Solar Power in India Discussion on cost trends and implementation road map

Confidential and For Limted Circulation

March, 2011

DISCLAIMER

The information provided in the presentation is based on preliminary analysis and further refinement may be required The reference to KPMG Analysis; indicates only that we have (where specified) undertaken certain analytical activities on the underlying data to arrive at the information presented; we do not accept responsibility for the underlying data.
Collection of data for assessment has been limited to such information as can be collected from resources on the published public domain and meetings with market participants Wherever information was not available in the public domain, suitable assumptions were made to extrapolate values for the same

Confidential This report contains analysis and intellectual property of KPMG. Circulation is restricted and only with prior consent of KPMG.

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Agenda

Cost Reduction Potential for Solar Power In India

Solar PV technology - Innovation and Scale Solar CSP technology Localisation and Scale

Implementation Roadmap
Possible steps by Governments to support market creation

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Cost Reduction potential What aspects of solar power lead to cost reduction possibilities?

1. Technology innovation
Ongoing R&D cost reduction/ efficiency improvement India suited technology leveraging of India advantages

5. Other Enablers
Banker education/ incentivization for fair cost financing Sustained momentum accelerates Indian industry; aligns international markets to Indian landscape

Cost Reduction Levers

2. Localization
Localization of multiple components possible Indigenous manpower for engineering design

3. Govt Incentives
Aggregation initiatives (Solar Parks) for scale economies Reduction of location sensitive charges wheeling/ Tx to encourage Sun based siting

4. Competitive Intensity
Tariff competition - percolation to suppliers leading to margin reductions on key high value imports Cost reduction of EPC wraps through innovative contracting models

We believe multiple levers for cost reduction exist the pace of cost reduction would largely depend on the pace of capacity addition
2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Solar PV Cost Reduction Potential Manufacturing Innovations

Module Costs: $1.1-1.2 per Wp Polysilicon $ 0.30 per Wp 27%

Reduction in polysilicon feedstock prices Deployment of Fluidized Bed Reactor (FBR) process Costs of Si-FBR processes are around $ 20 per Kg Cost reduction potential by 35-40%

Cost Structure

Ingots/Wafers $ 0.25 per Wp 23%

Technology improvements Usage of innovations like: Diamond wire wafering, Ultra thin kerfless wafers etc. Polysilicon usage is expected to come down from ~ 7-6.5g/W to ~ 3g/W within the next decade Cost reduction potential by 45-50%

Cell $ 0.22 per Wp 21%

Modules $ 0.30 per Wp 29%

Drivers for cost reduction

Improvement of cell efficiency Increasing light absorption layers, Usage of better absorption material etc Cell efficiencies expected to increase from 16-17% to 18-19% and then later on towards 22-23% Cost reduction potential per kWh by 15-20%

Potential for cost reduction

Source DOE USA Estimates, Other Analyst Reports, KPMG Analysis

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Solar PV Cost Reduction Potential Non module BOS Costs

Balance of System (~45- 50% of total solar system cost)

Inverters

Transformers, switch gears and cables

Civil & General Works

Installation and Commissioning

IDC and Financing Charges

Majority of inverters are imported currently Key Considerations Players are looking at assembly of inverters in India which could contribute towards cost reduction

Market and technology already established Driven by prices of commodities like Copper and CRGP coil

Driven by localized site conditions and low labour costs

Availability of manpower for design engineering Local sourcing of materials

Driven by low cost innovative financing options Exim route Tax free solar bonds

Potential for cost reduction

LOW

LOW

HIGH

HIGH

HIGH

Balance of System costs are likely to come down due to local sourcing and lower labor costs
2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Solar PV Projection of Cost Trends

SOLAR PV
Module Costs Non Module BOS Costs TOTAL SYSTEM COSTS TOTAL SYSTEM PRICE Electricity Costs (Without Margin)* Electricity Prices - (With Margin Estimates)

Units
$ per W $ per W $ per W $ per W Rs per Unit Rs per Unit

2010-11
1.07 1.03 2.10 2.73 9.69 12.30

2015-16
0.80 0.70 1.51 1.88 7.20 8.77

2021-22
0.59 0.60 1.19 1.48 5.90 7.10

Source KPMG Analysis

Note: *Interest rate 11%; A 1% decrease in interest rate can result in tariff reduction by about 3% Polysilicon prices to drop from $ 45 per Kg to $ 35 per Kg by 2021-22 Polysilicon usage: - reduce from around 6.5 g/W to 3.5 g/W by 2021-22 Processing costs - 5% reduction year on year; BOS ( Other than invertors) 10% year on year reduction for next 5 years;

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Solar CSP Localization Potential Key high value CSP components lend themselves to high localization potential

Trough Structures & Associated Works

Parabolic Trough Mirrors

Molten Salt Storage Components

Power Block

Engineering Design/ Execution

Most fabrication requirements welding, casting etc available Localization possible with design transfer and hand-holding

High value item Most raw materials available locally Manufacturers with required competence present in India

Requires fabrication of pipes, tanks Manufacturers with required competence present in India Pumps may still be imported

