Partnership to Advance Clean Energy - Deployment

(PACE-D) TA Program

Accelerating Deployment of Solar Rooftop through Gross

Metering for Karnataka 11th September, 2015

Presented at the

Stakeholder Consultation for RE Hybrids and Gross Metering

Bangalore, India

Presented by

The USAID PACE-D TA Program

• Introduction to the Global and Indian Solar

Rooftop Market

• Solar Rooftop Business Models – the

relationship with incentive structures

• Consumer Analysis of Karnataka

• Objective of Study

• Benefits of Gross Metering

• Business Case for Gross Metering

• Determination of FIT for Gross Metering

Co

nte

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Mainstreaming EE in Corporate Loans

• Solar - fastest-growing generation technology globally - key contributor has been solar rooftop.

• Large markets like U.S. and Germany - added more capacity through rooftop

A number of drivers have been pushing the development of solar

rooftop projects across the globe

Country Solar PV Installed Capacity (GW) Share of Rooftop PV (%)

Germany ~38 ~60%

US ~20 ~40%

Japan ~24 ~35%

Australia ~4 ~80%

Solar Deployment areas/

benefits

Supply gap

reduction

Energy

security

T&D loss

reduction

Stimulate

investments

Optimal utilization

of infrastructure

Large ground mounted solar

projects √ √ √

Large commercial solar

rooftop projects √ √ √ √ √

Small household based

rooftops projects √ √ √ √ √

4

Sector Installed by SECI (MW) Installed by States (MW) Total installed (MW)

Commercial 10.9 17.2 28.9

Government 3.0 4.9 7.3

Hospital 1.6 0.5 2.1 Institutional (Schools,

Collages) 2.2 5.1 8.3

Religious institution 0.6 7.5 7.6

Residential 0.0 0.3 0.3

Total 18.35 35.532 54.187

• India’s solar rooftop market potential

~124 GW

• India has set an ambitious target of 40

GW by 2022

• 13 States have notified Solar Policy’s

supporting grid connected rooftop

systems

• 19 states/ UTs have notified regulations

for net metering/feed-in-tariff mechanisms

India’s solar rooftop journey has just started and the sector has the potential for rapid

scale up – however right now the sector is still in infancy with close to 300 MW of installed

While significant potential exists in India, the sector is still in infancy with development of

the requisite eco-system is still falling into place

Policy and regulation

Multiple incentive

structures

Utility’s participation

Simple Procedures

and Processes

Distribution Utility Preparedness

Standardized interconnection processes

Awareness of rooftop solar

Capacity of Utility

personnel

Financing

Financing products and guidelines/

norms

Risks and associated mitigation strategies

Evaluation Tools and

capacity of FI’s

Market and Awareness

Standards & certifications

B2B business models

Contracting structures & their sanctity

6

Solar Rooftop Development

Business Models

Incentive Terms used in the Presentation

• Gross Metering – a framework where all the energy generated is exported

to the grid with no internal consumption at the rooftop owners facility

• Net Metering – a framework wherein the energy generated by the rooftop

system is first used internally (by the rooftop owners facility) and the

excess is exported to the grid only to be netted against imports at later

times

• FIT – A feed in tariff used to denote the price paid by a utility for power

under the gross metered regime

• Solar Tariff - this is the tariff paid for excess power exported to the grid by

the Net Metered consumer under the present Net Metering Regulations in

Karnataka today

Gross Metering and FIT have been used interchangeably in the

presentation and stand for power exported to the grid under gross

metering at a price determined by the Regulatory Commission

Solar PV implementation across the globe has followed two routes – large scale

centralized generation or smaller scale distributed generation

Solar Rooftop

Solar rooftop (aka Consumer-end Driven) Space has seen a number of models emerge –

basically based on ownership, metering and types of rooftops which have been defined by

the policy and regulatory regime, taxation structures and market structures

10

Country Quantity Pricing Fiscal Measures Installed

Capacity

Germany FiT Linked capacity

cap (MW)- introduced

recently

• FiT • Capital Subsidy (way

back)

• Low interest loans

Around 38

GW

Italy FiT Linked capacity

cap (MW)- introduced

recently

• FiT • None

France FiT linked capacity

cap

• FiT • Tax Abatement on

Equipments

Spain Annual Capacity Cap

(MW)

• FiT • Investment

Subsidies (prior to

2004)

US Energy Purchase

(RPS)

