Financing Solar Energy

Transcription

1 FICCI Soar Energy Task Force Report on Financing Soar Energy By FICCI Soar Financing Subgroup

2 FICCI Soar Energy Task Force Report on Financing Soar Energy By FICCI Soar Financing Subgroup

3 Discaimer This paper is a resut of work done by the members of the FICCI Soar Financing Subgroup under the FICCI Soar Energy Task Force with feedback from other members of the Task Force and industry stakehoders. This paper expresses the views of the industry on avaiabiity of finance for soar energy sector. No part of this pubication may be reproduced or transmitted in any form or by any means, eectronic or mechanica, incuding photocopy, recording or any information storage and retrieva system, without prior permission in writing from FICCI. FICCI wi not accept any iabiity for oss arising from any use of this document or its content or otherwise arising in connection herewith. A Rights are reserved.

4 Tabe of Contents Foreword 1. Background - Soar Financing in India Assumptions from Nationa Soar Mission Debt Finance - Domestic Fund & ECB Requirement A. Base Case Scenario B. Best Case Scenario C. Off-Grid Scenario D. Summary of Financing Requirements Financing Chaenges Steps to Address Financing Chaenges A. Making Renewabe Energy as an Independent Sector within the Banking / RBI guideines B. Increasing Liquidity through Various Measures C. Lowering Cost of Borrowing D. Steps to Improve Performance of State Utiities Summary of Recommendations References About the FICCI Soar Energy Task Force Acknowedgements Appendix FICCI Soar Energy Task Force Report on Financing Soar Energy

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6 FOREWORD Financing wi be an important piar for the success of soar energy in India and needs to be addressed with a sense of urgency to enabe the objectives of the Nationa Soar Mission to be achieved. The FICCI Soar Energy Task Force has therefore embraced this piar with high priority and has accordingy set up a Soar Financing Subgroup to deiberate and recommend soutions for channeing cost effective finance to this sector of nationa importance. This Report on Financing Soar Energy provides poicy recommendations to enabe ow cost financing and greater accessibiity to finance for Soar Energy projects in India. The paper aso highights the barriers to financing for soar energy projects, the financing needs of the sector based on base case and best case scenarios, and the soutions to channe cost effective finance to the sector. FICCI beieves that the success of the Nationa Soar Mission wi argey depend on the avaiabiity of ow cost finance for the soar sector. This report refects the views of payers in the soar vaue chain and is a resut of the coaborative work of the FICCI Soar Energy Task Force after intensive discussions and deiberations. I hope this Report wi be usefu for poicymakers to evove appropriate financing mechanisms and hep shape poicy in this direction. I am sure the Report wi aso be a vauabe insight to stakehoders of the soar energy sector in India. Dr. A Didar Singh Secretary Genera Federation of Indian Chambers of Commerce and Industry

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8 1. Background - Soar Financing in India Soar Energy occupies a critica pace in India's power strategy due to its scaabiity, easy depoyabiity and avaiabiity of abundant sunshine. With decining costs and avaiabiity of free fue resource, Soar Energy can enhance India's energy security, mitigate carbon emissions and aso improve economic we-being. India through the Jawahara Nehru Nationa Soar Mission (JNNSM) and through various state government initiatives has embarked on a program to support the growth of the industry through arge gridconnected and decentraized projects and by providing support for oca manufacturing. However, some chaenges need to be addressed. Soar energy projects today require arge upfront investment and due to its higher prevaiing costs have reasonaby ong payback periods. Despite favourabe poicies and support being provided by the Centra Government and the State Governments, enders are reuctant to provide financing for soar power projects. Lenders are wary about off-taker risk with regard to a number of states given their financia heath. Additionay, banks in India face structura chaenges due to their sectora exposure imits. Financing of soar projects fas within the power sector which aso incudes arge therma coa or gas based power pants. The arge amount of credit extended to the fossi fue based power sector has caused banks to reach their respective exposure imits thus imiting their appetite for soar and renewabe energy projects. Given these chaenges, the sector needs additiona poicy and structura reforms and assistance from the Government to empower the ending community to finance soar energy projects. This paper incudes critica anaysis of these chaenges and attempts to put forward few suggestions after gathering inputs from various stakehoders. 1 FICCI Soar Energy Task Force Report on Financing Soar Energy

