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ASSOCIATE SPONSORS

LEAD SPONSOR

Viability o solar projects inIndia

The RECMechanism

BRIDGE TO INDIA, 2012Original illustration by Dwarka Nath Sinha


2/40 BRIDGE TO INDIA, 2012

LEAD SPONSOR

Enerparc is an internationally successul specialist in the whole value chain olarge-scale photovoltaic power plants in the megawatt segment. The company

was ounded beginning 2009 and has oces in Germany, United States andIndia. As pioneers o this industry, the Enerparc team is specialized in projectdevelopment, installation as well as in the investment and operation o solarpower plants. The service ranges rom the technical planning (EPCm) to theturn-key delivery (EPC) and nally to the operation (O&M) o the power plant. Inthe last 24 months the Enerparc Group successully connected more than 700MW to the grid and it operates 300MW o own PV power plants.

Telephone: +91 011 4060 1442

Fa: +91 011 4060 1235

Email: [email protected]

.enerparc.com

ASSOCIATESPONSORS

Canadian Solar, one o the largest solar module manuacturers in theworld, was ounded in Canada in 2001 and successully listed on NASDAQExchange (symbol: CSIQ) in 2006. To date, Canadian Solar has successullyestablished seven wholly-owned manuacturing subsidiaries in China, with amodule capacity o 2.05 GW in 2011. In the last 10 years, Canadian Solar hasdeployed over 3.5 GW o solar modules in over 50 countries. Canadian Solar is

headquartered in Ontario, Canada, with subsidiaries in USA, Germany, Spain,Italy, Japan, Korea, Australia, Singapore, HongKong and China.

Telephone: +1 519 837 1881


[email protected]

.canadiansolar.com

GIZ is a ederal enterprise, which supports the German Government inachieving its objectives in the eld o international cooperation or sustainable

development.

GIZ operates in many elds: economic development and employment promotion;governance and democracy; security, reconstruction, peace building andcivil confict transormation; ood security, health and basic education; andenvironmental protection, resource conservation and climate change mitigation.We support our partners with management and logistical services, and act as anintermediary, balancing diverse interests in sensitive contexts.

Telephone: +49 61 96 790

Fa: +49 61 96 7911 15




Established in 1982 in Bad Staelstein, Germany, IBC SOLAR is one o theworlds leading photovoltaic systems integrator. Globally, IBC SOLAR has alreadyimplemented more than 120,000 ready-to-use photovoltaic installations with atotal power o more than 2GWp. Its scope o services ranges rom large scalepower plants solutions upto to smaller on- and o-grid systems. Completeengineering services, delivery o all key components and ollowing construction

(EPC) o turnkey power plants is regarded as its core competencies.Furthermore, IBC SOLAR is developing and constructing own large scaleinstallations in selected markets. Key components used are manuacturedunder an OEM regime with IBC branding and quality commitment. In addition,comprehensive consultancy services as well as operation and maintenanceo the installations are key services. Since 2008, IBC SOLAR has constructedseveral multi megawatt power plants under the NSM Policies or leading Indianmultinational enterprises such as the Videocon and Aditya Birla Group.

Telephone: +49 95 73 92 24 0

Fa: +49 95 73 92 24 111


The opinions and analyses expressed in this report are thoseo BRIDGE TO INDIA, and do not, in any way, unless specifcallymentioned, convey or include the opinions o the sponsors o thisreport.



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1. Overview 01

2. The Renewable Energy Certificate(REC) Mechanism

02

2.1. Background 02

2.2. Solar RECs 02

2.3. Lessons from the non-solar REC market 03

2.4. Procedures and timelines 06

3. Is the solar RECs market viable? 09

4. Solar REC business models 12

4.1. Business Model 1: APPC + REC 12

4.2. Business Model 2: RESCO + REC 13

4.3. Business Model 3: Captive + REC 15

5. Regulations under discussion 17

6. Conclusions and recommendations 18

7. Annexure 19

7.1. State-wise RPO Quotas (2012-2013)

7.2. Status of non-solar RPO compliance across different states

(2012-2013)

19

19

7.3. Glossary of terms 20

8. Guest Article

Setting up large scale PV: Lessons from new markets byMr. Santosh KM, Managing Director, ENERPARC India

21

9. Interviews 24

Mr. Stefan Mueller, COO, Enerparc 24

Mr. Vinay Shetty, Country Manager Indian Subcontinent,

Canadian Solar

26

Mr. Jens Burgtorf, CSO, Director, Indo-German Energy Program,

GIZ

28

Mr. Jan Marc-Raitz, Director, Commercial Department, PVProjects, IBC Solar

30

CONTENTS


6/40 BRIDGE TO INDIA, 2012 6

Figre 21 RPO reqirements o selected states in India 02

Figre 221 Floor and orbearance prices 02

Figre 222 Projects registered nder the REC mechanism 03

Figre 231 Registered REC projects b reneable energ resorce 03

Figre 232 Historical nonsolar REC demand b consmer categor 04

Figre 233 Histor o demandsppl o nonsolar RECs 04

Figre 234 Historical price discover o nonsolar REC prices 05

Figre 241 Process or the issance o solar RECs 06

Figre 242 Solar REC eligibilit 06

Figre 243 Details o the accreditation ees paable to the SLDC 08

Figre 244 Details o the registration ees paable to the NLDC 08

Figre 245 D etails o the issance ees paable to the NLDC 08

Figre 31 Epected solar PV capacit based on the REC mechanism 09

Figre 32 Derivation o epected solar PV capacit based on the REC

mechanism earonear

10

Figre 33 India solar and grid price projections 11

Figre 34 Assmptions or the projection o solar and grid prices 11

Figre 35 Solar REC price projections 11

Figre 411 Stateise APPC prices 2012 12

Figre 412 Assmptions or determining EIRR APPC + REC 12

Figre 413 Financial viabilit o APPC+REC projects 13

Figre 421 Assmptions or determining EIRR RESCO + REC 14

Figre 422 Financial viabilit o RESCO+REC projects 14

Figre 431 Assmptions or determining EIRR Captive + REC 16

Figre 432 Financial viabilit o Captive + REC projects 16

LIST OFFIGuRES



1. OVERVIEwThe Indian government has decidedto incentivize the installation o solarPV in order to increase the energysupply o India, provide more energysecurity, oer de-central powersolutions and create a uture industry.The policy initially ocused on supplyside measures. It started with capitalsubsidies. Then, with the NationalSolar Mission (NSM) and the Gujaratsolar policy, solar PV was supportedthrough preerential eed-in-taris(FiTs). Now, solar Renewable PurchaseObligations (RPOs) or utilities as wellas direct power customers (throughOpen Access) and large captive

power consumers are supposedto create a demand side pull tocomplement the supply side push.

So-called obligated entities, whohave to ulll RPO quotas have ouroptions. They can avoid ullling theirobligations, in which case they couldbe penalized. Alternatively, they canpurchase solar power rom the marketor generate their own solar power.The ourth option is to buy RenewableEnergy Certicates (RECs) to meet thequota. Solar plant owners, who selltheir power outside o preerential FiTs

to the grid, generate these certicates.This oers a new type o project tosolar project developers. They cannd an o-take or their power undermarket conditions and simultaneouslygenerate RECs.

The REC mechanism comes with therisk o uncertainty o REC pricing.While there is a xed REC foor priceo `9,300 (143)* per REC (equivalentto 1MWh), there is some uncertaintyon the pricing post 2017. BRIDGE TOINDIA estimates that REC prices willbe in the band o `2,200 (34) per RECto `4,000 (62) per REC between 2017

and 2022. The most signicant risk,is o the lack o enorcement o RPOs.This is allayed to a certain extent romthe market data or non-solar RECs.Judging by the perormance o thenon-solar REC market and indicationsrom the regulatory bodies, BRIDGETO INDIA predicts that there will be astrong move by states to ulll theirRPOs.

* All values are at 1 = `65 (long-term average rate)

Indian solar policiesinitially ocussed on

supply side measures.

Now, solar RPOs aresupposed to create a

demand side pull.



2. THERENEwABLE

ENERGy

CERTIFICATEMECHANISM

2.1 BACKGROuND

RECs are a market mechanism toacilitate the compliance o RPOs.RPOs are enorced on three categorieso power consumers distributionlicensees, Open Access consumers andcaptive consumers. The obligations aredriven by the National Action Plan onClimate Change (NAPCC) that aims at15% renewable energy in the overallenergy mix o India by 20201. Thereare two categories o RPOs solarand non-solar. States in India are reeto set their own RPOs in line with the

recommendations rom their StateElectricity Regulatory Commissions(SERCs). The table below lists themajor states with solar-RPO quotas2.