• Net Metering • Tax Abatement on

Equipments

• Capital Subsidy

• Tax rebates

Around 20

GW

Japan Energy Purchase

(RPO)

• Now Moved to

FiT

• Capital Subsidy Around 24

GW

As pointed out - globally Policy and Regulatory Instruments have played a critical role in

the development of the solar industry – the same is the case with rooftop solar

• On 10th October, 2013 KERC, under the solar tariff order, determined the tariff for grid

interactive rooftops and small solar PV power plants (Rs. 9.56/kWh)

• Under the same tariff order, KERC suggested that the concept of net metering can be

adopted for grid tied solar rooftop systems

• In pursuance this, BESCOM along with other distribution utilities launched the Net

metering based Solar rooftop program in October 2014

• Despite a supporting policy and regulatory environment and a clear and simplified process

for interconnecting systems, the scheme has not be able to achieve the desired results

• Rooftop capacity around 2.14 MW has been commissioned under the program so far

• Challenges faced by the program are (based on PACE-Ds analysis)

– Difficulties in encouraging consumers with lower retail tariff

– Marketing by developers and equipment suppliers yet to take off

– participation from 3rd party investor still limited due to contracting and payment

security issues

11

Although the state of Karnataka has taken a number of proactive steps in terms of policy

and regulation, the development of Solar rooftop sector in Karnataka has not achieved the

expected results

• India has set an aspiring target of achieving 40 GW though Solar rooftops by

2022, wherein the target for Karnataka is 2300 MW

• To achieve this target, Net Metering alone may not be sufficient.

• The Objective of this study is to analyse and if found suitable propose a

mechanism which can facilitate the development of the solar rooftop sector in

the state

• The focus of the study is to evaluate whether solar rooftops developed under a

gross metering regime using Feed in Tariffs would accelerate the deployment of

solar rooftop in the state

12

Objective of the Study – propose a mechanism which can facilitate development

of the solar rooftop sector in Karnataka

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Total

India 200 4,800 5,000 6,000 7,000 8,000 9,000 40,000

Karnataka 10 275 290 134 403 460 518 2,300

Solar Rooftop Development – The case

of Karnataka

14

Hypothesis – the gross metering framework using Feed in Tariff offers tangible

benefits and has the potential to scale up rooftop deployment in the state

Gross metering - solar financially viable for investor/ consumer but at lower cost limiting utility losses

Simple to design and deploy – experience of utilities in deploying the instrument

Allows wide scale participation from a number of consumers and investors

Limited revenue loss for the utility and long range optimization of public finances

Positive long term impact on tariffs for all consumer categories

Capacity Addition: Consistent and stable curve leading to a well developed industry value chain

Long term regulatory consistency for solar market development

15

Stakeholder Parameter Term

Short (5 years) Medium (5- 10

Years)

Long (10 to 20

years)

Consumers Impact on Tariff Increased burden –

due to differential

between FiT &

APPC/ MCPP

Still higher burden

due to still existing

differential

Negative impact

due to lower

procurement cost

Viability for consumers –

ability to invest rooftops

All consumer categories

Project Size Optimization High – project sizing can be based on space

Utility Sale of power to consumers No Impact on Sales of the Utility

Impact on Utility Cash flow Medium – due to

higher FIT

requirement

Marginal – The FIT

is expected to

reduce in medium

term

Low – FIT

requirement would

be lesser than

APPC

Impact on Average Power

Procurement Cost

High Marginal Low

Developers

/ 3rd Party

Investors

Contract Sanctity High – as DISCOM has signed PPA

Payment Security Issues Low

The gross metering framework provides

more options for consumers but does

burden them in the short term

16

The Gross Metering Framework allows all consumer categories to participate in the solar

rooftop program

• The DISCOMs serve approximately 20 million retail consumers in Karnataka

• In terms of energy sale, Agriculture is the biggest (36%) consumer followed by Domestic (21%).

