Opportunities in Financing Renewable Energy Projects focusing on FiT and RECs Balawant Joshi Director, balawant@gmail.com, balawant.joshi@abpsinfra.com In this presentation.. Investment Potential for Renewable Energy in India Feed In Tariff Mechanism Renewable Energy Certificate Mechanism 1
Investment Potential for Renewable Energy in India RE Potential Vs Installed Capacity 120000 100000 80000 102788 100000 60000 40000 20000 0 15384 16179 16000 5000 1700 3300 1143 481 1953 74 Wind SHP Biomass Solar Bagasse Waste to Energy Potential (MW) Achievement (MW) Wind Potential estimated at 80 meter hub height No official data on solar potential, industry estimation Source: MNRE, as on Jan 31, 2012 2
Indian Renewable Energy Share Source: Climate Connect News 5 NAPCC: Guidelines for RE development National Action Plan for Climate Change (NAPCC) At National level for FY 2010, target for RE Purchase may be set at 5% of total grid purchase, to be increased by 1% each year for 10 years. SERCs may set higher target than this minimum at any point in time. Central & State Govts may set up a verification mechanism to ensure that renewable power is actually procured. Appropriate authorities may issue certificates that procure renewable power in excess of the national standard. Such certificates may be tradable, to enable utilities falling short to meet their RPS. Penalties as may be allowed under EA 2003 may be levied, if utilities are still falling short in RPS. 3
NAPCC has set agenda for Renewable Energy NAPCC target of 5% for RE Procurement in 2010 Target to increase by 1% each year to reach 15% by 2020 Separate target for Solar Energy Provides for creation of Renewable Energy Certificate Mechanism Considering that demand for electricity would increase to 1700 BU by 2020, it would create market for 255BU units of renewable energy generation. NAPCC identified REC framework to realize annual target of National RPO NAPCC Targets require New Business Models Scenario Required Generation from RE by 2020 (BU) Average CUF - RE (%) Required Capacity Addition (MW) Current Capacity (MW) Capacity Addition p.a. (MW) Optimistic 255 40% 72774 23129 6200 Realistic 255 35% 83170 23129 7500 Actual 255 28% 103963 23129 10000 India has to increase its RE Capacity Addition by FOUR FOLDS from the Present Capacity of 23129 MW under Realistic Scenario to meet the target of 15% RE generation by 2020 envisaged under NAPCC 4
Projected RE Investment Requirement Scenario Required Generation from RE by 2020 Average CUF-RE Required Capacity addition (MW) Current Capacity Capacity Addition p.a (MW) Anticipated RE Investment(US D) Optimistic 255 40% 72774 23129 6200 12.40 bn Realistic 255 35% 83170 23129 7500 15.00 bn Actual 255 28% 103963 23129 10000 20.00 bn 9 Evolution of Market Model & Role of Utility A B C A - Market model based on Open Access/wheeling for self use B - Model based on FIT and RPO for sale to distribution licensee & third party, within State C- Market model based on instruments with cross border features (REC) catering to National level demand 5
Feed-In Tariff Mechanism Electricity Act 2003 : Enabling provisions The EA 2003 has several enabling provisions to accelerate the development of RE based generation (Section 3): National Electricity Policy and Plan for development of power system based on optimal utilization of resources including renewable sources of energy, (Section 4): GoI to prepare a National Policy permitting stand alone systems (including those based on renewable sources of energy and non-conventional sources of energy) for rural areas. (Section 61(h)): Tariff regulations by Regulatory Commission to be guided by promotion of generation of electricity from renewable energy sources in their area of jurisdiction. (Section 86(1)(e)): Regulatory Commission to specify purchase obligation from renewable energy sources. 6
Many States have taken action Armed with legislative powers, many State Electricity Regulatory Commissions took constructive action for promotion of renewable energy: Issued Feed In Tariff Orders for technologies operational in their area of jurisdiction. Issued Renewable Purchase Obligations for Obligated Entities Determined various charges applicable for undertaking transaction of renewable energy Determined / approved principles of long term energy purchase RE - FiT for the year 2011-2012 State SPV ST Roofto p Wind SHP Biomass Bagass e AP 15.39 15.04 3.50 2.60(1 st year) 4.51 4.26 1.88(10th yr) Assam 10.00 3.19 4.00 3.2 4.40 Bihar 17.91 15.31 17.91 3.44 3.51 Chhattisgarh 15.84 13.26 15.84 4.36 Gujarat 15.00 11.00 12.54 3.56 3.707 4.40 4.61 Haryana 14.95 12.85 4.08 5.26 MSW HP 17.91 17.91 2.87 Karnataka 14.50 11.35 14.50 3.70 3.40 3.66 (1 st yr)and 3.59 4.13(10 th yr) Kerala 17.91 15.31 17.91 3.64 2.94 2.76 MP 15.35 11.26 15.49 4.35 5.40 3.3 (1 st yr), 2.80 3.79 (10 th yr)and 5.14 ABPS Infrastructure Advisory Private 14 Limited (20 th yr) 7