9 2. Assumptions from Nationa Soar Mission The Jawahara Nehru Nationa Soar Mission (JNNSM) targets 20,000 MW or more by 2022 eading to conditions of grid-competitive soar power. Interim JNNSM targets are 1,100 MW by 2013 and reaching 4,000 MW to 10,000 MW by 2017 through the mandatory use of the renewabe purchase obigation (RPO) by utiities and backed with a preferentia tariff. S.No. Appication Segment Target Phase -1 ( ) Phase-2 ( ) Phase-3 ( ) 1 Soar therma coectors 7 miion m² 15 miion m² 20 miion m² 2 Off grid soar appications 200 MW 1,000 MW 2,000 MW 3 Source: MNRE, 2013 Grid power, incuding roof top and sma pants 1,100 MW 4,000-10,000 MW 20,000 MW 3. Debt Finance - Domestic Fund & ECB Requirement 2 For cacuating fund requirement for debt, we have assumed 2 cases for grid projects viz. base case (6.7 GW by 2017 and 20 GW by 2022) and best case (9.5 GW by 2017 and 40 GW by 2022). The debt equity ratio assumed is 30:70. We have considered the potentia for Externa Commercia Borrowings (Ecbs) starting at 60% and graduay decreasing to 30% by 2022 as domestic manufacturing increases and simutaneousy import percentage decreases. FICCI Soar Energy Task Force Report on Financing Soar Energy

10 A. Base Case Scenario Figures in Rs. Crores Assumptions for base case incude: ,441 MW of grid connected soar projects as on Mar 09, 2013 as per MNRE data 2 2. Discount rate of 9% is used 3 3. Capacity addition for 2014 is obtained by fufiing 65% target of the RPO gap for FY GW capacity requirement is obtained by considering 60% fufiment of RPO 4 requirement in FY22 Debt Fund & ECB Requirements Base Case (6.7 GW by 2017, 20 GW by 2022) JNNSM Phase 1 JNNSM Phase 2 JNNSM Phase 3 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 CAPEX(Rs.Cr/MW) Capacity Added in MW 950 1,050 1,200 1,400 1,600 1,900 2,200 2,600 3,000 3,600 Tota Capex 9,500 8,400 9,120 10,108 10,974 12,380 13,619 15,600 18,000 21,600 Equity (30%) 2,850 2,520 2,736 3,032 3,292 3,714 4,086 4,680 5,400 6,480 Tota Debt Requirement 6,650 5,880 6,384 7,076 7,682 8,666 9,533 10,920 12,600 15,120 ECB% 60% 60% 56% 52% 48% 44% 40% 36% 32% 30% ECB Requirement 3,990 3,528 3,575 3,679 3,687 3,813 3,813 3,931 4,032 4, Capacity addition is expected to foow a growing trend from Year Capex is assumed to be decreasing by 5% each year ti INR 6 Cr in FY20 1 State-wise instaed capacity data compied on the basis of information obtained from IREDA, NVVN, State Agencies and Project Deveopers by MNRE 2 Market Information 3 Soar RPO compiance status, MNRE, Based on the Nationa Eectricity Pan for Generation, January 2012; Data from MNRE, The Rising Sun-2. KPMG, 2012 FICCI Soar Energy Task Force Report on Financing Soar Energy

11 B. Best Case Scenario Figures in Rs. Crores Debt Fund & ECB Requirements Best Case (9.5 GW by 2017, 40 GW by 2022) JNNSM Phase 1 JNNSM Phase 2 JNNSM Phase 3 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 CAPEX(Rs.Cr/MW) Capacity Added in MW 950 1,350 1,700 2,200 2,800 3,500 4,400 5,600 7,300 9,700 Tota Capex 9,500 10,800 12,648 15,222 18,018 21,000 26,400 33,600 43,800 58,200 Equity (30%) 2,850 3,240 3,794 4,567 5,405 6,300 7,920 10,080 13,140 17,460 Tota Debt Requirement 6,650 7,560 8,854 10,656 12,612 14,700 18,480 23,520 30,660 40,740 ECB% 60% 60% 56% 52% 48% 44% 40% 36% 32% 30% ECB Requirement 3,990 4,536 4,958 5,541 6,054 6,468 7,392 8,467 9,811 12,222 Assumptions for best case incude: 1. Capacity addition in 2014 is obtained by fufiing 70% target of the RPO gap for 3 2 FY % additiona capacity is considered for sustainabiity and energy security GW capacity requirement is obtained by considering 100% fufiment of RPO 4 requirement in FY22. 20% additiona capacity is considered on the base of 34 MW for 2 sustainabiity and energy security totaing up to 40 MW 3. Capacity addition is expected to grow at an increasing trend from Year Capex is assumed to be reducing at 7% year-on-year from CERC specified 5 baseine ti INR 6 Cr in FY Market Information 3 Soar RPO compiance status, MNRE, Based on the Nationa Eectricity Pan for Generation, January 2012; Data from MNRE, The Rising Sun-2. KPMG, 2012 FICCI Soar Energy Task Force Report on Financing Soar Energy

