further improve their standards?

For timely implementation of solar projects and improving their quality of execution, it is necessary to the make relevant information required at each level of the project cycle available to the stakeholders in a transparent manner. From the results seen so far, it is expected that the projects under the central or state level policy schemes will be developed by the involvement of both, the experienced as well as less experienced project developers. The successful implementation and timely commissioning of projects requires the completion of many stages of approvals and clearances from various agencies, especially for the availability

Mr. Jens BurgtorfCSO, Director,

Indo-German Energy Program, GIZ

In order to create increasing

enforceability of RPO targets, the

compliance period may be reconsidered

as quarterly or half yearly.


of land, permission for evacuation of power, permissions for construction and operation, and its financing.

GIZ, in coordination with the MNRE initiated the development of a web based platform SOLAR GUIDELINES which will facilitate the dissemination of the latest information on the development of projects, policies by central and state governments, regulatory frameworks specified by the appropriate electricity regulatory commission, contractual agreements, and details of approval and clearances required for the timely commissioning and financial closure of solar installations.

What is the one key policy measure that India can learn from Germany with regards to decentralized energy solutions?

A key policy measure that made Germany one of the worlds leading ma

Bridge to India_india Solar Decision Brief_the Rec Mechanism

Documents

ibc solar

sponsorscanadian solar

gw of solar modules

pv power plants

india bridge

total power

photovoltaic installations

key components