Setting the context Investment Opportunities on Solar for PSUs
Consultation Workshop: 15-Sep 2015Accelerating Solar Energy Deployment in
Public Sector Undertakings
Presented by Vinod Kala (EVI)Lead consultant RE Deployment and Financing
Partnership to Advance Clean Energy – Deployment (PACE-D) Technical Assistance Program
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Contents
· Investment Opportunities for PSUs
· Large RE projects
· Roof Tops
· Financing constructs
INVESTMENT OPPORTUNITIES FOR PSUS
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• Tax incentives– Accelerated depreciation benefits as an operating entity
• Business Portfolio benefits– RE assets are stable cash flow generators– Diversification of cash-flow mix
• Energy Security– Self consumption- cost lock-in– Energy access/security for distributed infrastructure
• Aligned with Green priorities and Sustainable Development.– RE-INVEST Commitments– Greening of energy mix used in operations– Projects can be designed to yield ESG benefits for community – CSR Commitments
• Solar park development can be an attractive business opportunity in itself– Many PSUs have commitments– Need development support
• Large PSU’s competitive advantage in setting up RE– Competitive Financing of large scale projects– Access to GW scale sites – Attractive for high quality suppliers– Ability to create large scale programs
Rationale for PSUs to invest in RE
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Areas to Invest
• Can be a few MW to GW scale projects. Grid Connected
• Wind, Solar, Hybrids, most likely choices
• Plants• Distributed Infrastructure
(e,g platforms, petrol pumps, mobile towers, post and telegraph centers, e-governance kiosks, bank ATMs etc
• Solar PV, Wind-Solar Hybrids
• Industrial Processes may use solar thermal cost competitively for
- HVAC systems- Supplementing thermal
energy inputs- Process steam generation
. Potential use for bio-fuels, Agri/MSW waste etc.
• Micro Grid, Irrigation, Drinking Water RE enables rural infrastructure in communities near plant operation
• Company’s infrastructure can serve as anchor load (e.g platform, petrol pumps or mobile towers)
80 GW+ 40 GW+
2 GW+
LARGE RE PROJECTS
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• Solar Park: a designated land for concentrated solar power generation• GOI is targeting 25 solar parks, each with a capacity of 500 to 1000 MW; totaling around
20000 MW in the coming 5 years– INR 25 lacs support for feasibility assessment– Up to 20 lacs/MW of 30% of development cost as support for build infrastructure for SECi/State Anchored parks
• Key features– Fully developed land along with transmission facilities, provision for water,, roads, drainage– Land approved for installation of solar power plants and necessary permissions including change of land use etc. – Road connectivity to each plot of land – Water availability for construction as well as running of power plants and demineralization plant – Flood mitigation measures like flood discharge, internal drainage etc. – Availability of Construction power and Telecommunication facilities – Provision for transmission facility consisting pooling station (with 400/220, 220/66 KV switchyard and respective
transformers)– A minimum of 5 Acre per MW land will be made available
• Solar Park development structures envisaged– State Nodal Agency (SNA)– SECI– SEC+SNA– PPP of the three types of Govt entities, with a private party
Solar Park Policy of GoI
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• Even with utilizing 3% wasteland for solar, states have huge solar potential– The table below showcases Solar potential calculated by NISE (all figures in GW)
• New RE Act– New RE Act aims to have same RPO obligations across the country.– Tough penal provisions; violation of law will not be tolerated.– Renewable Generation Obligation (RGO) will be imposed- mandating the conventional electricity producers to
generate RE
• The revised Electricity Act– OA will be available to all consumers with load of more than 1 MW– Penalty for non-compliance of any provision of the act has been raised to Rs 1 cr. Penlty for RE generators will be INR 10 lakhs
State Commitments
AP GJ KA MP MH RJ TN DL
38 35 25 61 64 142 17 2
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Business models- General
Net/ Gross Metering (roof
tops, irrigation,
micro grids)
User owned- Captive
