Solar Opportunity - Business Model Options Infrastructure & Government Santosh Kamath Director, KPMG Advisory Services Private Limited.

Solar Opportunity - Business Model Options

Infrastructure & Government

Santosh Kamath

Director, KPMG Advisory Services Private Limited

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Agenda

1.Solar Photovoltaic Technology

2.Solar Thermal Technology – Concentrating Solar Power (CSP)

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Solar Photovoltaic (PV) - Business Model Options & Critical Success Factors

Manufacturer

EPC Player Developer

Appliance Manufacturer

Crystalline Silicon PV

Thin-Film PV

• Low cost manufacturing

• Manufacturing Innovations

• Technology innovation

• Engineering capability

• Tie-ups with suppliers

• Managing contracts including PPAs

• Land Bank

• Financing

• Product Design

• Marketing & Distribution

Stand-alone

Grid

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Supply outlook

0

2000

4000

6000

8000

10000

12000

14000

16000

2006 2007 2008 2009E 2010E 2011E

MW

Polysilicon capacity Wafer production Cell production Demand - moderate Demand - policy driven

There is currently oversupply in the value chain but supply dynamics could change based on demand visibility

Source: Needham, Company reports, EPIA, KPMG analysis

Wafer and cell production could expand to meet the demand

Polysilicon shortage has led to a large addition of capacity

Zone of uncertainty

OVERSUPPLY

“Expect 2 Years With No Profits”

Morgan Stanley Analyst

Wafer, ,Cell and Module capacities have lower gestation periods and can quickly ramp up production once there is more visibility on demand

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Global Competitive Behavior – Past Trends (1/2 )

Poly silicon Wafer Cell Module Systems Integration/ Developer

Sun power

Conergy, Solon, Centro solar

Canadian Solar

UPSTREAM DOWNSTREAM

Acquire other system integration companies in different geographies

Strategic tie-ups with upstream manufacturers

Expansion into wafer segment

Key Strategic Initiatives

…A vertically integrated presence to capture profits across value chain

PV Crystalox ,LDK Solar

Trina Sola, Yingli

Expansion into poly-silicon space

Strategic tie-ups with silicon manufacturers

Yingli acquires Cyber Power Group Ltd., a solar-grade poly-silicon production company

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Global Competitive Behavior – Recent Trends (2/2 )

Poly silicon Wafer Cell Module Systems Integration/ Developer

REC Solar, SolarWorld

Solarfun, Suntech, Evergreen solar, JA Solar

Downstream move – Equity Stake in solar farm developer

UPSTREAM DOWNSTREAM

JV to develop solar farms

Suntech – Acquires MSK and EI Solutions System Integrators

Key Strategic Initiatives

…An increased focus on market access

Thin-film Module

First Solar*, Ascent Solar ,Energy Conversion Devices First solar acquires solar power project pipeline n USA*Strategic land rights of approximately 136,000 acres (approximately 210 square miles) with the potential to

deploy up to 19 gigawatts

Q cells

Stake through subsidiaries in thin-film technology firms

JV Partnership with LDK to develop PV systems in Europe and China

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• Ability to procure solar silicon

• Ability to reduce energy costs

• Ability to reduce silicon consumption

• Ability to produce high quality thinner wafers

• Ability to increase cell conversion efficiency

• Access to cheap and skilled labor

• Ability to secure module supply contracts

Wafer Cell Module

Technology

…. Advancement in wafer and cell technologies are considered to be the key drivers in the overall cost reduction possibilities for crystalline PV

Capital & Energy Labour

CSFs for Business Model – Crystalline PV Manufacturing

Poly silicon

• Ability to secure low cost and good quality inputs ( Poly-silicon, Wafer, Cell)

• Ability to get market access – Increase capacity utilization

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CSFs for Business Model – Thin Film Manufacturing

Concern

Players

A-Si CdTe CIGS

•Many established players like Sharp, Q cells and Schott Solar have diversified into A-Si

•First solar is the largest thin-film manufacturer in the world

•Some industry players have exited this space

•New entrants and start-ups are focused

•Efficiency degradation

•Lower conversion efficiency

•Feedstock limitation -Availability of telluride

•Cadmium is carcinogenic

•CIGS is limited by availability of Indium , a rare earth metal that could cause supply bottleneck

• Ability to manage technology vendors for up-gradation and quality assurance.

