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Approach Paper to setting up Solar PV Power Project on REC Mechanism

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Approach Paper to setting up Solar PV Power Project on REC Mechanism
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Approach Paper to setting up Solar PV Power Project on REC Mechanism

Table of Contents
1. Solar PV Power Project ........................................................................... 3
1.1 Technology .......................................................................................................... 3 1.2 Regulation ........................................................................................................... 4 1.2.1 National Solar Mission .................................................................................. 4 1.2.2 State Policies................................................................................................. 5 1.3 Financial .............................................................................................................. 5

2. Renewable Energy Certificate (REC) Mechanism................................. 6


2.1 2.2 2.3 2.4 2.5 REC Financial Modeling ...................................................................................... 7 Risks with REC.................................................................................................... 8 REC versus PPA ................................................................................................. 8 Strategy Suggested ............................................................................................. 9 Projects Precedent .............................................................................................. 9

3. About Gensol Consultants Pvt Ltd ...................................................... 10


3.1 Brief History ....................................................................................................... 10 3.2 Quality Commitment .......................................................................................... 10 3.3 Awards and Accolades ...................................................................................... 10 3.4 Presence ........................................................................................................... 10 3.5 Credentials ........................................................................................................ 11 3.5.1 Owners Engineer ........................................................................................ 11 3.5.2 Lenders Engineer ....................................................................................... 11 3.5.3 Detailed Designing ...................................................................................... 11 3.5.4 Detailed Design Vetting ............................................................................... 11 3.5.5 Feasibility Analysis & DPR .......................................................................... 11 3.5.6 Project Execution ........................................................................................ 11

1. Solar PV Power Project

We will pool all our scientific, technical and managerial talents, with financial sources, to develop solar energy as a source of abundant energy to power our economy and to transform the lives of our people.
- Prime Minister Manmohan Singh on Launch of National Solar Mission

India enjoys ample sunlight with energy incident in the range of 5 7 kWh/sqm/day, approximately twice that of Germany the global leader in Solar Photovoltaic (PV) Installations. To tap into this potential and create new and sustainable options, the policy makers have framed policies inviting project developers to setup Solar PV Power Projects. The salient features of a Solar PV Power Project are: Land Requirement for setting up 1 MW Solar Power Plant is 5 to 7 acres. Cost for Engineering, Procurement and Construction is Rs 10 crores* per MW and is rapidly reducing. About 17 lac units of electricity is produced in a year from a 1 MW Solar PV Power Plant. There is very little recurring Operation & Maintenance Costs on account of no moving parts. The rate of purchase of solar power ranges in between Rs 7.5 to Rs 17 per unit depending on the Policy. The guaranteed life of a Solar Power Plant in 25 years.

1.1

Technology
The energy from sunlight gets converted into DC Current on hitting the solar panels. The current so produced is fed into inverter to give AC Current at a low voltage. The transformer connected to the inverter steps up the voltage to an exportable level after which the electricity produced is fed to the grid.

The solar modules are the most important component of the solar power plant and account for approximately half of the total cost. The following types of modules are commercially used in India today.

Approach Paper to setting up Solar PV Power Project on REC Mechanism

Approach Paper to setting up Solar PV Power Project on REC Mechanism Type Crystalline Amorphous Silicon Cadmium Tellurium CIS / CIGS Area Required 4 5 acres / MW 7 8 acres / MW 6 - 7 acres / MW 5 - 6 acres / MW Cost* (Rs) 9.5 crores / MW 9 crores / MW 9 crores / MW 9.5 crores / MW Generation per MW 17 Lac units / year 17.5 Lac units / year 17.5 Lac units / year 17.5 Lac units / year

*The costs are dependent on the dollar to rupee exchange rate at the time of transaction

1.2

Regulation

A Solar PV Project Developer can set up a solar power project in India in one of the following 3 ways:

National Solar Mission

Solar PV Policies

Solar Policy of the Central Govt aimed at setting up 20,000 MW of Solar Power Plants by 2022

State Policies
Individual states like Gujarat, Rajasthan, Karnataka and Madhya Pradesh have released their own policies to set up Solar PV Power Plants in the respective states

Renewable Energy Certificates


Any Project Developer can set up any size of project anyhere in India. Unlike preferrential tariff under NSM and State Policies, REC's offer a variable tariff over the lifetime of project.

1.2.1

National Solar Mission


350 MW allocates of 5 to 20 MW at Rs. 7.5 to Rs 9.4 Per unit through Reverse Bidding

100 MW allocated in sizes of 2 MW and smaller at Rs. 15 to Rs. 17 per unit st on 1st come 1 serve

July 2010

Dec 2010

Dec 2011
Objective of setting up 20,000 MW by 2022.