Figre 21: RPO reqirementso selected states in IndiaState Solar RPO

20122013

Andhra Pradesh 0.25%Gujarat 1.00%

Haryana 0.50%Himachal Pradesh 0.25%Karnataka 0.25%Kerala 0.25%Madhya Pradesh 0.60%Maharashtra 0.25%Punjab 0.07%Tamil Nadu 0.05%Uttar Pradesh 1.00%Uttarakhand 0.25%

Renewable energy resources aredistributed dierently across eachstate in India. The RECs are aimed ataddressing this mismatch betweenthe availability o renewable energyresources in states and their RPOrequirements. Obligated entities havethe option o purchasing RECs to ulltheir RPOs.

2.2 SOLAR RECS

In line with RPOs, there are twocategories o RECs solar and non-solar. Solar RECs include both PV andCSP technologies. Non-solar RECsinclude a basket o renewable energytechnologies such as wind, biomass,biouel cogeneration and small-hydro. RECs are traded on the IndianEnergy Exchange (IEX) and the PowerExchange o India Ltd. (PXIL). The IEXcurrently has a leading market shareo 91%.

1 REC = 1Mwh

Every MWh o solar energy producedgenerates one REC. Solar RECs aretraded once, on the last Wednesdayo every month. The trade price isdiscovered based on their demandand supply. In addition, and in orderto provide a minimum o certainty onREC prices, the Central ElectricityRegulatory Commission (CERC) has

xed a foor and orbearance price orthe period 2012 to 2017 between whichthe RECs can be traded.

Figre 221: Floor and

orbearance prices3

Floor Price `9,300 (155)

Forbearance Price `13,400 (223)

Although the REC market wasestablished on February 2011, thesolar REC market has been largelyinactive. The rst trading o solar RECswas in the session o May 2012. Thedemand or solar RECs was 1,637, argreater than a total o 149 available onthe supply side.

1 Government o India, The Prime Ministers Council on Climate Change, National Action Plan on Climate Change2 State Electricity Regulatory Commission Orders. For a complete list, see Annexure 13 REC Registry

BRIDGE TO INDIA, 2012


Source: BRIDGE TO INDIA


Every MWh o solarenergy produced

generates one REC.

RECs are traded onthe Indian Energy

Exchange (IEX) andthe Power Exchange o

India Ltd. (PXIL).
http://bit.ly/Nw01lLhttp://bit.ly/Nw01lL



None the less, there were only veRECs traded at a price o `13,000(200), indicating that the sellingprice bid was ar too high. The lack oactivity on the solar REC market canbe attributed to the lack o solar REC

projects supplying the certicates.Indias rst solar REC project tostart trading is a 2MW project inMadhya Pradesh developed by M&BSwitchgears Limited.

Going ahead, the supply o solarRECs is likely to be bolstered by sixadditional projects that are currentlyregistered.

4 REC Registry5 105 KW6 The REC Registry lists this project as 1.055MW7 REC Registry8 REC Registry

B

RIDGETOINDIA,2012


Figre 222: Projects registered nder the REC MechanismAgst 20124

Project State Capacit Mw

Jaibalaji Business Corporation Pvt.Ltd. Maharashtra 1.0

Omega Renk Bearings Pvt.Ltd. Madhya Pradesh 0.15

M/S Gupta Sons Madhya Pradesh 0.5

Jain Irrigation Systems Ltd. Maharashtra 8.5

Kanoria Chemical & Industries Ltd. Rajasthan 5.0

Numeric Power Systems Ltd. Tamil Nadu 1.16

M&B Switchgears Ltd. Madhya Pradesh 2.0

2.3 LESSONS FROMTHE NON-SOLARREC MARKET

While the solar REC market has justtaken o, the non-solar REC markethas been active since May 2011. Onthe supply side, the non-solar RECmarket is primarily driven by windenergy projects (50% at 1,332MW),ollowed by bio-uel cogeneration (23%at 622.5MW) and biomass (20% at542MW)7 .

Figre 231: Registered REC projects b reneable energresorce8

BRIDGE TO INDIA, 2012Source: BRIDGE TO INDIA

50%

6%

20%

23%

1%

Wind

Small Hydro

Biomass

Bio-fuel Cogeneration

Solar PV

While the solar RECmarket has just takeno, the non-solar REC

market has been activesince May 2011.

The lack o activity on

the solar REC marketcan be attributed to

the lack o solar RECprojects supplying the

certicates.



Figre 233: Histor o demandsppl o nonsolar RECs11

Figre 232: Historical nonsolar REC demand b consmercategor10



On the demand side, distributioncompanies (DISCOMs) contributedto nearly 76% o the demand or thenancial year 2011-2012 ollowed bycaptive power producers at 13% andopen access consumers at 11%9.

The maximum demand or non-solarRECs occurred towards the end o thenancial year between the monthso January and March 2012. Thissuggests that there would be a rushto ulll the RPOs at the year-end toprevent being penalized. The penaltyequals the orbearance price or

solar or non-solar RECs. DISCOMs,driving the demand or RECs currently,are uncertain with regards to theenorcement o the RPOs by theirSERCs. Compliance is mandatedannually and DISCOMs preer to weigh

their options until the very end othe year. As a result, there is a year-end spike in the demand or RECs byDISCOMs looking to make a rush toulll their RPOs. The months o Juneand July saw demand alling belowsupply or the rst time with relativelylower demand rom the DISCOMs earlyin the nancial year.

B

RIDGETOINDIA,2012


0

50,000

100,000

150,000

200,000

250,000

TOTALDEMAND

Captive PowerProducer

Open AccessDISCOM

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Oct-11

-

100,000

200,000

300,000

400,000

500,000

600,000

NUMBEROFREC

s

DemandSupply

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

9Indian Energy Exchange10Indian Energy Exchange11Indian Energy Exchange

The maximum demandor non-solar RECs

occurred towards theend o the nancial

year between themonths o January and

March 2012.

The months o June

and July saw demandalling below supply or

the rst time.
http://www.iexindia.com/index.htmhttp://www.iexindia.com/index.htmhttp://www.iexindia.com/index.htmhttp://www.iexindia.com/index.htmhttp://www.iexindia.com/index.htmhttp://www.iexindia.com/index.htm



While strong demand in the initialstages o the market is encouraging,some concerns remain. An analysiso the RPO compliance through thepurchase o RECs indicates that only2.49% o the required non-solar RPO

is being met (See Annexure 7.2)12 .This indicates that a negligible portiono the obligated entities are currentlyullling their RPOs. It remains to beseen i this trend continues into theuture. Moreover, the urgency to ullltheir RPOs is least at the beginningo the nancial year. Non-solar RECsdemand ell sharply by 24% by thebeginning o the current nancial yearleading to a consequent all in prices.

For project developers, this leadsto a signicant cash-fow problem.The CERC is looking to amend theRPO regulations to make the RPOulllment mandatory on a quarterlybasis rather than annual.

Figre 234: Historical price discover o nonsolar REC prices13



Judging by the perormance o thenon-solar REC market, one can draw

parallels to the solar REC market. Onthe demand side, there is an indicationo a possible push to ulll the RPOsrom all the three categories oobligated entities.

The supply, which has hitherto beenthe bottleneck, is likely to correct itselwith the registration o Indias rstsolar REC project. Six other projectsare registered and are likely to start

active trading in the next 6-9 months.In addition to these actors and

the nancial attractiveness o RECprojects, one can expect the solarREC market to gain momentum inthe next six to nine months. Thereis a likelihood that DISCOMs willpurchase solar power or rely on their

corresponding generation arms tomeet their solar RPOs. Purchasingsolar power will ensure that RPOsare met and more importantly thatthe DISCOMs receive much neededpower. Tata Power and MAHAGENCOin Maharashtra have already shownan indication to put up their ownpower plants to help meet theircorresponding DISCOMs RPOs.However, most states might not have

adequate solar resource to incentivizepower producers to set up solarprojects. Further, setting up solarcapacity requires considerable policysupport rom state governments that is

currently lacking in many states. ManyDISCOMs would have to rely on the

RECs to meet their RPOs. Captive andopen access consumers are relativelysmaller players with little or noexperience in solar power generation.They would have liquidity concernssince investing in solar plants wouldmean directing liquidity away romtheir core businesses. They too wouldpreer buying RECs.

-

500

1,000

1,500

2,000

2,5003,000

3,500

4,000

4,500

Feb-11 May-11A ug-11 Nov-11F eb-12 May-12 Aug-12

PriceFloor PriceForbearance Price

12 There is insucient data rom the solar REC market to draw conclusion on solar RPO compliance. However

parallels can be drawn13 Indian Energy Exchange

The lack o supplyin the REC market is

likely to correct itselwith the registration o

Indias rst solar RECproject.

A negligible portion othe obligated entities

are currently ulllingtheir RPOs.
http://www.iexindia.com/index.htm%0Dhttp://www.iexindia.com/index.htm%0D




06

2.4 PROCEDuRESAND TIMELINES

The process o registering a projectunder the REC scheme is divided into

two distinct phases accreditationand registration. The entire processconsists o our steps which can(almost completely) be undertakenonline. The process o accreditationand registration takes a minimumo 45 days. The issuance o RECs isa recurring activity which takes amaximum o 15 days rom the date oapplication.

