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Report and Recommendation of the President to the Board of
Directors
Project Number: 44941 April 2011
Proposed Guarantee Facility Solar Power Generation (India)
In accordance with ADB's public communications policy (PCP,
2005) this abbreviated version of the RRP excludes confidential
information and ADB's assessment of project or transaction risk as
well as other information referred to in paragraph 126 of the
PCP.
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CURRENCY EQUIVALENTS (as of 1 February 2011)
Currency Unit Indian rupee/s (Re/Rs)
Rs1.00 = $0.022
$1.00 = Rs45.91
ABBREVIATIONS ADB Asian Development Bank ASEI Asia Solar Energy
Initiative CERC Central Electricity Regulatory Commission CO2
carbon dioxide DMC developing member country ESMS environmental and
social management system GUVNL Gujarat Urja Vikas Nigam Limited
MNRE Ministry of New and Renewable Energy NSM National Solar
Mission NTPC National Thermal Power Corporation NVVN NTPC Vidyut
Vyapar Nigam PCG partial credit guarantee PPA power purchase
agreement REC renewable energy certificate RPO renewable purchase
obligation SEB state electricity board SERC state electricity
regulatory commissions SPV special purpose vehicle TA technical
assistance
WEIGHTS AND MEASURES kWh kilowatt-hour m2 square meter MW
megawatt MWh megawatt-hour
GLOSSARY
Insolation Insolation or irradiance is a measure of intensity
and availability of sunlight in a given location which can be
converted to electricity either through photovoltaic solar panels
or concentrating solar thermal power technology.
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NOTES
(i) The fiscal year (FY) of Indian banks and companies ends on
31 March. FY before a calendar year denotes the year in which the
fiscal year ends, e.g., FY2000 ends on 31 March 2000.
(ii) In this report, $ refers to US dollars.
Vice-President L. Venkatachalam, Private Sector and Cofinancing
Operations Director General P. Erquiaga, Private Sector Operations
Department (PSOD) Director M. Barrow, Infrastructure Finance
Division 1, PSOD Team leader D. Purka, Senior Investment
Specialist, PSOD Team members C. Gin, Senior Counsel, Office of the
General Counsel S. Gupta, Principal Investment Specialist and Unit
Head, Private Sector
Operations, India Resident Mission, PSOD V. Medina, Safeguards
Officer, PSOD J. Munsayac, Social Development Specialist, PSOD A.
Patil, Investment Specialist, PSOD A. Porras, Safeguards Officer,
PSOD B. Raemaekers, Senior Financing Partnership Specialist
(Guarantees
and Syndications), Office of Cofinancing Operations In preparing
any country program or strategy, financing any project, or by
making any designation of or reference to a particular territory or
geographic area in this document, the Asian Development Bank does
not intend to make any judgments as to the legal or other status of
any territory or area.
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CONTENTS
Page
FACILITY SUMMARY
I. THE PROPOSAL 1II. BACKGROUND AND RATIONALE 1
A. Project Identification and Selection 1B. Sector Background
2C. Alignment with ADB Strategy and Operations 4
III. THE FACILITY 5A. Facility Description 5B. Development
Impact 6C. Environment and Social Dimensions 7D. Program Financing
Plan 8E. Implementation Arrangements 9F. Projected Operational and
Financial Performance 10G. Guarantee Pricing 11
IV. THE PROPOSED ADB ASSISTANCE 11A. The Assistance 11B.
Justification for ADB Assistance 12C. Risks and Mitigation Measures
13D. Assurances 15
V. RECOMMENDATION 15
APPENDIXES 1. Design and Monitoring Framework 17 2. Indias
National Solar Mission 19 3. Pipeline of Solar Power Generation
Projects 26 4. Summary Poverty Reduction and Social Strategy 29 5.
Summary Environmental and Social Management System 32 6. Partner
Bank Due Diligence List 37 7. Summary Guarantee Term Sheet and
Project Eligibility Criteria 38
SUPPLEMENTARY APPENDIXES (available on request) A. Economic and
Financial Analysis of Representative Solar Power Project B. Credit
Analysis of NTPC Vidyut Vyapar Nigam C. Credit Analysis of Gujarat
Urja Vikas Nigam Limited D. Due Diligence Report of Norddeutsche
Landesbank Girozentrale (Nord/LB)
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FACILITY SUMMARY Facility Description A facility whereby the
Asian Development Bank (ADB) will issue partial
credit guarantees (PCGs) in an aggregate amount of up to $150
million of principal (or its equivalent in Indian rupees or other
foreign currency acceptable to ADB), in favor of foreign and local
commercial banks lending to solar power generation projects in
India. The facility will support multiple projects up to a maximum
size of 25 megawatts (MW) under a solar power program with the
central or state government. Under the facility, ADB will issue
PCGs to guarantee scheduled payments of principal and interest
under loans to be provided by foreign or local commercial banks.
The PCGs will be provided without government counter-guarantee.
Classification
Targeting classification: General intervention Sector
(subsector): Energy (Renewable energy) Themes (subthemes):
Environmental sustainability (eco-efficiency);
economic growth (promoting economic efficiency and enabling
business environment); capacity development (institutional
development); private sector development (private sector
investment)
Location impact: National (high), regional (medium), rural
(medium) Partnership: Foreign and local commercial banks,
development partners
Environmental and Social Safeguards Classification
Environment: FI Involuntary Resettlement: FI Indigenous Peoples:
FI
Impact, Outcome, and Benefits
The outcome will be the demonstration of the profitable and
sustainable solar power generation plants under the National Solar
Mission (NSM) and state power schemes, which will contribute to the
growth of Indias power generation supply through low carbon
resources. The impact will be successful implementation of phase I
of the NSM, increased foreign direct investment by the private
sector in the solar power industry and long-term cost reduction for
solar power in India.
Project Borrowers and Sponsors
Projects will be implemented by special purpose vehicle
companies, incorporated in India, which will develop, construct,
commission, and operate solar power generation projects. Project
sponsors will include local and foreign investors with at least 50%
of their shares held by private sector entities.
Guaranteed Lenders
Select local and foreign commercial banks operating in the
project finance market in India. ADB will conduct due diligence and
seek the Investment Committees approval of each partner commercial
bank to be eligible under the facility. ADB will not issue PCGs to
any single lender that in aggregate would exceed 40% of the
facility.
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ii
Proposed ADB Assistance
A guarantee facility of $150 million backed by the ordinary
capital resources of ADB. Project loans under the facility will
have a term of up to 15 years (18 years in some exceptional cases)
including a grace period of up to 1 year, and other terms and
conditions as approved by ADBs Investment Committee. The guarantees
will partially cover nonpayment by the borrower. The net present
value of the guaranteed outstanding principal and accrued interest
will not exceed 50% of the loan amount for the project.
Implementation Arrangements
Projects will be initially screened by partner commercial banks
and assessed as to whether they are in line with ADBs eligibility
criteria for the facility. Banks will conduct due diligence in
accordance with ADBs requirements and in line with ADB policies on
anticorruption, safeguards, integrity, and procurement. ADB will
conduct due diligence on partner commercial banks and submit this
to the Investment Committee prior to any guarantees being issued.
PCGs will be materially in line with the agreed terms for the
facility. Appropriate facility limits and other sub-limits on
sponsors, partner banks, and projects will be maintained, unless
otherwise approved by the Investment Committee.
Risks and Mitigating Measures
Key risks examined and mitigated during due diligence include
(i) technology risk and equipment manufacturer risk; (ii) sponsor
risk; (iii) off-taker risk; (iv) regulatory risk, (v) risk sharing
with partner banks, (vi) lack of technical expertise of partner
banks in the evaluation of solar energy projects, and (vii)
selection of partner banks. These risks will be mitigated by: (i)
establishment of well defined eligibility criteria for equipment
manufacturers and sponsors, (ii) appropriate structuring of the
facility, (iii) the strong commitment of the government to support
solar power projects, (iv) continuous involvement of ADB in the
selection process of each of the partner banks, (v) parallel
technical assistance provided by international solar experts, and
(iv) detailed evaluation of potential local commercial banks.
Justification / ADB Value-Added
ADB assistance (through the facility and parallel technical
assistance) will help solar projects close affordable long-term
financing, which is a necessary condition for the viability of a
solar power project. ADBs assistance will mobilize the
participation of local and foreign commercial banks with little or
no experience in solar energy in India. The assistance will
demonstrate the commercial viability of utility-scale,
grid-connected solar photovoltaic technology in India.
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I. THE PROPOSAL
1. I submit for your approval the following report and
recommendation on a proposed guarantee facility for solar power
generation projects in India. The design and monitoring framework
is in Appendix 1.