12 C. Off-Grid Scenario Debt Fund & ECB Requirements Base Case (0.8 GW by 2017, 3 GW by 2022) JNNSM Phase 1 JNNSM Phase 2 JNNSM Phase 3 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 CAPEX(Rs.Cr/MW) Capacity Added in MW Tota Investment Required Tota Debt Requirement (@60%) Assumptions for off-grid incude: 1. Capex is assumed to be reducing at 15% each year ti INR 7 Cr in Off-grid subsidy is not considered for anaysis 3. ECB % wi decrease from 60% to 30% due to indigenous manufacturing in the entire vaue chain 4. Debt funding for grid connected soar projects at 70% and for off-grid at 60% from financia institutions D. Summary of Financing Requirements Base case: The tota debt fund requirement woud be around INR 21,674 Cr on a present vaue basis for additiona 5.3 GW by 2017 and INR 52,249 Cr on a present vaue basis for additiona 18.6 GW by The ECB requirement woud be INR 11,699 Cr by 2017 and INR 22,714 Cr by The domestic fund requirement woud be INR 9,975 Cr by 2017 and INR 29,536 Cr by FICCI Soar Energy Task Force Report on Financing Soar Energy

13 Best case: The tota debt fund requirement woud be around INR 31,551 Cr on a present vaue basis for additiona 8 GW by 2017 and INR 99,135 Cr on a present vaue basis for additiona 38.6 GW by The ECB requirement woud be INR 19,346 Cr by 2017 and INR 47,617 Cr by The domestic fund requirement woud be INR 12,204 Cr by 2017 and INR 51,518 Cr by Off-grid case: The Debt fund requirement woud be around INR 2,708 Cr on a present vaue basis for additiona 0.6 GW by 2017 and INR 7622 Cr on a present vaue basis for additiona 2.8 GW by ECB case woud not be feasibe in case of off-grid projects. Debt percentage is taken at 60% of the investment required. We have assumed off-grid woud reach around 3 GW by Figures in Rs. Crores Base Case Best Case Off-Grid case FY17 FY22 FY17 FY22 FY17 FY22 NPV of Debt Requirement 21,674 52,249 31,551 99,135 2,708 7,622 NPV of ECB Requirement 11,699 22,714 19,346 47,617 NA NA Domestic Fund requirement (NPV) 9,975 29,536 12,204 51,518 2,708 7,622 6 FICCI Soar Energy Task Force Report on Financing Soar Energy

14 4. Financing Chaenges Despite favourabe poicies and support being provided by the Centra and State Governments, soar power financing faces the foowing major chaenges: 1. Power Sector Exposure Limit: Most banks have aready reached their exposure imits in power sector set by them in pursuance of the RBI guideines. In addition, there is continua asset iabiity mismatch due to the ong term nature of the soar power pant projects. These factors cause tightness in iquidity and borrowing costs. 2. Lack of Payment Security / SEB Heath: Though the Centre has provided Gross Budgetary Support of INR 486 Cr towards payment security mechanism under JNNSM giving some comfort to the enders, deteriorating financia heath of the state utiities makes the enders uncomfortabe in financing state sponsored soar power projects. As a resut enders tend to pace soar projects in high risk categories and that increases cost of borrowing. 3. Smaer Size Projects: To enhance participation by more bidders/deveopers, soar projects are fragmented into sma capacities as compared to traditiona power pants and therefore, enders are reuctant to finance sma transactions. Even if finance is avaiabe, transaction costs are higher. 4. Technoogy: Soar is reativey new to India. Banks/Deveopment Finance Institutions (DFIs) are sti reuctant to invest in technoogies that have not been foowed cosey. Given the perceived technoogy risk, project finance in soar is yet to take off on a substantia scae. 7 FICCI Soar Energy Task Force Report on Financing Soar Energy

