1

2011
India – Renewable Energy Potential

INDIA
Renewable Energy Potential

Carbon Credit Capital LLC

561 Broadway
New York, NY 10012
Tel: 212-925-5697
(Main Office)
www.carboncreditcapital.com
 2 India – Renewable Energy Potential

Introduction: India’s Energy Needs and Potential

India’s energy markets present tremendous challenges and opportunities over the next few years. Its
economy, which has grown at a compounded annual growth rate (CAGR) of 10% over the last decade (in
PPP terms), is expected to expand by another 11% by 2020.1 The country is expected to overtake China
as the world’s most populous nation by 2025, according to the US Census Bureau.2 The country already
adds 16 million people to its population every year.3 Given the expected increase in the income and
population, huge increases in electricity capacity must be installed to meet this booming demand.

With peak demand at 119 GW, and available peak supply at 104 GW, India currently has a large supply
deficit of 15 GW, or 12.7%.4 In some northern and northwestern regions of the country, the deficit is as
high as 15-18%.5 The lack of supply of electricity stems from low private sector investment and a low
level of access to electricity. For example, only 66%, of the Indian population has access to electricity,
compared with 99% in China.6 On a per capita basis, India’s electricity consumption is at 380 kWh/
capita, compared with 987 kWh/ capita in China.7 The issue is of particular importance in rural India,
where as much as 52% of the rural population has no access to electricity. India has some of the highest
levels of electricity transmission and distribution losses in the world; it was around 35% in 2003-2004,
but has gradually come down to around 28% in 2008-2009 due to technological improvements.8

A part of the answer to the formidable challenge of providing access to electricity is likely to come from
renewable energy, where the government has put in place a number of incentives to stimulate
investment. In particular, Jammu & Kashmir, Punjab, Bihar, Uttar Pradesh, and Maharashtra could
benefit significantly, given their large renewable energy potential.

1
Economist Intelligence Unit Country Analysis. “INDIA - Selected series from 2000 to 2020.”
2
“At 1.4 bn, India's population to surpass China's by 2025: US Census.” Economic Times, December 16, 2009.
http://economictimes.indiatimes.com/news/politics/nation/At-14-bn-Indias-population-to-surpass-Chinas-by-2025-US-
Census/articleshow/5343525.cms. Accessed January 2011.
3
UNFPA – India. “Population and Development.” http://india.unfpa.org/drive/PopulationandDevelopment.pdf. Accessed January 2011.
4
Central Electricity Authority. “Load Generation Balance Report 2010-2011,” May 2010, p. 1. http://www.cea.nic.in/god/gmd/lgbr_report.pdf.
Accessed January 2011
5
Central Electricity Authority. “Load Generation Balance Report 2010-2011,” May 2010, p. 2. http://www.cea.nic.in/god/gmd/lgbr_report.pdf.
Accessed January 2011
6
Birol, Fatih et al. “World Energy Outlook 2010 – New Electricity Access Database.” International Energy Agency.
http://www.iea.org/weo/database_electricty10/electricity_database_web_2010.htm. Accessed January 2011.
7
World Bank Group. “Private Participation in Infrastructure Database.” Updated December 2010.
http://ppi.worldbank.org/explore/ppi_exploreCountry.aspx?countryID=152,
http://ppi.worldbank.org/explore/ppi_exploreCountry.aspx?countryId=50. Accessed January 2011.
8
“sonalthakur.” “T & D Losses in India: Aggravating the Power Problem.” Indian Industry Tracker, August 26, 2010.
http://industrytracker.wordpress.com/2010/08/26/td-losses-in-india-aggravate-the-power-problem/. Accessed January 2011.
 3 India – Renewable Energy Potential

India’s Capacity Deficit

Peak electricity demand is expected to rise to over 350 GW over the next ten years, requiring huge
capacity additions and investments in the sector as the given figure indicates.

Source: Planning Commission, Integrated Energy Policy Report, 2006

Efficiency losses represent the difference between capacity demand and total capacity supply required
to meet this demand. They are a result of transmission and distribution losses, plus electricity theft.
While the deficit in India’s energy projection scenarios is expected to persist, the gap is likely to continue
to close by 2031-32.

Worst Case Scenario (GW) Best Case Scenario (GW)

Capacity at End of 10th 5-year Plan (at
132 132
2007)
Capacity Additions During the 11th 5-Year
52 79
Plan (2007-2012)
Expected Capacity at End of 11th 5-year
185 211
Plan (2012)
Expected Capacity Supply Required by 2012
220 220
@8% GDP Growth Rate
Capacity Surplus (Deficit) at 2012 (35) (9)
Source: Planning Commission, Integrated Energy Policy Report, 2006; Central Electricity Authority, Report on Feasible Capacity Addition during
the 11th 5-Year Plan, 2010; CCC Internal Estimates.