IPP/ RESCO
Financier owned
Fixed FITBilateral
PPAs- dis-coms states
Third Party Sale
Sale on exchanges
Surplus power
Surplus power
Tariff Bidding
Surplus power
Significant wind, bio-mass and
hydro; some solar
Large solar plants,
JNNSM, states
Large Wind, Bio-mass projects, (AP, KA,
TN)
Ultra Mega Projects-
Solar, Wind, Hydro
Small % sold;
Mostly coal projects,
little renewable
NM concepts- irrigation, roof tops
Can become big with
re-financing
Early days- large scale
projects may use
Lease financing
potential- AD benefits
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Solar cost competitiveness v/s grid- solar competitive in most states – Large Projects
Cost of Generation of Solar (W/o AD)Cost of Generation of Solar (With AD)
5.0-5.6
4.5-5.1
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Type of Customers for power from large parks
• Tariff Lock-in• Long term cost saving• Meeting RPO• Meeting green
commitments
They may prefer meeting commitments from another PSU• Railways• Defense• Ports• PSU Operations/ Plants• Self consumption
Have customer/corporate pressures to go green
Can buy in $ linked PPAs and benefit from reduced costs
To meet power needsMeet RPOReduce Long Term Costs
ROOF TOP PROJECTS
13
Customer Owned
RESCO Owned
Utility Owned
Gross Metered
Net Metered
Grid Tied
• All benefits can flow to customers, incl. depreciation
• Not all customers want to invest
• Rural micro grids, large complexes could follow this model
• Leasing models to get depreciation benefits
• Utilities can anchor large scale programs reducing costs, risks; including collection risks
• Utilities need to be strongly aligned if scale up is targeted
Models where work is happening
Customers get FIT, some state policies
support
Most on site RE programs currently follow this model
Customers get roof top rental: e.g Gandhi Nagar; utility meets RPO
Urban, commercial and industrial complexes, SEZs.
No Programs as yet
Solar city programs; large complexes. DSM + RE type programs
Customers with ability to pay-- industrial, commercial
All customer segments; incl. residential, commercial, industrial
Utilities likely to find it difficult to
serve
Model to which we need to transition to scale up
Legend
Off Gird
Business models- roof top
Sample LCOE Calculations- Roof Top Diesel – Rs 18-30/KWhr
• Capital subsidy value
• If grid cost inflation is accounted for, even with no benefits solar PV is competitive with grid in most states
• Vis-a-vis diesel solar power is competitive everywhere, even if storage required is 6 hrs
Capital Cost ~ Rs 65/W assuming programmatic approach; 16% ROE (post tax); Tariffs in Jan 2014
NEW FINANCING INSTRUMENTS FOR RE
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Reduced risk profiles of operating RE Assets
Resource assessment risks
Site acquisition risks, delays, costs, non availability
Evacuation access risks
Other permits and consents related risks e.g environment, local community etc.
Project execution risks, costs; delays
Technology performance risk
Credit Risk
LA
RA
EA
PC
PE
TP
CR
FM Force MajeureEvent risks
Development
RA
EA
TP
CR
FM
Operating Asset
Equity Discounting
rates
18-22%
10%-14%
Depending on tax efficiency and residual risk for equity investors
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Clean Energy is becoming increasingly attractive for investors, due to long term economics
⏏*R(C )- R(RE)
* R (C): return on conventional power; R(RE) – return on RE without subsidies
Time ---
Inflation, as fossil fuel run out their availability
Environmental costs
Falling costs of RE; repowering at the same sites
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Solutions which are Scalable, Liquid will attract wide participation (including domestic and foreign investors)
– Green Bonds – debt with lower cost (by 2%-3%/a), long tenures (15 yrs+), flexible structure (allowing better leveraging depending on cash flow from assets)
– Investment Trusts – for equity investors seeking low risk-low return investments
With – Appropriate tax provisions, – Simplification of investment rules – Availability of Risk mitigation/management products
Can lower the Cost of Finance significantly to reduce/eliminate subsidies (capital subsidy, VGF, GBI) and accelerate achievement of grid parity
Summary Ideas
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Green Bonds
Renewable Energy is one of top priority areas for Green Investments.
