CDM MARKET BRIEF

India December 2008

1 CDM investment climate index: regional comparison

CDM investment climate index (CDM ICI), Asia December 2008 (excerpt)
Rank Country CDM ICI (max. 100 pts) Regional classification
1 Malaysia 92.6 Very good climate
2 Korea (Rep.) 91.1 Very good climate
3 PR China 84.7 Good climate
4 India 82.1 Good climate
5 Indonesia 79.6 Good climate
6 Philippines 78.9 Good climate
Source: DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH
(For calculation method, see www.kyoto-coaching cologne.net)

The CDM ICI measures the investment climate for CDM projects. It can range between 100 points (highest)
and 0 points (lowest). Altogether, the climate is rated as ‘good’ in India, placing it at Rank 4. Due to its
distinctly superior institutional setup for CDM projects (experienced and efficient DNA, far more registered
projects), India’s total number of points exceeds that for Indonesia or the Philippines, for example.

2 General climate for foreign investments

General economic statistics, fiscal year 2007/08 (1 April - 31 March)

Population (2008): approx. 1.15 billion inhabitants
Nominal GDP: US$ 1,099 billion
Per capita GDP: US$ 941
GDP growth (real): +8.7% (forecast calendar year 2008: 7.8%; 2009: 6.3%)
Consumer prices: +6.4% (2006/07: +6.2%)
Goods exports: US$ 162.9 billion
Goods imports: US$ 251.4 billion
Foreign direct investments: US$ 24.6 billion
Gross foreign debt (2006/07): US$ 156.7 billion
Currency reserves (March 2008): US$ 315.0 billion
Exchange rates (3 Nov. 2008): US$ 1 = INR 50.72, EUR 1 = INR 64.59
Country credit rating acc. to Institutional Investor 63.5 of 100 points (Rank 54, +1.2 points on previous year)
(September 2008):
Corruption Perceptions Index 2008 3.4 out of 10 points (10 = free of perceived corruption)
(Transparency International):

Locational advantages:

Favourable macroeconomic climate (present real GDP growth of 6-8%), young population, rapidly growing
middle class of about 50 million with a propensity to consume, booming service sector (above all IT and
outsourcing industries) and broad industrial base

Locational disadvantages:

Considerable infrastructure deficits (energy, water supply, transport), heavy dependence on agriculture and
weather conditions (monsoons), large role played by illicit economy, pronounced bureaucracy, relatively
large government influence in broad sections of the economy
 CDM MARKET BRIEF

3 Specific climate for CDM projects

3.1 Ongoing CDM projects in the country

Along with the PR China and Brazil, India presently ranks as one of the largest host countries for climate
protection projects. About two-thirds of certified emission reductions (CERs) stem from CDM projects in
these three countries. India affords a variety of opportunities for CDM and its project range is very diverse
both in terms of technology type and scale.

A total of 359 of the 1,192 emission abatement projects registered by the CDM Executive Board (EB; the
UN body responsible for approving CDM projects) up to the beginning of November 2008 are located in
India. Measured by the number of registered projects, the subcontinent thus ranks no. 1 worldwide, well
ahead of the PR China (286), Brazil (146) and Mexico (106).

At about 32 million tonnes of CO2e a year, India, however, only occupies 2nd place for carbon credits
anticipated from registered projects, behind the PR China (120 million t). The reason for this is its
comparatively large ratio of small and medium-sized CDM projects. Of the registered projects, 138 were
classified as large-scale, so that the ratio of these to the total number has hardly improved at all in the last
two years. At present, there are four projects registered in India with an anticipated CO 2e annual reduction
of more than 1 million t, including three HFC23 projects and one gas/steam combination power plant with
German participation (Siemens supplies the turbines and the KfW Carbon Fund buys the carbon credits).