Expected deficit at the end of 11th Five Year Plan, between 2007-2012, ranges from 35 GW to 9 GW. In
the worst case, the current capacity addition rate will be maintained, causing deficits to increase to 35
GW. However, this is an unlikely scenario as India is implementing many schemes, including the National
 4 India – Renewable Energy Potential

Solar Mission, which will boost capacity additions. In the Best Case Scenario whereby the Central Energy
Authority’s projections are met, deficits will decrease to 9 GW. Clearly, massive capacity additions are
needed if close the demand-supply gap.

Status of Renewable Energy in India

In 2003, the Government of India undertook some important steps to reform India’s electricity markets,
as part of the India Electricity Act. The Act freed licensing electricity generation in rural areas from
licensing bottlenecks. It mandated that open access to transmission lines be provided to distribution
licensees and generation companies, so as to foster competition and lead to gradual cost reduction. It
de-bundled the State Electricity Boards of 13 states. It stipulated the setting up of State Electricity
Regulation Commissions (SERCs) and authorized them to set minimum Renewable Power Purchase
Obligations, ranging from 5% to 10%. The SERCs set tariffs at 16% Return on Equity.9

Source: EIA, 2010; MNRE Annual Reports 2001-2008

As can be seen, the Electricity Act has had a significant impact on renewable capacity. Between 2001
and 2008, total renewable electricity installed capacity had a CAGR of 22%, compared to the CAGR of
conventional installed capacity, which was at 4%.

9
Sarukte, Hermant E. et al. “Presentation on Salient Features of the Electricity Act, 2003.” Slideshare.
http://www.slideshare.net/rapper44/presentation-on-salient-features-of-the-electricity-act-2003-presentation. Accessed January 2011.
 5 India – Renewable Energy Potential

India’s Renewable Energy Policies

With the passage of India’s Electricity Act of 2003, numerous policies promoting the increased usage
of renewable energy have been enacted by the central government, as well as individual state
governments, including:

1. Renewable purchase obligations (RPOs). The Electricity Act stipulates that State Electricity
Regulatory Commissions (SERCs) specify RPOs for their own states. As of 2010, only 18 states
have implemented such obligations, but future SERCs plan to put RPOs in all states.10
2. Accelerated Depreciation. For wind and biomass projects, there will be an 80% deduction on the
value of equipment during the first year of operation.11
3. Tax Incentives. Investors in wind energy projections are given tax exemption status for up to 10
years. Specific wind devices and equipment can obtain excise duty exemptions or concessions,
as well as customs duty reductions.12 The same applies to bioenergy projects.13
4. Generation-based incentives and subsidies. Generation-based incentives include subsidies and
loans to renewable energy producers according the amount of electricity produced. For
example, generation-based incentives for small hydro projects are set at INR 12,000-50,000 per
kW (USD 240-1,000 per kW) for projects of capacity 100-1,000 kW; and INR 2 million to 50
million per MW (USD 40,000-100,000 per MW) for larger projects of capacity 1-25 MW.14
5. Feed-in tariffs. All electricity generated from renewable sources is subject to feed-in-tariffs of
various rates. A feed-in tariff is not a subsidy per se, but is a premium paid by a utility to its
consumers for excess power generated by alternative energy systems, and is used by
governments as an incentive for consumers to adopt alternative energy sources.15 This is
regarded as a very effective policy instrument because it is a price stabilization mechanism that
makes investment returns more certain.

10
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, p. 25.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
11
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, p. 32, p. 74.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
12
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, pp. 32-33.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
13
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, p. 74.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
14
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, p. 61.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
15
DaSolar Energy. “Glossary of Energy Terms.” http://www.dasolar.com/solar-energy/glossary. Accessed January 2011.
 6 India – Renewable Energy Potential

An example of a massive nation-wide policy would be the National Solar Mission which aims to scale-up
India’s solar capacity to 20 GW by 2022.16 The feed-in-tariff for FY 2010-2011 is higher than average,
consisting of INR 17.9 (US$ 0.36) per kWh for Photovoltaic plants and INR 15.3 (US$0.31) per kWh for
Concentrated Solar Power Plants. Power purchase agreements are also long-term, lasting for 25 years.
These lead to an internal rate of return of 16-17%.17 With a view to boost concentrated solar power
systems, the feed-in tariff for solar thermal systems greater than 5 MW are set at INR 11 (USD 0.22) per
kWh for the first 12 years and INR 4 (USD 0.08) per kWh for the remaining 13 years, and concentrated
solar power generation is exempted from electricity duty.18

Policy Comparison – U.S. and Germany

In the U.S., a more laissez-faire approach is undertaken by the Federal Government. Firstly, State
Renewable Portfolio Standards (RPS), flexible market-based policies which require that electricity
providers obtain a minimum percentage of their power from renewable energy resources by a certain
date ensure that public benefits of renewable energy are recognized. However, unlike RPOs, individual
states are largely left to their own discretion to implement these policies.19 Secondly, grants and loans
are given out by the relevant authorities as a lump-sum incentive, supported by tax incentives which
were signed into law as the Energy Improvement and Extension Act of 2008.20 Thirdly, a depreciation
benefit of 50% during the first year of operation for renewable energy projects is issued to energy
providers.21 However, it is noteworthy to emphasize that there has been no strong feed-in tariff
program implemented in the U.S.

