January 2012

Table of contents

Table of contents

Executive summary
1

Indias strong economic growth, combined with countrys industrialization, increasing population and increased access to power has led to rising demand for power in the country
1

Historically, the supply has consistently lagged the demand in the country by c.10%, and expected to worsen further

Government of India has set very ambitious targets to plug the gap, the big push coming from renewables With the strong commitment from Government, and the various announced incentives, the renewables, particularly solar, presents an opportunity to earn very attractive returns over a longer time frame India has significant potential for generating renewable energy, particularly in hydro, wind and solar This study presents a case for and against investing in the solar sector, identifying the potential returns on offer taking into account the current regulatory framework

Indian power sector: Overview

1

Indias rapidly expanding economy is presenting many problems for the Indian Government, not least the fact that around one third of Indians do not currently have access to electricity Despite making up 17% of the worlds population, India only has a 3% share of the worlds energy consumption
1

Population growth to further increase energy demand

2 Indias per capita consumption is significantly below other comparable emerging markets, including the world average 3 Indias consumption per capita of 704 kW/annum is more at par with

Philippines than China, which has a consumption per capital of 2,585 kW/annum

(kW / annum)

Consumption per capita

Source: World Bank, Global Insights and broker research reports.

Population growth rate

Indian power sector: Overview (contd)

1

GDP is closely related to energy production, and insufficient capacity is currently having a negative impact on GDP growth
1 GDP has grown at rates of between 6.5 9% per year over the past 3 years; the ability to maintain these rates is threatened by the lack of capacity

GDP growth rate

Demand for energy in India has continually exceeded production capacity; with a peak historic energy shortage of 12.7% in 2009-2010

Despite Governments attempts to improve situation, energy gap has continued to increase

(TWh)

(GW)

Generation demand and supply

Source: Global Insights, CEA and broker reports.

Peak capacity demand and supply

Indian power sector: Overview (contd)

1

To address this gap, the GoI has targeted an expansion of its power capacity to 342GW by 2017 from 209GW currently, through series of 5-year plans
1 This equates to a yearly addition of approximately 18GW, a projection that was restated in the Governments 5 year plan 2 Main source of power is from thermal power plants (59% of the total

installed capacity)

3 Hydro contributes 19%, whilst renewable accounts for 11%, nuclear for 2% and the remaining 9% is held as captive

Originally the expectation of the governments current 5 year plan, covering the period 2007 2012, was to add an additional 93GW of capacity across the period, 15% of which was to be generated from renewable sources 3 If the Government is to come close to meeting this target in the near future, renewable energy technologies will play a major role in making it possible
2

(GW)

Targets for increased capacity vs. Actual installation

Source: MNRE, CEA and broker research reports.

Current installed capacity by type: 209.1 GW

Indian renewables sector: Overview

Excluding large hydro projects, renewable energy generation currently makes up 11% of generating capacity in the country (c.23GW) 2 Government targets to set up 74GW of renewable energy by 2022
1 1 Implies that c.51GW of renewable energy capacity needs to be added over the next ten years 3

Governments commitment to the sector can be seen via its recent performance as shown in the below table:
Target for 2011-12 Achievement during the month of Jan-12 101 48 25 20 200 25 3,435 292 1 486 Achievement during 2011-12 2,023 258 146 285 446 1 3,159 16,179 3,300 1,143 1,953 481 74 23,130 70% 14% 5% 8% 2% 0.3% 100% MW % of total

Technology

Wind Small Hydro Biomass Bagasse Solar Waste to Energy Total (MW)

2,400 350 460

State Renewable Purchase Obligations (RPOs):

1 State-wide RPOs require states to purchase up to a minimum of 10% of annual energy requirements from renewable sources by 2012 2 Scheduled to increase to 20% by 2020

Source: Ministry of New and Renewable Energy. Note: Capacities as of 1/31/2012.

2003 Electricity Act

2003 Electricity Act introduced a number of reforms to the Indian power market, essentially opening up the electricity market up to the private sector 2 These changes included:
1

removing the requirement to obtain a license to set up a generation plant 2 providing more open access to the transmission networks, and,
1

introducing competition for the distributors by providing open access to consumers 3 Under the legislation electricity generators can either sell to the local State Electricity Board under a 15-20 year PPA or negotiate custom PPAs with industrial customers 4 Merchant contracts tend to be shorter in duration (5-10 years) but are usually much more lucrative
3

The state and central government sectors dominate the market in terms of ownership of power generating assets 6 However, since the liberalization of the energy markets, the private sector has grown from 11% to presently c.21%
5

Source:

Broker research reports.