II. BACKGROUND AND RATIONALE
A. Identification and Selection
2. Asian Development Bank (ADB) technical assistance (TA)
supports the Ministry of New and Renewable Energy (MNRE) in the
formulation and implementation of Indias National Solar Mission
(NSM), announced by the Government of India in January 2010. 1 The
NSM intends to commission 20,000 megawatts (MW) in grid-connected
solar power generation by 2022 to help fill persistent energy
shortages with diversified low-carbon power generation, secure its
energy independence using indigenous resources, and become a
manufacturing hub for the solar energy industry in Asia. 3. During
TA implementation, ADB staff engaged the MNRE in various
discussions on how to encourage private sector investment in and
financing of solar projects under the NSM program. This included
specific assistance on drafting a bankable power purchase agreement
(and a subsequent power sales agreement with the states),
transparent eligibility guidelines and selection criteria, and an
enhanced regulatory framework for green energy. All parties
stressed the importance of long-term financing and the impact of
its cost on the levelized cost2 of solar electricity. Given the
high up-front but low operating cost profile of solar power
generation, the profile, tenor, and cost of debt play a significant
part in optimizing costs and viability; and have been the main
focus of ADBs efforts in this area. 4. As the MNRE defined the
details of the NSM program, it became clear to the project team
that the first phase projects would be relatively small (2 MW25
MW), mostly solar photovoltaic projects. Based on current cost
estimates (about $3,000$3,300 per kilowatt of installed capacity),
the total costs of such projects are likely to be too small for
direct ADB lending. The challenge thus became how to support the
financing of multiple small solar projects that would demonstrate
their viability in the context of Indias operating and climatic
environment. ADB discussed various financing structures and support
mechanisms with local and foreign commercial banks. Based on the
feedback received from these banks, there is an immediate window of
opportunity for ADB to make a real impact in this nascent but
critically important sector, by mobilizing available commercial
funds into solar projects and building capacity within the local
banks on the technical and commercial risks of solar power
projects. This iterative consultation process led to the design of
a multi-project partial credit guarantee (PCG) facility structured
to provide long-term financing and share commercial risks between
banks and ADB for the first wave of solar projects. Commercial risk
mitigation and extension of debt tenors are critical to ensure the
bankability and viability of, and to lay the groundwork for, a
sustainable solar program.
1 ADB. 2008. Technical Assistance to India for Integrated
Renewable Energy Development. Manila (TA 7099-IND).
This ongoing TA will fulfill ADBs participation requirement for
nonsovereign guarantee operations. 2 Levelized cost refers to the
present value of the total cost of constructing and operating a
generating plant over its
economic life converted on an annual basis.
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2
B. Sector Background
5. As of October 2010, installed power generation capacity in
India was 167,278 MW, 64.9% of which is fired from thermal sources
(coal and gas), 22.3% from hydropower, 2.7% from nuclear power, and
10.0% from renewable energy. Indias growth rates in energy
consumption are much higher than the gross domestic product growth
rate, reflecting an increasing share of energy investment. Indias
energy sector contributes about 58% of the countrys greenhouse gas
emissions.3 6. Solar energy is abundant in India, with high
insolation measured at about 300 sunny days on average per year4
and estimated to be 5 billion megawatt-hours (MWh) per year of
energy over Indias land area. Most regions receive 47
kilowatt-hours (kWh) per square meter (m2) per day; the national
average is 4.5 kWh/m2/day. This rate of insolation is among the
highest in the world, comparing favorably with Australia (4.7
kWh/m2/day) and ahead of the Peoples Republic of China (3.4
kWh/m2/day) and Western Europe (2.9 kWh/m2/day).5 Effective
unlocking of this huge potential, through photovoltaic or
concentrating solar thermal power development, provides the ability
to generate power on a distributed basis and enables rapid capacity
addition with relatively short lead times (e.g., less than 1 year).
7. From an energy independence and security perspective, solar is
the most secure of all sources since it is renewable and abundantly
available. Given the large number of poor and unserved people in
India, all efforts need to be made to exploit this source of
energy. Solar projects can be flexibly sited within high insolation
areas to avoid competing for scarce land that may have other
productive uses. The acquisition of land has become a major hurdle
for infrastructure development projects in India and other
developing member countries (DMCs). While domestic coal-based power
generation is the cheapest electricity source today, future
scenarios suggest that this could change. Under current electricity
deficit conditions and looming domestic coal shortages, peak energy
prices could reach Rs8.50 per kWh ($0.18 per kWh) as the country
begins to partly rely on imported coal to meet its energy demand.
Given energy shortages, India is increasing the use of diesel-based
electricity, which is both expensive (up to Rs15.00 per kWh) and
polluting. 8. The NSM is an initiative of the central and state
governments to promote ecologically sustainable energy growth while
addressing Indias energy security challenge. It will constitute a
major contribution by India to the global effort to meet the
challenges of climate change. The NSM helps implement some of
Indias objectives under the National Action Plan on Climate Change,
which recognizes that solar energybecause of Indias tropical
climate and abundant sunshinehas great potential as a future energy
source and will enable the decentralized distribution of
electricity production. However, solar power generation is the
least developed form of renewable energy in India because of
technical and financial challenges (Table 1).
3 Agence France-Presse, 2010. 4 Government of India, Ministry of
Power, Central Electricity Authority. 2010. Monthly Power Sector
Report: April
2010. New Delhi. 5 Conergy. 2009. Deployment Challenges for
Large Scale On-Grid Solar PV Implementations. Singapore.
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Table 1: Renewable Energy in India (MW)
Source Potential Installed FY2009 Cumulative Installed Biomass
16,881 131 834 Wind 45,195 683 10,925 Small hydro (up to 25 MW)
15,000 129 2,558 Cogeneration (bagasse) 5,000 253 1,302
Waste-to-energy 2,700 4 65 Solar (under the National Solar Mission)
20,000 3 6
Total 104,776 1,203 15,690 MW = megawatt. Source: Ministry of
New and Renewable Energy.
9. Unfortunately, the total costs (capital and operating costs)
for solar power generation are currently much higher than for
thermal power stations, which are centralized and sized to reap
economies of scale (e.g., 2,0004,000 MW). One of the objectives of
the NSM is to create conditions (through a rapid scaling up of
capacity, technological innovation, and indigenization) that will
drive down the capital costs of solar power generation toward grid
parity.6 The NSM aims to achieve grid parity (peak energy) by 2022
and parity with coal-fired thermal power by 2030. As more solar
capacity is installed globally, production costs for panels and
other components will decrease as a result of economies of scale
and manufacturers locating production facilities close to demand in
Asia. This cost trajectory will depend on the scale and pace of
global deployment, technology development, and transfer of
knowledge. Once solar power costs approach or reach grid parity,
this will facilitate the deployment of smaller and more distributed
power generation stations that can serve more remote and nonurban
locations where Indias poor are concentrated. 10. The objective of
the NSM is to establish India as a global leader in solar energy by
creating the policy conditions for rapid diffusion of technology
and investment across the country. The NSM will adopt a three-phase
approach, spanning the remaining period of the Eleventh Five Year
Plan, 200720127 and first year of the 12th plan (1,000-2,000 MW of
utility-scale capacity by 2013) as phase 1; the remaining 4 years
of the 12th plan as phase 2 (4,00010,000 MW added by 2017); and the
13th plan as phase 3 (20,000 MW by 2022). The NSM will evaluate
progress against plan milestones to review capacity and targets for
subsequent phases based on emerging cost and technology trends, so
as to protect the government from heavy subsidy exposure in case
anticipated cost reductions do not materialize as expected. 11. NSM
activities are currently embedded within the existing framework of
the Electricity Act, 2003, but solar-specific regulatory frameworks
and contractual arrangements are being established to facilitate
its development. One of the key regulatory drivers for promoting
solar power is a renewable purchase obligation (RPO) in which a
minimum amount of electricity must be purchased from clean energy
sources by power distribution companies (e.g., varies from 1.0% to
15.0% in Indian states at present). As required by the National
Electricity Policy (2005), the National Tariff Policy (2006) was
amended by the cabinet in January 2011 to mandate that the state
electricity regulators specify a minimum amount of electricity
generated by solar power that must be purchased by power
distribution companies. The solar power purchase obligation for
states will start at 0.25% no later than 2013 and increase up to
3.0% by 2022. 6 Grid parity refers to the cost of electricity on an
Indian rupee per kilowatt hour basis, which is equivalent to
the
current market price for short-term power. 7 Government of
India, Planning Commission. 2008. Eleventh Five Year Plan, 200712.
Delhi.
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12. The Central Electricity Regulatory Commission (CERC) has
issued detailed guidelines for determining feed-in tariffs for
solar power, taking into account current cost and technology
trends. These will be revised on an annual basis for new projects
being commissioned (although presently fixed until the end of March
2012). This will be complemented by a renewable energy certificate
(REC) mechanism to allow utilities and solar power generation
companies to buy and sell certificates to meet their solar power
purchase obligations. In January 2010, CERC announced REC
regulations that enable the interstate trading of such certificates
to meet the RPOs. This will drive utility-scale renewable power
generation, but it is not yet consistently in place across all
statesrepresenting a risk for solar project developers. The NSM
offtake regime, with its blended tariff structure, is therefore
critical in bridging the near-term competitiveness of solar with
other renewable technologies. Short-term adoption is critical in
achieving cost economies of scale and diffusing the technology in
the long term. RPOs of 1%15% of total power purchases have been
established by 18 states based on renewable potential in the state.
