In Focus 4. Solar Power, Carbon Finance and Telecommunications in India

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1 Solar Power, Carbon Finance and Telecommunications in India In Focus 4 Solar Power, Carbon Finance and Telecommunications in India Carbon Credit Capital LLC 561 Broadway New York, NY Tel: (Main Office)

2 2 Solar Power, Carbon Finance and Telecommunications in India Over the last ten years, cell phones in India have come a long way - with the total subscriber base increasing by over a factor of 100 since As of February 2011, India had 752 million cellphone subscribers, the second largest in the world after China. With the expansion of mobile telephony to newer markets within India, India s cellular tower industry, which erectsthe equipment that enables the functioning of networks, has also grown rapidly. Seventy percent of India s 1.2 billion persons live in rural areas, which are riddled with energy access problems. Even in non-rural areas connected by an electricity grid, supply remains intermittent and unreliable. This has caused an increase in demand for diesel generators, which are costlier electricity generation substitutes to grid connected electricity. As the demand for cellular connectivity is highly inelastic, India s telecom tower companies consume large amounts of diesel due to grid electricity generation and transmission bottlenecks. The costs of diesel consumption form about 30% of total operating expenses for Indian telecom tower companies. As of February 2011, India has over 310,000 telecom towers, where equipment cooling requirements necessitate consumption of 2 billion liters of diesel fuel each year. The CMAI, India s telecom industry body, expects another 250,000 telecom towers to be erected by 2015, as the subscriber base inches closer to the 1 billion mark. Demand for new tower sites is also expected to come from the introduction of 3G networks and additional coverage by existing operators. Already, a large part of the million new cellular services subscribers that India adds each month come from rural areas, where the electricity deficit is challenging. As Indian telecom networks seek to consolidate their hold in newer, rural markets, consumption of diesel and associated costs will spiral, unless steps are taken to mitigate this. Diesel is more expensive than grid connected electricity, less energy efficient than most other fossil fuels and responsible for over 5 million tonnes of CO2e greenhouse gas emissions every year. Use of solar power for cooling tower site equipment can potentially help these companies achieve substantial savings from lower maintenance and electricity costs, and make use of incentives such as government subsidies and carbon finance. Transitioning to solar power also insulates telecom tower companies from the risk of rising diesel prices at a time when the Government of India appears to be taking decisive steps towards fuel price deregulation, in the face of a mounting subsidy burden and volatile crude oil prices. Telecom tower companies can also benefit from carbon finance, which can provide additional cash flows from these emission reduction projects. Cellular networks depend on equipment like Base Transceiver Stations (BTS) or Node B, along with Antenna, Power System and Backhaul Equipment for enabled connectivity. The BTS is

3 3 Solar Power, Carbon Finance and Telecommunications in India an important part of the telecom network machinery and needs to be kept at a constant, cool temperature in order to function. As India is a warm weather country where summer time temperatures regularly reach well over 40 degrees centigrade, telecom companies use air-conditioners to keep the BTS cool. Air conditioners, in turn, require large amounts of electricity. In absence ofreliable, grid connected electricity, cellular tower companies use diesel-based electricity generators that enable air conditioners to keep equipment cool. According to a white paper on green telecom issued by the Telecom Regulatory Authority of India, about 65% of energy costs of a typical telecom company stem from equipment cooling needs. Government Support India s government has made climate change mitigation one of the centerpieces of its policy agenda, with the Prime Minister s National Action Plan of Climate Change detailing eight strategies to lower greenhouse gas emissions. The biggest, most ambitious and, according to India s Ministry of New and Renewable Energy, most important of the three is the Jawaharlal Nehru National Solar Mission (JNNSM). The JNNSM aims to set up 22,000 MW of solar energy installations by 2022, and establish grid parity with the cheapest available coal-fired alternatives by Of the 22,000 MW, 2,000 MW will come from off-the-grid electricity of the kind proposed for telecom towers in this article. Under the JNNSM, India has instituted a number of subsidy packages to promote the use of solar energy in India, a subject that was explored in the previous edition of Marketracker India. India s Ministry of New and Renewable Energy has already invested 1.2 billion rupees in solar powered telecom tower sites in a project covering 3 states of Andhra Pradesh, Bihar and Uttar Pradesh, and involving three of the largest telecom tower companies IndusTowers, GTL and BSNL. India s finance minister also announced a 50% subsidy on solar panels in last year s Union Budget. Already, previous solar-telecom related investments have benefited from a 30% capital subsidy. The Minister of New and Renewable Energy has also been quoted in newspapers stating that the government intends to also offer interest subsidies and accelerated depreciation to investors. Economics of Substituting Diesel with Solar Of the 310,000 telecom towers in India, about 70% are located in rural areas where electricity supply is either absent or intermittent and unreliable. As telecom networks cannot risk an interrupted power supply, they resort to diesel powered electricity generation. On average, a typical telecom tower site consumes 2 liters of diesel per hour, in the absence of grid connected electricity. The diesel generator capacities are generally in the order of KVA, and emit 2.63 kg of CO2 for every liter of diesel burned. According to India s Ministry of Environment and Forestry, telecom tower companies consume 2 million liters of diesel per year, emitting 5.3 million tonnes of CO2. According TRAI, a switch from diesel to