In Germany, on the other hand, the government has a more hands-on approach to promoting
renewable energy usage. In 2004, the Renewable Energy Sources Act was passed; it prescribed fixed
tariffs of which grid operators must pay for the feed-in of electricity generated from hydro, landfill gas,

16
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, pp. 41-42.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
17
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, p. 40.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
18
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, p. 51.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
19
International Energy Agency. “Global Renewable Energy – Policies and Measures.”
http://www.iea.org/textbase/pm/?mode=re&id=124&action=detail. Accessed January 2011.
20
International Energy Agency. “Global Renewable Energy – Policies and Measures.”
http://www.iea.org/textbase/pm/?mode=re&id=4203&action=detail. Accessed January 2011.
21
International Energy Agency. “Global Renewable Energy – Policies and Measures.”
http://www.iea.org/textbase/pm/?mode=re&id=123&action=detail. Accessed January 2011.
 7 India – Renewable Energy Potential

sewage treatment and mine gas, biomass, geothermal, wind, and solar sources.22 Additionally, the
government enforces RPO’s that target not the producer, but the consumer; for example, the
Renewable Energies Heat Act of 2009 requires owners of buildings that are to be newly erected to use a
certain percentage of renewable energy for heating purposes.23 While the government has liberalized
the electricity market, it has given its support to renewable energy so that renewable energy producers
do not feel the pinch; for instance, it passed the Combined Heat and Power (CHP) Law of 2002 to
promote large CHP plants that were affected by decreasing electricity prices as a consequence of
liberalization.24 Meanwhile, private sector involvement in renewable energy is encouraged by policies
such as the KfW Program of 2005, which offers low-interest loans (interest rates of 3.6% and 4.15%) for
small investments in solar photovoltaic generation, making private investors the main beneficiary.25

Evaluation of the Policies

In the U.S., policies have resulted in stagnation in renewable capacity, as a result of inconsistent policies
across states, ineffectiveness of the State Renewable Portfolio Standards, loans to producers, and
political opposition against renewable energy legislation. In Germany, however, policies resulted in ever
increasing percentage renewable capacity, as Feed-In-Tariffs have been effective, being tailored to
specific renewables. The regulatory environment has also been made favorable towards private
investors. The tax incentives and subsidies act as a support for the feed-in-tariffs, rather than being an
overall solution. RPOs target consumers themselves rather than the distributors.

In India, there have been successes with the Feed-In-Tariff, but the unfavorable regulatory environment
has hampered private investment in renewable development. While renewable energy capacity growth
in India is high,26 there needs to be greater improvement if the supply-demand gap is to narrow. The
main lessons that India can learn from the U.S. and Germany example is that while a strong government
hand is needed to support the renewable industry in a consistent manner in order for it to compete with

22
International Energy Agency. “Global Renewable Energy – Policies and Measures.”
http://www.iea.org/textbase/pm/?mode=re&id=1969&action=detail. Accessed January 2011.
23
International Energy Agency. “Global Renewable Energy – Policies and Measures.”
http://www.iea.org/textbase/pm/?mode=re&id=4168&action=detail. Accessed January 2011.
24
International Energy Agency. “Global Renewable Energy – Policies and Measures.”
http://www.iea.org/textbase/pm/?mode=re&id=1631&action=detail. Accessed January 2011.
25
International Energy Agency. “Global Renewable Energy – Policies and Measures.”
http://www.iea.org/textbase/pm/?mode=re&id=3596&action=detail. Accessed January 2011.
26
NOTE: Large Hydro (>25 MW) is NOT classified as renewable energy source, so U.S. Energy Information Administration figures for India are
significantly larger than those for MNRE. If capacity for India’s large hydro is removed, India’s renewable percentage drops, but shows greater
growth.
 8 India – Renewable Energy Potential

traditional sources of energy, ultimately private sector investment and subsidies targeting consumers
must be encouraged.