When NTPC Vidyut Vyapar Nigam (NVVN) supplies bundled power to
state utilities at the rates determined in accordance with CERC
regulations, those state utilities will be entitled to use the
solar part of the bundled power for meeting their RPOs under the
Electricity Act, 2003. Further information on Indias National Solar
Mission, power purchase schemes, and regulatory framework are in
Appendix 2. C. Alignment with ADB Strategy and Operations
1. Consistency with Strategy 2020
13. The facility is consistent with Strategy 2020, 8 which
emphasizes ADB support for environmentally sustainable development
and private sector development. The facility will expand ADBs
promotion of, and investment in, sound environmental management
while capitalizing on its operational strength, such as
infrastructure development and finance. The strategy seeks to meet
the regions growing energy demand by helping DMCs to develop
environmentally friendly technologies, specifically promoting
energy efficiency and the use of clean energy sources. One of the
key actions is to mitigate climate change by moving DMCs onto
low-carbon growth paths by (i) improving energy efficiency, (ii)
expanding the use of clean energy sources, (iii) reducing fugitive
greenhouse gas emissions, (iv) modernizing public transport
systems, and (v) arresting deforestation. In addition, one of
Strategy 2020s goals is that ADBs cofinanced lending will increase
at a faster rate than ADBs stand-alone financing operations, with a
long-term objective of total annual direct cofinancing exceeding
the value of ADBs stand-alone financing. The facility would be
consistent with this cofinancing goal.
2. Consistency with the Country Strategy
14. Approved by ADBs Board of Directors in June 2009, the India
country partnership strategy, 20092012 emphasizes continued and
sustained infrastructure development (e.g., transport, energy,
urban and water resource management).9 ADBs energy program in India
aims to enhance the impact of the governments initiatives for
demand- and supply-related programs. The planned activities include
(i) developing renewable and alternative energy sources, and clean
generation technology; (ii) reducing technical and commercial
losses in transmission and distribution networks and facilities;
(iii) strengthening interregional transmission capacity; (iv)
bringing demand-side management and energy conservation into
the
8 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of
the Asian Development Bank, 20082020.
Manila. 9 ADB. 2009. Country Partnership Strategy: India,
20092012. Manila.
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5
mainstream; and (v) promoting private sector participation,
while ensuring environmental sustainability, and supporting
institutional strengthening to implement the reforms required by
the Electricity Act, 2003. Key thematic concerns include
environmental sustainability, private sector development, private
sector operations, governance, and partnerships. 15. The facility
complements the current lending and TA program by ADBs South Asia
Department in support of solar power projects in India. There has
been close cooperation between ADBs Private Sector Operations
Department and South Asia Department on the TA program with the
MNRE. In addition, ADB is preparing a $100 million loan in support
of a 500 MW solar park being developed in the state of Gujarat.
Additional TA is proposed for a similar solar park in the state of
Rajasthan for developing solar engineering centers of excellence in
local universities, funding of smart grid transmission management
systems, and vocational educational programs in support of the
solar industry in India.
3. Consistency with the Sector Strategy
16. Under ADBs Energy Policy, ADBs investments will focus on
energy efficiency and renewable energy projects, as well as the
expansion of energy access. Starting in 2013, ADB will increase its
target of clean energy investments to $2 billion a year from $1
billion, in a bid to accelerate low-carbon growth and reduce
greenhouse gas emissions in the region. 10 As part of the policy
implementation, ADB is emphasizing private sector participation as
a tool to enhance energy sector efficiency as a result of
introducing increased competition and increased investable
resources. The objective is to create a framework that makes
investing in the energy sector a commercially viable proposition
and ADB is committed to facilitate direct private sector
participation. 17. The facility is also directly aligned with ADBs
Asia Solar Energy Initiative (ASEI) to (i) facilitate knowledge
sharing and transfer for solar power; (ii) help develop, finance,
and commission 3,000 MW of solar power generation capacity in DMCs
by May 2013; and (iii) pilot test innovative financing mechanisms
and risk mitigation measures specifically for solar power. The ASEI
seeks to stimulate solar power development in DMCs with the goal of
(i) increasing economies of scale to reduce costs and improve solar
energys competitiveness within the grid; (ii) exploiting select
DMCs solar radiation resources to service their fast-growing
electricity demand and utilize their greater availability of land
compared with most developed countries; and (iii) promoting DMCs
potential to become global and regional manufacturing hubs for
solar technology goods and equipment. ADBs solar initiatives in
India have been extensively coordinated with the energy community
of practice.
III. THE FACILITY
A. Facility Description
1. Facility Rationale and Design
18. Commercial banks in India typically lend against fixed asset
collateral or, if insufficient, against corporate guarantees as
opposed to the cash flow and debt service capacity of the project
(i.e., project financing). Banks rely heavily on relationships with
existing borrowers to grow their lending business. This practice
makes it difficult for new companies or borrowers to obtain
financing on reasonable terms or without high collateralization.
With solar projects being
10 ADB. 2009. Energy Policy. Manila.
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relatively small and having some technical risks that cannot be
easily mitigated at the present time, banks remain wary of lending
to solar projects and/or lending beyond their existing corporate
relationships. 19. The facility will help close these gaps by
sharing credit risks with commercial lenders. Supported by parallel
capacity development TA (para. 37), the facility has the twin
objective of (i) making limited recourse debt financing available
on reasonable terms and conditions, and (ii) extending the tenor of
loans to solar projects to recoup the current high capital costs.
ADB would issue PCGs to international and local lenders to cover up
to 50%11 of any nonpayment by the borrowers. The PCGs would cover
any default of scheduled repayments of principal and accrued
interest. This is not a first loss guarantee, which would be paid
prior to any loss sharing by the commercial banks; banks will incur
losses alongside any ADB claims paid.
2. Project Borrowers and Sponsors
20. The projects to be supported under the facility are likely
to be financed through special purpose vehicle companies (SPVs),
established by project sponsors to build, own, and operate the
assets as a stand-alone independent power producer incorporated in
India. Based on the indicative pipeline of projects (Appendix 3),
the SPVs are sponsored by a mix of local and foreign investors with
either experience as power sector operators in India or joint
venture consortia of financial investors and companies with solar
power experience outside of India. The facility will only be
eligible for lenders to those SPVs in which 50% or more of the
shares are owned by private sector companies and sponsored by
investors with acceptable experience and credit quality.
3. Outcome and Outputs
21. The outcome will be the demonstration of profitable and
sustainable solar power generation plants under the National Solar
Mission and/or state solar power policies. These projects will
diversify the countrys energy mix, increase energy security, reduce
reliance on fossil fuels, lower imports and exposure to
international energy prices and exchange rate fluctuations, and
decrease the emission of greenhouse gases as well as local
pollutants. The amount of carbon dioxide emissions reduced is one
of the indicators for the outcome, in addition to financial and
operation indicators. 22. The facility will support the development
of utility-scale, grid-connected solar power projects in India
through long-term commercial financing. The facility will mobilize
lending and develop the capacity of commercial and partner banks to
undertake technical due diligence on solar projects and provide
affordable longer-tenor loans, which are critical to their
viability, sustainability, and replicability. The design and
monitoring framework is in Appendix 1. B. Development Impact
23. Solar power is most appropriate for off-grid and distributed
electricity generation because of its modular scalability to meet
small loads, ease of installation, and minimal
11 Sharing of the risks between ADB and the commercial bank
ensures an equitable balance and prevents against
moral hazard. This level of risk sharing is calculated on a
present value basis over the life of the loan, which provides
flexibility for guarantees to be structured in different ways
(either a constant guarantee scheme or a back-ended scheme in which
coverage is higher in the latter years of the loan) depending on
the banks preference. The net present value of the guaranteed
outstanding principal and accrued interest shall not exceed 50% of
the total principal of the guaranteed loan.
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operating and maintenance costs. As the cost of solar power
equipment drops as a result of economies of scale from indigenous
production and development of local capacity, solar energy will
become more affordable, reliable, and accessible in the remote and
underdeveloped areas of India. In essence, demand from
utility-scale grid-connected solar projects in the first phase will
lead to long-term cost reductions for solar power across India,
including for off-grid consumers who are often bypassed in terms of
sharing the benefits of development. 24. Significant capacity
beyond a pilot scale needs to be developed and operated on a
commercial basis in the DMCs for solar power technology to scale
up. It is expected that the facility will directly leverage private
sector investment for about 130 MW of projects, which would result
in 205 gigawatt-hours of electricity from solar energy added to the
grid in India and 1.76 million tons of carbon dioxide abated during
the first 10 years of operations. The facility improves the
financial viability of solar projects by extending the tenor of the
loans without a commensurate increase in lending margins. This will
alleviate some pressure on project cash flows to service debt and
as a result, improves the returns on the private sector investors
equity to an acceptable level. This effect will generate more
investment in this nascent sector. Higher returns on equity on the
first projects would, in turn, allow electricity regulators to
lower the feed-in tariff levels required in the future. 25. In the
medium term, commercial banks that finance projects alongside ADB
will become more comfortable with solar power and have direct
access to performance and operational data to understand the risks
better. This will transform market risk perceptions and induce
other banks to lend to the sector without ADB support or (limited)
recourse to the sponsor. This hypothesis can be compared with the
evolution of the wind power sector in India since 2000. Banks
initially had similar concerns on wind power resources and the
unproven performance of wind energy turbines in India. Now with
over 14,000 MW of wind power installed in India, local commercial
banks are more comfortable with the risks, understand technical
parameters better, and offer long-term debt financing without
recourse to parent companies. The same results can be expected
(e.g., longer tenors, lower margins) once there is a track record
of solar operations. The target of 4,000 MW of solar power in the
second phase of the NSM (20132015) cannot be met without similar
developments in the project finance market. Performance indicators
for the medium-term impacts include the cumulative solar capacity
in the country by 2015, the percentage of solar projects financed
on a non-recourse basis, and the project margins charged as
compared with other renewable energy projects. 26. In line with the
ASEI, one of the long-term objectives is to reduce the capital
costs for solar power in DMCs. This can be accomplished in India
once the manufacturing of solar power components is indigenized and
reaches economies of scale. Significant demand from projects for
capital equipment, solar panels and modules, and experienced
contractors is a prerequisite to generate investment in local
manufacturing. Based on a much lower cost of labor but strong
engineering and technology base, there is significant scope for
manufacturing cost reductions in India. Local manufacturing will
reduce the price of solar components and increase the
competitiveness of solar power with other sources of energy
production. Establishing a large commercial market in DMCs will
stimulate global competition in the sector, further lowering prices
and the cost of electricity production. C. Environment and Social
Dimensions
27. The facility is classified under category FI for
environment, involuntary resettlement, and indigenous peoples under
ADBs Safeguard Policy Statement (2009). The partner banks will be
required to establish and adopt an appropriate environmental and
social management system
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8
(ESMS). Implementation of the ESMS will ensure that the projects
meet ADBs safeguard requirements on environment, involuntary
resettlement, and indigenous peoples. The partner banks will
appoint suitably qualified officers to oversee environmental and
social aspects of the operations and the day-to-day implementation
of the ESMS. 28. For this type, size, and nature of project, no
significant environmental impacts are expected. The solar power
developers are required to implement mitigating measures and good
construction management practice. The occupational health and
safety performance of the contractors and their workers will be
closely monitored during construction. ADB will coordinate with the
partner banks to ensure that an ESMS satisfactory to ADB has been
adopted prior to ADB issuing a guarantee for the first project.