2022

30 projects of 5 MW each totaling to 150 MW at Rs. 11 to Rs 13 per unit through Reverse Bidding*

*Reverse Bidding is a process by which allocation is given to the project developers offering the least tariff to sell solar power, accompanied by keeping proportionately high Bank Guarantees. Project developers intending to claim the tax benefit of Accelerated Depreciation would have had to give a further discount on the tariff arrived at after bidding. Domestic Content Protection in National Solar Mission clause dictates that the solar PV power plants built on crystalline technology should purchase the modules and cells from Indian manufacturers only.

Approach Paper to setting up Solar PV Power Project on REC Mechanism

1.2.2

State Policies

Gujarat 968 MW of Solar Power Projects have been allocated in 2 phases at a tariff of Rs 15 for first 12 years and Rs 5 for 13 years after that. These projects have a commissioning deadline of 31st December 2011. The project developers could have taken the benefit of Accelerated Depreciation without further discount in tariff. The tariff of the next phase is proposed to be Rs. 12.04 for the first 12 years and Rs. 6.84 for 13 years after that. However, the size, timing and process of allocation is not yet clear. Rajasthan 100 MW of PV Power Plants will be allocated in sizes of 5 and 10 MW to Project Developers on the basis of reverse bidding. 30th Jan, 2012 is the last date to apply. Considering that 70% of bidders in National Solar Mission were from site in Rajasthan, it is highly likely that the bidding in Rajasthan State Solar Policy will got to similar levels. Karnataka 80 MW of Solar Power Plants 50 MW PV and 30 MW Thermal - are waiting to be allocated to the 22 bidders who had applied under the Karnataka State Solar Policy and hope to be selected on the basis of reverse bidding. Other States Madhya Pradesh, Tamil Nadu and Andhra Pradesh are among the states slated to release their solar policies soon. However, as is clear from NSM and most of the state policies, the new policies will also most likely incorporate Reverse Bidding as the procedure to allocate projects.

1.3

Financial

Taking an average tariff of Rs. 8.77 / unit and an average project size of 12.5 MW based on the latest round of Reverse Bidding in National Solar Mission, the project should be able to achieve an Equity IRR of 17.5% if the cost of the project including EPC, land and soft cost is less than Rs. 8.5 crores / MW and generation is more than 18 lac units / MW. This is under the assumption that the Project Developer is importing modules and getting Exim Bank financing to the extent of 50% of the Project Cost at 10% interest rate (post hedging) for a tenor of 15 years. The balance debt is taken from domestic banks at 12.75% interest rate from Domestic Banks for a tenor of 12 years. Average Tariff Average Project Size Project Cost Loan Interest Rate Loan Tenors Rs 8.77 12.5 MW Rs. 8.5 crores / MW 10 % and 12.75% 15 years and 12 years

Assumptions for 17.5% Equity IRR

Approach Paper to setting up Solar PV Power Project on REC Mechanism

2. Renewable Energy Certificate (REC) Mechanism


The State Electricity Regulatory Commissions (SERC) of most of Indian states have made it mandatory to consume certain percentage of electricity from Renewable Energy. This obligation is referred to as Renewable Purchase Obligation (RPO). RPO is separately set for Solar and Non Solar Resource and is on an average 0.25% and 5% respectively. Though, the RPO is set for all states, but not all of them enjoy equal potential to generate renewable power. In order to make a state capable of meeting its RPO by taking credit for a project setup in a different state, which enjoys better potential, the Renewable Energy Certificate was instituted. Under this mechanism, a project developer can set up a project in any state and sell electricity to the grid of the respective state at Average Pooled in Power Cost (APPC) approximately Rs. 2 to Rs 3 per unit or can sell the electricity to any 3rd party consumer at a mutually agreed price. For every 1000 units of electricity generated 1 REC would be earned by the Project Developer, which can be bought by the obligated consumer over Indian Power Exchanges to meet its own RPO. The maximum and minimum costs for Solar and Non Solar RECs have been fixed for the next 5 years (2012 13 up to 2016 17) as follows: Solar REC Rs 13,400 (Rs. 13.4 / unit) Rs 9,300 (Rs. 9.3 / unit) Non Solar REC Rs 3,300 (Rs. 3.3 / unit) Rs 1,500 (Rs. 1.5 / unit)

Maximum Minimum

In case an obligated entity does not meet its RPO, and even a single REC remains unsold on the exchange, a penalty of maximum cost of REC shall be imposed on the entity. Also, while in other policies the Project Developer is not able to claim the tax benefits from Accelerated Depreciation (AD) without giving a further discount in tariff, under REC route the project developer can claim AD in the company which is setting up the project without any reduction in other revenues.