Green investing becoming significant for very large investors
Borrowers get benefits of lower cost, fixed interest (v/s variable for bank loans), longer tenure, and non recourse options of financing.
Corporates issuances are increasing rapidly.
• Can be listed on Alternate Investment Markets in London or Luxembourg or other similar exchanges
• Can be traded bilaterally as well, as they use risk mitigated, ring fenced structures
• Raise long term debt for new projects
• Re-finance long term loans• Re-finance construction
loans
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Renewable Energy Investment TrustsAttracts large, low risk investors such as Pension Funds, Insurance Companies, HNIs, Soverign Wealth Funds etc. Also Sharia Compliant- meets Islamic Finance requirements
Maximises cash distribution – usually 75%-90% of distributable cash needs to be distributed, by law.
In most domains globally , the structure offers tax efficient ways of investingAsset acquisition strategy maximizes availability of tax shelters/ credits.
Examples- Singapore Business TrustsMaster Limited Partnerships (USA)
• Listed on stock exchanges• Norms to ensure wide public
participation. • Considered better than investing in
utilities, because it isolates development risk
• Re-finances operating RE assets- lower risk
• Limits on investing in non operating or financial assets; limited leverage
• Diversifies risks through the asset portfolio
• High standards of governance
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Investment Trust- the structure
Inv. Trust
Project 1
Sponsor
Inv1
Inv2
Inv n
Trustee
InvestmentManager
Project Manager
Sponsor Transfers Assets/ majority SPV stock to the TrustInvestors invest in the Trust based on independent valuation; receive units from the Trust, which are listed on a stock exchangeTrust pays in cash and in ‘units’ (shares) to the sponsor. Sponsor needs to hold a minimum stock in the Trust
Investment Manager – manages asset acquisitions, divestments, investor related processes (incl. listing and trading, distribution of cash/dividends, legal compliances, valuation accounting, audits and reporting) etc.
Project Manager – operates and manages assets for efficient performance
Trustee- ensure that investor interests are protected.
THANK YOU
CONTACT: [email protected]
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Challenges of RE financing and the new approach needed
$250 bn+ new debt and equity needed by 2022
Long term investors
Investors need exit options
low interest costs; low discounting rates for equity
Low interest rates and low discounting rates are possible with risk mitigated, diversified ring fenced, project portfolios with no development risks
Large investors with long tenor, low risk, low cost capital – pension funds, sovereign wealth funds, insurance co etc
Liquidity of instruments, helps attract large scale investors.
High level of tax efficiency helps reduce the cost of debt/ equity
Market Needs New Approach
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• State-wise wise Solar Parks• 10 Solar Parks/ Ultra Mega Solar Power Projects are being proposed in the following states who have communicated
their interest for setting up of Solar Parks/ Ultra Mega Solar Power Projects• ILFS, Essar, Adani, World Bank supprted solar parks in Odisha, MP
• State Government in which the solar park is developed will sell ~ 20%+ of the power produced through its DISCOM
Solar Park Policy of GoI
S. No. State Solar Park Proposed Capacity (MW)
Area
1 Madhya Pradesh Ultra Mega Solar Power Plant, Rewa 750 3750
2 Andhra Pradesh
Anantapur Solar Park 1500 9000
3 Kurnool Solar Park 1000 5000
4Rajasthan
Bhadla Phase II Solar Park 700 4500
5 Bhadla Phase III Solar Park 1000 5000
6 Jaisalmer Solar Park 1000 30525
7 Uttar Pradesh UP Solar Park 600 3038
8 Gujarat Banaskantta Solar Park 700 3500
9 Telangana Mahabubnagar Solar Park 1000 5408
10 Karnataka Karnataka Solar Park 1600 8000