•Ability to partner with existing CdTe players like First Solar

•Ability to drive technology innovation

•Ability to invest risk moneyCSF

CIGS – Copper Indium Gallium Selenide

CdTe – Cadmium Telluride

A-Si – Amorphous Silicon

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111 106.5

159 165

2 1.5 5

238 250

30 22.5 27

381.5

50 37.5 50

493

73 8060

0

100

200

300

400

500

600

Wafer Cell a-Si Cd-Te CIGS

MW

2006 2007 2008 2009E 2010E

Build-up of scaleAcross the value chain, the median capacity of the industry has been going up, which is most significant in the case of Wafers and Cells

Economies of scale in Thin film

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

30 60 100 200 300 400 500

Capacity (MW)

USD

/W

a-Si CIS CdTe

Expected economies of scale in thin film is likely to see capacity scale-ups

Crystalline Thin film

The bars correspond to actual/planned capacity additions by year

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Players in Thin-film - CIGS technology is supported by new start-ups with strong venture capital funding…

2006 or earlier

2007 2008 2009 2010

Plant Construction /

Ramp up

Pilot Production

Production > 5MW

Production > 25MW

Year of Market Entry (Expected)

Development Status

PV Flex

Scheuten

CIS Solartechnik

Johanna

Avancis

MalibuSignet

NexPower

Kenmos

CSG

Calyxo

Sontor

ersolSchott

HondaSharpSanyo

Uni-solarKaneka

Mitsubishi

First Solar

Source – KPMG Analysis, EuPD Research 2008

Free Energy

R&D

Nanosolar

Heliovolt

Miasole

Terrasolar

Solyndra

Solon

Wurth Solar

CIGS

CdTe

A-Si

Solar Thin-film – Industry Profile

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Industry clustersCapacity expansions along the value chain are clustered around certain key geographies

Wafer Cell

a-Si Cd-Te

48%41%

3%8%

4%

12% 14%

34%

4%

20%14%

25%

6%

49%

17%

11%

14%

93%

47%

5%

7%

22%

0%

20%

40%

60%

80%

100%

120%

Wafer Cell a-Si Cd-Te CIGS

China Taiwan Japan Germany Norway USA Spain Philippines India

China is gearing up to be a major cell and wafer player

USA’s capabilities in research make it a significant thin film

player

USA, Japan and Germany are hot-beds of thin film technology, while China and Taiwan are growing manufacturing bases for crystalline wafer and cell

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CSFs for Business Model – Project Developer

Solar Farm Roof Top

PPA with customersPPA with utility

• Ability to get access to customers

• Marketing and customer relationships

• Manage customer service and performance. Supply chain to manage multiple/retail customers

• Ability to sign a PPA with govt /utility

• Ability to secure low cost and high quality equipments

• Developing land banks and managing grid interconnections

Key challenges -

•Risk of default from customers

•Dealing with utility / electricity metering & measurement, grid connections etc.

•Permits and clearances

•O&M of equipment at customer premises

CSF

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CSFs for Business Model – Standalone Applications

Equipment Supply System Solution DesignDistribution &

InstallationMaintenance &

Service

• Source Equipments - Tie-ups with Manufacturers

• Secure supply of good quality and low cost modules

• Procure balance of system components – battery, inverter, cables, electrical components from vendors

• Design and develop solar solutions

• Customize solutions

• Configuration - Stand-alone systems; grid connection etc

• Appropriate Size and Orientation

• System assembly and installation

• Adhere to standards & specifications

• Install and connect the system through meters and other equipments

• Provide quick and high quality service at customer end

• Local infrastructure in-place to respond to breakdowns or any other problems

Description

VALUE CHAIN

• Cost competitiveness

• Product design

• Assure high reliability and performance

• Good quality service

CSF

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To Summarise for PV

Business Model Options Include:

• Wafer & Cell Manufacturing: Scale, Government incentives and ability to innovate in manufacturing processes and access to cell technology are key drivers. Strategic tie-ups for supply contracts are also key differentiators.

• Modules: Likely to be low margin game. Could be a potential entry point for a new entrant. Can also be part of integrated play with cells and wafers.

• Polysilicon: Ability to source cheap energy and negotiate Government incentives will be key drivers

• Thin-Film: Access to technology will be the key factor

• Standalone Systems: Product design and marketing will be key capability requirements. Potential could be large.

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Agenda

1.Solar Photovoltaic Technology

2.Solar Thermal Technology – Concentrating Solar Power (CSP)

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Solar thermal technologies - Brief Snapshot

Key Parameters

Parabolic Trough(Most commercially proven

technology)

Central Receiver Systems(Prototype, Semi Commercial )

Parabolic Dish(Prototype testing)

Key Advantages

• High system reliability• Low materials demand• Proven hybrid concept• Storage capability• Best land use factor

• High temperature (around 500-800°C)• High efficiency possible• Hybrid operations possible

• Potential for low capex• High efficiency• Modularity

Disadvantages• Low operating temperatures

(around 400°C)• Land needs to be graded level

• High maintenance and equipment costs• Reliability concerns

• Highly complex• No storage possible

ApplicationsGrid connected plants, mid-to-high process heat

Grid connected plants, high temperature process heat

Stand alone, small off-grid power systems or clustered to larger grid connected dish-parks

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Solar Thermal Technologies – Value Chain

Engineering R&D

EPCProject Development Operations

Iberdrola, ENEL, Energias de

Portugal, FPL

Schott Solar , Rioglass, FlabegEpuron

Solargenix Energy LLC

Solar Millennium AG, Abengoa S.A, BrightSource Energy, Acciona Energia

Ausra, Solel, Skyfuel

• Vertical integration- Presence across the entire value chain

• Diversification strategy in solar (Renewable portfolio, Solar Portfolio)

• Market Access –

• PPA’s with utilities

• Strategic Alliances

• Amongst Technology, EPC, Financing players.