Source: Energy Information Administration

Capital Investment in Renewable Energy

According to the Global Climate Network, India’s required capital investment to meet its 11th 5-year plan
(2007-2012) as of the beginning of year 2010 is USD 6.6 billion. It forecasted that the total investment
requirement is up to a maximum of USD 12.7 billion.27 The dominant form of financing is asset financing
and public capital markets; the total value of asset financing in 2009 was USD 1.9 billion, making up 70%
of domestic renewable energy investments.28 However, private equity would be needed for construction
and expansion. Other major forms of financing include corporate financing, involving the use of internal
company capital to finance a project directly or the use of internal company assets as collateral to obtain
a loan from lenders; and project financing, involving financing a project through debt and equity that are
repaid by the revenues and assets of a specific project rather than through the company’s balance
sheet.29

27
Global Climate Network. “Investing in Clean Energy.” November 2010, p. 17.
http://www.globalclimatenetwork.info/ecomm/files/Investing%20in%20Clean%20Energy%20Nov2010.pdf. Accessed January 2011.
28
Global Climate Network. “Investing in Clean Energy.” November 2010, p. 18.
http://www.globalclimatenetwork.info/ecomm/files/Investing%20in%20Clean%20Energy%20Nov2010.pdf.
29
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, pp. 105-106.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
 9 India – Renewable Energy Potential

Financing Renewable Energy

Sources of financing in renewable energy in India has traditionally come from the Central government
and non-governmental organizations (NGOs) in the form of loans and grants. The main government
financer is IREDA, which finances up to 70% of the project cost with interest rates between 1.75% to
10.5% in the hydro, wind, biomass, and solar sectors. At this point, venture capital and private equity is
still limited due to the risks associated with the current renewable energy technology.30 In December
2009, IREDA financed 1,921 projects with loan commitment amounts of over USD 2.4 billion. Other
sources from the public sector include PFC, Rural Electrification Corporation, and NABARD.31 Foreign
sources of funding include the World Bank, the International Finance Corporation, KfW, United Nations
Energy Programme, and the Asian Development Bank.32

While financing through the Clean Development Mechanism (CDM) is still small, India has the 2nd largest
market share of CDM projects after China. As of June 2010, the CDM executive board registered 506
projects in India, which comprised over 20% of all registered projects. There are also around 422
unilateral CDM projects as of June 2010, which are being developed by Indian stakeholders without the
engagement of Annex I industrialized countries.33 The advantages of using CDM to finance renewable
energy projects in India include lowered compliance costs, and enables renewable energy providers to
receive financing by selling credits.34

Financing structure of RE companies is set at a debt-equity ratio of 70:30 for tariff determination.
However, the debt-equity ratio is typically more heavily weighted towards equity for better financial
performers. For instance, Greenko, a company with large growth, had a debt-equity ratio of 31:69 in
2010.35

30
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, p. 101.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
31
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, pp. 102-104.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
32
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, pp. 108-109.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
33
Arora, D. S. et al. “Indian Renewable Energy Status Report,” National Renewable Energy Laboratory, pp. 110-111.
http://www.nrel.gov/docs/fy11osti/48948.pdf. Accessed January 2011.
34
Duflo, Esther et al. “Towards an Emissions Trading Scheme for Air Pollutants in India.” India Ministry of Environment and Forestry Discussion
Paper, p. 13; http://moef.nic.in/downloads/public-information/towards-an-emissions-trading-scheme-for-air-pollutants.pdf. Accessed January
2011.
35
Mirabaud Securities. Greenko Group Broker Report. May 19, 2010, p. 17 (Balance Sheet).
http://www.greenkogroup.com/docs/reports/Mirabaud_Securities_2010.pdf. Accessed January 2011.
 10 India – Renewable Energy Potential

Conclusion

India’s burgeoning demand for electricity may lead to a worsening electricity crunch, but this situation
can be averted by appropriate policies that scale-up the development of renewable energy. Germany’s
example of top-down intervention, along with the promotion of private investment and consumption,
are a good guide for India to follow, especially for India’s ambitious National Solar Mission. In order for
India to meet its energy goals, huge amounts of capital investment are required. While the central
government and NGOs have been instrumental in providing financial support to renewable energy
projects, more private investment is needed, and the CDM could potentially become one of these
sources. Once the public and private sector investment in renewable energy is coordinated, India will be
well on its way to narrowing its demand-supply gap and meeting its energy goals.

About Carbon Credit Capital’s Clean Energy Fund

Carbon Credit Capital is planning to develop approximately 1,000 MW of clean power capacity in India
and generating associated CERs. We are capitalizing on the attractive investment opportunity in India for
clean power generation, which is bolstered by government incentives, strong demand for power and
carbon credits. We will act as equity partners to experienced local developers building and operating
these plants. Our strategy is based on the view that becoming principals in CDM projects through equity
investment is the way forward for developing high quality CERs and benefiting from the attractive
investment opportunity clean power projects present. We have applied a focused and systematic
approach to developing the right team, in-country partners, networks and local knowledge base in India
over the past year and a half in order to be successful in the strategy we are pursuing.