4 4 Solar Power, Carbon Finance and Telecommunications in India solar power will save $1.4 billion in operating expenses and 5 million tonnes of greenhouse gases. As more telecom tower sites are set up in India due to introduction of 3G and expansion of telecom services, the savings potential will only increase. In order to confirm these numbers, this article develops a simple back-of-the-envelope approach to understanding these remarkable cost-saving business opportunities. Cell Sites Electricity Availability (Hrs) Description Average diesel use (hrs/day) Total Cell Sites Liters of Diesel per Year 10% > 20 Metro Cities 0 31, % Tier 2 cities 8 62, ,040,000 30% Semi-Urban Areas 16 93, ,120,000 25% 8-12 Mostly Rural Areas 24 77, ,900,000 15% < 8 or Off Grid Rural Areas 32 46, ,120,000 Estimated Diesel Consumption per annum (Liters in Billions) 1.95 Estimated Conservative Estimate of price of Diesel per Liters (Rupees) Rs Estimated Annual Diesel Expense by TelecomTowers (Rs in Billions) Rs Estimated Diesel spend by TelecomTowers per year ($ in Billions) $ 1.51 Estimated Emissions (Millions of Tonnes of CO2e ) 4.48 European Climate Exchange Price of Secondary CER (On Feb 23, $ 2011) Potential Market Value of Diesel-related Emission Reductions ($ in Millions) $ Under conservative diesel use and diesel fuel price assumptions, our estimate of the total savings achieved by substituting diesel with solar power in India amount to $1.51 billion, almost equal to the Government of India s estimates. However, these calculations assume a diesel price of 35 rupees per liter, an exchange rate of 45 rupees per USD, and 2 liters per hour of diesel use in absence of electricity and upper limit electricity availability. We arrive at the following conclusions: 1. Indian telecom tower companies consume nearly 2 billion liters of diesel fuel each year. 2. At a conservative estimate of 35 rupees per Liter (pump price in most of India generally exceeds 40 rupees per liter), this amounts to a total of billion rupees, or $1.51 billion in annual diesel consumption expenditure. This amount excludes money spent in sourcing and transportation of diesel costs. 3. Electricity generated from diesel amounts to 4.5 million tonnes of CO2 emissions. This figure falls short of the 5 million tonnes of CO2 emissions estimated by the TRAI.