29. Most solar projects are being sited on barren or
unproductive government land in a coordinated effort by state
governments. Each 5 MW solar power plant will require about 12
hectares of land. No physical displacement is expected since lands
can be flexibly acquired to avoid impacts on existing villages and
communities. The solar power plants will typically utilize the
existing distribution substations and will be connected to the
state electricity grid. If extensions of transmission lines are
required, these are expected to be established along existing
public road rights-of-way. Potential impacts on indigenous peoples
and/or scheduled tribes will only be ascertained once specific
sites for each solar power plant are identified. However, since
barren and unproductive lands will be used, the impacts on
scheduled tribes, if any, are unlikely to be significant. 30. Other
social dimensions (e.g., gender, labor issues) of each solar power
project will be analyzed as part of the environmental and social
assessment to be undertaken by each SPV in accordance with the
Safeguard Policy Statement and the ESMS of partner banks. The
summary poverty reduction and social strategy is in Appendix 4 and
a summary ESMS is in Appendix 5. D. Financing Plan
31. With over 700 MW awarded to project sponsors in December
2010 through the National Solar Mission and an additional 965 MW
allocated by the state government of Gujarat (Appendix 3), total
investment costs over the next 3 years in the sector are about $4.5
billion equivalent. Assuming a debtequity ratio of 70:30 as
prescribed by the CERC tariff guidelines, $3.2 billion equivalent
of debt financing will be required. Even if only half those
projects materialize ($1.6 billion in debt), significant demand for
financing from ADB and the facility is likely. The facility has
been conservatively sized at $150 million to support 1215 projects
between 2011 and 2014, which would represent a reasonable sample of
first projects to be financed. Should there be additional demand
for guarantees prior to the end of the 3-year availability period,
ADB can propose extending the facility through additional
financing. 32. The estimated investment cost for projects to be
supported under the facility is $429 million equivalent and assumes
(i) a project debtequity ratio of no greater than 70:30; and (ii) a
guaranteed percentage of 50% on the total debt of the projects. ADB
PCGs would, therefore, cover up to $300 million equivalent of
commercial loans to projects from domestic and international
commercial bank lenders. The remainder of funding will come from
equity and subordinated debt (or like instruments).
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9
E. Implementation Arrangements
33. The facility can issue PCGs over a 3-year period following
Board approval. PCGs will be limited to a maximum tenor of 15 years
(18 years may be considered only in exceptional cases, as
determined by ADB in its sole discretion). Additional sub-facility
limits on partner banks, sponsors, and projects are specified
below. Any exceptions or changes to these implementation
arrangements will require the prior approval of the Investment
Committee.
1. Selection and Approval of Partner Commercial Banks
34. Local and/or foreign partner banks will be selected at ADBs
sole discretion. Initially, no more than five partner banks will be
selected. Any additions to the number of proposed partner banks
will be submitted to the Investment Committee for endorsement (It
is proposed that the board of directors delegate approval authority
for partner banks to the Investment Committee). ADB will require
that each prospective lender submit all documentation and
information as outlined in the due diligence checklist (Appendix
6). Prospective partner banks will be screened and due diligence
results presented to the Investment Committee for approval based on
the following factors: (i) credit standing (at least BBB equivalent
credit rating by an international rating agency or AA equivalent
credit rating by a local rating agency);12 (ii) experience and
capabilities in limited recourse lending in India and/or Asia;
(iii) existing portfolio in the power sector; (iv) willingness and
ability to make financial commitments in renewable energy required
under the facility; (v) senior management commitment; (vi)
staffing, management, and technical capability to implement the
facility; and (vii) operating policies, guidelines, and systems in
loan origination, credit assessment, and loan administration and
enforcement. No more than 40% of the entire facility can be
consumed by PCGs issued to the same partner bank.
2. Selection and Approval of Projects
35. Projects will be identified and selected by partner banks
based on customary due diligence on project preparation, financial
and commercial viability, adequate sponsor credentials and
creditworthiness, and overall project risk mitigation. Projects
will then be screened against eligibility criteria (Appendix 7),
and banks will need to submit a due diligence report to ADB that
meets all the requirements, including the projects compliance with
ADBs policies on anticorruption, safeguards, integrity, and
procurement. Projects must have signed a long-term power purchase
agreement either with the NVVN (under the National Solar Mission
framework) or in compliance with an approved state solar power
policy. Individual state policies will be reviewed on a
case-by-case basis before PCGs are issued.13 The net present value
of the outstanding guaranteed principal and accrued guaranteed
interest shall not exceed 50% of the total principal of the
guaranteed loan. Guarantees with the same sponsor or parent company
of the SPVs shall be limited to no more than five projects or an
aggregate of 30 MW, whichever limit is reached first. These limits
will ensure a diversified portfolio across partner banks, sponsors,
and projects.
12 International credit ratings to be from Standard & Poors
(S&P), Moodys, or Fitch Ratings; local credit ratings to be
from CRISIL (an S&P company), Investment Information and
Credit Rating Agency (ICRA), or Credit Analysis and Research
Limited (CARE).
13 The project team has conducted due diligence on the solar
power policy in Gujarat, the regulatory norms, the credit standing
of the offtaker, and the template form of power purchase
agreement.
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10
3. Reporting and Monitoring
36. Partner banks will be required to notify ADB promptly of any
loan default. Banks will be required to continuously monitor the
performance of the project loans and submit annual reports to ADB
that include information on disbursements and repayments,
construction progress, project operating performance (as against
baseline conditions), and quarterly and annual financial
statements, the latter having been audited in compliance with
Indian national standards. ADB will monitor the use of the PCG,
portfolio quality, and compliance with ADB eligibility
requirements. ADB will regularly monitor the credit quality of
partner banks (through existing credit rating reports), and will
conduct a review for any partner banks that are placed on negative
credit watch by major credit rating agencies or have their credit
rating downgraded. ADB will carry out an annual performance review
of the facility to assess the average risk rating of the portfolio
and monitor the performance of the facility against indicators in
the design and monitoring framework (Appendix 1).
4. Technical Assistance
37. ADB is preparing separate parallel TA that will build
capacity and provide technical support to the partner banks during
the due diligence of private sector solar power projects. ADB will
engage international engineering consultants to provide expertise
and hands-on support to partner banks as they conduct due diligence
on individual projects. The consultants will advise the partner
banks in the areas of solar technology, insolation and irradiance
studies, solar panel manufacturers, and performance warranties.
Consultants will also be engaged to conduct periodic training for
commercial banks and other stakeholders in several locations across
India during the implementation period of the facility. ADB is
coordinating the first set of training sessions with the National
Renewable Energy Laboratory, part of the US Department of
Energy.
5. Anticorruption Policy
38. The partner banks will be advised of ADBs Anticorruption
Policy (1998, as amended to date) and Policy on Combating Money
Laundering and the Financing of Terrorism (2003). Consistent with
ADBs commitment to good governance, accountability, and
transparency, the guarantee and/or loan documentation will require
the project borrowers to institute, maintain, and comply with
internal procedures and controls following international best
practice standards for the purpose of preventing corruption or
money laundering activities or the financing of terrorism, and
covenant with ADB to refrain from engaging in such activities. The
legal documentation will further allow ADB to investigate any
violation or potential violation of these undertakings. F.
Projected Operational and Financial Performance
39. While partner banks will be primarily responsible for
carrying out due diligence on the projects, ADB has carried out
financial and economic analysis of a representative project to
assess its viability and sustainability under different funding and
operating scenarios. These results were used to structure the type
and tenor of the guarantee. The financial internal rate of return
of projects under CERC tariffs would be 13.2% and the weighted
average cost of capital is projected to be 7.8%. The economic
internal rate of return would be 20.5%, which is above ADBs
standard discount rate. The economic and financial analysis is in
Supplementary Appendix A.