1 2

India presents a great potential for solar power India receives solar energy equivalent to over 5,000 trillion kWh per year, far more than its total energy consumption

Daily average solar energy incident varies from 4 - 7 kWh per sq. m. depending on the location and time of the year 4 Irradiation data suggests that 0.5% of Indias land area under solar PV could meet all electricity needs of the country in 2030
3 5

Rajasthan and north Gujarat receive highest annual radiation with over 6 kWh/sq meter Andhra Pradesh, Maharashtra, and Madhya Pradesh receive radiation of 5-6 kWh/sq m
1

But, still comparable to European countries with a high solar installations, such as Spain and Italy

Source:

MNRE website, PV Group and broker research

reports.

Jawaharlal Nehru National Solar Mission

Launched in Jan 2010 by honorable Prime Minister Dr. Manmohan Singh, JNNSM is a major initiative of the Government of India and State Governments to establish India as a global leader in solar energy

Aims to install 20GW of solar capacity by 2022 in addition to 2,000 MW of off-grid solar power Mission will adopt a 3-phase approach:

Phase 1: Spanning the remaining period of the 11th Plan and first year of the 12th Plan (up to 2012-13) Phase 2: remaining 4 years of the 12th Plan

(201317)

Phase3: 13th Plan (201722)

Target for Phase I (2010-13) 7 million sq meters 200 MW 1,000 - 2000 MW Target for Phase 2 (2013-17) 15 million sq meters 1,000 MW 4,000 - 10,000 MW Target for Phase 3 (2017-22) 20 million sq meters 2,000 MW 20,000 MW

Proposed roadmap:
Application segment

S. No.

1. 2. 3.

Solar collectors Off grid solar Applications Utility grid power, including roof top

First batch of projects allotted for Phase 1 included 150 MW of Solar PV and 470 MW of Solar Thermal
MNRE website, Wikipedia.

Source:

Renewable incentives offered by GoI

Feed-in-tariffs (FiT)

Generation based incentives

Accelerated depreciation

Preferential tax rates

Prefe renti al FiTs offer ed to rene wabl e ener gy plant s conn ected to state electr icity grids

and easier to forecast revenue stream

Considers the cost of capital and aims to provide a high per-tax equity IRR Successfully implemented in various European countries

Provided to support power projects connected to distribution grid of state utilities

Maximum amount of GBI applicable for a solar project determined after deducting PPA rate (signed with state utility) from a notional amount of Rs. 17.91 per kWh CERC reference tariff of Rs. 5.5 per kWh implies a GBI of Rs. 12.41 per kWh for solar

PPAs Renewable energy certificates signe (REC) d for long perio d ensur Carbon emission reductions ing reduc (CER) ed risk

80% accelerated depreciation during the initial years of operation, providing effect to substantial tax benefits and strong cash flow profile In parallel with the GBIs in a mutually exclusive manner

Option to either avail accelerated depreciation or GBI, but not both

Project developers applicable for a 10 year tax holiday

However, a minimum alternate tax (MAT) of 18.5% applicable during the period, as compared to the corporation tax rate

Gencos can opt for feed-intariff revenue structure or the REC structure Incentives of 1 REC per MWh which can be sold in the open markets Solar REC banding fixed at Rs. 12 per kWh Rs. 17 per kWh

Carbon credits issued by the Clean Development Mechanism board for emissions reduction achieved under the rules of Kyoto Protocol Developed western markets but Indian markets are still far behind

Source: MNRE data, other web-based available data.

Solar India: Key investment highlights

Quasi-regulated sector

1 Long

Ab undant supply

term PPAs offers a predictable and stable cash flow profile, emphasizing the low risky nature of the sector

Global initiatives
2 With the world

Government support

economies focusing on carbon free environment, the need for renewables becomes more strong

High margin

3 Sector

Reducing costs

strongly backed by the GoI, underlined by various incentives offered aimed at providing high IRRs

4 High EBITDA and Net

income margins, characterized by low working capital, supports the financial case for renewables

5 Oversupply

and severe competition among solar component providers pushing costs down and severe competition among solar component providers pushing costs down

6 Oversupply

Solar India: Key concerns

1 Reliability

GoI

on

1 Strongl

2 Delayed

payments from SEBs of policy changes initial

3 Risk

4 High

costs

y reliant on Govern ment, which has been marred with redtapism and criticize d for slow pace of reforms

and infrequent payments from the State Electricity Boards

3 High levels of debt on

Government as a result of funding renewable subsidies can lead to reduction in incentives, as is currently the case with various European economies