Step 1: FlllPrereqisites

There are three categories o projectsthat are eligible or RECs:

1. Projects or captive consumption(sel-use)

2. Projects or third party sale(RESCO)

3. Projects with a Power PurchaseAgreement (PPA) with a DISCOM

Figre 242: Solar REC eligibilit

Figre 241: Process o issance o solar RECs

0 4530day days days

FULFILLPREREQUISITES

ACCREDITATION(SLDC)

REGISTRATION(NLDC)



In order or any o the three categorieso projects to be eligible, the ollowingpre-requisites must be ullled:

1. The project does NOT have anypower purchase agreement to sellthe electricity at a preerential tarior FiT. For example, projects undersolar policies, such as the NationalSolar Mission (NSM) or the GujaratSolar Policy.

2. The project sells the electricitygenerated to either:

a. The distribution licensee o thatarea at a price NOT greaterthan the average pooled costo power (APPC) o such adistribution license.

b. To any other licensee, an openaccess consumer or any otherconsumer at a mutually agreedprice or through a powerexchange

3. The project must be grid connected(in order to acilitate independentmetering)

The NLDC has not xed theminimum size or REC projects.

It has allowed the state nodalagencies to decide on this. OnlyMaharashtra, Orissa and Jammuand Kashmir have set the minimumsize as 250kW. All other states donot speciy a minimum size or RECprojects (or a ull list please visitthe BRIDGE TO INDIA blog).

Step 2: Accreditation itha State Load Dispatch

Center

Application or accreditation must besubmitted to the State Load DispatchCenter (SLDC). Every state has adesignated SLDC which is responsibleor scheduling the demand and supplyo power in that state. Projects cannotapply earlier than six months prior

to commissioning. The accreditationis valid or ve years ater which theproject must reapply. The processtypically takes 30 days rom the dateo application provided all documentsare in the correct order. The project

receives a certicate o accreditation.

Step 3: Registrationith the National LoadDispatch Centre

Ater successul accreditation, theproject must be registered under theNational Load Dispatch Center (NLDC).Projects cannot apply or registration

prior to three months rom the dateo commissioning. The certicate oregistration is valid or ve years romthe date o registration.

Step 3: Issance o RECs

The NLDC is responsible or theissuance o RECs. Projects must applyor the issuance within three months ogeneration o the power. Applications

or issuance can be made ortnightlyi.e. the 1st and 15th o every month. TheRECs must be sold within one yearrom the date o issuance, ailing whichthe RECs will lapse.

The NLDC has notxed the minimum

size or REC projects.It has allowed the

state nodal agencies todecide on this.

The NLDC isresponsible or the

issuance o RECs.
http://www.bridgetoindia.com/blog/http://www.bridgetoindia.com/blog/



Figre 244: Details o the registration ees paable to the NLDC

One time registration ees `5,000 (77)

One time application processing ee `1,000 (15)

Annual charge (to be paid by 1st April) `1,000 (15)

Revalidation/Extension ees (End o 5 years) `5,000 (77)

Taxes and duties 12.36%B

RIDGETOINDIA,2012


Figre 245: Details o the issance ees paable to the NLDC

Application or issuance `10 per REC (0.15)

Taxes and duties extra 12.36% BRIDGE TO INDIA, 2012Source: BRIDGE TO INDIA

Figre 243: Details o the accreditation ees paable to theSLDC

One-time application processing ee (paid to state agency) `5,000 (77)

One-time accreditation charge (paid to state agency) `30,000 (462)

Annual charge (to be paid by April 10th) `10,000 (154)

Revalidation/Extension (end o 5 years) `15,000 (231)

Taxes and duties 12.36%B

RIDGETOINDIA,2012


FEES ANDCHARGES



3. IS THE SOLARREC MARKET

VIABLE?The viability o the REC marketis linked to three crucial actors:demand, supply and the price visibilityor solar RECs.

The demand or solar RECs is drivenby the enorcement o RPOs on theobligated entities. Although ocialdata on RPO compliance is yet to bereleased, the perormance o the non-solar REC market shows that demandis robust but limited. A ew DISCOMs,or example those in the state oPunjab, have not met their RPOs orthe nancial year 2011-12. The Punjab

Electricity Regulatory Commission(PERC) allowed the Punjab StatePower Corporation Ltd to carry overthe obligations to the Financial Year2012-13 (April to March)14 .

The enorcement o RPOs remains theweak link in the REC mechanism. The

CERC has allayed concerns to suggestthat RPOs will be enorced strictly. TheRPOs stem rom the NAPCCs targeto generating 15% renewables in the

overall energy mix by 2020. There is anongoing eort by the CERC through theForum o Regulators (FoR) to convinceSERCs to comply with the regulation.

BRIDGE TO INDIAs analysis indicatesthat the total capacity o RECprojects would be 868MW by 2016.It is assumed that only 25% o theRPO requirements will be ullledthrough the REC mechanism. The

remaining 75% is assumed to beullled by obligated entities throughthe direct purchase o solar power.This projection is based on the totalsolar RPO requirement o each stateand a probability actor that obligatedentities will achieve their RPO.

Figre 31: Epected solar PV capacit based on the RECmechanism earonear15

14The Hindu - Punjab ERC allows state DISCOM to carry orward renewable purchase obligations. Dated 17th May

2012.15 Source: BRIDGE TO INDIA analysis

B

RIDGETOINDIA,2012


The enorcement oRPOs remains the

weak link in the RECmechanism.

BRIDGE TO INDIA'sanalysis indicates that

the total capacity oREC projects would be

868MW by 2016.

0

50

100

150

200

250

300

350

2012

27

110

173

220

337

2013 2014 2015 2016

EXPECTEDDEMAND(MW)
http://bit.ly/LOqL1Vhttp://bit.ly/LOqL1Vhttp://bit.ly/LOqL1Vhttp://bit.ly/LOqL1V



Figre 32: Derivation o epected solar PV capacit based on theREC Mechanism earonear16

year 2012 2013 2014 2015 2016

I. Total solar RPOrequirement

2,027 2,985 3,944 4,788 5,964

II. Solar RPO ullledthrough policies17

928 1,728 2,558 3,533 4,543

III. Remaining solar RPOrequirement (I-II)

1,099 1,257 1,386 1,255 1,421

IV. Solar RPO ullledthrough the directpurchase o solar power

824 943 1,040 941 1,066

V. Remaining solar RPOrequirement (III-IV)

275 314 346 314 355

Probability Factor 18 10% 35% 50% 70% 95%

Expected/required solarREC projects 27 110 173 220 337

BRIDGE TO INDIA expects that thetotal number o solar RECs traded islikely to touch 480m by the year 2016based on the aoresaid assumptions.

On the supply side, the solar RECmarket has recently commenced

trading and not enough data isavailable to draw conjecture. Withseven solar REC projects already beingregistered, the supply issue shouldcorrect itsel in the next six to ninemonths.

The nancial viability o REC projectsstrongly hinges on the REC pricesover the lietime o the project. TheCERC has provided some visibilityon the REC prices by xing the foor

and orbearance price between 2012and 2017. While this instils somecondence, investors and banks arestill cautious.

REC prices 20172022

Although the REC price range hasbeen xed until 2017 by the CERC,there is considerable concern overREC price visibility post 2017. The

CERC is unlikely to announce solar

REC prices post 2017 until the currentcontrol period (2012-2017) comesto an end. In such a case, projectingREC prices becomes very important inorder to estimate the nancial viabilityo solar REC projects.

The REC price band is determined byCERC through the ollowing ormula:

Floor price = LCOE o solar energy

(at 0% ROE) minimum APPC

Forbearance price = LCOE o solar

energy (at 16% ROE) minimum APPC

The foor price is calculated basedon the dierence between the cost ogenerating solar energy at 0% Returnon Equity (RoE) and the state with the

least APPC. The orbearance priceis calculated based on the dierencebetween the cost o generating solarenergy at 16% ROE and the state withthe lowest APPC.

In order to project REC prices post2017, APPC and solar LCOE priceshave been projected. BRIDGE TOINDIAs analysis shows that grid parityis likely to be achieved by 2022 acrossall the states in India.

16 Source: BRIDGE TO INDIA analysis17 Through the state policies and the National Solar Mission.18 It is assumed that only 10% o the obligated entities will ulll their RPO in 2012 which will slowly ramp up to 95%

by 2016.

B

RIDGETOINDIA,2012

Source: BRIDGE TO INDIABRIDGE TO INDIAexpects that the total

number o RECs tradedis likely to touch 480m

by the year 2016.

The CERC is unlikelyto announce solar RECprices post 2017 until

the current controlperiod (2012-2017)

comes to an end.



19 Source: BRIDGE TO INDIA analysis20 CERC. Petition number 142/2011. Determination o orbearance and foor price or REC ramework.21 Average annual increase in APPC prices across India between the years 2001 2011.22 Terms and Conditions or CERC, Tari determination rom Renewable Energy Sources Regulations, 2012.