15 5. Lack of On-Ground Insoation Data: Soar Radiation is a raw materia for soar power and any error in soar resource estimation adds uncertainty to the future returns. On ground soar insoation data is sketchy and a database needs to be deveoped for different ocations to give comfort to the enders. Hence, ack of insoation data resuts in enders insisting on (P90 - P95) eves for energy production and revenues. 6. High Sensitivity to Variabe Interest Rates and Impact on Financia Viabiity: Variabe interest rate impacts the cost of the project to a significant extent as a the investment is upfront and projects are debt funded. 7. Evacuation Arrangements: Evacuation of power produced is not possibe in case the grid is unavaiabe or if the evacuation infrastructure is insufficient. Deveopers need to be compensated by the discom by way of a deemed generation cause in the Power Purchase Agreement. Lenders typicay ook for a deemed generation cause and if it not there, then this resuts in a higher interest rate. In view of the above chaenges, deveopers of soar power projects are finding it difficut to get their projects funded. The Ministry of New and Renewabe Energy (MNRE) is addressing points 3-5 with knowedge sharing of demonstrated technoogies, instaing monitoring stations on their own as we as through a deveopers of the Nationa Soar Mission and buiding scae into the assignment of Power Purchase Agreements (PPAs). However points 1-2 remain a critica chaenge for the banking poicymakers and some suggestive steps towards addressing these chaenges are described beow. 8 FICCI Soar Energy Task Force Report on Financing Soar Energy

16 5. Steps to Address Financing Chaenges We summarize beow the steps that coud be considered to increase the fow of funds to the soar energy sector: A. Making Renewabe Energy as an Independent Sector within the Banking / RBI guideines Renewabe energy shoud be considered as a separate sector for measuring sectora exposure imits by banks. Actua exposure to the power sector varies in banks from 7.5% to 9% of the tota gross credit but banks have aready reached their respective exposure imits based on their commitments. Remova of renewabe energy sector from specific caps for power sector wi channe funds to renewabe energy projects. Separate caps may be stipuated for each renewabe category such as soar and wind. a) Background The Indian economy has been growing at a rate of 7.5% over the past 10 years. The power sector has aso been growing at a simiar rate to contribute to the growth of our economy. The instaed power capacity in India has grown from 97,884 MW in March 2000 to 2,23,625 MW in Apri, 2013 (Centra Eectricity Authority, 2013). About 68% of the instaed generation capacity is from fossi fues. The contribution of renewabe energy sources (other than Hydro) to the tota instaed power capacity as on Apri 2013 is ony 27,541 MW (12.3%). Under the 12th Pan ( ), it is envisaged to add generation capacity of 75, ,000 MW, which itsef requires huge outay of funds for the Power Sector. 9 FICCI Soar Energy Task Force Report on Financing Soar Energy

17 b) Bank Credit for Power Sector The growth of Credit (i.e. outstanding) in Power Sector has increased from INR 2,77,576 Cr in Apri, 2011 to INR 4,35,268 Cr in Apri, 2013 (credit growth by over 57% in two years) whereas the credit for overa Infrastructure sector has increased by 42% during same period (i.e. INR 5,34,340 Cr in Apri, 2011 to INR 7,59,481 Cr in Apri, 2013). During this period the non-food credit has increased ony by 33% ony (i.e. INR 3,682,918 Cr to INR 4,888,435 Cr) Lakh Crore Lakh Crore 0 Apr.22, 2011 Mar.23, 2012 Apr.20, 2012 Mar.22, 2013 Apr Gross Outstanding credit - R.H.S Power Infra 10 Source: Sectora Depoyment data from Reserve Bank of India, 2013 FICCI Soar Energy Task Force Report on Financing Soar Energy

18 Considering the importance of Power Sector, it is evident that its credit growth is higher than overa Infrastructure credit growth. This has resuted in an enhanced power sector portfoio with Banks. Furthermore, the power sector needs to grow to achieve the panned growth. It is estimated that an investment outay of USD 320 biion is needed for the eectricity sector (approximatey INR 14.5 Lakh Cr at an average debt funding requirement of INR 2 Lakh Cr per year) in the 12th Five Year Pan ( ). The funds avaiabe for power sector wi be inadequate to support such expansion. c) Financing Renewabe Energy Project under Power Sector exposure imit As per the prevaent banking practice, advances to renewabe energy sector are aso accounted in power sector exposure imits. Taking this into consideration, there may not be enough headroom for accommodating renewabe energy sector under power sector exposure ceiing norms, which wi affect the debt funding of renewabe energy sector. Thus this necessitates a paradigm shift of Banks' treatment of renewabe energy sector as separate from conventiona power sector and having separate exposure ceiing norms. d) Renewabe Energy can be considered as a Separate Sector because of the foowing: i. Government Poicy Initiatives for Renewabe Energy The governments, both at the Centra and State eves, have been providing strong fiip for harnessing renewabe energy potentia in India. The tota grid interactive renewabe energy power during the period as projected 11 FICCI Soar Energy Task Force Report on Financing Soar Energy