Turbines are specialized but global suppliers have Indian presence can localize Heat exchangers Local designs available

Limited capabilities with Indian vendors however, required CAD/ CAM facilities available Local manpower available

11-15%

9-12%

5-7%

12-15%

7-9%

Most components can be localized readily or with limited assistance pace would depend on industry willingness based on market size visibility Certain complex items (e.g. Absorber tubes, Heat transfer fluid, C&I components, Specialized pumps) may take time due to limited suppliers and concentration of technology
2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Solar CSP Solar Thermal Cost Reduction Potential translates into a saving of about USD 1Mn/ MW
Key components for solar thermal components (shown
below) lend themselves to savings through localization and competitive intensity data based on KPMG local market survey
Component SOLAR FIELD (Mirror structure, Hydraulic equipment, Swivel joints, Foundations for Mirror Structures) SOLAR FIELD ASSEMBLY SOLAR FIELD (Pipes and valves, Pipe Supports, Insulation, Civil works) POWER BLOCK (Civil Works) Absorber Tubes Parabolic Mirrors EPCM Fees Savings possible 30% - 40% Reason
Others 12%

Project Cost Break-up for a Solar Thermal Plant With Thermal storage
IDC 8%
Power Block 12%

Localization

Land 1% EPCM fees 8%

30% - 40% ~30%

Localization Localization
Salt Storage 15% Solar Block 44%

~30% ~20% 10% -15% 20% - 30%

Localization Competitive intensity Competitive intensity Competitive intensity + Localization

Put together, these components can form about 40%-50% of a solar thermal plant with storage

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Solar CSP Projection of Cost Trends

Drivers for cost reduction in the next 15 years Economies of Scale: Scaling up plants beyond 50 MW have a potential for cost

Potential reduction in LCOE till 2025

3000 12

10.49
2500

11 10

$ Mn per KW

reduction by 21-30%. Deployment of new technologies: Expected

194 2000 476

8.37 7.29
150 368 1,308

9 8

1500

1,690

5.9
122 300 1,065 110 269 824

7 6 5 4 3 2 1

Rs./ kWh

reduction in costs is 18-22%.

Cost & Efficiency Improvements have a potential cost reduction of 10-15%.

1000

500

LCOE has a potential reduction of 45%- 60% by 2025.

FY 2011

FY 2016

FY 2020

FY 2025

Solar Field Cost (Mirrors/Receivers/BoS of Solar field) Power Block/ BoP Others LCOE

Source: Estela 2010 Source: KPMG CSP Financials

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Competitive Intensity

Stiff tariffs are evident in NSM bidding: State Tariff Orders lend economic viability at capital costs of ~ USD 2.5 3 Mn/ MW (for CSP) much lower than the global benchmarks of ~ USD 3.5 - 4 Mn Similarly, for Solar PV the capital costs discovered in the competitive bidding process of ~ USD 2.4-2.8 Mn/MW - much lower than global benchmarks of ~ 3-3.2 Mn/MW CSP - With India being seen as a strong candidate for solar power, global suppliers are keen on entering the market; ongoing discussions with suppliers have sensitized them to Indian price requirements and we are seeing margin alignment in certain items
Post NSM Bidding: Absorber tubes quotes have seen reduction of around 20% Parabolic trough mirror quotes have also witnessed >10% reduction

With Phase II of NSM mandatorily requiring indigenized cell to be used by players, the existing cell manufacturers are looking at ramping up the capacity and module manufacturers integrating backward to cell manufacturing which can lead to further reduction in cost.

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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Other enablers for cost reduction

Financing charges

Nascence of sector makes banks apprehensive; potential viability boosting measures (e.g. thermal storage) adds to apprehension Financing plays a key role in viability determination due to capital intensive nature of projects (Table below) Govt initiatives to create solar funds through agencies such as PFC can provide funding avenues at reasonable costs as well as boost confidence of private banks

Impact of financing on project financials (Illustrative for 25 MW CSP plant with storage) Increase in interest rate by 1% Increase in tenure by 1 year Levelized tariff higher by19 P/KWh Equity IRR higher by 0.4%

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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The landed cost of power to consumers in certain key states is expected to reach closer to solar power cots within the coming decade.
14.0 12.0 10.0 9.69 12.30

Solar Power Costs (With & W/o Margin Estimates) Vs. Cost of Supply

Gujarat

TN

8.77

Rajasthan (7.18)

Karnataka

8.47 6.96 5.94 4.65

Rs. / kWh

8.0 6.0 4.0 2.0 2010-11 7.20 5.79 4.47

8.17 6.74 6.10 4.84

Gujarat (5.56) TN (5.66) Maharashtra (4.48) AP (4.76)