Published 06.02.2012.23 McKinsey: Solar Power - Darkest Beore Dawn; 201224 Source: BRIDGE TO INDIA analysis



0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.008.00

9.00

10.00

2010 2012 2014 2016 2018 2020 2022 2024

INR/kWh

APPC Tariff

LCOE of solar

Figre 33: India solar and grid price projections15

States like Tamil Nadu will see gridparity being achieved much earlier,around 2017 due to higher APPCprices o `3.38 (0.05)/kWh20. Thestate o Kerala will be the last state toachieve grid parity in 2022 based onthe current APPC price o `1.9 (0.02)/kWh. Since the foor and orbearanceprice is based on the state with thelowest APPC, the REC prices are likely

to be dened by the CERC until 2022.

Figre 34: Assmptions orthe projection o solar and gridprices

Assmptions

Annual APPC escalation 5.00%21

CERC solar tari (`/kWh)22 15.39

CERC CAPEX consideration(2012) (`m per MW)

100

CAPEX alls by 40% (2012 2015)

CAPEX alls urther by 30% (2015-2020)23

Figre 35: Solar REC price projections24

20122017 20172022 2022

Floor Forbearance Floor Forbearance Floor Forbearance

`9,300( 155)

`13,400(223)

`2,200(34)

`4,000(62)

0 0

Given the projection or solar RECprices, the nancial viability o RECprojects can be modelled over thelietime o the project. The nancialviability or dierent business modelsunder the REC mechanism is exploredin the next section.

BRIDGE TO INDIAs REC pricing modelshows that projected REC foor andorbearance prices or the controlperiod 2017-2022 are:

The state o Keralawill be the last state

to achieve grid parityin 2022 based on the

current APPC price o`1.9 (0.02)/kWh.



4.1 BuSINESSMODEL 1: APPC+REC

In this model, the project sells powerto the DISCOM at the APPC and inaddition avails RECs. The viability osuch projects is strongly linked tothe APPC in the state in which such aproject is being considered. The APPC(2012) across major states is listedbelow.

Figre 411: Stateise APPC

prices 201225

State APPC `/kwh

Kerala 1.99

Madhya Pradesh 2.09

Himachal Pradesh 2.23

Uttarakhand 2.34

West Bengal 2.43

Andhra Pradesh 2.50

Rajasthan 2.60

Maharashtra 2.62

Uttar Pradesh 2.62

Karnataka 2.66

Punjab 2.71

Haryana 2.77

Gujarat 2.98

Tamil Nadu 3.38

In order to arrive at the Equity IRR(EIRR), the ollowing assumptions have

been considered.

4. RECBuSINESS

MODELSFigre 412: Assmptions ordetermining EIRR APPC + REC

Assmptions

Annual APPCescalation 5.00%

REC prices

2012-2017 `9,300 (155)

2017-2022 `2,200 (223)

2022-2027 `0 (grid parityachieved by 2022)

CAPEX (perMW)26

`88m (1.3m)

Debt interest rate 6.00%27

CUF 18.00%

The APPC escalation is in line withthe average escalation o APPCprices across dierent states inIndia. The CAPEX is based on currentprice trends in the market and isconservative, leaving much roomor discount. Debt interest rates areindicative o the nancing optionsthat can be availed rom international

banks that provide export nance. Anaverage Capacity Utilization Factor(CUF) o 18% is considered, which isagain conservative and lower than thenational average CUF considered byCERC (19%)28 .

BRIDGE TO INDIAs analysis showsthat this model is viable or the stateo Tamil Nadu or a nancial investorlooking or a minimum o 15% EIRR.

Other states such as Gujarat, Haryana,Punjab, Karnataka, Uttar Pradesh,Rajasthan, Maharashtra and AndhraPradesh are all attractive to investorswho are looking at solar energystrategically (EIRR expectation o 8 to15%). This model proves unattractive inthe states o Kerala, Madhya Pradesh,Himachal Pradesh, Uttarakhand andWest Bengal (EIRR o less than 8%).

For a detailed viability analysis and

project report contact BRIDGE TO INDIA.

25 CERC. Order on foor and orbearance price. 201226 CAPEX prices as o July 201227 Considering un-hedged loan rom a oreign bank.28 CERC. Tari Order or Renewable Energy. 2011





This model is viable orthe state o Tamil Naduor a nancial investor

looking or a minimumo 15% EIRR.



Figre 413: Financial viabilit o APPC+REC projects29

upsides - From a regulatory point-o-view, this business model is relativelyeasier when compared to the otherbusiness models. In general, mostDISCOMs are aced with a genuineshortage o power and would be willingto purchase solar power at APPC. Thisis much lower than the price o solarpower under the NSM and variousstate policies.

One o the key advantages o thisbusiness model is the scale oprojects. Individual project sizes canbe very large (5MW and above), whichcan bring signicant cost advantages.BRIDGE TO INDIA believes that thisbusiness model will be popular withdevelopers who have considerableleverage with the DISCOMs. This iscritical in order to secure a long-termPPA with the DISCOM.

Risks - The major drawback in thismodel is the poor nancial state omost DISCOMs in the country. Thisseriously jeopardizes the ability o theDISCOMs to adhere to the PPA andensure timely payments.

4.2 BuSINESSMODEL 2:

RESCO+RECIn this model, the project enters intoan independent PPA with a third party(excluding DISCOMs) and, in addition,

RECs are availed. The third party cantypically be an industrial, commercialor residential consumer o electricity.The project can either be set up on thecustomers premises (land or rootop)or at another location. In both cases,the project must go through the openaccess route or a third party sale opower.

The viability o such projects is strongly

linked to two actors:1. PPA price The negotiated price

o power hinges on the currentprice being paid by the third party.Commercial consumers paythe highest prices or electricityollowed by industrial consumersand then residential consumers.The project developer must oerthe third party a tari that is lowerthan what the consumer pays

currently in order or this solutionto be attractive.

2. Strength o the third party toadhere to a long term PPA rom anancing perspective, this is a keyquestion.

To obtain the Equity IRR, the ollowingassumptions and PPA priceshave been considered. It must beunderlined that the assumptions areairly conservative. The REC prices

considered post 2017 are rom BRIDGETO INDIAs REC price orecast (seeprevious section).

29 Source: BRIDGE TO INDIA analysis

B

RIDGETOINDIA,2012


Equity IRR (%)

APPC(INR/KW

h)

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

KLMP

HPUK WB

AP MH UP

KA PBHR

GJ

TN

2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

One o the keyadvantages o this

business model is thescale o projects.

The major drawbackin this model is the

poor nancial state omost DISCOMs in the

country.



Figre 421 Assmptions or determining EIRR RESCO + REC

Assmptions30

Tari escalation 5.00%

REC prices

2012-2017

2017-20222022-2027

`9,300 (155)`2,200 (223)`0 (grid parity achieved by 2022)

CAPEX (per MW) `88m (1.3m)

Debt interest rate 12.00%31

CUF 18.00%

Figre 55: Financial viabilit o RESCO+REC projects32

Risks - From a regulatory standpoint,there are several bottlenecks inimplementing this model currently.

1. Absence o a net metering policy Since this model involves signingan independent PPA, it mustbe assured that the third partyconsumes 100% o the powergenerated. In practice, this is noteasible since demand varies withtime and season and does notmatch the generation prole o asolar power plant. In such caseswhere supply exceeds demand,there must be an option o injectingthe excess electricity onto the gridduring times o peak demand. Theregulations or net-metering are

under discussion with the CERCand will not be implemented beoremid-2013.

2. Interconnection and open accessThe current regulations do notallow the connection o such RECprojects at the consumer side (LTside) o the bus. Projects mustbe connected at the high voltagelevel at the DISCOM side. Forprojects that are connected at highvoltage under current regulations,any third party sale o powermust be registered under openaccess. However, open access isnot an ecient solution when thepoint o generation and the pointo consumption are the same

30 Source: BRIDGE TO INDIA analysis31 Considering debt rom an Indian bank.32 Source: BRIDGE TO INDIA analysis

B

RIDGETOINDIA,2012


B

RIDGETOINDIA,2012


In cases where supplyexceeds demand,

there must be anoption o injecting theexcess electricity onto

the grid during timeso peak demand.

The currentregulations do not

allow the connectiono such REC projects at

the consumer side o

the bus.

15% 20% 25%0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

0% 5% 10

GRIDPRICE(INR/kWh)

Equity IRR (%)

EIRR



(example: rootop power projects).Open access involves wheelingcharges, banking charges and gridlosses or using the distributionnetwork o the DISCOM. Theseadditional costs reduce the viabilityo such models. The CERC iscurrently discussing the option oimplementing such third party PPAmodels as o-grid or semi o-gridmodels, thereby circumventing theneed to go through open access.But at the moment there is noclarity on when such regulation willbe ramed or implemented.