CDM projects registered by the CDM Executive Board in India as at 1 November 2008
Project category Number of Anticipated annual C02
projects reductions by 2012 (in 1,000 t)
Renewable energies 237 approx. 9,819
..Biomass/Biogas 135 approx. 5,262
..Small hydropower 43 approx. 2,370
..Solar energy 1 approx. 1
..Windpower 58 approx. 2,186
Energy efficiency 102 approx. 6,768
..Cement industry 13 approx. 1,544
..Other 89 approx. 5,224
Other 20 approx. 14,965
..Industrial gases (oxidation of HFC23) 4 approx. 10,568
..Fuel switch 10 approx. 4,137
..Landfill gas 3 approx. 112
..Other (including local public transport) 3 approx. 148
Total 359 approx. 31,552
Sources: UNFCCC website, UNEP Risø Centre

As at the end of November 2008, 1,069 projects had been awarded host country approval (HCA) by the
Indian designated national authority (DNA). According to DNA, 40 new applications are submitted every
month. Indian industry has been showing keener interest for about one and a half years now. A growing
number of firms have grasped the business potential of CDM projects, also the large state-owned
enterprises. India’s leading steel group, the Steel Authority of India Ltd., is looking to launch a total of 38
CDM projects with potential savings of 20 million t CO2e by 2012. The Indian Oil Corp. currently has three
projects worth INR 240 million (about EUR 3.7 billion) in the pipeline. Indian Railways intends to generate
CERs by using biodiesel fuel from jatropha plantations.
 CDM MARKET BRIEF

Owing to the increased commitment by the public sector, the DNA estimates that the average volume of
projects, presently amounting to just about 90,000 CERs, will increase further in the next few years. The
DNA also foresees keener market interest by foreign enterprises. Nevertheless, just over 80% of projects
are still under unilateral management, that is, without a foreign stake.

Even though the quality of Indian CDM projects is still an issue in 2008, government representatives, the
Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry
(CII) at least forecast an improvement in the CDM project proposals submitted. Many projects are, however,
still likely to have difficulty documenting the ‘additional’ emission savings required by the EB. Particular
criticism is levelled in this connection at local consulting firms that have seized on the CDM market in recent
years and lack enough experience in project implementation.

Projects with Indian host country approval as at September 2008 1)

Project category Number of projects
Renewable energies 280
Renewable energies (biomass) 251
Energy efficiency 296
Industrial and other gases (HFC, PCF, methane) 45
Fuel switch 53
Waste treatment 18
Forestry 6
2)
Total 949
1) Project details are available on the website: www.cdmindia.nic.in; 2) At the beginning of November 2008,
the number had already risen to 1,069 projects.
Source: Ministry of Environment and Forests

Almost all large institutional buyers of CO2 reductions are engaged in the country and are looking for
suitable projects, including the KfW Carbon Fund as well as several World Bank funds. As of January 2008,
futures on project-related emission reductions can be traded on the Multi Commodity Exchange of India
(MCX). The smaller National Commodity and Derivatives Exchange (NCDEX) also started trading in CER
futures in April 2008. Large Indian banks are also now engaged in CDM and are cooperating with project
developers and CER traders, such as Mitcon, Ecosecurities or CantorCO2e. The KfW Carbon Fund has
signed cooperation agreements with three major Indian finance institutions, the State Bank of India (SBI),
the Industrial Development Bank of India (IDBI) and the Small Industries Development Bank of India
(SIDBI). It collaborates with these institutions in developing and financing CDM projects and marketing
CERs.

In the assessment of market players, project owners are still too reticent to conclude long-term purchase
contracts for CERs. The sellers frequently withhold their certificates in the hope of obtaining a higher price
on the exchange at a later date.

3.2 Mode of operation of designated national authority (DNA)

The National Clean Development Mechanism Authority (NCDMA) was founded in December 2003. It is
made up of eight representatives from six ministries (environment, foreign affairs, finance, industry and
electricity and the Ministry for New and Renewable Energy) and a member of the Planning Commission. It
is chaired by the Ministry of Environment and Forests (MoEF), which also assigns the Member Secretary
responsible for coordinating NCDMA, Mr R.K. Sethi, who in turn also currently acts as chairperson of the
CDM-EB.
 CDM MARKET BRIEF

The procedure for submitting the requisite project documents (project concept note and project design
document) up to host country approval (HCA) is described in detail in English on the website:
www.cdmindia.nic.in, where the application forms can also be downloaded.

The whole approval procedure is scheduled to take 60 days. The NCDMA members decide on the projects
at their monthly meetings. If all their objections have been settled, the Member Secretary issues the HCA.
Until now, the NCDMA has charged no fee for its activity. Market players gauge the work of the NCDMA as
speedy and effective. As a rule, if all the requisite approvals by the ministries and authorities involved have
been granted, the HCA is issued within 60 days.