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11
G. Guarantee Pricing
40. The cost of financing14 is critical to the financial
viability of solar power projects (and the underlying feed-in
tariff). Approximately 85% of the total costs (capital and
operations) over the projects economic life are financed up front.
This is unlike financing for a thermal power project, where only
30% of the total costs are financed up front (the remainder are
fuel and recurrent costs, which are financed annually through cash
flow generated by operations). Without the lending experience or
installed capacity to prove performance, banks will assign high
risk ratings to these projects and commensurate lending margins.
The PCGs effectively replace a portion of the project risk, as
assessed by the lender, with ADBs AAA credit rating. This risk
mitigation will help reduce loan margins required by the partner
commercial banks. The PCGs can incentivize banks to reduce the cost
of debt, provided that the PCG fees do not consume the savings
created by the guarantees risk sharing structure. Guarantee pricing
has been set in line with market benchmarks, and will vary within a
set band based on exposure size and tenor.
IV. THE PROPOSED ADB ASSISTANCE
A. The Assistance
1. Instrument and Amount
41. The facility will provide for ADB to issue PCGs in an
aggregate amount of up to $150 million of principal (or its
equivalent in Indian rupees or other foreign currency acceptable to
ADB15) in favor of foreign and local commercial banks lending to
solar power generation projects in India that meet the minimum
eligibility criteria (Appendix 7). Under the facility, ADB will
issue PCGs to guarantee scheduled payments of principal and
interest under loans to be provided by foreign or local commercial
banks. The PCGs will be provided without government
counter-guarantee. The facility will partially cover payment
default risk on loans made by approved partner banks to private
sector borrowers in India implementing solar power generation
projects as awarded under the National Solar Mission or an approved
state government solar power policy.
2. Terms and Conditions
42. A guarantee term sheet template has been presented to
prospective partner banks and a summary term sheet template is in
Appendix 7. The guarantee agreement to be entered into with
respective partner banks will ensure that the net present value of
the outstanding guaranteed principal and accrued guaranteed
interest shall not exceed 50% of the total principal of the
guaranteed loan. The facility will be available for 3 years from
Board approval, with project loans having a maximum tenor of up to
15 years (exceptional consideration of tenors of up to 18 years
subject to agreement by ADB). A guaranteed loan may be made in
Indian rupees or any foreign currency that is acceptable to the
lender and ADB. The Investment Committee determines up-front fees,
standby fees, and guarantee fees.
3. Compliance with Investment Limitations
43. The proposed facility will be within the country, industry,
group, and single project exposure limits for nonsovereign
investments. 14 Inclusive of up-front arrangement fees, commitment
fees, margins over the cost of funds, and any guarantee fees. 15
Guarantees issued in currencies other than U.S. dollars will be
adjusted on a quarterly basis to ensure the
proposed ceiling amount for the Facility limit shall not be
breached.
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12
B. Justification for ADB Assistance
44. While solar power technologies have been commercially proven
in developed markets such as Germany, Spain, and the United States,
there was only 11 MW of installed capacity in India as of December
2010 (mostly installed in 2010). 16 Lenders remain concerned about
the risks of solar technology performance, unproven indigenization
of the technology to Indias climatic conditions, and the nascent
stage of regulatory development with respect to renewable and
specifically solar energy. ADBs participation as a guarantor will
help mitigate risks and leverage commercial funds into a new
subsector in India. The facility leverages commercial bank loans
and builds capacity at the appropriate institutions that can apply
such knowledge and lessons to future lending in India. 45. ADBs
support for the facility is justified based on the following:
(i) ADB assistance will play a crucial role in helping solar
projects close affordable long-term financing, which is a necessary
condition for the viability of a solar project. As a result of the
recent banking crisis, liquidity remains limited, and local banks
can rarely provide clean (or uncovered) loans for more than 810
years without recourse to project sponsors. Tenors required for
solar power generation projects are typically longer than other
energy projects.17 ADBs PCG will share project risks with banks (to
reduce the cost of financing) and extend commercial bank tenors to
fund power generation plants that have high up-front investment
costs, but no recurrent fuel cost. Without the cover provided by
ADBs PCG, projects may obtain finance but they will do so with the
inevitable condition of having to seek refinancing after
commissioning when operational performance has been proven. This is
a cost-inefficient process that can be mitigated more appropriately
through up-front risk-sharing arrangements.
(ii) Sponsors or developers of solar power projects expect that
ADBs participation in
the financing will trigger local and/or international bank
participation, additional equity investment, and further interest
in the financing of solar projects. ADBs PCG in particular
encourages the commitment of local commercial banks, which have
little experience in solar energy.
(iii) The facility will play a pioneering role in demonstrating
the commercial viability of
grid-connected solar photovoltaic technology in India. The
projects will be among the first grid-connected power generation
projects with a commercial component under the NSM or state
schemes. Once solar power performance under Indian climatic
conditions is proven, this will catalyze the deployment of
larger-scale solar projects (important to generate sufficient
demand for local manufacturing and economies of scale) and increase
foreign private sector investment.
(iv) The facility directly achieves the strategies outlined by
ADBs energy community of
practice in the ASEI for mainstreaming solar projects through
(i) supporting the
16 This figure incorporates recently commissioned solar projects
according to project developers and investors. 17 In 2010, the ADB
Board of Directors approved long-term loans for two solar power
generation projects in Thailand.
ADB. 2010. Report and Recommendation of the President to the
Board of Directors: Proposed Loan and Administration of Grant for
the Solar Power Project in Thailand. Manila (loan tenor of 18
years); ADB. 2010. Report and Recommendation of the President to
the Board of Directors: Proposed Loans and Technical Assistance for
the Bangchak Solar Power Project in Thailand. Manila (loan tenor of
15 years).
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13
design of appropriate policy frameworks and institutional
capacity development for rapid diffusion of solar energy technology
for power generation; (ii) creating innovative financing mechanisms
and risk mitigation measures to encourage solar power generation;
and (iii) facilitating the development of large capacity solar
projects that drive down solar generation costs toward grid
parity.
(v) Direct ADB lending to solar projects may not always be
practical, given the small
size and short development and implementation timetable. The
central or state government issues a solar power tariff order
within the CERC guidelines and invites investors to tender for
allocations based on qualifications, ability to acquire land and
close financing. Investors must then deposit funds (scaled based on
project capacity) into a government account to secure their
performance. They are given a limited timeline (90180 days) to
acquire land, sign the power purchase agreement (PPA), and close
financing. The investors performance funds would be forfeited if
the deadlines are breached. It has proven difficult on other
projects for ADB to complete its appraisal and process the
transaction within this time frame. The facility is designed to
work with partner commercial banks on a streamlined basis to meet
financial close within the time lines.
C. Risks and Mitigation Measures
46. The facility involves risks with respect to partner
commercial banks and, as the guarantees will be project-specific,
to the projects themselves. While not an exhaustive list of risks,
the following key issues have been examined and mitigated as
appropriate:
(i) Technology risk. Photovoltaic solar panel technologies are
still in the innovation stage and are rapidly changing, and often
owned by companies with limited track record and weaker credit
quality. Moreover, solar panel technologies have varying track
record in terms of efficiency and degradation rates. This risk is
mitigated to some extent by the eligibility criteria established
for the selection of equipment manufacturers based on their
operating track record and installed capacity. ADB consultants
under the parallel TA will help validate these risks. In addition,
more stringent performance and cash flow stress scenarios will be
applied to the base case projections to ascertain debt servicing
ability.
(ii) Sponsor risk. The projects key risks, i.e., technology,
limited track record of
equipment manufacturers, the nascent solar power sector in
India, substantial long-term exposures, and relatively high
leverage (i.e., up to 70% of the project costs), will be partially
mitigated by the sponsors guarantee for completion of the project.
Given the critical role of the sponsors, certain eligibility
criteria related to the sponsors experience in the sector, the
sponsors equity investment in the project, and solvency and
liquidity ratios have been included in the program.
(iii) Offtaker risk. Projects will be exposed to nonpayment
and/or non-dispatch risk
from the SEBs or defaults from NVVN. Through existing TA
support, ADB has been advising MNRE on drafting of the NVVN PPA,
and based on continued dialogue with banks and developers, the
bankability of the PPA has been improved as a result, including the
security provisions and step-in rights for the lenders. There is
divergence in the credit profiles of the solar power offtakers for
the projects being considered under the proposed facility. The NSM
projects benefit from much lower offtaker risks as NVVN, has a
reasonably strong credit
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14
profile. On the other hand, state government supported solar
power projects may face higher offtaker risks given the weak credit
profile of the state electricity boards. The PPAs signed with GUVNL
have a slightly different tariff structure, which somewhat reduces
the payment burden on distribution utilities and is expected to
reduce the risk of PPA renegotiation. In addition, the PPA includes
compensation payments equivalent to 3 years of revenue in the event
of default or termination, which may act as a deterrent but may not
essentially mitigate the underlying credit risks. In addition, the
program aims to diversify exposures across various offtakers by
including exposure limits.