3. Cross Subsidy Surcharge (CSS) Electricity prices in India are

not uniorm. Commercial andIndustrial consumers subsidizethe residential and agriculturalconsumers by paying highertaris. When such high valueconsumers are lost to otherelectricity providers, the DISCOMsace disproportionate losses. Inorder to compensate or this,a CSS is levied. The CSS variesacross DISCOMs and is typically in

the range o`

0.30 to`

1.5 per unit.Although there is a strict mandateto reduce the CSS over time, inpractice this has not happenedand is unlikely to happen in thenear uture. For the CSS to becompletely discarded, the DISCOMsexpect an even pricing o poweracross all consumer categories.This is a politically sensitive matterand is unlikely to be implementedin the near uture. In some cases,

to promote the development orenewable energy technologies,the CSS can be waived. However,the regulations clearly state thatall concessions must be waivedo in order to be eligible or RECprojects.

4. Wary DISCOMs Most DISCOMsare wary o losing their highvalue consumers. Since DISCOMsare authorized to approve such

projects, most projects are delayedunnecessarily. This is one o themajor barriers to the successulexecution o this business model.

upsides - One o the key advantageso this business model is theindependence rom the DISCOMs.The PPA risk now lies with the powerconsumer, which can be managedthrough strong nancial diligence.

Although the maximum project sizeswill not likely be greater than 2MW,the model is scalable across thecountry. BRIDGE TO INDIA develops itsown RESCO+REC based projects orindustrial and commercial consumerso power. Investors looking to investin sch projects are invited to contact

BRIDGE TO INDIA.

Risks - One o the key challenges

or small to medium companies is tomanage a geographically distributedportolio o projects.

4.3 BuSINESSMODEL 3: CAPTIVE +REC

In this model, commercial or industrialconsumers o grid electricity set

up a solar REC project or the sel-consumption o solar power. Theamended regulations allow RECsor sel-consumption projects. Theollowing criteria must be satised asper the Electricity Act 2003, in order tobe considered as a captive user:

1. Minimum o 26% stake in theproject rom the power consumer

2. Minimum o 51% o the electricityshould be sel-consumed

The nancial viability o such projectsis linked to the current grid tari whichthe consumer pays to the DISCOM. Thereturn on investment or such projectsis based on the dierence between thecost o generation o solar power andthe grid price. In addition, RECs are thecrucial trigger or the nancial viabilityo such projects.

The ollowing assumptions have beenconsidered to estimate the nancialviability o such models.

For the CSS to becompletely discarded,

the DISCOMs expect aneven pricing o poweracross all consumer

categories.

In the captive + RECmodel, commercial orindustrial consumerso grid electricity setup a solar project orthe sel-consumption

o solar power.



Figre 431: Assmptions or determining EIRR Captive +REC33

Assmptions

Tari escalation 5.00%

REC prices (`)

2012-2017 `9,300

2017-2022 `2,200

2022-2027 `0 (grid parity achieved by 2022)

CAPEX (`m) 88

Debt interest rate 12.00%

CUF 18.00%B

RIDGETOINDIA,2012

B

RIDG

ETOINDIA,2012



upsides - The key advantage othis model is that it signicantlyreduces the PPA risk since thepower consumer is invested inthe project. Tax incentives such as

accelerated depreciation can beavailed by such captive consumerswhich will drive this segment.Innovative business models with agroup o investors (group captive)would also become easible.

Risks - From a regulatory standpoint,this model is easier to implementcompared to the RESCO+RECmodel. None the less, the ollowing

Figre 432: Financial viabilit o Captive + REC projects

Investor Expectation Equity IRR (%)

GRIDPRICE(INR/kWh)

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.00.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

challenges exist:

1. Absence o a net metering policy(as discussed in the previoussection)

2. Inability to connect the plant at the

consumer side o the low voltage(415V) means that the outputrom the solar plant will have tobe stepped up to at least 11kV.This creates additional costs otransormers and switch-gearswhich would signicantly reducethe viability o such models

33 Source: BRIDGE TO INDIA analysis34 Source: BRIDGE TO INDIA analysis



5. REGuLATIONSuNDER

DISCuSSIONThe REC mechanism is relatively newin India and several regulatoryloopholes remain. The CERC isconsidering several changes to the

regulations which would beimplemented in the coming months.

Some o these are:

1. Vintage based multiplier: One othe major concerns is that RECprices over the lietime o theproject must refect the currentcapital cost. REC prices woulddepreciate over time, refectingthe alling cost o capital o asolar plant. This would unairly

disadvantage REC projects sincethe capital costs are made upront.

To circumvent this problem, theCERC is mulling a vintage basedmultiplier. In this mechanism thesolar REC projects commissionedin the period 2012-2017 will beissued a multiplicative actor.This actor would be equal to theall in CAPEX rom 2012 to 2017.This actor would be used to issue

additional RECs. Assuming that thecapital cost alls by 50% in 2017,every REC issued in 2012 would beworth two RECs in 2017.

2. Quarterly ullment o RPO: Inorder to ensure a smoother cash-fow, the CERC is considering aquarterly implementation o theRPOs. This would distribute moreevenly throughout the year andprevent year-end spikes in the

REC prices. Such a regulationwould be benecial to both projectdevelopers (cash-fow) and theobligated entities (year-end highprices).

3. Net Metering: The net-meteringscheme being considered by theCERC includes the ollowing topics:

a. Connection o renewableenergy source to the grid atlower voltages

b. Accounting and billing

c. Saety standards and technicalrequirements

d. Taxes and duties (or waivers)or sel-generated electricity

e. An overarching policyramework or distributedenergy generation

These regulations would ensurethat there is a well-dened policyramework or connecting smallscale solar power projects onto thegrid. This will reduce the likelihoodo unnecessarily delays and

complications in such projects.Secondly, one o the majorconcerns or such REC projects isover-generation. Instances whenthe supply exceeds the demand(building is empty, holidays,exceptionally sunny days, etc.),the excess power can be ed intothe grid and consumed at a laterstage. Such banking regulationsare also under discussion and

would come as a boon to solarproject developers under the RECmechanism.

4. REC or o-grid: Currently o-grid projects are excluded romthe REC mechanism. However,with a comprehensive meteringpolicy, the CERC intends toinclude o-grid projects underthe REC mechanism. The mainissue with o-grid projects is thatresponsibility cannot be assigned tothe DISCOM or a periodic readingo the solar meter, accounting andreporting the power generated tothe SLDC. The DISCOM is currentlyincentivized to carry out theseunctions only i the project is gridconnected.

One o the majorconcerns is that REC

prices over the lietimeo the project mustrefect the current

capital cost.

Currently o-gridprojects are excluded

rom the RECmechanism.



Going ahead, it remains to be seeni obligated entities will ulll theirRPOs through the REC mechanismor by directly purchasing solar power.

Since DISCOMs have contributed tonearly 76% o the demand, there arequestions raised i the demand orsolar RECs will continue to remain.There is no clarity on this issue at themoment.

Enorcement o RPOs remains theweak link in the entire REC mechanismand must be addressed immediately bythe CERC. There is denite resistance

rom the DISCOMs in meeting theirRPOs due to the additional burdenplaced on them. A recent reportreleased by the FoR concludes thatthe additional burden caused by theimplementation o RPOs is less than`1.0 per unit35 which indicates that theresistance is purely notional.

REC based models will dene thedistributed solar landscape in India inthe coming years. BRIDGE TO INDIA

endorses the RESCO+REC model andis currently developing a pipeline osuch projects across India. Investors,ho are looking to engage ith the

REC model, are invited to contact

BRIDGE TO INDIA.

The weakest link in executing thismodel currently is the absence oclear regulations on connectivityand metering. The CERC is actively

tabling these regulations. However,

the window period (2012-2017) or theREC foor and orbearance prices isrunning out. This period o REC pricesis guaranteed only until March 2017.

Every months delay in announcingthese regulations will seriously

jeopardize the nancial viability oREC projects. First movers in thisspace have a signicant advantagesince REC prices are surely goingto reduce post 2017. For a detailed,timebond and cstomized nancial

analsis o the three bsiness models,

contact BRIDGE TO INDIA or project

development conslting services.

The nancing o REC projects isanother weak link as Indian banksremain wary o the REC mechanism.The market will start with smallerkilo-watt scale projects being ullyleveraged (100% equity). Oncesucient data is available rom theREC market and a proo o concept isestablished through working models,this situation is likely to change. Bankscurrently preer a wait-and-watch

approach to take a call on the RECmechanism.

Despite these challenges and risks, theREC mechanism remains an attractiveo-take option or project developersin the medium term (2012 to 2022).The REC market remains a key otake-option as the market moves awayrom subsidies to commercially viablemodels.

35 Forum o Regulators. Assessment o achievable potential o new and renewable energy resources in dierent

states during 12th plan period and determination o RPO trajectory and its impact on tari. 2012.

Enorcement o RPOsremains the weak

link in the entireREC mechanism and

must be addressedimmediately by the

CERC.

The nancing o RECprojects is anotherweak link as Indian

banks remain wary othe REC mechanism.