Key Industry Themes

Technology ManufacturingLand Permits Financing Construction

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CSP - Business model options

Technology Supplier/ Manufacturer

√

√

√

√ √ √

• Technology R&D Innovation – Drive

costs towards grid parity

• Low cost manufacturing

• Core Component Access – License

or partnerships for – components like :-

Heliostats, Absorber tubes, Curved

mirrors and receivers etc

• Market Access – PPA

with utility

• Efficient power plant

operations

• Land Selection –

Build land bank

Developer

•EPC – Project

Management and

Construction

Capability

Niche or Integrated Presence

Turn key EPC Provider

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Thank You

19

Santosh Kamath

Director

KPMG Advisory Services Private Limited

+91 99670 16369

[email protected]

20©2009 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved.

APPENDIX

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Solar power offers immense potential as a clean alternative to meet the growing grid and off-grid energy requirements of the country

Grid Power -

• India’s energy shortage is about 10%*

• Peak deficit about 17%*

• Government announced the “National Solar Mission” - which envisages capacity addition goal of 1000 MW of solar power per year

Potential in Remote Villages -

• 33% of India’s population has no access to grid electricity

• Replace kerosene lighting consumption per household – 50 to 70 liters per year

• Solar Lamps could be used for lighting load

Commercial Applications -

• Replace diesel generators in stand-alone systems like telecom towers, oil & gas platforms, railway communications etc

…Solar power can be used to meet energy requirements for centralized as well as decentralized applications as solar systems can be built for capacities varying from Wp to MWp

*CERC

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Government has taken several investor friendly initiatives to promote solar power development in India

Along with incentives for power generation, there are favorable incentives for setting up manufacturing facility in India.

• Semiconductor policy - Government will bear 20 % of Capex during the first 10 years, if a unit is located within Special

Economic Zones (SEZs) and 25% for industries not located in an SEZ. Capital subsidy can be in the form of investment

grant and interest subsidy

Incentives for solar power generation in India Governments Tariff for PV Tariff for Solar Thermal

West Bengal Rs 11 per kwh Not Declared

Haryana (12 MW) Rs 15.96 per kwh Not Declared

Tamil Nadu (50 MW) Rs 15.15 per Kwh Not Declared

Rajasthan (50 MW Cap) Rs 15.78 per kwh Rs 13.78 per kwh

GUJARAT (500MW)

Projects commissioned before 31-12-2010

Rs 13/kwh for 12 years; Rs 3/Kwh from 13th to 25th year

Other projects commissioned before 31-03-2014

Rs 12/kwh for 12 years; Rs 3/Kwh from 13th to 25th year

Projects commissioned before 31-12-2010

Rs 10/kwh for 12 year; Rs 3/Kwh from 13th to 25th year

Other projects commissioned before 31-03-2014

Rs 9/kwh for 12 year; Rs 3/Kwh from 13th to 25th years

MNRE ( 50MW Cap)Generation-based subsidy up to Rs. 12/kWh for 10 years so that the maximum tariff a project may receive after state support is Rs. 15/kWh ( 5% digression starting 2010: Rs. 11.40/kWh )

Other fiscal benefits include:-•Accelerated Depreciation – 80% in the first year•Excise duty cuts and Tax holiday

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A portfolio of technologies at different levels of maturity and outlook are available for consideration..

Solar Power

Solar Thermal Technologies (CSP)

Parabolic Trough

Dish SterlingPower Tower

Poly-Silicon Wafer Cell ModuleSystem Assembly /

Integration

Established – Efficiency Improvements

Nascent - Innovation Stage

Amorphous Silicon

CdTe – (Proprietary Technology)

CIGS

Key challenge :- Outlook on grid parity for different solar technologies

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Detailed Approach – Real Options Evaluation Framework

Option 1: Start as an EPC Player, License Technology as soon as industry growth is visible

Modest Returns EP = +20 Slow growth pattern of the

Industry

EP = -10

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Specific Technology

EPC Player, Tech agnostic

Multiple Technologies

EP = -100

EP = -200

Right Bet EP = +500

Rapid Growth commences in

Year 4

Wrong Bet (Switching Costs)

EP = -200 EP = +500

EP = +700

EP = +600

Some Win

All Win

Rapid Growth

Option 2: Take Technology Position Now (Acquire, JV, In-house)

EP = -50

EP = -100

One Technology

Multiple Technology

Rapid Growth

EP = +700

EP = +1000

ILLUSTRATION

Expected payoffs and probability of the event shall be estimated by studying past trends in similar technology oriented industries.

P = 50%

P = 30%

P = 70%

P = 30%

P = 70%

P = 30%

P = 70%

P = 30%