(iv) Regulatory risk. The regulatory environment pertaining to
solar power in India is
still evolving and may change over the course of the program and
adversely affect the viability of the projects. The central and
state governments have shown a significant commitment to promote
electricity supply from renewable energy sources (for energy supply
diversification as well as climate change motivations) by
introducing the RPO requirement, the percentage of which increases
every year. The National Tariff Policy was amended in January 2011
to enact solar-specific RPOs as well, demonstrating the political
will to support the National Solar Mission. Some state regulators
introduced solar RPO requirements even before the policy was
amended. Purchases from solar power are exempted from market
dispatch orders by state regulators (i.e., must run status). That
said, it is very likely that comparable solar technology would be
more efficient and cheaper in the medium-to-long-term. This would
decrease the competitive standing of the present pipeline of
projects, which require higher tariffs to recover the higher
technology and investment costs. This would thus expose the
underlying projects and ADB to regulatory risks as offtakers may
seek to renegotiate contracts and tariffs. As the credit profile of
most of the state offtakers is already stressed from under-recovery
of costs for conventional power, the incentive-based payments
required to establish the viability of solar photovoltaic or solar
thermal power projects may add to their financial burden and over
time, increase the risks of nonpayment under contracted terms. This
is mitigated by the strong commitment of the Government of India to
solar power projects with the introduction of very robust
regulatory framework.
(v) Risk sharing with partner banks. The project borrowers will
ultimately be
responsible for loan repayment. However, there is risk that they
will be unable to service the guaranteed loans. By carefully
selecting each partner bank, ADB will ensure that appropriate
credit assessment and due diligence is carried out before any
guaranteed loan is advanced. The proposed facility may provide a
back-ended guarantee structure, with ADB providing up to 100% cover
to the partner banks on the default risk of the underlying
projects. For these projects, there are concerns as it may trigger
a sense of complacency in the due diligence, project selection and
exposure monitoring activities of the partner banks under the
comfort that ADB will eventually absorb all the credit losses in
the latter years of the loan tenor. This concern is aggravated by
the partner banks limited experience in financing solar power in
India and the expectations that over time, ADB will reduce its
involvement in the project assessment process. To align the
interests of the partner banks with that of ADB and incentivize the
partner banks to exercise risk discipline in its approval and
monitoring process, it was agreed that ADBs 100% cover will be
limited to the tail end of the loan and the
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15
guarantee fee would be structured such that partner banks have
an incentive to consider continued financial support to the
projects on a stand-alone basis.
(vi) Lack of technical expertise of partner banks in the
evaluation of solar
power projects. The potential partner banks have limited
technical expertise in the evaluation of solar power projects.
Although the parallel TA would help build their internal capacity,
these benefits may only be realized in the medium term, while the
build up of exposure under the facility may occur at a more rapid
pace. Some foreign banks operating in India may have some
experience in the sector; however, they may not have an in-depth
knowledge of the sponsors and the regulatory framework in the
country. To mitigate this, operating arrangements have been
established such that ADB will be actively involved in the
selection of projects by each of the banks, and in the initial
transactions, this involvement would be more detailed until
confidence is established with the partner banks project selection
abilities.
(vii) Selection of partner banks. ADB will rely on the partner
banks for the
selection, structuring, and monitoring of the projects. Although
broad criteria has been established for the selection of partner
banks, there is a need for ADB to conduct a more comprehensive
assessment of the risk profile of local commercial banks (i.e.,
those without an international credit rating). Although ADB will
not be exposed to any direct credit risk on the partner banks, any
distress in their financial condition would divert resources and
may reduce their oversight over the projects covered under the
facility. This aspect is critical given the long-dated maturity and
the proposed back-ended guarantee scheme. This risk will be
mitigated by the detailed evaluation of the credit profile of
potential local partner commercial banks both at the initial
selection stage and on an annual basis.
D. Assurances
47. Consistent with the Agreement Establishing the Asian
Development Bank, the Government of India will be requested to
confirm that it has no objection to the proposed facility. ADB will
enter into suitable guarantee agreements and other required legal
documents once the proposed facility is approved by ADBs Board of
Directors and the individual partner banks are approved by ADBs
Investment Committee. These agreements will be on terms and
conditions satisfactory to ADB.
V. RECOMMENDATION
48. I am satisfied that the proposed guarantee facility would
comply with the Articles of Agreement of the Asian Development Bank
(ADB) and recommend that the Board approve the guarantee facility
for ADB to issue partial credit guarantees without government
counter-guarantee, in amounts, in aggregate, of up to $150,000,000
(or its equivalent in Indian rupees or other foreign currency
acceptable to ADB) from ADBs ordinary capital resources, in favor
of eligible foreign and local commercial banks lending to solar
power generation projects in India, with such terms and conditions
as are substantially in accordance with those set forth in this
report, and as may be reported to the Board.
Haruhiko Kuroda
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16
President 17 March 2011
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Appendix 1 17
DESIGN AND MONITORING FRAMEWORK
Design Summary Performance Targets
and/or Indicators Data Sources and/or
Reporting Mechanisms Assumptions
and Risks Impact Successful implementation of phase 1 of the NSM
Increased foreign direct investment by the private sector in the
solar energy industry Long-term reduction in levelized cost of
solar energy in India
1,100 MW of solar capacity commissioned by 2011; 2,000 MW by
2013 8 commercial banks undertaking independent technical due
diligence of solar projects by 2015 50% share of private capital in
solar industry by 2015 Regulated solar photovoltaic (Rs17.9 per
kWh) and concentrating solar power tariffs (Rs15.3 per kWh)
decrease at least 20% by 2015 Regulated ceiling for solar
photovoltaic capital costs decreases from Rs169 million per MW to
Rs135 million per MW by 2015 (20% reduction)
Ministry of New and Renewable Energy statistics Distribution
company data and annual reports Solar industrial associations
reports Company annual reports Central and state electricity
regulatory commission orders and reports
Assumptions Stable and consistent regulatory policies for the
renewable energy sector Consistent policy decisions by the
government for the National Solar Mission Risks Change of
government, which impacts renewable energy policies Supply of solar
energy exceeds RPO requirements plus the demand for renewable
energy certificates
Outcome Solar power generating facilities under India's National
Solar Mission and state power schemes installed and deliver energy
to the grid
205,000 MWh of solar power per annum delivered to the state
grids by 2015 Generation of at least 1.76 million tons of CO2
emission reduction in total during the first 10 years of operation
Loan tenors for facility supported projects are extended from 810
years to
NVVN reports Carbon market reports Central and state electricity
regulatory commission reports
Assumptions Plants achieve capacity utilization factors and
energy yields within the estimates assumed by financiers and
investors Offtakers honor the payment and tariff provisions in the
PPAs and there are no defaults by SEBs (either directly or through
NVVN) Risks Solar-specific RPO orders are not issued or delayed
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18 Appendix 1
Design Summary Performance Targets
and/or Indicators Data Sources and/or
Reporting Mechanisms Assumptions
and Risks 1215 years
by state regulatory commissions Sufficient solar RPO penalty
system is not enacted The grid management systems are unable to
handle the variability of energy production from renewable
sources.
Outputs Supported financing of solar projects Solar
project-related technical due diligence and capacity building
provided to partner and local commercial banks Mobilization of
affordable debt and equity from domestic and international
investors for renewable energy power plants
130 MW of solar power generation capacity commissioned by 2015
1015 solar project loans guaranteed by 2015 Technical due diligence
for at least 15 solar power projects for partner and local banks by
2015 An ESMS is established by each partner bank. Debt and equity
mobilization of $300 million from domestic and international
sources
Borrower annual reports Guaranteed lender annual monitoring
reports NVVN annual reports Distribution utility disclosures to
state electricity regulators Capacity development technical
assistance consultants reports ESMS and other relevant
safeguard-related document submissions by partner banks Partner
bank annual reports on environmental and social safeguards
compliance
Assumptions Project agreements are adhered to by third parties.
Interest and participation of domestic commercial lenders,
international financial institutions Risks ADBs partial credit
guarantee may be insufficient to help lenders overcome their risk
assessment to provide required long-term financing
Activities with Milestones 1.1. NSM phase 1 new project
allocations made (completed) 1.2. NSM phase 1 projects sign PPA
(completed) 2. First partner bank approved (March 2011) 3. Two
additional partner banks approved (September 2011) Financial close
for NSM phase 1 projects and projects under the state solar
policies (March 2011December 2011)
Inputs
ADB guarantees
Foreign and local bank loans (70%)
Equity (30%)
ADB = Asian Development Bank, CO2 = carbon dioxide, ESMS =
environmental and social management system, KWh = kilowatt hour, MW
= megawatt, MWh = megawatt hour, NVVN = NTPC Vidyut Vyapar Nigam,
NSM = national solar mission, PPA = power purchase agreement, RPO =
renewable purchase obligation, SEB = state electricity board.
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Appendix 2 19
INDIAS NATIONAL SOLAR MISSION A. Background 1. The current power
generation capacity in India is insufficient to meet demand.
According to the Central Electricity Authority, the energy shortage
in 20102011 is expected to be 10.6% (93 terawatt-hours) and the
corresponding peak load deficit is expected to be 12.1% (the
equivalent energy of 15 gigawatts).1 For annual gross domestic
product growth of 8%, it is estimated that India will have to
double its current installed capacity to over 300 gigawatts by
2017.2 2. Fossil fuels dominate the power generation mix, with coal
accounting for over 50% of the power generation capacity in India.