Case Study:
States like Kerala do not enjoy a good solar potential relative to other Indian states. To meet its RPO, the distribution companies of Kerala can purchase Solar RECs over the exchange sold by a Project Developer who might have set up the project in Gujarat because of its higher solar potential. The Project Developer would get Rs. 2.7 per unit from the Gujarat distribution company with which it would have a long term 25 year PPA. This price would also keep on increasing as the cost of electricity increase with time. The RECs sold on the exchange shall fetch a minimum price of Rs. 9.3 for the next 5 years. If the developer sets up the project in its profit making company, then he can further claim tax benefit on account of Accelerated Depreciation to the tune of 24% of the investment in the project reducing the payback period by more than 1 year.

Approach Paper to setting up Solar PV Power Project on REC Mechanism

2.1

REC Financial Modeling

In spite of assuming the REC Prices to be ZERO after 5 years in the most radical possible scenario, we are getting returns comparable to the best possible scenario with Reverse Bidding.
Per MW Cost of Project Expected Generation Power Sale Tariff Tariff Escalation Max possible tariff Price of REC for 5 years Price of REC after 5 years Exim Financing Interest Rate (Exim) Interest Rate (Domestic) Tenor of Exim Tenor of Domestic Accelerated Depreciation Optimistic Rs. 9.5 cores 17.5 Lac units Rs. 4.0 per unit* 5% Rs. 8 Rs 11.5/unit Rs. 6.0/unit 50% of Cost 10% 12.5% 15 years 12 years Yes Conservative Rs. 10 crores 16.5 Lac units Rs. 2.7 per unit 3% Rs 7 Rs 9.3/unit Rs. 4.0/unit No NA 13% NA 12 years Yes Radically Pessimistic Rs. 10.5 crores 16 Lac Units Rs. 2.7 per unit 3% Rs 6 Rs 9.3/unit ZERO No NA 14% NA 12 years Yes

Equity IRR
*Assuming sale to a 3rd Party

90%

40%

16%

Approach Paper to setting up Solar PV Power Project on REC Mechanism

2.2

Risks with REC

There is no visibility of tariff 5 years down the line. There is limited trading history available for Non Solar RECs and no trading history available for Solar RECs till date The above lead to difficult in raising debt for the project, which as for now is being given solely on the basis of balance sheet financing. The Obligated Entities need to meet their obligations on an annual basis which concentrates the trading of RECs towards latter part of the year leading to unpredictable cash flows The State Distribution companies which are the largest Obligated Entities to meet RPO have poor financial health and hence, there are doubts whether they will be able to meet RPO in the first place even if there is a fear of penalties

Resolutions under Discussion Quarterly enforcement instead of yearly enforcement to ensure more predictable cash flows. Introducing a concept of vintage RECs wherein for an REC generated from a project setup today shall be equivalent to multiple RECs generated from a project 5 years from today. Even if the cost of the RECs reduces after 5 years the project developer offsets that loss by having more RECs to sell.

2.3

REC versus PPA


REC REC promises a much higher Return on Equity No Bank Guarantees required to set up the project Can be claimed without any revision to tariff Any Capacity power plant can be setup Project can be setup in any state PPA Lower return on equity which can only be justified by large scale Bid Bond and Performance Guarantees to the extent of Rs 2 3 crores / MW need to be kept on allocation Tariff is revised downwards in case AD is claimed Capacity Sizes allowed change from policy to policy Project needs to be setup in the corresponding state under whose policy the project is proposed 25 year visibility of tariff Firm PPA signed at a preferential tariff gives comfort to lenders

Parameters Return on Equity Bank Guarantees

Accelerated Depreciation Choice of Capacity Choice of State

Continuation of Tariff Bankability of Power Sale

No visibility beyond 5 years A changing REC price with lower visibility reduces bankability Poor financial health of discoms leads to fears for payments. Yearly compliance leads to concentrating payments towards the end of year.

Predictability of Payments

NSM has payment security mechanism. However, poor financial health of discoms is a matter of concern in PPA route as well.