6. CONCLuSIONSAND RECOM-MENDATIONS



7. ANNExuRE7.1 STATE-wISE RPO QuOTAS (2012-2013)36State NonSolar RPO Solar RPO

Andhra Pradesh 4.75% 0.25%

Arunachal Pradesh 4.10% 0.10%Assam 4.05% 0.15%

Bihar 3.25% 0.75%

Chhattisgarh 5.25% 0.50%

Delhi 3.25% 0.15%

Goa and Union Territories 2.60% 0.40%

Gujarat 6.00% 1.00%

Haryana 1.50% 0.50%

Himachal Pradesh 10.00% 0.25%

Jammu and Kashmir 4.75% 0.25%

Jharkhand 3.00% 1.00%

Karnataka37 10.00% 0.25%

Kerala 3.35% 0.25%

Madhya Pradesh 3.40% 0.60%

Maharashtra 7.75% 0.25%

Manipur 4.75% 0.25%

Meghalaya 0.60% 0.40%

Mizoram 6.75% 0.25%

Nagaland 7.75% 0.25%

Odisha 5.35% 0.15%Punjab 2.83% 0.07%

Rajasthan 7.10% NA38

Tamil Nadu 8.95% 0.05%

Tripura 0.90% 0.10%

Uttar Pradesh 5.00% 1.00%

Uttarakhand 4.50% 0.025%

West Bengal 4.00% NA39

7.2 STATuS OF NON-SOLAR RPOCOMPLIANCE ACROSS DIFFERENT STATES(2012-2013)40State Nonsolar RPO million kwh

Andhra Pradesh 3,44041

Assam 137

Bihar 172

Chhattisgarh 276

Gujarat 3,435

36Source: National Load Dispatch Center. Renewable Purchase Obligations and its compliance (RPO Regulations)

by SERC.37 For BESOM, MESCOM and CHESCO. For other DISCOMs Non-solar: 7% and solar: 0.25%38 Satised through 100MW o PPA under the NSM39 West Bengal does not recognize RECs40 Source: National Load Dispatch Center. Renewable Purchase Obligations and its compliance (RPO Regulations)

by SERC.41 Based on the RPO quotas given in Annexure 7.1 and the total electricity demand o each state (CEA).

B

RIDGETOINDIA,2012

http://nldc.in/REC.aspxhttp://nldc.in/REC.aspxhttp://nldc.in/REC.aspxhttp://nldc.in/REC.aspxhttp://nldc.in/REC.aspxhttp://nldc.in/REC.aspxhttp://nldc.in/REC.aspxhttp://nldc.in/REC.aspx



Haryana 929

Himanchal Pradesh 741

Karnataka 5,180

Kerala 576

Madhya Pradesh 888

Maharashtra 7,477

Punjab 319

Rajasthan 2,089

Tamil Nadu 2,433

Uttar Pradesh 3,016

Uttarakhand 404

West Bengal 1,279

Orissa 311

Delhi 432

Total non-solar RPO (MWh) 33,534,056Total non-solar REC traded onexchange

834,103

Percentage non-solar Achieved/Fulllled through purchase o REC

2.49%

7.3 GLOSSARy OF TERMS

APPC Average Pooled Purchase Cost

CAPEx Capital ExpenditureCEA Central Electricity Authority

CERC Central Electricity Regulatory Commission

CSP Concentrated Solar Power

CSS Cross Subsidy Surcharge

CuF Capacity Utilization Factor

DISCOM Distribution Company

EIRR Equity Internal Rate o Return

FiT Feed-in-Tari

FoR Forum o Regulators

IEx Indian Energy ExchangeLCOE Levelized Cost o Electricity

LT Low Tension

NAPCC National Action Plan on Climate Change

NLDC National Load Dispatch Center

PERC Punjab Electricity Regulatory Commission

PPA Power Purchase Agreement

PxIL Power Exchange India Ltd.

REC Renewable Energy Certicate

RESCO Renewable Energy Service Company

RoE Return on EquityRPO Renewable Purchase Obligation

SERC State Electricity Regulatory Commission

SLDC State Load Dispatch Center

B

RIDGETOINDIA,2012




8. GuESTARTICLE SETTING uP LARGE

SCALE PV: LESSONSFROM NEwMARKETS

One o the most exciting phases orany business is when it enters a newcountry or market. Arguably, it isalso the most challenging. When newbusiness models are introduced in anew market or country, their successdepends on a combination o actorsunique to a businesss capabilities and

the markets requirements.

Solar power businesses havepropagated like a green wave acrossglobal markets in the past decade.The rst mover markets in gridconnected PV power were Germany,Japan, Australia, United Kingdom andsome states in the USA (New Jerseyand Caliornia). These markets havepioneered models involving dierentpolicies, regulations, revenue streams,

businesses and delivery channels,providing a useul point o reerenceor newer markets.

There has been a signicant anddramatic transition in the PV industrywith the capital cost o PV powerplants alling drastically in the lasttwo years. This has been driven partlyby overcapacity in certain parts othe value chain (cell and module

manuacturing) and by organic capacityadditions in others (polysilicon). As anexample, the capital cost o setting upa PV power plant in 2010 in Europe wasaround `162.5 195 (2.5 - 3.0)/Wp.This value ell by hal by the beginningo 2012. Coupled with this, there hasbeen a signicant shit in markets bothin terms o size and geography.

The combination o these actors haspushed PV businesses to cross overrom a technology ocused, subsidydriven business to an applicationcentric, market driven one. This hasbeen a turbulent transition and onethat is still underway. But, there are

clear signs that once the transition iscompleted, the PV business will slipinto the mainstream energy businessand be driven by demand and supply

elasticity as opposed to subsidies. Thishas started to happen already. On thesunny Sunday o August 19th 2012,Germany had 18.6GW o PV poweravailable in the grid, while the totaldemand was 50 GW.

In many ways, the emergingsolar markets are building on theexperiences o mature markets,avoiding pitalls and learning rom

best practices. There is little sensein reinventing the wheel. Most o thelearnings on PV technology, systemsengineering and its application, eldperormance and operations romthese pioneering markets can beapplied to newer markets with somelocalization.

That said, there are some learningsthat are unique to a given market andcannot be replicated rom pioneering

markets in totality. Chie among theseare regulatory, statutory, investment,taxation, exchange volatility,receivables, project delivery and debtnancing amongst others.

Compared to conventional energyprojects, PV power plants are,rom an engineering point o view,relatively less complex and canbe developed and installed much

aster a 10MW PV plant in eight toten weeks is manageable in mostmature PV markets. However, asopposed to conventional energy, wheretechnology has matured and is not astchanging, PV witnesses ast changesin technology and hence increasesthe risk o technology obsolescence.Further, a new technology takestime to demonstrate perormancedelity. Lab test results and actualeld perormance in varying climaticconditions dier signicantly in somecases. A decision on choosing PVtechnology needs to actor both, therisk o obsolescence and the trackrecord in eld perormance.

21 BRIDGE TO INDIA, 2012

There has beena signicant anddramatic transition in

the PV industry withthe capital cost o PVpower plants allingdrastically in the last

two years.

In many ways, theemerging solar

markets are buildingon the experiences

o mature markets,avoiding pitalls and

learning rom bestpractices.

Mr. Santosh KM,

Managing Director,ENERPAC India



Energy production rom PV is aunction o technology as well aslocal meteorology. Modules powerdegrades with time and the rate othis degradation is also dependenton the technology. An optimal way to

select a technology will be to assessthe cumulative energy generated overits useul lie o 25 years actoring inannual degradation. When practicaldegradation rates are available, sucheld data needs to be used to ascertainthe energy production. However,a degradation o maximum 0.25%per year is a standardized value orlenders in matured markets.

Another pitall in technology selectionrelates to cost assessment. Modulelevel costs alone are not a useulmetric to compare project costs. Forsome module types, the balance osystem costs like those o mountingstructures, DC cables and land arehigher or a given plant capacity.Further, in some countries, labor orland costs are high. As a result, eveni a given modules costs are lower,overall project costs may skew in theother direction.

Choosing the right insolation dataset and meteorological database orsystem design is also important. Inmany countries, real measured dataor the proposed installation locationmay not exist. In such cases, oneneeds to depend on commerciallyavailable meteorological datasets. Arange o such data sets exists, but

the energy production estimatedusing them can vary by up to 5%. Thiscan have a signicant impact on theprojects economics. A pragmaticchoice o data is essential to ensurethat the theoretical energy estimatesare closer to reality. Simulationtechniques used also have an impacton energy estimates and a right choiceneeds to be exercised here as well.Predicting nature remains more an

art than a science and a wrong choicemay look good on paper but has thepotential to adversely aect realproject economics.

In countries and markets where solar

energy policies are newly introduced,regulatory uncertainties are a norm inthe initial period. Usually, there is a lagbetween the announcement o a policyand the clarity needed on the variousaspects o its deployment. This delay

needs to be actored into investmentdecisions.