The total installed power generation capacity in India in October
2010 was 167,278 megawatts (MW). Of this, 64.9% was fossil fuel
fired power plants (coal, gas, and diesel); 22.3% hydropower; 2.7%
nuclear power; and 10% renewable energy.3 Indias energy sector
contributes about 58% of the countrys greenhouse gas emissions.4
India is implementing a National Action Plan on Climate Change that
suggests that 15% of energy could come from renewable sources by
2020. 3. India has vast solar energy potential. About 5 billion
megawatt-hours (MWh) per year of energy exist over Indias land
area, with most regions receiving 47 kilowatt-hours per square
meter (kWh/per m2) per day, averaging 4.5 kWh/m2/day nationally.
This rate of insolation is among the highest in the world,
comparing favorably with Australia (4.7 kWh/m2/day) and ahead of
the Peoples Republic of China (3.4 kWh/m2/day) and Western Europe
(2.9 kWh/m2/day).5 Effective unlocking of this potential will
enable rapid capacity addition with relatively short lead times
(e.g., less than 1 year) and no additional greenhouse gas
emissions. Unfortunately, the total costs (capital and operating
costs) for solar power generation are currently significantly
higher that thermal power stations, which are centralized and sized
(e.g., 2,0004,000 MW) to reap economies of scale. 4. The Jawaharlal
Nehru National Solar Mission (NSM), launched in January 2010, is an
initiative of the central and state governments to promote
ecologically and economically sustainable growth in solar power
generation by creating an enabling policy and regulatory framework.
The NSM is one of eight national missions outlined in the National
Action Plan on Climate Change.6 B. Objectives and Targets 5. The
objective of the NSM is to establish India as a global leader in
solar energy by creating the policy conditions for its diffusion
across the country as quickly as possible. The immediate aim of the
mission is to focus on setting up an enabling environment for
penetration of solar technology in the country both at centralized
(utility-scale, grid-connected) and decentralized (off-grid, rural
electricity supply) levels. The mission will adopt a
three-phase
1 2011, Load Generation Balance Report 2010-11, Central
Electricity Authority, Ministry of Power. 2 2009, Powering India:
The Road to 2017, McKinsey & Company. 3 2010, Monthly Power
Sector Report: October 2010, Central Electricity Authority,
Ministry of Power. 4 2010, Agence France-Presse, Quoting a report
from the Ministry of Environment, Government of India. 5 2009,
Development Challenges for Large Scale on-grid Solar PV
Implementations, Singapore, Conergy
(Referencing International Energy Agency Greenhouse Gas R&D
Program, Gloucestershire, UK. 2003) 6 The other seven national
missions cover enhanced energy efficiency, sustainable habitat,
water, sustaining the
Himalayan ecosystem, green India, sustainable agriculture, and
strategic knowledge for climate change.
-
20 Appendix 2
approach, spanning the remaining period of the Eleventh Five
Year Plan, 200720127 and the first year of the 12th plan (up to
2012-13) as phase 1, the remaining 4 years of the 12th plan
(20132017) as phase 2, and the 13th plan (20172022) as phase 3. The
targets for the deployment across application segments are in Table
A2.1.
Table A2.1: National Solar Mission Targets
Application segment Target for Phase 1
(20102013) Target for Phase 2
(20132017) Target for Phase 3
(20172022) Solar collectors 7 million m2 15 million m2 20
million m2
Off-grid solar applications 200 MW 1,000 MW 2,000 MW
Utility grid power (including rooftops) 1,0002,000 MW
4,00010,000 MW 20,000 MW
M2 = square meters, MW = megawatt, Source: Ministry of New and
Renewable Energy. Jawaharlal Nehru National Solar Mission: Towards
Building Solar India. C. Policy and Regulatory Framework 6. To
achieve the NSM objective, it is critical to create a policy and
regulatory environment that provides a predictable incentive
structure that enables rapid and large-scale capital investment in
solar energy applications and encourages technological innovation
and lowering of costs. NSM activities are currently embedded within
the existing framework of the Electricity Act, 2003; National
Electricity Policy, 2005; and the National Tariff Policy, 2006 (and
as amended in December 2010). However, in the long run,
sector-specific legal and regulatory frameworks will be established
for the development of solar power.
1. Electricity Act, 2003 7. The Electricity Act, 2003 has been a
major step toward liberalizing the power market in India along the
value chain, encouraging competition and attracting private
investment. Under the acts part VII section 61(h), the promotion of
cogeneration and electricity generation from renewable sources is
identified as a consideration in the establishment of tariff
regulations, allowing the Central Electricity Regulatory Commission
(CERC) to establish a preferential tariff for renewable energy.8
Further, the open access provision allows licensed renewable energy
power generators access to transmission lines and distribution
systems and only requires that the generators pay a wheeling charge
for the use of the transmission lines and a fee to the load
dispatch center.
2. National Electricity Policy, 2005 8. The National Electricity
Policy, 2005, stipulates the need for increasing the share of
electricity from nonconventional sources and allows for the state
electricity regulatory commissions (SERCs) to establish a
preferential tariff for electricity generated from renewable
sources to enable them to be cost-competitive.9 Section 5.12.3 of
the policy encourages the development of cogeneration facilities
and allows for SERCs to promote arrangements between
7 Government of India, Planning Commission. 2008. Eleventh Five
Year Plan, 200712. Delhi. 8 Ministry of Power. 2010. The
Electricity Act, 2003.
http://www.powermin.nic.in/acts_notification/electricity_act2003/pdf/The%20Electricity%20Act_2003.pdf
9 Ministry of Power. 2010. The Gazette of India: Extraordinary Part
I Section 1.
http://www.powermin.nic.in/whats_new/national_electricity_policy.htm
-
Appendix 2 21
co-generators and distribution companies interested in
purchasing excess electricity through a competitive bidding
process.
3. National Tariff Policy, 2006 9. The National Tariff Policy
announced in January 2006 mandates each SERC to specify a renewable
purchase obligation (RPO) with distribution companies in a
time-bound manner. These purchases are to be made through a
competitive bidding process. The objective of this policy is to
enable renewable energy technologies to compete with conventional
sources. Section 6.4 of the National Tariff Policy calls for the
relevant commission to establish preferential tariffs with
distribution companies for the purchase of electricity from
non-conventional technologies.10 The National Tariff Policy
mandates that each SERC specify RPOs by distribution companies in a
time-bound manner. Given the magnitude and importance of the
activities under the NSM, solar-specific amendments have been made
to these RPOs. In January 2011, the union cabinet approved the
proposal from the Ministry of Power to amend the National Tariff
Policy to fix a percentage of energy purchase from solar power
under the RPOs. The solar power purchase obligation for the states
will start at 0.25% (by 2013) and increase up to 3% by 2022.
4. Renewable Purchase Obligations 10. As of December 2010, 18
states have established RPOs or have draft regulations under
consideration (Table A2.2) with RPO requirements ranging from 1% to
15% of total electricity generation. Solar RPOs have also been
specified in most cases, and it is expected that the state level
tariff orders will be modified to conform to the minimum solar
power purchase obligations specified by the Ministry of Power.
Table A2.2: State Renewable Purchase Obligations
State Order date RPO (per annum) Solar RPO (per annum) Andhra
Pradesh 6 Jul 10 5% 0.25%
Bihar 2 Aug 10 1.5% (for FY2011, 2.5% for FY2012, 4.0% for
FY2013)
0.25% (for FY2011, 0.5% for FY2012, 0.75% for FY2013)
Chhattisgarh 9 Nov 10 5% (for FY2011, 5.25% for FY2012, 5.5% for
FY2013)
0.25% (for FY2011-FY2013)
Gujarat 17 Apr 10 5% (for FY2011, 6% for FY2012, 7% for
FY2013)
0.25% (0.5% in FY2012; 1% in FY2013)
Haryana 8 Jul 10 1% 0.25% (for FY2011; 3% for FY2022)
Himachal Pradesh
12 Mar 10 10.1% (annual increase of 1% until FY2013)
0.1% (until FY2013)
Karnataka 11 Feb 08 10%
Kerala 23 Nov 10 3% (for FY2010, with annual increase of 0.3%
until a maximum RPO of 10%)
0.25%
Madhya Pradesh 7 Nov 08 10%
Maharashtra 3 Mar 10 6% (annual increase of 1% until FY2014; 9%
for FY2015 and
0.25% (for FY2011FY2013; 0.5% for FY2014FY2016)
10 Ministry of Power. 2010. Tariff Policy.
http://www.powermin.nic.in/whats_new/pdf/Tariff_Policy.pdf.