4 Despite various 2 Cash

constra ined and highly leverag ed IPPs may find it difficult to cope with the slow

technological achievements in the sector, the initial setting up costs of solar plants is still very high, with grid parity levels still far from reality

Recent developments: Solar

In December 2010 the GoI announced the winners of its first solar auction with around 610MW awarded to 35 winners 1 Auction had bids for c8.0x the capacity offered 2 c.470MW of total capacity was solar thermal, whilst the remainder was solar PV 3 First auction widely criticized due to 1 small size of the projects (maximum of 5MW) 2 irrational bidding, largely due to the auction rules, whereby project developers that were offering to sell electricity at the cheapest rates were selected 2 In August 2011 the GoI invited companies to register for the second national auction to award licenses to build 350MW of solar PV by 2013 1 Some modifications made to the rules and guidelines, including, maximum size of each project increased from 5MW to 20MW, and each bidder could win as much as 50MW of total capacity 3 In December 2011, MNRE announced generation based incentives (GBI) of Rs. 12.41 per kWh
1 1

Quantum of GBI is kept fixed, as a difference of the CERC tariff (Rs. 17.91 per kWh) and a reference tariff of Rs. 5.5 per kWh

Source:

Ministry of New & Renewable Energy and broker research reports.

Solar thermal: Technology overview

Solar thermal flow chart

In solar thermal energy plants, solar radiation is concentrated by mirrors or lenses to obtain higher temperatures a technique called Concentrated Solar Power (CSP) Solar thermal panels transfer the sun's heat, as opposed to generating electricity Most popular application is to subsequently generates electricity
Wikipedia and web.

2 3

heat

water,

which

then

Source:

PPA tariff: Merchant power prices: GBI: REC: Capital cost / MW: Capacity utilization factor: Debt / Equity ratio: Debt interest rate:

INR 5.5 / kWh INR 5.8 / kWh INR 12.41 / kWh INR 14.5 / kWh INR 169 million 19% 70:30 13.4%

As per latest MNRE announcement

Average of 2008-09, 2009-10, As per latest MNRE Average of floor and As per CERC guidelines for As per CERC guidelines for As per CERC guidelines for As per CERC guidelines for

2010-11

announcement

forbearance price

2010-11

2010-11

2010-11

2010-11

Debt repayment period: Tax rate Return on Equity Construction period Depreciation O&M expenses % of sales O&M expenses escalation Interest on W.C.

As per CERC guidelines for As per CERC guidelines for

10 years MAT @ 18.5% (1 yrs) 34% thereafter 15% 18 months 7.0% (1 10 yrs) 1.3% thereafter 10.0% 2.0% 12.89%
st st

2010-11 10

2010-11

Assumptions for the base case Assumptions for the base case As per CERC guidelines for

2010-11

Assumptions for the base case Assumptions for the base case As per CERC guidelines for

2010-11

Key financials

Cash flow statement

Free cash flow analysis

Sensitivity analysis

Equity value sensitivity to IRR and Capex / MW

Equity value sensitivity to CUF and IRR

C a p e x / M W

T a r g e t I R R

Capex / MW

C a p e x / M W

Equity value sensitivity to CUF and Capex / MW

PPA tariff: Merchant power prices: GBI: REC: Capital cost / MW: Capacity utilization factor: Debt / Equity ratio: Debt interest rate: Debt repayment period: Tax rate

INR 5.5 / kWh INR 5.8 / kWh INR 9.81 / kWh INR 14.5 / kWh INR 153 million 23% 70:30 13.4% 10 years st MAT @ 18.5% (1 10 yrs)

As per latest MNRE announcement

Average of 2008-09, 2009-10, As per latest MNRE Average of floor and As per CERC guidelines for As per CERC guidelines for As per CERC guidelines for As per CERC guidelines for As per CERC guidelines for As per CERC guidelines for

2010-11

announcement

forbearance price

2010-11

2010-11

2010-11

2010-11

2010-11

2010-11

34% thereafter 15% 18 months 7.0% (1 10 yrs) 1.3% thereafter 10.0% 2.0% 12.89%
st

Return on Equity Construction period Depreciation O&M expenses % of sales O&M expenses escalation Interest on W.C.

Assumptions for the base case Assumptions for the base case As per CERC guidelines for

2010-11

Assumptions for the base case Assumptions for the base case As per CERC guidelines for

2010-11

Key financials

Cash flow statement

Free cash flow analysis

Sensitivity analysis

Equity value sensitivity to IRR and Capex / MW

Equity value sensitivity to CUF and IRR

C a p e x / M W

T a r g e t I R R

Capex / MW

C a p e x / M W

Equity value sensitivity to CUF and Capex / MW