Financing is another area thatneeds ocus in new markets. Here,manuacturers, investors anddevelopers need to spend considerableeort and time in interacting withbanks and lenders on the nuances osolar energy. This will help lendersunderstand the solar business. The

time taken or a nancially viableproject to close debt nancing tendsto be in the order o our to six monthsin new markets. On the other hand,in matured markets, this can takeonly our to six weeks as the solarbusiness is well understood and hasa proven track record. Also, in certaincountries where regulations do notpermit oreign currency borrowingor limit the same, access to low costdebt becomes a problem. In countrieswhere local currency is volatile,hedging the currency risk also needsto be actored in. Both o these actors,i not suciently understood, havea potential to adversely aect theviability o the investment.

Another risk in new and emergingsolar markets is the nancial health oend customers (utilities or open accesscustomers) that buy solar energy. As

taris or solar electricity normallyare above the average pool price atwhich utilities have been historicallyprocuring energy, a detailedassessment o receivable risks needsto be done and adequately actored into assess the viability o the projects.Local manpower and contractorsin such nascent markets will lackexperience in executing solar projects.The pioneering risk o executing with

local contractors and manpower cansometimes lead to delay in execution.It may also result in improper or illengineered projects which may impactthe projects energy delivery over itslie time. On the other hand, having an


Energy production

rom PV is a unction otechnology as well as

local meteorology.

In countries andmarkets where

solar energypolicies are newly

introduced, regulatoryuncertainties are a

norm in the initialperiod.



experienced partner executing projectscan de-risk these delays.

The mode o project execution innew and emerging markets tendto be lump-sum turnkey EPC

contracts along with operationsand maintenance contracts or alimited period. Such contracts are anadvantage or the developers as it de-risks them rom product perormanceand energy generation passingthese risks to the EPC contractors.In markets where local currency isvolatile, hedging risks also gets passedon to the EPC contractors in theturnkey EPC model. On the fip side,

such contracts will also be expensiveand also reduces the developers spano control on the project.

As developers gain experience inPV, there is a tendency in maturedmarkets to move away rom turnkeycontracts to either an EPCM modelor split packages with the systemintegration responsibility lying with anEPCM company or with the developerdirectly. There are some tangiblenancial benets that the developersderive in an EPCM contracting model.Such contracts tend to drive downthe cost o the solar installation byavoiding the cascading eects o themargins. In addition, they providethe developers with extended creditperiod benets that OEMs oer andcomplete control over the selection othe sub-contractors and components.Lastly, they enable developers to derive

the benets o low cost debt nancingor equity nancing that some OEMsuppliers, like module companies,oer.

Grid delity, its quality and uptime isanother area that needs a detailedassessment in the conception stage oprojects. Large megawatt scale solarprojects normally are connected tohigh voltage grids whose quality anduptime will be good and predictable.However, as solar deployment gathersmomentum, there is also a tendencyor solar plants to be deployed insmaller capacities in a distributeddecentralized model largely in

commercial establishments, ocesand industries. Such small capacitysolar plants may end up connecting tomedium voltage or low voltage grids.Such grids in urban and rural areasin emerging markets tend to have a

higher downtime due to scheduled andunscheduled power outages. Also, inmarkets where there is a net decito electricity in peak demand periods,the grid quality drops. Solar plants willnot be able to export energy in suchsituations o grid non-availability andthis risk needs to be actored into theprojects nancials.

History has shown that emerging

technologies always go through aperiod o development, demonstrationand deployment beore entering in tothe main stream, depending on thestrength and scale o the demandor that technology. Energy is one othe prime needs o societies and thedemand or energy is ever increasing,as the ability to support economicgrowth depends in large part on theavailability o energy.

Over the last ew years, there isalso an increasing awareness tocontrol and mitigate the potentiallyharmul eects to the environmentarising rom rapid economic growth.The initial skepticism on humancontributed climate change has givenway to an acceptance o this eect.Both, Governments and communitiesare becoming increasingly awarethat economic progress should be

accomplished without adverselyimpacting our environment.

Solar energy makes it possible tohave the cake and eat it too; to caterto ever increasing energy needswithout adversely aecting theenvironment. As solar energy entersthe mainstream, some o the lessonsrom its growth and development cyclewill be important to understand andlearn rom.


History has shown thatemerging technologies

always go through aperiod o development,

demonstration anddeployment beore

entering in to the mainstream.

As developers gain

experience in PV,there is a tendencyin matured marketsto move away rom

turnkey contracts toeither an EPCM model

or split packages.



9. INTERVIEWSHow do you rate the Indian solar

market in the international context?

India has for long demonstrated itscommitment to green and sustainable

energy. Both off grid solar as well ascontract manufacturing businesses

have existed in India for a long time.

The National solar mission is a boldand proactive step by the Indian

Government in enlarging the solardeployment. In a short span of 2 years,

India has already commissionedprojects in excess of 1 GW. India,

as we know, is one of the fastest

growing economies in the world andis the second most populous country.However over the last 50 years

there has been a chronic shortfall ofelectrical energy supply over an ever

increasing demand. The liberalizationof the power generation sector has

helped plug this to an extent but nonavailability of domestic coal and gas

in sufficient volumes have resulted inmost of the new private conventional

energy plants operating below theiroptimal plant load factors.

India is blessed with more than 300

days of sunshine and solar energy ishence the right technology to plug the

energy deficit. As a solar market, Indiahas emerged into the sunshine and

will continue to be attractive for manyyears to come.

What is Enerparcs strategy in India?

Will Enerparc focus on projects

outside of policy allocation, such as

REC?

Generation based subsidy (GBI)projects and merchant energy andcarbon trade based projects both have

their attractions and in many wayssynergies. The GBI route provides a

committed revenue stream whereasmerchant energy along with carbon

trade investments provides a wayfor solar to be deployed outside the

licensing mechanism and driven bymarket forces.

While we have a clear interest in GBI

projects under the policy allocationumbrella, once REC trading stabilizes

and one is able to witness its trackrecord, there will be an increased

interest from private enterprises toconsider projects along merchant and

carbon trade route. There are signs ofthis happening already. Enerparc views

both GBI and merchant and carbontrade as two parallel tracks and will

have an interest in both these vehicles.

Bankability has been the key

challenge for solar projects and in

particular REC based projects in India,

how do you see this improving? Is itimproving?

In India solar energy is categorizedunder power sector in debt parlance.

Banks have already substantialexposure to power sector.

As close to 1 GW of solar projects are

now commissioned in India, lenderscan now start to get a real feel of

asset performance and hence therisk perception would become more

tangible and less speculative, therebyeasing financing.

While the initial round of solar project

bidding saw aggressive and sometimesvery bullish energy tariff discounts

offered by developers, if the recentMadhya Pradesh bidding result is

anything to go by, there seems to bea rationalizing effect and a correction

happening with developers gettingmore aware of real economics of

investment. Bankability for suchprojects that have a workable tariff

might not be a concern.

With REC based projects, as trading

of solar REC has commenced, onceprice and volume discovery is done,

bankability would improve.

What are the challenges as foreigncompany entering the Indian market?

India has opened to international

investments and the processes are

Mr. Stefan Mueller

COO,

Enerparc

For REC based

projects, once price

and volume discovery

is done, bankability

would improve.



getting progressively better and moretransparent rom the governmentalpoint o view. The solar market isevolving and businesses need tobuild in fexibility and agility to enablechanging and adopting with themarket. Finding skilled manpowerwith the right entrepreneurialmindset is still a challenge and sois synergizing high perormanceexpectations o the internationalinvestor with that o the local team.

Ho do o see EPC prices in 2013?

where do o see major cost saving

potentials?

The big drop in module prices in 2011was a result o oversupply and thisis getting corrected across the solarindustry. We do not expect sharp pricereductions like the one in 2010 tocontinue in 2013. There are signs oprices plateauing in 2012. We couldexpect perhaps a 3-5% reduction inEPC prices driven by module prices in2013. The main driver or Indian EPCprices are the timing and the eciencyo design and execution.

Other cost elements o EPC arehowever not seeing signicantreduction, in act there could be somepotential upside in some cases, likethe volatile rupee exchange rate whichhas a potential to oset the moduleprice reduction gains.

what are the challenges or the PV

indstr at the moment and hat can

be done to overcome them?

Globally, oversupply has been thenumber one bane o PV industry in thelast 2 years. This is getting correctednow to an extent. Upstream costs likethose o polysilicon have also droppedsignicantly in recent years as morecapacity addition has happened. Thiseect o upstream cost reduction is amore sustained one.

Overall the PV industry is stilldependent on subsidies but whencompared to 4-5 years ago, owing tothe dual eects o PV cost and pricereduction and increase in conventionalelectricity tari, the point at which grid

parity will be reached is very near. Inact in some geographies, grid parity isalready reached.

Ho do o rate pnitive tari dties

on modles in order to protect the

local indstr?

The drive to promote localmanuacturing is certainlycommendable. However in an

increasingly globalized world,regulatory intervention in solartrade can have adverse eect onsolar industries growth. The largermission o solar energy is to providean alternative to ossil uel, to reducegreenhouse gas emissions and todo this economically. To achievethis end, competitive sourcing andconsequently lower capex will lead toincreased solar installations. Punitivetaris will be counterproductive toachieve this end. The solar modulescosts are decreasing in proportion tothe overall project cost and modulesare becoming commoditized. Alreadytransport cost have a tangible eectand this commoditization will drivelocal production o modules soonerthan later.