3.3 Local consultants, validators and verifiers

Of the 359 projects registered at the EB up to mid-November 2008, 135 had been validated by DNV, 75 by
SGS and 53 by TÜV South. Other designated operational entities (DOEs) with extensive activities on the
Indian market are Bureau Veritas Certification, TÜV Nord and TÜV Rheinland. According to a DOE
representative, the prices for project validations in India are commensurate with international standards.

The growing number of national and foreign consultants providing services in preparing the requisite project
documents has raised competition in the consulting sector even further. According to experts in the trade,
there are also some ‘black sheep’ on the market, whose services are not up to standard. A trend among
most providers is to tie remuneration directly to success, i.e. to HCA or project registration. Consulting firms
that lack the substantial finances needed find this kind of arrangement more difficult.

The fees charged by consulting firms for preparing a project design document (PDD) depend on project
size and complexity and the methodology used. In November 2008, on a stand-alone basis, i.e. preparing
PDDs without additional services, consultants questioned cited fees ranging from US$ 6,000 to US$
10,000 for less sophisticated, smaller projects and up to US$ 45,000 to US$ 55,000 for large-scale
projects requiring the development of new methodologies. If additional consulting services are required
(e.g. supplementary assistance in validation and registration or soliciting prospective buyers for the
emission certificates), a success fee of between 3% and 5% of the CER is usually charged.

GTZ is also engaged extensively in CDM in India, including advice to the Indian government on this issue.
In addition, it offers project developers support in identifying CDM projects.

3.4 Local legal requirements for CDM projects and taxation aspects

The same legal provisions apply for foreign direct investments in CDM projects as for other projects in the
relevant sector. Foreign direct investments and participating interests in the energy sector (except for
nuclear energy) are not subject to any limitations. As a rule, the transactions are handled on the ‘automatic
route’. Here, all the investor has to do is notify the Reserve Bank of India of capital transfer within 30 days.

Regulations on the taxation of CER revenue do not apply nationwide in India. While there is no national tax
on CERs so far, some federal states have introduced additional duties. Enterprises should therefore
enquire at the competent authorities beforehand about current legislation in the respective federal state. At
present, the Institute of Chartered Accountants of India (ICAI) is working on accountancy standards for the
treatment of emission certificates.

3.5 CDM partnership agreements (memorandum of understanding)

In CDM, India maintains close cooperation with other countries and institutions, including Germany
(especially with KfW and GTZ).
 CDM MARKET BRIEF

3.6 Opportunities for CDM projects in the energy sector

The scope for CO2 savings measures in the Indian energy sector is considerable. To maintain present
annual GDP growth of 6% to 8%, about 80 GW additional power station capacity is scheduled to be created
under the ongoing five-year plan (up to 2012). It is, however, questionable whether this target can be met.
Some 50 to 60 GW ought to be more realistic.

Energy and environmental data

India Asia 1) OECD
2)
Primary energy demand (Mtoe 2007) 404
of which from renewable energy sources approx. 7%
Electricity generation (TWh, 1 April 2007 – 31 March 2008) 704
of which from renewable energy sources approx. 17% 3)
CO2 emissions from fuel combustion (Mt, 2006) 1,250
Electricity demand/capita (kWh/capita, 2006) 503 667 8,381
CO2/Primary energy supply (t of CO2/toe, 2006) 2.21 2.04 2.32
CO2 per capita (t of CO2 per capita 2006) 1.13 1.28 10.93
CO2/GDP (kg of CO2/US$, purchase power parity 2000; 2006) 0.34 0.35 0.41
1) without PR China; 2) only commercially traded energy (approx. 30%-40% of primary energy supply
stems from non-commercial sources, e.g. the use of wood or dung); 3) ratio of windpower: approx. 1.2%;
biomass: approx. 0.3%, hydropower: approx. 15%
Sources: BP Statistical Review of World Energy 2008, IEA, Central Electricity Authority, Observ’ER

The energy efficiency of the available coal, gas and diesel power stations is still in need of considerable
improvement. Moreover, due to the large role of coal in energy supply, there are also opportunities for CO2
reduction through so-called fuel switching. There are also many opportunities for smaller savings measures
in industrial enterprises.