• Subsidised categories constitute 57% of the total units sold in Karnataka

• Average cost of supply for BESCOM is Rs. 5.50/kWh & for BESCOM, the average retail tariff is

Rs. 4.59/kWh

• Distribution losses (AT&C) for BESCOM are 13.4% of which technical losses at LT level are

12.28%. KERC Supply tariff order, 2015-16

-

5.00

10.00

15.00

20.00

25.00

BESCOM HESCOM GESCOM MESCOM CESC

Sales to Different Consumer Categories (BU)

Agriculture Domestic Commercial Industries Others

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

BESCOM HESCOM GESCOM MESCOM CESC

Consumer Profile (‘000)

Agriculture Domestic Commercial Industries Others

With NEM, Rooftops are not viable for subsidised consumers, Which constitutes to 86% of total Consumers

Procurement from Solar Rooftop projects using the gross metering framework will become

cost completive in the long run and will reduce considerable loss to revenue from utility

• The figure projects average power procurement cost vis-à-vis procurement cost from solar rooftop

projects installed in FY2016

• Increase in electricity demand & fuel prices, utility’s power procurement costs will rise, driving up retail

tariffs and APPC, reducing the gap to FIT - solar FIT remains constant throughout life of the project cycle

• However in the same time the cost of commercial power rises substantially leading to loss in

considerable revenues to the utility

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Rs/

kWh

Solar FIT LT-Commercial APCC LT- Domestic

Short Terms Medium Tem Long Term

Procurement from solar will become cost competitive for distribution utilities in long run

6.3

5.2 4.6

10.0

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14.2

7.9 10.7

13.5

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Rs/

kWh

Solar FIT Commercial Tariff Domestic Tariff APPC

Solar rooftop FITs will become increasingly competitive with conventional power

generation and considerably lower than the commercial consumer tariffs

• The figure depicts the solar rooftop FITs installed over the years vis a vis changes in retail supply tariff &

APPC

• As per our models, the Solar rooftop FIT will be lower than the average cost of power purchase of utilities

• Utilities stand to lose considerable revenues from commercial and industrial consumers in case of net

metering – gross metering stems that loss

Solar FIT Req. will be

lower than APPC

Short Terms Medium Tem Long Term

Technology Innovations and Improvement in Operational efficiency will help in reducing Solar FIT

requirement continuously

0.00

200.00

400.00

600.00

800.00

1000.00

2015 2016 2017 2018 2019 2020 2021 2022 2023

Rs.

Cro

re

Cost to Utility in NM Cost to utility in GM

Utilities will suffer from higher losses due to revenue reduction than they would through

higher pay-out if gross metering framework was adopted

• Net Metering mechanism will replace the grid energy with energy from solar rooftop thus it

would impact utility sales negatively

• Graph projects the loss to utility under the net metering mechanism from implementation of

solar rooftops vis a vs higher pay-out for FIT under gross metering

• However under gross metering, utility power procurement cost will increase but at a reducing

rate due to a reducing FIT

Cost to utility under

NM ~ Rs. 1600 Crore

Cost to utility under

GM ~ Rs. 733 Crore

The impact of reduced sales due to Net Metering would be much higher than incremental cost of

power procurement under gross metering

• Gross Metering is a more powerful mechanism for developing rooftops as the FIT can be

tuned as per market conditions – the FIT also provides flexibility to promote other solar

uses such as solar based pumping

• Gross Metering allows all consumers to deploy solar rooftops while Net Metering is viable

only for high paying consumers

• With Gross Metering, utilities face no threat of losing customers and business, while they

end up procuring cheaper power over the life of solar projects vis a vis net metering

• In long run, the cost of procurement from solar rooftops would be cheaper than other

conventional sources for utilities

• However Gross Metering based FIT needs frequent revisions and care needs to be taken

on the quantum of capacity procured under this mechanism to limit burden on the end

consumers

20

Inferences till now

21

Capital Cost vis-à-vis FIT

Parameters Units GERC RERC HERC KERC*

Category of Project Rooftop (draft) Rooftop Rooftop Rooftop

Capital Cost (Rs./kWp) 80 56.5 68.0 90.0

Tariff (Rs./kWh) 8.42 6.45 7.19 9.56

• Tariffs provided by various regulatory commissions for solar rooftops:

• Based on our analysis, FIT for solar rooftops will be:

Parameters Units Levellised Tariff for different Capacity

System Size (kWp) 1-10 10-100 Above 100

Capital Cost (Rs./kWp) 75,000 72,500 70,000

Feed-In-Tariff (Rs./kWh) 7.97 7.71 7.44

Thank You

Key Partners: RE Component

Design and development of

innovative financing mechanisms Microfinance Partners

Capacity to design and implement

supportive policies and regulations

Implementation of techno-commercially

viable pilots

• In terms of public

expenditure per unit

capacity addition, Germany

and Japan have had the

most effective frameworks

for promoting solar

capacity development over

the long term

• German investments

focused more on FiT

leaving technology and

supply chain development/

cost reduction to the

market

• Japan focused more on

R&D, investment subsidies

and demonstration projects

– however market unable

to take off – shifted to FiT

in 2010 Deloitte

23

Measures for optimizing public

investments in solar development

Source: (Avril and Lemare,2012)