19 by MNRE is approximatey 18,000 MW requiring an investment in excess of INR 1,20,000Cr. Some of the significant poicy initiatives towards achieving the projected capacities of renewabe energy sector incude: Renewabe Purchase Obigation of a minimum of 5% on a distribution utiities Trading of Renewabe Energy Certificates (REC) 10 year tax hoiday in a bock of 15 years for renewabe energy projects Generation based incentive for grid connected wind energy projects Acceerated depreciation benefits for wind energy projects Launching of Jawahara Nehru Nationa Soar Mission (JNNSM) for deveopment of soar power projects Gross Budgetary support of INR 486 Cr to MNRE as payment security scheme to enabe financia cosure of projects under JNNSM These steps have resuted in creation of a favourabe business environment for the deveopment of the renewabe energy sector. As a resut, the tota instaed capacity from renewabe sources has increased from approximatey 2,000 MW in March, 2000 to 27,541 MW in Apri, ii. Priority in Procurement for Renewabe Source of Energy 12 A Distribution Licensee is required to meet Renewabe Power Obigations for which it has to procure renewabe energy, the payment towards power procurement is treated as an operating expense and it is a higher priority expense item. Therefore, procurement of renewabe energy becomes a priority item for obigated icensees. FICCI Soar Energy Task Force Report on Financing Soar Energy

20 iii. Conservation of Fossi fues and Atering India's Energy Mix As per Panning Commission estimates, 1,00,000 MW of power generating capacity is expected to be added in the 12th Five Year Pan, of which 18,280 MW (18%) wi be from renewabe energy sources. Thus, there is a cear thrust on buiding the renewabe energy capacities in the 12th Five Year Pan. Debt funding of renewabe energy projects by Banks wi be a major step towards this direction. This wi aso hep in conserving the imited coa reserves of the country. iv. To promote "Green Banking Poicy" of Banks Financing of the renewabe energy projects wi hep banks to reduce their carbon footprint (from the therma power projects being financed by the banks) and hence wi promote "green banking". B. Increasing Liquidity through Various Measures a) Soar Energy Fund Though Centre has given support to provide Gross Budgetary Support of INR 486 Cr towards payment security mechanism under JNNSM giving some comfort to the ender, deteriorating financia heath of the state utiities with osses touching amost INR 82,000 Cr make the enders uncomfortabe in financing state sponsored soar power projects. As a resut enders tend to pace soar projects in high risk categories and that increases the cost of borrowing. Therefore, creation of a arger and dedicated fund that supports any defaut by state utiities wi go a ong way in mitigating perceived risk of defaut. This coud be done through budgetary aocation from the Nationa Cean Energy Fund 13 FICCI Soar Energy Task Force Report on Financing Soar Energy

21 (NCEF). This coud be designed aong the ines of the U.S. Loan Guarantee program to enabe mitigation of initia risks associated with soar energy growth with an aim to acceerate grid parity. This fund coud achieve the foowing: 1. Provide backstop or credit enhancement for soar projects coming under the Nationa Soar Mission (NSM) 2. Meet the Viabiity Gap Funding (VGF) requirements of upcoming bids b) Soar Bonds Soar bonds woud strengthen oan market by creating higher iquidity and mitigating risk. It woud aow banks to access ong tenor of dedicated funds for the sector. For a bond market, a minimum rating of BBB eve is required. To get suitabe bond rating, government backing of bonds (structured obigations) through sovereign funds is important. Pease see Appendix incuding SunPower Soar bond and CRISIL municipa bond rating parameters. Power Finance Corporation (PFC) aong with Indian Renewabe Energy Deveopment Agency (IREDA) can create bonds and fund projects. The Government coud aso underwrite payment with regards to eectricity deivered by deveopers either through issue of GOI bonds or through creation of specia funds specificay designed to minimize the risk. Additionay, Soar bonds coud be made tax-free to mobiize bond market. c) Securitisation 14 Refinancing of oans or Take-out financing woud mitigate Asset Liabiity mismatch of banks and speciaized Non-Banking Financia Company (NBFC) in soar ending. DFIs / Banks / NBFCs shoud be aowed to use sovereign rating to borrow ong term funds in domestic /internationa markets through issuance of bonds. If FICCI Soar Energy Task Force Report on Financing Soar Energy