Approach Paper to setting up Solar PV Power Project on REC Mechanism

2.4

Strategy Suggested

As has been seen above that in the most radically pessimistic scenario also, the returns from REC route are comparable to the best possible scenario under Reverse Bidding. The following approach would balance the risks and returns: Chose a profit making company under which to set up the project Chose the size of project so as to absorb the tax benefit of Accelerated Depreciation Commission the project as early as possible to enjoy the complete benefit of the predictable REC prices for the next 5 years

2.5

Projects Precedent

Jain Irrigation Systems Ltd* The only Solar PV project visible on the REC website (www.recregistryindia.in) under accreditation is 8.5 MW project at Jalgaon, Maharashtra where in Jain Irrigation Systems Ltd is setting up the project using modules from its own manufacturing line and using power in its own factories after wheeling from the grid. The project has achieved financial closure and is expected to commission by February.

Gensol Consultants Pvt Ltd has the proud privilege of being the Owners Engineer to this project wherein we are advising Jain Irrigation Systems on the design, procurement and execution of the project.

Approach Paper to setting up Solar PV Power Project on REC Mechanism

3. About Gensol Consultants Pvt Ltd


3.1 Brief History

While the climate change debate was still brewing, Gensol Consultants Pvt. Ltd. was among the first in India to take a proactive approach. Today, we boast of reduction of 25 million tonnes of carbon dioxide through our 450+ client base spread across the renewable energy spectrum in India. Gensol Solar Division, set up in early months of 2009 is dedicated to using technology, engineering and innovation to give its clients the best returns on their capital. It is with this view that we strive to provide support and engineering expertise to clients and investors in Solar Power Sector through our offerings of complete concept to commissioning services for MW scale grid-connected and off-grid standalone solar power projects.

3.2

Quality Commitment

Among one of the first ISO 9001:2000 certified consultancy firms since inception.

3.3

Awards and Accolades

BusinessWorld1 Hottest Young Entrepreneur of the Year 2010 Economic Times2 Power of Ideas Winner 2009

Featured In Business Dailies: Business Standard Business Magazines: Business India Industry Journals: Power Line

Economic Times BusinessWorld Energetica

Financial Express Forbes India Carbon News

3.4

Presence

In order to have a local presence in the ever-dynamic renewable energy sector and ensuring easier access to clients has 3 offices to serve projects all over the country: Ahmedabad, Gujarat Gurgaon (New Delhi), Capital of India Bangalore, Karnataka

1 2

BusinessWorld is Indias largest Business Magazine in terms of readership Economic Times is Indias largest Business Newspaper in terms of readership

Approach Paper to setting up Solar PV Power Project on REC Mechanism

3.5

Credentials

Gensol Consultants has been a partner of choice for many a Fortune 500, internationally and nationally Listed Companies. Our reach spans across 16 Indian states and entire renewable energy spectrum. Solar Clients of Gensol Consultants Pvt Ltd include: 3.5.1 Owners Engineer 60 MW (4 Projects) Haryana Power Generation Corporation Ltd, Haryana Govt. enterprise 25 MW Alex Astral Solar Power Ltd., Gujarat 5 MW Konark Group, Gujarat 5 MW Swiss Park Vanijya Pvt Ltd, Rajasthan 5 MW OPG Energy Pvt Ltd, Rajasthan 5 MW Alex Spectrum Radiation Pvt Ltd, Rajasthan Lenders Engineer Exclusive Lenders Engineer to L&T Infra Finance 6 MW Indiabulls Power, UP & Maharashtra 10 MW Greeninfra Solar, Gujarat 5 MW ESP Urja, Gujarat (Sun Edison Project) 10 MW Millennium Synergy, Gujarat (Sun Edison Project) 20 MW PLG Power, Gujarat 25 MW Sun Group, Gujarat 10 MW Ruchi Soya, Gujarat Detailed Designing 20 MW Client Confidential, Gujarat 1 MW L&T ECC Division, Rajasthan 8.5 MW Jain Irrigation, Maharashtra Detailed Design Vetting 2 MW R V Akash Ganga, Uttarakhand Feasibility Analysis & DPR 20 MW Cargo Motors, Gujarat 5 MW RSB Energy, Orissa 5 MW Chemtrol Industries, Rajasthan 5 MW Shashi Kiran Group, Karnataka 2 MW Shri Bhagirathi Textiles Ltd, Maharashtra 5 MW Tip Top General Agencies Pvt Ltd, Rajasthan Project Execution 1 MW Sheth Developers, Maharasthra 100 kW off Grid Dibrugarh University, Assam 200 kW off Grid Natural Dehydrates, Gujarat 100 kW off Grid Raheja Developers, Gurgaon 12 kW off Grid Residential Project, Gujarat 5 kW off Grid Raheja Developers, Delhi 2 kW off Grid JSS Academy, Noida

3.5.2

3.5.3

3.5.4 3.5.5

3.5.6