-
22 Appendix 2
State Order date RPO (per annum) Solar RPO (per annum)
FY2016)
Manipur 26 Apr 10 1% (for FY2011 and FY2012; 2% for FY2013)
0.25%
Mizoram 26 Apr 10 5% (for FY2011; annual increase of 1% until
FY2013)
0.25%
Orissa 16 Mar 10 5% (for FY2012; annual increase of 0.5% until
FY2016)
0.5% (for FY2012; annual increase of 0.25% until FY2016)
Punjab 24 Nov 06 3% (for FY2011 with a view to achieve 10% by
FY2020)
Rajasthan 7 Mar 07 7.45% (for FY2010, 8.5% for FY2011, 9.5% for
FY2012)
Tamil Nadu 28 Apr 10 14% (for FY2011)
Tripura 16 Sep 10 1% (for FY2011, 1% for FY2012, 2% for
FY2013)
0.1%
Uttar Pradesh Draft 4% (for FY2011, 5% for FY2012, 6% for
FY2013)
0.25% (to increase to 1% by FY2013)
Uttarakhand 6 Jul 10 4% (for FY2011, 4.5% for FY2012, 5% for
FY2013)
0.025% (for FY2012; 0.05% for FY2013)
West Bengal 10 Aug 10 2% (for FY2011, 3% for FY2012, 4% for
FY2013)
FY = fiscal year, RPO = renewable purchase obligation. Source:
Indian Renewable Energy Development Agency Limited. Solar Energy:
Compendium of Regulations & Tariff Orders of CERC, SERC and
Policies of State Governments, http://www.ireda.gov.in/Solar/DATA/
Tariff%20order/Title.pdf; various sources and state
information.
5. Tradable Renewable Energy Credits 11. The availability of
renewable energy sources differs across states. In some states
(such as Delhi), the potential for harnessing renewable energy
compared with the demand for energy is very small. In other states
such as Tamil Nadu (wind), Rajasthan (solar) or Himachal Pradesh
(hydro), it is very high. This variability offers opportunities for
interstate trading in the form of renewable energy credits (RECs).
12. In January 2010, CERC announced the terms and conditions for a
tradable REC program. Under this program, the renewable energy
generators will have two options: (i) sell the renewable energy at
a preferential tariff fixed by the concerned Electricity Regulatory
Commission, or (ii) sell the electricity generated and the
environmental attributes associated with the generation,
separately.11 On choosing the second option, the environmental
attributes can be exchanged in the form of a REC. The price of the
electricity component would be equivalent to the weighted average
purchase cost to the distribution company, including short-term
power purchase but excluding renewable power purchase cost. CERC
will issue the RECs and the value of one REC will be equivalent to
1 MWh of electricity delivered to the grid from renewable energy
sources.
13. The RECs can be traded only on power exchanges approved by
CERC within the band of a floor price and a ceiling price to be
determined by CERC. The floor price is determined by
11 CERC. 2010. CERC Announces Renewable Energy Certificate (REC)
RegulationA Step Forward for Green
Energy Promotion. Press Release (18 January).
-
Appendix 2 23
keeping in view the minimum requirements for ensuring the
viability of the renewable energy projects set up to meet the RPO
targets. This viability requirement covers loan repayment and
interest charges, operation and maintenance expenses, and fuel
expenses in the case of biomass and cogeneration projects. The
ceiling price is derived based on the highest difference between
the cost of generation for the renewable energy technologies and/or
renewable energy tariff and the average power purchase cost for the
respective states. Based on the above principles, CERC has
specified the following floor and ceiling prices for the RECs
(Table A2.3). These prices shall remain valid up to FY2012.
Table A2.3: Floor and Forbearance Prices for Renewable Energy
Certificates
(Rs/MWh) Applicable Renewable Energy Certificate Floor Price
Ceiling Price Solar 12,000 17,000 Non-solar 1,500 3,900 MWh =
megawatt-hour, Rs = Indian rupees. Source: Central Electricity
Regulatory Commission. 2010. Determination of Forbearance and Floor
Price for the REC Framework. Petition No. 99/2010 (Suo Motu). New
Delhi (1 June).
6. Power Purchase Agreements 14. The NSM promotes a more
affordable tariff through a power purchase agreement (PPA)
framework that bundles solar power with unallocated thermal power
produced by the National Thermal Power Corporation (NTPC).12 NTPC
will then sell the power to the state electricity boards (SEBs)
through NTPC Vidyut Vyapar Nigam (NVVN)NTPCs power trading
subsidiary (Figure A2.1). In February 2010, CERC announced a
feed-in tariff for FY2011 of Rs17.9 per kWh for photovoltaic and
Rs15.3 per kWh for concentrated solar power, and declared that the
PPAs would have a validity of 25 years. When NVVN supplies bundled
power to state utilities at the rates determined in accordance with
CERC regulations, those state utilities will be entitled to use the
solar part of the bundled power for meeting their RPOs under the
Electricity Act, 2003.
12 NTPC is a regulated central power utility, majority owned by
the Government of India. While 85% of the capacity of
its power plants is contracted through long-term PPAs, 15% is
reserved by the Ministry of Power to be allocated and sold by the
NTPC to energy-deficient states on an annual basis. This is
considered NTPCs unallocated power.
-
24 Appendix 2
Figure A2.1: Power Sales and Power Purchase Agreement
Architecture
NTPC = National Thermal Power Corporation, NVVN = NTPC Vidyut
Vyapar Nigam, PPA = power purchase agreement, RPO = renewable
purchase obligation, SEB = state electricity board, SERC = state
electricity regulatory commission, SPV = special purpose vehicle.
Source: MNRE. 15. In addition to NVVN, certain states such as
Gujarat have developed a regulatory framework for solar power. In
Gujarat, the Gujarat Electricity Regulatory Commission devised a
solar power procurement tariff regime. Under this regime, Gujarat
Urja Vikas Nigam Limited (GUVNL) will enter into 25-year power
purchase agreements with private developers for offtake of solar
power. The tariff will be fixed at Rs15 per kWh for the first 12
years and Rs5 per kWh for the remaining 13 years. The GUVNL PPA
includes several notable aspects, including termination payments
under certain events of default. D. Institutional Arrangements for
Implementing the National Solar Mission 16. It is envisaged that
the NSM will be implemented by an autonomous Solar Energy Authority
embedded within the existing structure of the Ministry of New and
Renewable Energy. The authority secretariat will monitor technology
developments, review and adjust incentives, manage funding
requirements, and execute pilot projects. The authority will report
to the Prime Ministers Council on Climate Change on the status of
its program. 17. The broad contours of the autonomous and enabled
authority would comprise the following:
(i) A steering group, chaired by the minister for new and
renewable energy and composed of representatives from all relevant
ministries and other stakeholders, will be set up to oversee the
overall implementation of the NSM.
NVVN
NTPC
Solar
SPVs
SEBs
Lenders
Payment Security
Mechanism
RPO Obligation 1,000 MW Thermal +
1,000 MW Solar
Debt
1,000 MW Solar (e.g., multiple projects)
Multiple PPAs
1,000 MW Thermal
Single PPA
Investors
Equity
SERCs
-
Appendix 2 25
(ii) An executive committee, chaired by the secretary of the
Ministry of New and Renewable Energy, will periodically review the
progress of implementation of the projects approved by the Mission
Steering Group.
(iii) An empowered Solar Research Council headed by an eminent
scientist will advise the mission on all research and development,
technology, and capacity building related matters.
(iv) A director, with the rank of an additional secretary, will
head the authority secretariat and be responsible for day-to-day
functioning as well as achieving the goals laid out in a time-bound
manner.
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26 Appendix 3
PIPELINE OF SOLAR POWER GENERATION PROJECTS
Name of Project Company
Size of Project (MW) Project Type
Project Site Location
Aatash Power Private Limited 5 Photovoltaic Gujarat Abellon
Clean Energy Limited 3 Photovoltaic Gujarat AES Solar Energy
Private Limited 5 Photovoltaic Rajasthan AES Solar Energy Private
Limited (US) 15 Photovoltaic Gujarat Alex Astral Power Private
Limited 25 Photovoltaic Gujarat Alex Solar Private Limited 5
Photovoltaic Orissa Alex Spectrum Radiation Private Limited 5
Photovoltaic Rajasthan Alpha Green 1 Photovoltaic Gujarat Ambit
Advisory Services Private Limited 5 Photovoltaic Gujarat Amrit
Animation Private Limited 5 Photovoltaic Rajasthan APCA Power 5
Photovoltaic Gujarat Aravali Infrapower Limited 5 Photovoltaic
Gujarat Asahi Energy Pvt. Limited 5 Photovoltaic Gujarat Aston
Field Solar (Rajasthan) Private Limited 5 Photovoltaic Rajasthan
Astonfield Solar (Gujarat), US 25 Photovoltaic Gujarat Avatar Solar
Private Limited 5 Photovoltaic Gujarat Azure Power (Punjab) Private
Limited 2 Photovoltaic Punjab Azure Power (Rajasthan) Private
Limited 5 Photovoltaic Rajasthan Azure Power Limited (US) 15
Photovoltaic Gujarat Backbone Enterprises Limited 5 Photovoltaic
Gujarat Bhaskar Green Power Private Limited 5 Photovoltaic
Rajasthan Camelot Enterprises Private Limited 5 Photovoltaic
Maharashtra CCCL Infrastructure Limited 5 Photovoltaic Tamil Nadu
Claris Lifesciences Limited 2 Photovoltaic Gujarat Clover Solar
Private Limited 2 Photovoltaic Maharashtra Coastal Projects Limited
5 Photovoltaic Karnataka Coastal Projects Private Limited 25
Photovoltaic Gujarat Comet Power Private Limited 5 Photovoltaic
Rajasthan Commonwealth Business Technologies (UK) 10 Photovoltaic
Gujarat Corner Stone Energy Private Limited 5 Photovolt