Finding skilled

manpower with theright entrepreneurial

mindset is still achallenge.

Globally, oversupply

has been the numberone bane o PV industry

in the last 2 years.



with the rst solar RECs having been

traded, the REC market seems to be

taking o slol. Do o think that

the mechanism ill create a robst

market otside o NSM?

As opposed to the licensed andcompetitive tari based subsidymodels already in place in variousstates, the REC mechanism oersa market driven and a licenseree vehicle to deploy PV projects.Since RECs have been traded onlyvery recently and in small volumesdevelopers and bankers are notcondent o the sustainability o thedemand or Solar RECs going orward.

The foor price o ` 9.3/ unit ends in2017. The market is unable to orecastuture outlook post 2017. However weare o the opinion that REC trading willnot cease in 2017 but would continueand with lower foor prices rom thecurrent values. Even a very pessimisticview o prices post 2017 still oersgood IRRs to the developer.

REC projects o 1 to 5MW scale areslowly coming up all over India.These are mostly being nanced bydevelopers themselves or throughnancial institutions. Banks have stillnot played a role here. I the policymakers, regulatory authorities and theministry take necessary steps to makeREC projects bankable, the marketwill open up dramatically. This will givean immense boost to the investors. Inorder to achieve this, RPOs needs tobe enorced diligently in all the states

across India.

Hence we are condent that REC tradeenabled merchant power based solarprojects will grow and will complementthe GBI based solar investments withan equal or better installation base.

Financing is a ke isse, especiall

so or REC projects. what can be

done to improve the bankabilit and

ensre availabilit o nance to schprojects?

The concept o bankability in PVmodules suraced when new module

manuacturers started operationsand banks were not willing to undprojects with these modules sincethey had no history in India. For thelast two years, grid connect solarprojects have existed in India, banks

are progressively getting amiliarwith the business and condencelevels are improving. Banks preertier 1 suppliers who have a provenhistory with qualied managementand leadership teams and a strongtechnology ocus. Hence, bankabilityis nothing but providing assuranceto the investors and bankers that theasset will perorm through its lie-time and provide the returns expected.

When bankers see this happening onthe ground, they will come orward.It is important that the regulatorsand the MNRE play a key role toprovide condence to bankers in Indiaby having an approval mechanismor good quality materials andengineering. We already have a ewprojects in the REC mechanism whichare working well. These investorscould be good brand ambassadorsor the REC mechanism. Projectswith premium quality materials andengineering with Tier 1 suppliersrom all over the world should beshowcased as bankable REC projects.We hope that the banks nd this as anattractive investment in the comingyears.

India is a niqe market reqiring

indigenos soltions. what can India

learn rom matre solar market and

here does India need to nd its onsoltions?

India has over 1600 hrs o peak sunannually. We have an abundance oland and our climate is most suitedto solar PV unlike the harsh wintersin the west. Look at how Europe[Germany, Italy] with even less than1000 hours /year o peak sun, madeit extremely investor riendly to

reach double digit GW installationsin a matter o ve to eight years.Their policies address large MWscale projects and also small rootop

Mr. Vina ShettCountry Manager -

Indian Subcontinent,Canadian Solar

Projects with premiumquality materials and

engineering with Tier 1suppliers rom all over

the world should beshowcased as bankable

REC projects.



programs. With a well-inormedbanking system and open marketpolicies these countries with lowsun insolation rates are the worldslargest markets. There are a ew areaswhere the Indian solar industry and

policies can adopt and learn romother markets. These are 1) creatingan investor riendly environment,2) simpliying complex import dutyand local tax structures 3) easingdebt nance rates or the greenenergy sector 4) simpliying policydeployment between several policies NSM plus various state policies 5)acilitating aster land acquisition orsolar projects 6) Building expertise

in human resources technical, R&Dare in tremendous shortage 7) improvegrid quality and reliability 8) enorcingRPOs enlarge RPO applicability to awider consumer base 9) support andpromote open market policies and notcreate trade barriers [anti dumpingduty, import duty, etc]. 10) Create arobust program or roo installationsand look at options similar to netmetering. 11) separate ocus or ruralelectrication and ogrid.

We must learn rom mature marketsand understand that good qualityinstallations with good qualitymaterials and components only willsurvive the 25 year lie time o PVprojects.

The Indian government ants to

promote domestic manactring

throgh the projects nder the NSM.

what, according to o, old be thebest a to promote high qalit and

lo cost manactring in India?

The Indian PV manuacturers havebeen let ar behind with respect to thetop manuacturers in China, Taiwanand Korea on manuacturing cost,manuacturing scale, technology andmanpower. Hence, several operationsin India have shut down. The best way

to salvage the situation rom here isto 1)open doors or oreign investment

and technology. 2) promote JVs. 3)abolish import duties on raw materialsand create an open market or topquality tier 1 PV players to look atIndia as an investor riendly placeto expand their global operations.

4) rationalise the tax structure LST/CST/VAT etc 5)create traininginstitutes or training young engineers6) and most importantly, discouragemonopolistic and unair trade practicesas antidumping duties on importedsolar PV modules. These will onlycreate trade barriers and will not helplocal manuacturing in any way. Thedichotomy in current local currentrequirement prohibiting crystalline

silicon module imports whilepermitting thin lm ones also needs tobe relooked.

Going orard, do o see scient

visible domestic demand in the Indian

market or Canadian Solar to look at

manactring locall?

We do see a considerable demand ormodules in the coming years. SeveralStates like Madhya Pradesh, AndhraPradesh and Uttar Pradesh haveannounced their solar policies. The PVprojects based on the REC mechanismare picking up steam. The NSMsphase two oers a good opportunity orus to look at manuacturing options inIndia. Local manuacturing could alsocater to the international markets oEurope and USA in the coming years.

A rationalisation o the Import duties

would help. While there is no Importduty on nished modules, importduties are applicable or raw materialslike waers, Al paste, etc. Thisrenders the local manuacturing to beexpensive [0.076/Wp-0.114/Wp]thanin China.

The other view is that ancilliary unitsor EVA, tedlar, rames, glass andother raw materials also needs to be

available within India to build a strongsupply chain.

The Indian PV

manuacturers havebeen let ar behindwith respect to thetop manuacturers

in China, Taiwan andKorea.

The NSMs phasetwo oers a good

opportunity or us tolook at manuacturing

options in India.



Do o see the REC projects segment

meeting RPO demand, or the FiT

polic based projects pla a bigger

role?

The announcement o a eed-in-tari

together with a Renewable PurchaseObligation (RPO) target encouragedrenewable energy installationswhich stand at around 25GW, as ondate. Later, as a tool to eectivelycomply with the RPO targets, the RECMechanism was introduced. Sinceimplemented in 2010, capacities omore than 3GW, almost 12% o thetotal renewable energy installations,have been registered to participate in

the REC Mechanism.

The ramework allows compliancewith the RPO target by purchase orenewable energy at the eed-in-tarirate specied by the appropriateelectricity regulatory commissionor by purchase o equivalent RECsor through a combination o both. Inthe medium term, obligated entitiesmay rely primarily on the purchaseo renewable energy under the eed-in-tari route or complying with thetargets, since they are tied up underpower purchase agreements with therenewable energy generators. Thepurchase o RECs will essentially meetthe incremental targets. However,the REC mechanism has provided alarger amount o fexibility to obligatedentities or ullling their RPO targetsand the purchase o RECs shall be thepreerred choice, or complying with

RPO targets, in the longer term.

what are or sggestions to

make the RPO mechanism more

enorceable?

Presently, the RPO complianceterm or the obligated entities is onan annual basis. In order to createincreasing enorceability o RPOtargets, the compliance period may

be reconsidered as quarterly or halyearly.

It has been observed that theElectricity Regulatory Commissionsin spite o enorcement provisions

allowed the carry orward o shortallunits rom one compliance yearto another, on account o the non-availability o sucient renewableenergy or RECs. It is expected thatthis will impact the RPO enorcement

clause and also the REC market. Suchprovisions should be discouraged inorder to make the RPO mechanismmore enorceable.

However, in order to saeguard theinterests o the stakeholders, theelectricity regulatory commissionsmay speciy the carry-orward othe shortall in energy units, or anycompliance year, i it is less than the

certain percentage specied by theappropriate electricity regulatorycommission. Such provisions, orexample, have been adopted bythe Oce o the Renewable EnergyRegulator in Australia.

Further, in order to make RPOcompliance more enorceable, theliable entities should be imposedshortall charges which may bereundable in case the liable entitiesull their RPO targets cumulatively inconsecutive years, or any such term aspermitted by the electricity regulatorycommissions.

Indian PV projects have so ar shoed

varied perormance and qalit o

project eection. what can be done

to rther improve their standards?

For timely implementation o

bridge to india_the rec mechanism_ viability of solar projects in india

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