5 5 Solar Power, Carbon Finance and Telecommunications in India Although these emissions form only a miniscule part of the total 1,050 million tonnes of India s CO2 emissions, there are opportunities to achieve this with existing technology. 4. At current prices of secondary market Certified Emissions Reductions (CERs) of $16.28on the European Climate Exchange, the value of emission reductions achieved by replacing diesel with solar power stands at$72.95 million per year.the Clean Development Mechanism can help provide these additional cash flows for telecom tower companies. The Diesel Debate Government of India currently subsidizes diesel prices in India. This is because of the many forward linkages the commodity has versus petrol, its less efficient rival. Diesel is used for agriculture pumps and long distance freight. However, the subsidy has also encouraged consumption of diesel in city cars where petrol is more suitable. The Solar Alternative While the price of diesel in India has increased significantly over the past decade, the price of solar PV panels has declined. The use of solar power for cooling equipment in telecom towers sites is particularly attractive for the following reasons: This sub-optimality has gotten the government to reconsider the subsidy, with the Kirit Parekh Panel recommending a hike in diesel fuel car excise duty. Other proposals include issuance of smart cards for truck drivers using diesel, to exclude use by other sources. Despite its stated intention to deregulate petroleum prices, the government has not yet moved to dismantle associated subsidies. Whatever the government eventually decides to do with diesel related subsidies will have important implications for the diesel consuming telecom tower companies. 1. The international supply and demand gap has resulted in higher crude oil prices, of which diesel fuel is a derivative. Costs associated with extraction of unconventional reserves such as heavy oil and oil sands are substantially higher. As unconventionally extracted crude oil replaces depleting conventional crude reserves, the market price of diesel is likely to increase. 2. Solar power bypasses transportation costs associated with use of diesel as a fuel in telecom tower sites. Once installed, the average estimated life for solar PV panels is 25 years, and they require substantially lower maintenance costs. 3. Installing solar panel PVs would also save telecom tower companies the cost of additional labour, employed in order to oversee the maintenance and diesel supply costs.

6 6 Solar Power, Carbon Finance and Telecommunications in India 4. Bulk of the demand for diesel comes from remote and rural areas where on-grid electricity supply is unavailable. This is either because of high transmission costs (relative to number of consumers), or difficult transportation. Use of diesel also faces the problem and costs associated with transporting it from source to demand center. Solar power avoids all these costs. 5. As was seen in the case of mobile phones over the last decade, learning by doing has substantially decreased the cost of solar power. In fact, according to Solar Plaza, the costs of electricity generated from PV for telecom tower sites at rupees per kwh, are already cheaper than the rupees per kwh of diesel. If we assume a 30% capital subsidy, solar power becomes even cheaper, at rupees per kwh. 6. Electricity in telecom tower sites is used mainly to power Air conditioners that cool the BTS. With day-time temperatures substantially higher than night-time temperatures, and the electricity grid experiencing higher peak-load levels during day-time, telecom tower sites are best placed to use solar power during the day, and fall back on the electricity grid at nighttime. Financing is the main obstacle faced by telecom tower companies that would like to save on diesel costs but are discouraged by high initial outlay and cost of capital. For example, the cost of installing PV panels was about 24 lakh rupees per site last year, compared to the Rs. 2 to 3 lakh for diesel powered gensets. According to the Meeco Group, a solar telecom solutionsprovider, it would take 3-4 years for a typical BTS site converted from diesel gensets to solar to break even, with the project yielding savings in excess of Rs 4.5 million over a period of 10 years.. Telecom companies are concerned that these investments make them overly reliant on debt. Fears that India s central bank will hike interest rates to combat inflation also do nothing to ease cost-of-capital concerns. Financial factors are not the only constraints in the transition from diesel gensets to solar power. The Telecom tower industry is also hesitant to invest in solar because of their relative inexperience in using solar power. Business-as-usual comforts prohibit these companies in making the move from an old and trusted technology to a newer, untested technology. Investors are also concerned that solar power can be intermittent during cloudy or rainy days, while diesel, despite high costs, is a reliable mode of electricity generation. Other concerns over solar power include the lack of trained staff with know-how on PV panel maintenance. Although replacing diesel power to solar power is a promising business opportunity, it is currently far from a no-brainer, and comes with its fair share of risks. The Clean Development Mechanism has the potential of addressing some of these concerns. For example, the stream of cash flows generated through the sale of carbon credits can bring

7 7 Solar Power, Carbon Finance and Telecommunications in India liquidity to debt-heavy balance sheets. If there is an investment grade off-taker for carbon credits, telecom tower companies may have an easier time obtaining bank loans. Thus, India s growing telecommunication tower industry can achieve substantial cost savings, while reducing their fossil-fuel dependence and carbon footprint, by switching to solar power generated electricity supply. The Clean Development Mechanism supports this by providing additional cash flows that can help overcome some of the risks of these projects. As more telecom towers are erected due to network expansion into rural and remote areas and introduction of 3G services, diesel consumption expenditure threatens to lower margins of large telecommunication players. These companies can harness the over 250 sunny days a year the country receives, by using solar power at a time the cost of PV panels is dropping substantially.