22 sectora aocation for power projects has exceeded the bank's cap, the bank can have their oans refinanced through RBI and/or other banks. Further, securitisation of soar oan portfoio woud aow banks to reduce risk and invest in new projects. Insurance companies, pension funds shoud be aowed to purchase soar oan portfoios from banks. Government sponsor agencies coud refine, purchase and repackage oans originated by banks/nbfcs for sae with suitabe credit enhancement to domestic insurance companies and pension funds. A arge project oan coud be broken into sma pieces to be bought by insurance companies, individuas, banks, pension funds and so forth. This shoud be backed by Defaut Guarantee Fund to provide securitised instruments an investment grade character and can be subscribed to even by highy (credit) risk-averse enders. A good size (critica mass) of soar projects with a ender wi enabe this mechanism. d) Construction Loans Construction oans shoud be aowed for a 3 year period or onger instead of current 1 year. This woud hep Engineering, Procurement & Construction (EPC)/Service Providers to receive payment from deveopers on deferred payment basis over 5 to 10 years. e) Making Soar a Priority Sector Current poicy for incusion under priority sectors is based on sectors that impact: Large section of the popuation The weaker sections Empoyment intensive sectors such as agricuture, tiny and sma enterprises 15 FICCI Soar Energy Task Force Report on Financing Soar Energy

23 Given the socia and environmenta impact of soar projects, it is recommended that RBI may incude oans for soar projects under the priority sector simiar to the case of education and housing sector. Incusion of renewabe energy projects in the priority sector wi give a boost to both on-grid and off-grid appications. C. Lowering Cost of Borrowing a) Reducing or eiminating the tax on interest Conducive taxation poicies woud enabe enders/sponsors to enhance returns on investments e.g. interest income received by Financia Institutions (FI)/enders on oan portfoio/ bonds coud be made tax exempt. Making interest income nontaxabe wi enabe owering of coupon rate on such bonds and aso attract investors. Renewabe Energy or Soar Bonds can function as a viabe and attractive vehice avaiabe to investors with tax appetite. These bonds woud be appeaing given their green attributes. b) Increasing Access to Externa Commercia Borrowing (ECB) Funding 16 Avaiabiity of cheap and abundant foreign capita through avenues such as ECBs, Suppier Credit, Participation of Origina Equipment Manufacturers (OEM), EPC payers, mutiatera agencies (IFC, ADB, JBIC, OPIC, EXIM etc.) can raise funds. ECB norms shoud be further reaxed for Soar projects. Currenty, ECBs are not aowed to pay-off existing rupee term oans which coud be reaxed. This woud hep in owering the cost of borrowing and channeize ong-term and ow cost funds into infrastructure projects that require ong-term and arge capita investments. Avaiabiity of externa capita can hep bridge the gap for tota debt required for funding soar sector. FICCI Soar Energy Task Force Report on Financing Soar Energy

24 c) Reducing Hedging Costs Hedging costs can be significant and in the range of 3.5-5%. These add to the interest rate associated with the ECB funding. Suitabe steps taken in the direction of reducing hedging cost wi have a direct impact on the financia viabiity of upcoming soar projects. D. Steps to Improve Performance of State Utiities Power utiities in the country face aggregate transmission and commercia osses of around 30% due to unmetered and unaccounted use - the highest in the word. In the past, the financia heath of many SEBs has mainy deteriorated due to insufficient cost recovery, inadequate tariffs and high operating costs. Power Distribution Reform was identified as the key area to bring about the efficiency and improve financia heath of the power sector. Consequent to the Ministry of Power taking various initiatives in the past, some of the states restructured their SEBs to achieve financia viabiity and improve operationa efficiency and hence the position was stabiized. In the recent past, there have been some cases of defaut in payment by distribution companies. According to the Shungu Committee Report, SEB cumuative osses for the five years ending FY10 amounted to INR 82,000 Cr and osses after subsidy stood at INR 27,000 Cr. The reasons are we-known - ow tariffs due to poitica compusions, high distribution osses and deayed payment of subsidies by governments - a have ed to a sharp deterioration in the heath of SEBs. The committee has suggested steps to bring them down to INR 22,100 Cr by FY FICCI Soar Energy Task Force Report on Financing Soar Energy