Many different CDM options are available in renewable energies as well. Related capacities are scheduled
to be expanded to between 20 and 25 GW by 2012 (October 2008: 13,450 MW). Windpower and bioenergy
above all are of interest for CDM projects. In windpower installations, which are promoted in India at
different levels, the subcontinent occupied fourth position worldwide in September 2008 with a total capacity
of almost 10 GW. India plans to give the windpower sector an additional boost with the help of feed-in
subsidies. The Ministry of New and Renewable Energy (MNRE) has proposed that windpower producers
who meet certain criteria should in future receive an additional INR 0.50 for every kWh fed into the public
power grid. The planned measure primarily aims at private and foreign investors that do not enjoy existing
tax privileges for windpower projects.

The emissions baseline for CDM projects in the energy sector is favourable in India due to the large use of
coal. Baseline data on the Indian electricity sector can be viewed at the website of the Central Electricity
Authority (www.cea.nic.in).

3.7 Finance facilities for CDM projects

Local banks and branch offices of foreign commercial banks offer a number of products to finance private
investment projects. The financial crisis could, however, have an effect on the business strategy of
international institutes in particular. However, carbon credits as supplements to project finance play a
subordinate role only. Banks in general do not bear certification risk. According to market experts, sound,
financeable CDM projects are still few and far between. A major problem is that they frequently lack the
necessary equity. Foreign lenders are subject to the guidelines on external commercial borrowings (ECB)
set by the Reserve Bank of India (RBI).
 CDM MARKET BRIEF

The Deutsche Investitions - und Entwicklungsgesellschaft mbH (DEG) also provides facilities for project
finance in India on commercial terms (including long-term loans, mezzanine finance, equity contributions
and guarantees). A particular focus is placed on renewable energies and energy efficiency. DEG
cofinanced a CDM project in India in 2005. The carbon credits are purchased by the World Bank (IFC) on
behalf of the Dutch government. Moreover, DEG can provide pro rata cofinance for certain project activities
with special developmental impacts under the PPP programme of the Federal Ministry for Economic
Cooperation and Development (BMZ) with up to EUR 200,000.

4 Recap

The Indian CDM market has passed a milestone. A growing number of Indian enterprises, including large
state companies in the raw materials and energy sector, are engaged in climate protection projects. Smaller
projects still account for the bulk, but market players predict that average emission reduction potential per
project will steadily rise in the coming years. The bankability of small-scale CDM projects will also be
improved through bundling. The involvement of large Indian banks ought to raise the standard of
professionalism in the industry further.

A strongpoint of the Indian CDM market is the advanced institutional landscape. The NCDMA primarily sees
itself as a public service provider and concentrates on a speedy appraisal of project sustainability. Many
national enterprises are also interested and there is an ample pool of CDM consultants and developers.
 CDM MARKET BRIEF

5 Advice/Service

DNA/National CDM Authority (NCDMA); R. K. Sethi, Member Secretary, Ministry of Environment and
Forests, Room No. 115, Paryavaran Bhawan, C.G.O Complex, Lodhi Road, New Delhi 110 003; Tel./Fax:
0091/11 24 36 22 52; Email: dir.cc@nic.in; Internet: www.cdmindia.nic.in

KfW Carbon Fund;

Email: carbonfund@kfw.de; Internet: www.kfw.de/carbonfund

DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH (advice/project finance);

Email: hei@deginvest.de (project finance); co@deginvest.de, sb@deginvest.de (Carbon Credit
Management), at@deginvest.de (Representative Office Delhi); Internet: www.deginvest.de, www.kyoto-
coaching-cologne.net

TÜV Rheinland Group (validation/verification);

Email: kober@de.tuv.com (Kyoto Coaching Cologne network - KCC), Internet: www.de.tuv.com

Indo-German Chamber of Commerce;

Email: bombay@indo-german.com, delhi@indo-german.com; Internet: www.indo-german.com

bfai - German Office for Foreign Trade (country information);

Email: asien@bfai.de, Internet: www.bfai.de

Imprint:

Author: Boris Alex, New Delhi

Editing and additional revision: Katja Simon, Martin Wiekert

Technical advisers: Dr Christopher Cosack, Volker Schwab

German Office for Foreign Trade (bfai),

Agrippastr. 87-93, 50676 Cologne
Tel.: 0221/20 57-0, fax: 0221/20 57-212, -262 ,-275, Internet: www.bfai.de

DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH,

Kämmergasse 22, 50676 Cologne
Tel.: 0221/49 86 -0, Fax: 0221/49 86 -12 90, Internet: www.deginvest.de

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