7.89 6.52 6.27 5.03

7.62 6.45 6.30 5.23

Punjab

5.15 3.68

7.10 6.84 5.90 5.66

WB

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

2019-20

2020-21

2021-22

Landed Cost of Power @ LT in 2021-22 In Rs. / kWh

Rajasthan 8.40

TN 6.62

Gujarat 6.50

Punjab 6.46

WB 6.25

Karnataka 6.24

AP 5.57

UP 5.46

MP 5.13

Maharashtra 4.85

38% of India Energy Requirement (ER) in 2021-22

34% of India ER in 2021-22

Cost of Supply (On Energy Input) assumed to grow @ 4.0% (y-o-y) vis--vis CAGR of 4.7% (for 2001-02 to 2008-09) Landed Cost of Power projected at 4.0% (historical India growth) for states having loss levels less than Indias; at 2.0% for states with limits greater than Indias but less than 50%; and at 1.0% for states with loss levels greater than 50%. Indias AT & C loss trajectory assumed to reduce at 4.5% y-o-y from actuals of ~ 30% in 2008-09 to 16.50% in 2021-22

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

IMPLEMENTATION ROADMAP

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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Implementation roadmap How can the capacity addition measures being taken by Govt be improved in subsequent phases?
Market Stability
Program to be designed to provide long term market stability signals - Accelerate grid parity and ecosystem development
Can be done by enunciating the quantum of budgetary support for the sector and

linking capacity installation targets to price reduction achieved

Financing - Credible financing plan; Current system puts cost burden entirely on states! Double whammy of coal cess & solar RPO!
Centralized financing methods federal guarantee/ solar bonds/ energy security cess Support through DFI credit enhancement mechanisms, backstop facility, takeout financing for banks. World bank can play a role here State potential to absorb solar power - Ability to absorb costlier solar power depends on the additional impact on utilitys power purchase cost and consumer tariff
Budgetary Support for solar power Rs 1750 Cr Rs 5/ KWH 1000 MW

Adjacent table shows the impact of price

Marginal Power Price Conventional Solar installed capacity that can be supported at a price of Rs 15/ KWh*

reduction achieved on the solar installed capacity (at a marginal conventional power price of Rs 5/ KWh)
* At an average (PV + CSP) net PLF of around 20%

At Rs 11/ KWh
At Rs 9/ KWh

1665 MW
2500 MW
15

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Implementation roadmap How can the capacity addition measures being taken by Govt be improved in subsequent phases?

Some of the other measures that can be considered are as follows:

Eliminate 5 MW cap in solar PV to help build scale economies Reduce multiplicity of agencies bring JNNSM entirely under MNRE. An entity could be created under MNRE to be the nodal agency (like NVVN) that implements the NSM Higher budgetary allocation for MNRE from the General budget Capitalization of the escrow account to make PPAs bankable Mitigate development risks clear policies on land/ water allocation, timely availability of evacuation infrastructure, installation of solar stations at radiation rich sites and data sharing with developers etc

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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Off-grid Applications Need to provide stronger thrust

The scale of off-grid sector can be larger than the utility scale sector in medium term
High Potential Applications Telecom Towers, Solar Water Heaters, Remote Area Lighting While capital subsidy programs exist, its administration is seen to be inefficient e.g. solar water heaters Consumer financing models would be required to give a fillip to the retail segment to offset the high initial cost

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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Select Experiences in India ( 1/ 2)

Client
Government of Gujarat, India

How KPMG helped

Solar park strategy development Business planning for solar park project Assessment of the revenue models for the solar park Development of implementation plan Strategy development for solar business opportunity Market overview of solar opportunity and business model implications thereof for a new entrant Developing the EOI strategy and assistance in preparing the EOI documents Development of detailed project report Business model options assessment Overview of the solar PV market space Best practices / Business Models followed by utilities in the solar developer space Analysis of the capital implications along with power purchase impact for distribution utilities Strategic assistance and feasibility study Overview of the solar PV market opportunity Demand supply analysis for solar PV value chain Development of business strategy

A Leading Real Estate and Infrastructure Player

AP Distribution Utility

A Leading South Indian Player

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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Select Experiences in India ( 2/ 2)

Client
New Entrants in Solar Thin-film and Crystalline Manufacturing Sector New Entrant in solar power sector

How KPMG helped

Validation of the business plan and fund raising assistance Independent assessment of the key assumptions and risks involved in the solar thin-film business plan and solar crystalline market Valuation of the project taking into account industry benchmarks Negotiations with prospective investors for fund raising Assistance in Setting up a Solar Thermal Plant Bankable DPR - Assistance in preparation of a Bankable DPR that addresses the concerns of Bankers and potential Equity Investors Plant Configuration - Assistance in defining plant configuration with or w/out storage; hours of storage Tariff based Bidding - Assistance in tariff based bidding under the JNNSM Program Procurement - Assistance in equipment procurement; market survey for localization potential and vendor capability assessment Assistance in Contracting, defining contractor qualification criteria, running the bid process and evaluation of shortlisted bidders CDM advisory for Solar PV and solar thermal projects up to 100 MW

Multiple Players

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Contact Us

Santosh Kamath Director KPMG Advisory Services Pvt. Ltd.

Tel: +912230902527 Mo: +91 9967016369 E-Mail: skamath@kpmg.com Lodha Excelus, Apollo Mills Compound, N.M.Joshi Marg, Mahalaxmi Mumbai - 400 011 Website: www.in.kpmg.com

The information contained herein is of general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

2011 KPMG Advisory Services Private Limited, the KPMG India member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.