24

Distribution Losses (AT&C) of Karnataka

Technical Losses @ 11 kV, 5.06%

Technical Losses @ LT line, 6.64%

Loss due to theft, 4.29%

Loss due to defective meters, 0.06%

Loss due to un-metered connections, 1.99%

Loss due to Unrealised Revenue, 2.89%

Source: FOR, Assessment of AT&C Losses of Karnataka, March-2014

• Out of total losses, Technical losses in Karnataka are roughly 11.7%

• With Solar rooftops, impact of technical losses could easily be minimised and Utility’s power

purchase cost can be reduced

Rooftops can

help utilities in

reduction of

technical losses

both at HT and

LT level

• Global Solar Market has witnessed a steep decline in Solar PV system price in last few

decades

• As per Experts, the system cost will keep on falling due to the following factors

– World Demand for panels

– Technological Innovations

– Learning

– Inflation

– Exchange Rate Risk

• To analyse the impact of key drivers on cost of solar power, the PACE-D team used three

cases i.e. Optimistic, Base and Pessimistic case

How will Solar Costs evolve in the future

Impact of Drivers on Cost of Generation from Solar

• To evaluate the impact of key drivers on Solar Cost of Generation, scenarios have been developed i.e.

Optimistic, Base and Pessimistic

• Assumptions

• Optimistic – 5% Reduction in Solar COG annually due to fall in price by technology innovation

with conducive policy and regulatory environment for investors

• Base – 3% Reduction in Solar COG annually due to moderate environment for investors

• Pessimistic – 2% Increase in Solar COG annually due to increase in prices because of low

technology innovations and rise in inflation

₹ 5.5 ₹ 6.3 ₹ 7.4

₹ 8.4

₹ 0.0 ₹ 1.0 ₹ 2.0 ₹ 3.0 ₹ 4.0 ₹ 5.0 ₹ 6.0 ₹ 7.0 ₹ 8.0 ₹ 9.0

FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22

Projection of Solar Cost of Generation (Rs/kWh)

Optimistic Base Pessimistic

Module Prices and their projections

As per IEA- Technology Roadmap Solar PV, The Cost of solar Modules will drop to half in next 20 years

The Price range of PV system will narrow and the Avg. cost will be halved by 2040 or before

• Capital Cost – Comparison of Capex. based bids invited by SECI for solar rooftops and

quotations provided by various system installers

• CUF – Several state commissions (KERC, HERC, GERC, RERC etc.) has considered

CUF of 19% for solar rooftops while determining tariff

• Interest Rates – Rate of interest for raising funds for installation of rooftops has been

considered 11.85% (SBI base rate +200 basis points)

• Return on Equity - Flat ROE of 20% (pre-tax) has been considered for entire life of plant

i.e. 25 years considering continuous cash flow for generator

• Discount Factor – Discount factor has been computed on the basis of WACC

• O&M Expense - O&M of solar rooftops is very low hence 2% of capital cost has been

considered as O&M Expense per year with annual escalation of 5.72% similar to

recommendation of KERC

• Depreciation – for the purpose of computing depreciation benefit, regulatory approach

has been adopted (Straight Line Method)

28

Assumptions for determination of Solar FIT

Financial Parameters for FIT determination

Parameters (Units) GERC HERC RERC KERC Proposed

Capital Cost/MW (Rs. /lakh) 800 680 565 900 720 - 675

Debt: Equity (Ratio) 70:30

Debt Repayment Tenure (Years) 10 10 12 10 10

Interest on Debt (%) 12.70% 13.75% 13% 12.50% 11.85%

Capacity Utilization Factor (CUF) 19% 19% 20% 19% 18%

Return on Equity (Post tax) (%) 14% 16% 20%(Pre Tax)

Discount Factor (%) 10.64% 14.42% 10.89% 13.41% 11.48%

Auxiliary consumption (%) 0%

O & M expenses (Rs. Lakhs/MW) 10 11 13 18 16 (2% of

Capital Cost)

O & M Escalation p.a. (%) 5.72%

Interest on Working Capital (%) 11.85% 14% 12.50% 13% 12.85%

Depreciation for first 10 yrs 6% 7% 5.83% 7% 7%

Depreciation for next 15 yrs 2% 1.33% 1.54% 1.33% 1.33%