RE - FiT for the year 2011-2012 State SPV ST Rooftop Wind SHP Biomass Bagasse MSW Maharashtra 15.61 15.24 16.11 WZ-1:5.37 WZ-2:4.67 WZ-3: 3.97 WZ-4:3.58 Orissa 17.80 14.73 18.52 500 Kw & below) 5.51 (500 kw to 1 MW) 5.01 (1 MW to 5 MW) 4.51 (5 MW to 25 MW) 3.87 4.98 Punjab 17.91 15.31 5.07 (Below 5 MW) 4.26 (Betwn 5 MW to 25 MW) 3.65 5.05 4.57 4.44 Rajasthan 15.32 12.58 15.32 4.69 Air cooled- 5.03.Water cooled- 4.59 Tamil Nadu 15.15 13.15 14.34 3.39 3.35 4.294 4.491 UP 5.02 4.21 Uttarakhand WZ-1:5.15 WZ-2:4.35 WZ-3: 3.65 WZ-4:3.20 (Less than 5 MW) 3.50 (5 MW to 10 MW) 3.40 (10 to 15 MW) 3.25 (15 to 20 MW) 3.15 (20 to 25 MW) 3.00 1.995 1.995 West Bengal 16.13 16.13 3.64 2.55 4.5 15 Renewable Energy Certificate Mechanism 8
Why REC Mechanism was created? Renewable sources are not spread evenly across country Many states with no or little RE were not able to promote RE States with good RE felt the have exhausted their capacity to absorb It is difficult to carry out inter-state sales using CERC OA Regulations for large scale deployment of RE following reasons: Most RE generators are difficult to schedule Transaction would be expensive due to low capacity factors of RE RE generators are not connected to STU but to Discoms Intra-state balancing systems are not stable Low transaction cost mechanism was required to enable OA/Captive and voluntary consumers to purchase RE. Therefore, a mechanism that will enable inter-state sale and purchase of renewable energy was required. Concept of REC Mechanism in India Existing Mechanism Renewable Energy Electricity REC Distribution Company At Tariff Determined by Regulatory Commission OA / Trader Bilateral agreement (de-regulated) REC Mechanism Renewable Energy Electricity REC Distribution Company Obligated Entity (Buyer) Avg. PP Cost of Host Utility (regulated) Market Rate as per Power Exchange 9
REC Mechanism Key Design Features Design Features Eligible Source Eligible Entities Obligated Entities REC Issuing Authority Sale/Purchase of REC Eligible Source All sources recognised by MNRE under Renewable Energy Category Two Categories of Certificates one for Solar and other for Non-Solar Eligible Entities Grid Connected RE Power Projects having NO PPA at preferential tariff and received accreditation certificate from State Agency Shall sell electricity at Pooled cost of Power Purchase to distribution utility or at mutually agreed price to any other licensee Obligated Entities As defined by SERC, distribution utility, OA User, Captive Consumer States to amend existing RPO Regulations (FOR Model REC Regulations) REC Issuing Authority National Load Despatch Centre shall issue REC to Generator based on the Energy Injection Report prepared by SLDC Sale/Purchase of REC Transaction of REC shall take place at Power Exchanges operating under the guidance of CERC REC Mechanism Key Design Features Design Features Denomination Form of REC Pricing of REC Redemption of REC Shelf Life Denomination One (1) REC shall be issued corresponding to 1 MWh of renewable energy is generated and injected into the Grid Form of REC REC shall be issued electronically to the Generator Pricing of REC To be discovered only on Power Exchanges through auction route. Floor and Forbearance Price shall be determined by the CERC Redemption of REC Obligated entities shall purchase REC from Exchange Platform and redeem it inlieu to their fulfilment of RPO with State Agency. Only single trade (once through) permissible. Multiple trades not allowed. Shelf Life RE Generator shall apply for issuance of certificate from 3 months of energy injection in the grid REC shall be valid for 1 year from the date of issuance 10
REC Pricing Framework Renewable Energy Electricity Component REC Component (Environmental Attribute) Bilateral Agreement (deregulated) (OA User/Trader) Average Pooled Power Purchase Cost (Distribution Utility) Market Discovered Price (Obligated Entity/Voluntary Buyer) Andhra Pradesh - Rs 1.78/kWh Maharashtra Karnataka Kerala Tamil Nadu Gujarat Rajasthan - Rs 2.43/kWh - Rs 1.85/kWh - Rs 1.46/kWh - Rs 2.62/kWh - Rs 2.21/kWh - Rs 2.48/kWh Parameters Forbearance Price (Rs/MWh) Floor Price (Rs/MWh) Non Solar REC Solar REC 3300 13400 1500 9300 REC Project Accreditation (As on April 10, 2012) Accredited Technology Wise Projects No Capacity (MW) 1274,6 331 673 490 166 20 56 59 4 16,55 1 1,67 Wind Small Hydro Biomass Bio fuel cogeneration Accredited State Wise Solar Others Projects No Capacity (MW) 728 683,1 560,9 328,25 104,6 11,5 47,5 17,5 21 38 46 70,55 24 22 11