25 More concerted action is required to be taken to incentivize/disincentivize the distribution entities to improve their operationa and financia performance. Some of the suggestions coud be as under:- Linking of benefits to state utiities under various schemes of the Government (such as Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY) and Acceerated Power Deveopment and Reform Programme (APDRP) are grant funded schemes) with the commitment, action and outcome on distribution reform. Unaocated power from Centra Generating Stations (approximatey 8,000 MW) coud be used as a too if the state utiities are not abe to improve their performance and financias. Adoption of standardized rating mode not ony focuses on performance and on the abiity to sustain the performance but aso incentivizes the reative improvement in performance and at the same time disincentivizes the deterioration in performance. Unending extension to the states for reorganization of SEBs which have yet to be unbunded shoud no onger be resorted to further. 18 FICCI Soar Energy Task Force Report on Financing Soar Energy

26 6. Summary of Recommendations The poicy framework put forth by the MNRE through the Nationa Soar Mission has acceerated the growth of the soar industry in India. However, there are some initia chaenges seen in financing of soar projects in India originating primariy from the cap in the bank's sectora exposure imits, risk perception around off-takers (SEBs) and ack of technoogy and on-ground demonstration data. Whie the MNRE is taking active steps to address the technoogy and on-ground risk perceptions through knowedge management and sharing, there is need for structura changes to banking guideines to aow fow of funds to the renewabe energy sector. The FICCI Soar Energy Task Force (SETF) which incudes various stakehoders from the soar industry recommends the foowing suggestions to address these chaenges and coaborativey work for the success of the soar industry in India. These recommendations incude: 1. Making Renewabe Energy as an independent sector (separate from Power Sector) as many banks have reached their sectora exposure imits. 2. Improving Liquidity through a soar energy fund, soar bonds, refinancing by pension/insurance funds, onger duration construction oans and making soar a priority sector. 3. Lowering the Cost of Debt by eiminating the tax on interest received by banks and reaxing ECB norms. 4. Addressing performance of state utiities and improving their fisca heath. The FICCI Soar Financing Subgroup sees addressing these chaenges as imperative for the growth of Soar Energy in the country and woud ike to suggest a coaborative approach among various stakehoders incuding the Ministry of New and Renewabe Energy (MNRE), Ministry of Power (MOP), Reserve Bank of India (RBI), the financing community and the industry. 19 FICCI Soar Energy Task Force Report on Financing Soar Energy

27 7. References 1. Data for benchmark cost for off-grid and decentraized soar under JNNSM obtained from Ministry of New and Renewabe Energy (2013). 2. Data obtained from IREDA, NVNN, State Agencies and Project Deveopers (2013). 3. Data provided by CEA base data, NVNN, State Agencies & Project deveopers. Ministry of New and Renewabe Energy (2013). Expected Soar RPO requirement and compiance Accessed on 03/06/2013: 4. KPMG (2012). Energy and Natura Resources. The Rising Sun. Grid parity gets coser. A point of view on the Soar Energy Sector in India. 5. Ministry of New and Renewabe Energy (2013). Current Trends/Status in Soar Powered Market. Workshop on "Chaenges and Issues in Soar RPO Compiance/RECs". AF-Mercados EMI. Accessed on 22/03/2013: chaenges_and_issues_in_soar_rpo_compiance_ /session- 1%20_Current%20Trends%20in%20Soar%20Power%20Market.pdf 6. Ministry of New and Renewabe Energy (2013). Soar RPO Compiance status. Accessed on 03/06/2013: 7. Ministry of New and Renewabe Energy (2013). State-wise soar instaed capacity break-up. Accessed on 03/06/2013: Reserve Bank of India (2013). Sectora Depoyment data. Accessed on 03/06/2013: FICCI Soar Energy Task Force Report on Financing Soar Energy

28 8. About the FICCI Soar Energy Task Force FICCI Soar Energy Task Force was aunched in March 2010, with the aunch of Jawahara Nehru Nationa Soar Mission (JNNSM) to provide a patform for the soar energy sector to deiberate on poicy and reguatory issues and advance interests of the sector at domestic and goba patforms. The Task Force is represented by 32 members from the entire vaue chain of the soar industry incuding manufacturers, project deveopers, system integrators, EPC companies, raw materia suppiers as we as the certification agencies. Mr V Saibaba, CEO, Lanco Soar is the current Chairman, and Mr Vivek Chaturvedi, CMO, Moser Baer Soar is the Co-Chairman of the FICCI Soar Energy Task Force. The Task Force has six Subgroups: Subgroups on on Soar Financing, Securing Suppy Chain, Creating Sustainabe Demand, Off-grid and Decentraized Soar Appications, Soar Therma, and Performance Standards, comprising soar industry stakehoders and chaired by industry eaders. The members of the FICCI Soar Energy Task Force incude the foowing: Abengoa Soar India ACME Teepower Limited Aied Gasses Pvt. Ltd Astom Power Appied Materias India Pvt. Ltd. AREVA India Astonfied Renewabe Resources Limited Bharat Heavy Eectricas Ltd. DSM India Private Limited 21 FICCI Soar Energy Task Force Report on Financing Soar Energy