REC Project Registered (As on April 10, 2012) Registered Technology Wise 1094,7 Projects No Capacity (MW) 473 605,73 258 148 17 42 53 1 1,67 Wind Small Hydro Biomass Bio fuel cogeneration Others Registered State Wise Projects No Capacity (MW) 6577 24025 971 10 27 3 85 5 2 175 1 3 174 2 9 6495 50 1 82 23 REC Trading Updates 250000 140000 200000 120000 100000 150000 80000 100000 60000 40000 50000 20000 0 0 REC Issued (Primary Axis) REC Redeemend (Primary Axis) REC Opening Balance (Secondary Axis) 24 12
REC Trading Volume and Prices 4500 4000 3500 3000 2500 2000 1500 1000 500 0 REC Prices (Rs/REC) Mrz 11 Apr 11 Mai 11 Jun 11 Jul 11 Aug 11 Sep 11 Okt 11 Nov 11 Dez 11 Jan 12 Feb 12 Mrz 12 250000 IEX PXIL 200000 REC Trading Volume 150000 100000 50000 0 Mrz 11 Apr 11 Mai 11 Jun 11 Jul 11 Aug 11 Sep 11 Okt 11 Nov 11 Dez 11 Jan 12 Feb 12 Mrz 12 IEX PXIL 25 Coexistence of FIT and REC Mechanism Currently, Feed In Tariffs are continuing though REC Mechanism has been implemented in the country. FITs were continued to avoid abrupt shift to REC Mechanism which could have caused disruption in market. However, as FIT provides more stable regime, most utilities as well as generators are preferring FIT regime over REC. Since REC Mechanism creates competition for electricity as well as environmental attributes, it has better potential to create competitive market. As REC Mechanism stabilizes, FIT mechanism may be reviewed. 13
Purchaser of Last Resort Currently, RECs are valid for one year. As of date, supply has far exceeded demand even at floor price. It is possible that RECs may lapse at the end of year because RECs may not get purchased even at floor price. It is necessary that MNRE creates fund that will purchase RECs that are about to expire at pre-determined price, say floor price. RPO Deficiency Funds at State Level could also act as the Purchasers of Last Resort. However, it is necessary that this mechanism provides certainty to RE generators. Modalities of Trading Currently, Trading in RECs is restricted to CERC approved organized trading platform. As a result, generators are not able to assign / securitize RECs to raise money for new projects. Lack of bilateral trade also hinders ability of distribution company to enter into long term purchase transactions. Encouraging the bilateral trade transactions of the Renewable energy certificates. Distribution licensees upon exceeding their RPO targets, may be enabled to participate in REC transactions for their surplus RECs. 28 14
Long Term Visibility of Floor and Forbearance Price In order to safeguard the interests of the RE Generator and Obligated Entity, the CERC has determined the floor and forbearance price. Present mechanism allows RE generator to opt for either the preferential tariff route or participate in the REC Mechanism Though CERC has increased visibility of floor and forbearance prices, it is insufficient to ensure financing of the project on the basis of REC Visibility is required for the period of loan repayment. 29 Multiple Trading of Renewable Energy Certificates Under the present REC Mechanism, as soon as the transaction takes place at the power exchange REC are redeemed. No role of intermediaries which typically play a role of market makers. Banks/ lenders can not acquire and then sell RECs. Since compliance is yearly, transactions are bound to take place towards year end. Multiple trading of RECs should be permitted. It should be mandatory to register every trade with Registry. Similarly shorter compliance periods can also be considered. 30 15
Shorter Compliance Period and Monitoring Mechanism Currently, compliance is annual. As a result, very little demand for RECs during initial part of the year. As a result, price will be low during most part of the year while hitting forbearance price closer to compliance period. It is necessary to create smooth demand curve to reduce price volatility. Monitoring institutions at State Level are weak. Currently do not have data regarding Obligated Entities other than Distribution Companies. No SERC has levied penal charges on Obligated Entities. Need to strengthen their capability. 31 ABPS Infrastructure Advisory ABPS Infrastructure Advisory A-309, Kohinoor City Kirol Road, off LBS Marg Kurla (West), Mumbai 400 070 Ph: +91 22 6124 0400/ 6124 0444 Fax:+91 22 6124 0499 Email: contact@abpsinfra.com 16