29 22 Emmvee Photovotaic Power Pvt Ltd. Grundfos Pumps India Pvt Ltd. IL&FS Energy Deveopment Company Ltd. Indian Oi Corporation Limited (IOCL) Kiran Energy Lanco Soar Larsen & Toubro Limited Maharishi Soar Technoogy (P) Ltd. Mahindra Partners Moser Baer Soar NTPC Limited OMC Power Photon Energy Systems Ltd. Soar Semiconductor Pvt. Ltd. Soid Soar Sunborne Energy Suryachakra Power Corporation Limited Tata Power Soar Thermax Limited Titan Energy Systems Ltd TUV Rheinand Underwriters Laboratories Wespun Energy Limited FICCI Soar Energy Task Force Report on Financing Soar Energy

30 9. Acknowedgements We acknowedge the inputs provided for this Report by the members of the FICCI Soar Energy Task Force. In particuar, we woud ike to acknowedge the contributions to the Report by the foowing: Mr Ardeshir Contractor, Managing Director, Kiran Energy (Chair of FICCI Soar Financing Subgroup), Dr Vishwesh Paekar, Mahindra Partners (former Chair of FICCI Soar Financing Subgroup) Mr Anand Jain, Head-Business Deveopment, Kiran Energy Mr Siddhartha Bhargava, Manager-Business Deveopment, Kiran Energy Ms Rita Roy Choudhury, Senior Director and Head-Environment, Cimate Change, Renewabe Energy, FICCI Mr Nirbhay Srivastava, Assistant Director-Renewabe Energy, FICCI Mr Satish Kamat, Formery with Mahindra Partners Mr Sachin Jain, Formery with Mahindra Partners We woud aso ike to acknowedge the inputs of senior officias from eading pubic and private sector banks such as SBI, ICICI, IDBI, IDFC and SBI Caps in the initia phase of deveopment of this Report. 23 FICCI Soar Energy Task Force Report on Financing Soar Energy

31 10. Appendix a) Soar Bonds Launch Date - December 15, 2010 Banks - Societe Generae and BNP Paribas Size miion Deveoper - SunPower Project Size - 44MW Montato di Castro park, Itay; Project was aready instaed whie time of issuing bonds Tenor - 18 years Two Casses - A1 bonds of 97.6 miion in fixed rate notes paying 5.715% and due in are guaranteed by Itaian export credit agency SACE and sod to institutiona investors and rated Aa2 by Moody's A2 bonds of 97.6 miion in fixed rate notes paying 4.839% and due in a purchased by the European Investment Bank and rated Baa3 from Moody's 24 Societe Generae aso provided two 5-year VAT faciities worth 22 miion. The SACE-wrapped A1 tranche, which is rated by Moody's the same as SACE, Aa2, is priced at a fixed rate of 5.715%, equivaent to 445bp over 6-month Euribor (assuming a Euribor rate of 1.26%). FICCI Soar Energy Task Force Report on Financing Soar Energy

32 b) How Municipa Bonds are rated by CRISIL CRISIL's Rating Criteria for Municipa Bonds CRISIL's Rating Methodoogy invoves an in-depth assessment of the foowing factors: o o o o o o Lega and administrative framework Economic base of the service area Municipa finances Existing operations of the municipa body Manageria assessment Project specific issues Proposed projects Project tenure and funding patterns Debt servicing requirements due to new projects Existing eve of service & improvements envisaged o Credit enhancement structure Escrow of specific tax revenues: vensure non co-minging of cash fows vleve of coateraisation vreiabiity of source (e.g. octroi) 25 FICCI Soar Energy Task Force Report on Financing Soar Energy

33 o SG guarantee Credit quaity of guarantor Lega vaidity Conditiona/unconditiona Irrevocabiity Trustee's powers to invoke guarantee 26 FICCI Soar Energy Task Force Report on Financing Soar Energy

34 Industry s Voice for Poicy Change Federation of Indian Chambers of Commerce and Industry (FICCI) Environment, Cimate Change, Renewabe Energy Federation House, 1 Tansen Marg, New Dehi T: F: E: renewabes@ficci.com W: