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DISCLAIMER

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CONTENTS
1. Overview  2. Market Dashboard 
2.1 Market Compass  2.2 India Solar Market Prices 2.3 Installed Capacity in India 01 02 02 02 03 04 04 05 06 06 07 07 07 07 08 08 08

3. Policy and Projects Outlook 

3.1 National Solar Mission  3.2 State policies  Tamil Nadu Andhra Pradesh Madhya Pradesh Uttar Pradesh

Karnataka Rajasthan Punjab 3.3 Renewable Purchase Obligation  3.4 REC projects 

4. Industry
4.1 Interview: Mr. HR Gupta, Managing Director, Indo Solar 10

5. Key question: How does the group captive model sale of solar power work in India? 
5.1 Background  5.2 Definition  5.3 Regulations: Theopen access mechanism  5.4 Benefits ofthe group captive model  5.5 Group captive power plants under an OPEX model  5.6 The business case for group captive power projects  5.7 Risks  5.8 Conclusion 

12 12 12 12 15 16 17 21 22 23 23

6. Annexure 
6.1 Glossary of terms

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 BRIDGE TO INDIA,

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1. OVERVIEW

India added a meager 155 MW in the previous quarter (July 2013 to September 2013) as compared to the cumulative 780 MW added in the first two quarters of 2013.

India added a meager 155 MW in the previous quarter (July 2013 to September 2013) as compared to the cumulative 780 MW added in the first two quarters of 2013.This slowdown is primarily due to the lack of allocations last year. In addition, for some projects under the Karnataka and Madhya Pradesh state policies, the deadlines have been extended without penalties. The mood is further suppressed, because the eagerly awaited phase two of the National Solar Mission (NSM) continues to be postponed. It is currently awaiting cabinet approval. However, with elections coming up and concerns over Indias high fiscal deficit remaining, the Request for Selection (RfS) document might be further delayed. While the NSM slacks, there has been some activity on the state level. In the last two quarters, new allocations for a cumulative capacity of 1.5 GW have been proposed.There is still confusion about how many Power Purchase Agreements (PPAs) will actually be signed from these allocations. For example, out of the total 2 GW capacity planned under Tamil Nadu and Andhra Pradesh state policies, even government officials assume that only 50% might actually be realized. So far PPAs for 60 MW have been signed (all in Andhra Pradesh). The key reasons for project delays have been problems related to land acquisition, delay in achieving financial closure and delay from developers end due to the recent rupee devaluation. The rupee devaluation has made imported equipments and foreign loans more expensive. Projects that were calculated too tightly or even with falling equipment costs in mind, might not be viable to build under current conditions. In fact, Chinese module prices for Indian supplies have stabilized, if not increased, in the last

couple of months. Thus delay might also translate into abortion in some cases. In spite of the various factors for delay, government officials in the south Indian states of Tamil Nadu and Andhra Pradesh seem confident that many more PPAs will be signed by the end of this year. Projects would then be commissioned between the last quarter of 2014 and first quarter of 2015. Over and above that, Andhra Pradesh is now inviting more interests and wants to sign PPAs in excess of 500 MW. If a significant part of these prospective PPAs get signed, the overall outlook of the market appears positive and we can expect a significant capacity addition over the next one year. Also, there has been some amount of new interest in the third party sale of power through various business models and we see the first projects coming up in this segment. The revenue for such third party sale of power is often combined with the revenue from Renewable Energy Certificates (RECs) and/or the benefit from Accelerated Depreciation (AD). Models such as group captive are being discussed for larger project capacities. In this edition, we are providing an in-depth assessment of the group captive model in our key question section. Indias total installed PV capacity at present stands at 1.96 GW. Apart from that, around 1.5 GW is currently at different stages of development. If PPA signing picks up for the projects allocated under the Tamil Nadu and Andhra Pradesh state policies and if the NSM is announced within this year, then we can expect a cumulative installed capacity of around 3.5 GW for utility scale projects in India by the end of 2014.

Indias total installed capacity at present stands at 1.96 GW. Apart from that, around 1.5 GW is currently under different stages of development.

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01

2. MARKET DASHBOARD 2.1 MARKET COMPASS

MA T

E UR

NA S

NG
IN
G

NT CE

R E M

2.2 INDIAN SOLAR MARKET PRICES

Indication Lowest FiT Interest Rate Average Capex c-Si modules (China, Taiwan) Thin Film modules (US and Malaysia) c-Si modules (Japan, Europe) Thin Film modules (Japan) All prices are for a reference 10MW project All prices are without duties and taxes
Source: BRIDGE TO INDIA

Trend Decreased Unchanged Decreased Decreased Decreased Decreased Decreased 13%

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GI

*$ rate has been used to avoid effect of currency fluctuations

---------------------1 The lowest tariff of ` 5.51/KWh (0.07/kWh, $0.09/kWh) has been mentioned by Sun Pharma under Karnataka bidding process. However, as per a governement official, who did not want to be named there is some dispute in the Karnataka bids and the process is on hold until further clarity.
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GR

OW

PV ` 5.51/kWh1 ` 65/Wp $ 0.58/Wp* $ 0.53/Wp* $ 0.65/Wp* $ 0.60/Wp*

2.3 INSTALLED CAPACITY IN INDIA

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Source: BRIDGE TO INDIA

03

3. POLICY AND PROJECTS OUTLOOK

In the last quarter, the states of Punjab, Uttar Pradesh and Karnataka allocated new projects.

We would describe the last quarter as being dominated by policy instability: We have seen confusion in Tamil Nadu over the tariff proposed by its regulatory commission; the announcement of the creation of the new state of Telangana from Andhra Pradesh, which put the allocations and future bankability of projects under question; Gujarat briefly contemplated a retrospective tariff revision; and new allocations in Karnataka seem to have been put on hold due to a dispute (refer below). Moreover, there has been no penalty levied for delayed projects under the Madhya Pradesh and Karnataka policies, which is setting a bad precedent for the upcoming projects in those states. On the bright side, in the last quarter (July 2013 to September 2013), the states of Punjab, Uttar Pradesh and Karnataka allocated new projects. A capacity of close to 1.5 GW is currently under different stages of development across India. With this proposed capacity addition we can expect Indias cumulative PV capacity for utility scale projects to reach at least 2.5 GW by mid of 2014 and close to 3.5 GW by the end of 2014. Earlier, BRIDGE TO INDIA had predicted an installed capacity of 4 GW by the end of 2014. However, due to delays in the signing of PPAs in Andhra Pradesh and Tamil Nadu and due to a noshow of phase two of the NSM until now, we have revised our projections downward. In the upcoming quarter (October 2013 to December 2013), the bulk of newly commissioned projects will come not from policies, but from the private sale of solar power under the REC mechanism.

3.1 NATIONAL SOLAR MISSION

Project developers have been looking forward to the new allocations under batch one of phase two of the National Solar Mission (NSM) for some time now. The draft RfS document was released in April 2013 and the bidding process was originally expected for May of this year. However, there has been no official news since. As per recent statements by ministry officials, the finalized policy and related documents have now been submitted to the Union Cabinet for approval. However, with concerns about Indias high fiscal deficit and with the model code of conduct for the upcoming elections, it is unlikely that the policy will be approved soon. If the allocations under the NSM are not annonced within a month, there is a high probability that it might be postponed until after the general elections in May 2014. BRIDGE TO INDIA, however, is optimistic that the bidding process for the NSM will begin this year itself.

The finalized policy and related documents for phase two of the NSM have now been submitted to the Union Cabinet for approval.

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Table 3-1: Overview of the state policies in India

Tamil Nadu Allocation date Jun-13 Andhra Pradesh Jun-13 Karnataka Apr-12 Punjab Jul-13 Madhya Pradesh May-12 Uttar Pradesh Jul-13 Rajasthan Mar-13 Total/average Most of the allocations happened in the first half of 2013 420

PPAs signed as on September 2013 (MW) Tariff (INR/ kWh)

60

60

225

75

6.48 6.49 (with an escalation of 5% p.a. for the first 10 years) 500 80

7.94 8.5 (60 MW) 5.51 8.05 (130 MW) 100

7.2 8.63

7.9-8.05

8.01 9.27 6.45

7.59

New PPAs expected to be signed by the year end (MW) Further allocations (MW) Delayed projects (MW) Expected commissioning date of projects under deployment Expected period of procurement

230

120

1,330

None

500*

None

None

None

None

RfS for 1 MW x 50 announced NA

550

NA

NA

50

NA

120

NA

170

Dec-2014

Dec2014

Mar-14 (50 MW) Dec-14 (110MW)

Dec -14

Mar-14

Dec-14

Mar-14

250 MW by March 2014; 1,240 MW by Dec-14

Jan 14 Mar 14

Jan 14 Mar 14

Ongoing

Jan 14 Mar 14

Ongoing

Jan 2014 Ongoing Mar 2014

Most of the procurements will take place between JanuaryMarch 2014

Essel Essel Welspun Acme Essel Roha Mining Infra (10 (32 MW), (25 MW), Infra (50 Dyechem (35 MW), MW), Asopus (34 Moserbaer MW), (25 MW), Kranthi Helena MW), Essel (25 MW), Moserbaer Essel Edifice Power InfraWelspun (20 Mining (30 MW (10 MW), projects (25 MW) MW), Sri (20 MW), ), Mahira SaiSudhir (30 MW) developed Energo Power (10 MW) (20 MW) Engineering (20 MW) (10 MW) * Based on an interview with the Andhra Pradesh state department officials, this will be based on direct allocation at the pre- determined tariff
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Key Projects

Source: BRIDGE TO INDIA

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Mohan Breweries (110 MW), United Telecom (100 MW), Welspun (60 MW)

Tamil Nadu TEDA has tried to assure the project developers that the new proposed tariff in Tamil Nadu will have no bearing on their projects and that TNERC will provide a sanction for the tariffs currently being offered.
Tamil Nadus tender in December 2012 led to an issuance of Letter of Intents (LOIs) for 690 MW of projects. As per our discussion with the officials, no PPAs have been signed as of September 2013 but all PPAs are expected to be signed in the next couple of months. The states nodal agency, Tamil Nadu Energy Development Agency (TEDA), has offered a tariff of `6.48/kWh (0.08/ kWh, $0.10/kWh) with a 5% escalation for the first 10 years. The Tamil Nadu Electricity Regulatory Commission (TNERC), the regulatory agency that is required to sanction all tariffs, has proposed a separate tariff of `5.78/kWh(0.07/kWh, $0.10/kWh)2 without escalation. The PPA with the developers is only bankable if TNERC approves the tariff being offered by TEDA. TEDA has tried to assure the project developers that the new proposed tariff will have no bearing on their projects and that TNERC will provide a sanction for the tariffs currently being offered. In a situation where the tariffs being offered by TEDA are not approved by TNERC, we can expect a majority of the project developers to back out. On the other hand, if TNERC approves the older tariffs, the largest capacity addition in 2014 can be expected from Tamil Nadu. As there has been an initial delay due to the concerns over the tariff revision, we might not see 300 MW projects being commissioned by June 2014 as predicted by us in the July 2013 edition of the India Solar Compass. Instead, we expect a capacity of 200 MW to be commissioned by September 2014.

loss in confidence in the processes being followed. Out of the 1,700 MW of original applications submitted in 2013, applications for less than 150 MW is expected to finalize. Another reason for a poor response from investor and developers in the state is the expected split of Andhra Pradesh into two separate states (the new state is to be called Telangana. As per our discussions with the government officials, they do not foresee the proposed division of the state to have a considerable impact on the solar projects.However, some developers have their reservations. This is especially true for those who have projects in central Andhra Pradesh, where the distribution company might be bifurcated in the future. Around 61 MW of PPAs have already been signed and as per the officials of New and Renewable Energy Development Corporation of Andhra Pradesh, another 80 MW of PPAs are expected soon. As there is an incentive for early commissioning in Andhra Pradesh, project developers who have a head start in terms of finalizing land procurement and partner selection for Engineering Procurement and Construction (EPC) before signing of the PPAs, will be able to benefit from that. We expect that at least a capacity of 60 MW will be commissioned ahead of schedule and within the third quarter of 2014. Apart from this, Andhra Pradesh has provided an open offer for developers to take up projects at the existing tariffs. Four to five large projects (up to 100 MW) are expected to take up this offer.

Out of 1,700 MW of original applications submitted in 2013, applications for less than 150 MW are expected to finalize in Andhra Pradesh.

Andhra Pradesh
Most investors are currently skeptical about projects in Andhra Pradesh taking off anytime soon. One reason is that the initial retrospective change in tariff by the state3 has led to a
---------------------2 1 EUR = INR 80 and 1 USD = INR 60 3 http://bridgetoindia.com/blog/?p=1605
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The recent allocation process in Karnataka, for a capacity of 130 MW has been put on hold as some companies have disputed the published tariffs.

Andhra Pradesh has also opened up a window for new interests for developers to set up solar projects at the same tariff that is being offered to the existing projects (`6.49/kWh (0.08/kWh, $0.10/kWh). As per our conversations with the officials, they are expecting fresh applications of around 500 MW. However, given the low tariffs in the state, BRIDGE TO INDIA thinks that their estimates are too optimistic and we do not expect that the fresh additional capacity will exceed 200 MW.

financial closure coupled with delays in acquiring land for projects has led to substantial delay in the commissioning of the remaining projects. One project developer commented that the delay of their project has been due to the recent rupee devaluation. The deadline for the remaining capacity of 120 MW has now been extended until March 2014 and none of the project developers is being penalized. Hence, we expect a capacity of 80 MW to be commissioned before the new deadline.

Karnataka
A capacity of 60 MW had been allocated under the Karnataka state policy in April 2012. As per the PPA, these projects were to be commissioned by October 2013. However, due to delay in land acquisition and financial closure, only one project with a capacity of 10 MW by Jindal Aluminum has been commissioned on time. The official deadline has been extended until 2014 without fines for the delays. According to unconfirmed sources, the recent allocation process for a capacity of 130 MW has been put on hold as some companies have disputed the published tariffs, claiming some procedural mistake. These allocations are likely to remain on hold until there is more clarity. We think that commissioning of any part of the newly allocated capacity of 130 MW within the next year is unlikely. The left over capacity of 50 MW from the allocations in 2012 is expected to be commissioned by the end of the first quarter of 2014.

Rajasthan
A capacity of 75 MW that has been allocated in Rajasthan seems to be on track. As per officials in the department, all projects are expected to meet their deadline of March 2014. Also, they mentioned that most of the projects have either secured financial closure or are in the process of finalizing it. Given the experience under most solar policies and going by the previous experinece of the developers, we, however, expect that two to three projects with a capacity of around 25 MW will be commissioned by the March 2014 deadline and the remaining by around June 2014.

Uttar Pradesh has finalized agreements with seven project developers for a cumulative capacity of 130 MW.

Uttar Pradesh

Uttar Pradesh has finalized agreements with seven project developers for a cumulative capacity of 130 MW. The developers are: Jakson Power (10 MW), Moser Baer (20 MW), Sree Developers (20 MW), DK Infracon (10 MW), Refex Energy (10 MW), Azure power (10 MW) and Madhya Pradesh Essel Infraprojects (50 MW). The PPAs in the state are expected to be In Madhya Pradesh, four projects of 25 MW each, one project of 20 MW and signed before the end of the year. The government has further signed a another of 105 MW were allocated in memorandum of understanding with May 2012. The 25 and 20 MW projects were to be commissioned by June 2013 National Hydro Power Corporation (NHPC) for a proposed 100 MW solar and the 105 MW project by December 2013. However, as of September 2013, project. It is not yet clear when this project is to be finalized. Most of the only a 105 MW project by Welspun mentioned project developers will has been commissioned ahead of schedule. As so often, the delay is cited likely do their own EPC and might be as being due to difficulties in achieving able to complete their projects ahead
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Punjab has finalized agreements with 26 project developers to develop a cumulative capacity of 250 MW.

2014. This is because the time spent in selecting an EPC partner will be saved and the allocation of internal resources will be more efficient. Also, as all the decisions regarding the technical design, selection of equipment and timelines will be taken by the project developer itself, it is expected that there will not be any procedural delays.

Out of a capacity of 155 MW that has been added in India in the previous quarter, around 40 MW is for the projects under the REC mechanism.

to the enforcement of Renewable Purchase Obligation (RPOs) in India. Delhi distribution companies (DISCOMs), for example, have already included the RPO compliance expenses in the tariff. The Madhya Pradesh Electricity Regulatory Commission has mandated the DISCOMs to comply with RPOs. Similarly, the obligated entities in Punjab have been mandated to comply with the Punjab RPOs of financial year 2011-12 and Punjab has finalized agreements 2012-13. West Bengal is planning to with 26 project developers to develop comply with its solar RPO by the end a cumulative capacity of 250 MW. of 2013. These developments are an Some of the key projects in the indication that more states are getting state are: Asopus Infrastructure (34 serious about implementing RPOs. MW), Welspun Solar (32 MW), Essel As more states begin to implement Infraprojects (30 MW), Moserbaer the RPO mechanism the demand for Clean Energy (30 MW), Azure Power solar power will increase. This can (30 MW), Solairedirect (20 MW), Punj provide an additional impetus to the Lloyd (20 MW). The projects have been solar market. For example, for the given six months for financial closure states that are not currently meeting and 13 months for commissioning. their RPOs, National Thermal Power The average tariff in Punjab is `8.28/ Corporation is setting up various kWh (0.10/kWh, $0.14/kWh).This power plants across the country for is higher than most other states, the DISCOMs in these states. Many largely due to the high land costs and of these projects are expected to be relatively low irradiation in the state. commissioned by March 2014. This As the debt financing is usually done includes the 50 MW project in Madhya after the land has been bought, these Pradesh (EPC contracted to Tata Power projects will look more attractive to the Solar), 10 MW and 15 MW project in lenders at the time of debt financing. Uttar Pradesh (EPC contracted to Due to this reason, the debt financing BHEL) and 10 MW project in Orissa for projects in Punjab is expected to (EPC contracted to BHEL). be relatively easier. None of the PPAs have been signed until now and we expect them to be signed by the end of the year. As a result, it is unlikely Out of a capacity of 155 MW that has that there will be any major capacity been added in India in the previous additions from Punjab in the first half quarter, around 40 MW is for the of 2014. However, we might see an projects under the REC mechanism. additional capacity of around 100 MW With projects for third-party sale of by September 2014. power gaining popularity and several

3.4 REC PROJECTS

3.3 RENEWABLE PURCHASE OBLIGATION

Recently, there has been more confidence in the market with regards

solar parks4 coming up primarily in the states of Madhya Pradesh and Rajasthan, in the next one year, we expect an additional capacity of 150 MW for projects that use a combination of revenue through RECs with industrial or commercial tariffs.

---------------------4 EPC providers are setting up solar parks specifically for REC or captive projects. These parks provide land and grid-connectivity assistance to solar project developers.

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Figure 3-1: Projected quarterly PV installations in India (in MW)

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Source: BRIDGE TO INDIA

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4. INDUSTRY
An anti-dumping duty has the potential to change the supply dynamics in the Indian solar sector drastically.

HR Gupta, Managing Director, Indo Solar

As of today, with some exceptions, most of the photovoltaic (PV) manufacturing capacity in India is either lying idle or operating at a very low capacity. Indian manufacturers have largely been unable to compete with international module suppliers on costs. To revive their fortunes, manufacturers are banking on the implementation of anti-dumping duties (ADD) and a domestic content requirement (DCR). DCR is only applicable for the NSM projects in India and it is expected that batch one of phase two of the NSM would have a capacity of around 200 MW earmarked for domestic modules. This is despite the fact that the US has challenged DCR in the World Trade Organization (WTO). However, this would be insufficient to support the 2 GW of manufacturing capacity in India. ADD on the other hand has the potential to change the supply dynamics in the Indian solar sector drastically. In the January 2013 edition of the India Solar Compass, BRIDGE TO INDIA had forecast that going by the procedure followed for ADD, an interim order could be announced as early as July 2013. Given that no interim order has been announced until date, it can be assumed that this investigation is taking longer than usual. This might be due to the fact that this is a high profile case with considerable international scrutiny and pressure. As per the normal procedure, the final outcome should have been expected 23rd November 2013 (one year from the date of initiation). However, given that the final outcome has to be preceded by an interim order, the investigations might well miss the deadline. BRIDGE TO INDIA has maintained that imposition of ADD would be negative for the Indian solar sector as it will drive up costs and slow down adoption of the technology, which should be the primary goal. Nevertheless, this is a legal and not a political procedure

and if dumping has taken place, then ADD will most likely be imposed irrespective of the implications on the industry. To present a contrarian view, we asked HR Gupta, Managing Director of Indo Solar, to share his views on the Indian solar manufacturing sector. Indo Solar is Indias largest cell manufacturer with a current manufacturing capacity of 160 MWp. The company has plans to increase the capacity to 360 MWp.

4.1 INTERVIEW: HR GUPTA, MANAGING DIRECTOR, INDO SOLAR

1. What is the current state of the Indian solar manufacturing industry? Cell manufacturing in India is practically idle. These facilities are either underutilized or completely shut. Module makers are mostly catering to the off-grid requirement and are now also receiving some enquires from Europe. However, sizeable orders and visibility is not there. Some module manufacturers are also developing their own projects and using their own modules for these projects to keep their plants operational. 2. What can be expected in terms of DCR and anti-dumping duties? By when can we expect some clarity on the subject? My understanding on DCR is that the documents for phase two of the NSM are awaiting cabinet approval. On ADD, we are now in the 20th month since we sought remedial action and 10th month since initiation. There is a high probability that the matter will be decided next month.

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In India, we have high cost of debt and high power costs but these can easily be optimized when manufacturers are bankable and can borrow cheaper offshore and switch to grid power.

3. If anti-dumping duties are enforced, 4. What would be your recipe to make the tariffs for solar power are the manufacturing of solar modules expected to go up. Do you agree? Is it competitive in the long run? justified? If you closely analyze costs, as The cost of solar power on a dumping was done by NREL and MIT, in the basis has already wiped out around US, you will see that operational US$ 80 Billion in market capital and manufacturing costs are similar the supply side of the solar value chain globally. In India, we have high cost has been decimated globally. of debt and high power costs but these can easily be optimized when If one allows only negative margins manufacturers are bankable, can on the supply side, soon there will borrow cheaper offshore and switch to be no supply side at all. In order to grid power. maintain a stable production capacity and allow for R&D, prices should Manufacturing of solar cells and be commensurate to support the modules is already competitive and sustainability of the sector. the bill of materials is anyway similar amongst all manufacturers.

Errata from the previous edition of the India Solar Compass (July 2013): Correction is in the table on page 19. Satec Enviro supplied only the steel for the trackers. They did not install the tracking system as reported by us. Insolare has installed the trackers for their project.

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5. KEY QUESTION: HOW 5.1 BACKGROUND now, the Indian solar market DOES Until has been dominated by policy based THE GROUP projects that rely on government or obligations. However, a CAPTIVE MODEL incentives fall in the cost of solar power and a WORK? rise in the cost of conventional power
Typically, group captive power projects have to operate within the ambit of the open access mechanism. Open access allows large power consumers to buy power directly from the open market.

MW and above) to buy power directly from the open market. On the basis of the type of contract, open access is categorized as: Short term open access (STOA), medium term open access (MTOA) and long term open access (LTOA). Typically, solar power plants under the group captive model opt for the LTOA based agreements. While open access consumers can buy directly from the group captive project or the open market, they are subject to several charges that are incurred for using the already available transmission and distribution infrastructure. These include: i C onnectivity charges These are recurring, fixed charges payable by a consumer for the electricity connection provided by the distribution licensee DISCOM. This varies with the connected load and is chargeable within a range of ` 15/kW/per month (0.19/kW/ per month, $0.25/kW/per month) to ` 500/kW/month (6.3/kW/ per month, $8.3/kW/per month) depending on the category of consumer. ii P oC charges Point of connection charges are transmission charges introduced to recover the fixed costs of the transmission network. They take into consideration the distance of the customer from the load center (generator) and the direction of the node in the grid. These charges and the related losses are applicable to captive generating plants and consumers connected to a central or state transmission network (66 kVA or 132 kVA) or a DISCOM network (11kVA and 33 kVA). Generally, the charges are in the range of `0.08 0.16/kWh (0.001 0.002/kWh, $0.001 0.003/kWh) iii T ransmission charges These charges are payable to the transmission licensee (state transmission unit) for using the transmission infrastructure.
12

have prompted many companies to explore business models wherein solar power can compete in the power market without government support. India is currently in a situation where parity for many industrial and commercial consumers is within reach. In such a situation, viability enablers such as accelerated depreciation, any additional revenue through the REC mechanism or any other incentive such as a waiver of open access charges or electricity duty can tilt the balance to make solar power an attractive option for power consumers and investors alike. Several new business models are evolving in India to tap into this opportunity. Generation of solar power under the group captive model is one of most talked about business models in the Indian market at present.

While open access consumers can buy directly from the group captive project or the open market, they are subject to several charges that are incurred for using the already available transmission and distribution infrastructure.

5.2 DEFINITION
The group captive model is based on the Electricity Act 2003. The act allows for a structure for supply of power to a group of consumers, treating them as captive consumers, as long as the following conditions are met: i N ot less than 26% of the ownership is held by captive consumers. ii N ot less than 51% of the aggregate electricity generated in such plant, determined on an annual basis, is used for captive consumption.

5.3 REGULATIONS: THE OPEN ACCESS MECHANISM

Typically, group captive power projects have to operate within the ambit of the open access mechanism. Open access allows large power consumers (typically with a connected load of 1
BRIDGE TO INDIA, 2013

The largest impact, amongst all the open access charges is that of the Cross Subsidy Surcharge, wheeling charges and transmission charges.

These charges are in the range of `50,000 to 200,000/MW/ month (625 2,500/MW/month, $833- 3,333/MW/month for LTOA consumers and in range of `0.10 0.50/kWh (0.001 0.006/kWh, $0.002 0.008/kWh) for STOA consumers.

iv Transmission losses Losses are considered for the assumed electricity units lost in the transmission line between the generator and the consumer. Typically, these are in the range of 2 6 %. v Wheeling charges These charges are payable to the distribution licensee for using the distribution network. They are applicable to all power generating plants connected to the distribution grid at 33 kV or below and availing open access. They are typically in the range of `0.10 0.80/kWh (0.001 0.01/ kWh, $0.002 0.013/kWh). vi Wheeling losses These are the losses incurred while transporting electricity through the distribution network. They are determined by the State Electricity Regulatory Commissions (SERCs) for each consumer categories and typically range from 4 10 %.

vii Cross Subsidy Surcharge These are charges payable by consumers who opt for supply through open access. In India, industrial and commercial clients cross subsidize electricity rates for agricultural and residential consumers. When a consumer opts for open access, the distribution licensee loses a high value consumer who would have subsidized low paying consumers. This surcharge is designed to make up for the lost cross subsidy. viii SLDC/RLDC charge These are charges payable by STOA consumers who avail services of the state/regional load dispatch center (SLDC/RLDC). Such services include scheduling, revisions in scheduling and energy accounting. They are typically in the range of `1,500 2,500 (19 31, $25 42) per day or part of the day. The largest impact is that of the Cross Subsidy Surcharge (CSS), wheeling charges and transmission charges. CSS, however, is waived off for group captive projects. Therefore, we are only concerned with the wheeling and transmission charges. These charges currently vary between zero and `2.12/kWh (0.03/kWh, $0.04/kWh) depending on the state.

Transmission and wheeling losses vary significantly across states.

Figure 5-1: Key charges and losses taken for an average case of group captive sale of power in India

BRIDGE TO INDIA, 2013

Source: BRIDGE TO INDIA

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The impact of open access charges and losses will be the lowest in Andhra Pradesh, Uttar Pradesh and Delhi and the highest in Maharashtra, Himachal Pradesh and Odisha.

As we can see in the Figure 5-2 the impact of open access charges and losses will be the lowest in Andhra Pradesh, Uttar Pradesh and Delhi and the highest in Maharashtra, Himachal

Pradesh and Odisha. The overall impact can vary between `0.63/kWh - 2.74/kWh (0.008 0.03/kWh, $0.010.5/kWh).

Figure 5-2: State-wise costs associated with the open access mechanism (without any concessional benefits, in INR/kWh)
Additional cost impact on solar power under the open access mechanism (without any concessional charges) 3.0 2.5 2.0 1.5 1.0 0.5
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Open access losses (impact in INR/kWh) Open access charges

Madhya Pradesh

West Bengal

Tamil Nadu

Andhra Pradesh

Karnataka

Haryana

Uttar Pradesh

Punjab

Rajasthan

Kerala

Bihar

Maharashtra

Himachal Pradesh

Andhra Pradesh and Uttar Pradesh, for example, have completely waived off these charges for the solar projects. Odisha and Himachal Pradesh, on the other hand, have the highest charges among all states. Transmission and wheeling losses also vary significantly across states. A combination of these can vary from 7.74% to 12.25% of the total power supplied. The tariff orders in Karnataka and Rajasthan account for the lowest losses in India, Punjab and Madhya Pradesh account for the highest. In some states,developers can avail

Chhattisgarh

Gujarat

concessional open access charges. For example, Andhra Pradesh and Uttar Pradesh have waived off the open access charges for solar power and Madhya Pradesh, Punjab and Gujarat are known to provide some concessions in terms of charges and losses considered. However, according to Central Electricity Regulatory Commission (CERC) guidelines, RECs cannot be claimed if concessional wheeling and distribution charges are being availed. Therefore, developers must choose between the two benefits.

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Odisha

Delhi

0.0

14

Source: BRIDGE TO INDIA

Figure 5-3: Cost associated with the open access mechanism for selcted states at currently available concessional charges (in INR/kWh)

The key benefit of the group captive model is that bankability risks of the off-taker can be minimized by spreading it across multiple power consumers.

Additional cost impact on solar power under the open access mechanism (with concessional charges) 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Open access losses (impact in INR/kWh) Open access charges States with concessional charges

Himachal Pradesh

together to build a larger project, thereby benefitting from economies of scale.

5.4 BENEFITS Smaller power OF THE GROUP customers can come CAPTIVE MODEL

thereby benefitting from economies of scale.

iii I n some states, it is also possible for power consumers to get additional power entitlement. Apart from the incentives such as a This means that users are usually waiver of CSS, power banking facilities entitled to draw a certain amount and concessional open access charges, of power from the sub-station and group captive consumers also have the in case they need more power, they following benefits: would need to get an additional sanction at a one-time cost or, in i The key benefit of the group captive some cases with revised tariff. model is that bankability risks of A group captive model can help the off-taker can be minimized by provide an additional entitlement spreading it across multiple power without changing the sanctioned consumers. Along with that, in case load from the sub-station. a power consumer stops buying power, another off-taker can easily iv Accelerated depreciation (AD) be accommodated instead. benefits and revenue through ii S maller power customers can come together to build a larger project, the sale of RECs might provide additional financial incentives.

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Source: BRIDGE TO INDIA

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Madhya Pradesh

Tamil Nadu

West Bengal

Uttar Pradesh

Andhra Pradesh

Karnataka

Punjab

Haryana

Kerala

Maharashtra

Chhattisgarh

Rajasthan

Gujarat

Orissa

Bihar

Delhi

and independent power producers (IPPs) who wish to offer an Operating Expense (OPEX) model can also avail the group captive benefits by adopting a certain financial structure.

5.5 GROUP CAPTIVE POWER PLANTS UNDER AN OPEX Third party investors MODEL

Group captive solar power projects may be an attractive option for captive i 1% common equity consumers who can not only buy power 9% preferential equity at cheaper rates from the plant but can ii 9 also, by investing into the project, avail In such a structure (refer to the Figure accelerated depreciation5 benefits. 5-4), the power consumer just invests the equity portion (30%) of the required Third party investors and independent 26% of the common stock (1%) into power producers (IPPs) who wish to the SPV. This means that for a 1 MW offer an Operating Expense (OPEX) project to be set up with a capital model (i.e. sale of power rather than cost of e.g. ` 70 million (875,000, sale of a power plant) can also avail $1,166,667), the power consumer just the AD benefits by adopting a certain needs to invest ` 54,600 (683, $910) financial structure. to make the project eligible for the group captive scheme. The investor or In such a case, a Special Purpose IPP can provide the remaining equity. Vehicle (SPV) can be formed with

joint holding of the investor (the developer) and the power consumer. The project will be owned by the SPV. If a third party investor wants to have the maximum AD benefit, the equity structure of the SPV could be as follows:

Figure 5-4: Financial structuring for a group captive project where the power consumer is not the investor
Capital cost of the project

The power consumer just needs to invest ` 54,600 (683, $910) to make the project eligible for the group captive scheme.

Debt (70%)

Equity (30%)

Preferential stock (99%)

Common stock (1%)

100% of the participative, cumulative & convertible preference shares will be held by the investor

26% of the common stock will be held by the power consumer The remaining 74% of the common stock will be held by the investor

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Source: BRIDGE TO INDIA

---------------------5 Accelerated depreciation refers to any one of several methods by which a company, for financial accounting or tax purposes, depreciates a fixed asset in such a way that the amount of depreciation taken each year is higher during the earlier years of an assets life. As this is subtracted from the cash flow, it allows the company to avoid paying taxes on the depreciated amount. An accelerated depreciation of 80% in the first year is allowed for infrastructure projects under section 80 (I) of the income tax act.
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Based on common understanding of the accelerated depreciation benefit, it does not make sense for a newly created SPV to claim the benefit as it has no existing profit on its balance sheets

There is no rule to specify the split between the preferential stock and the common stock and it can vary from project to project. The group captive regulations states that the 26% minimum share required for the power consumer is of the equity (or common stock). Disclaimer: Most project developers claim that this financial structuring is completely legal and followed for several power projects for other sources of power. However, some government officials are known to have raised concerns over the legality of such a model.

Therefore, investors looking to sell power (OPEX model) using the group captive mode should not expect to avail the benefits of AD.

5.6 THE BUSINESS CASE FOR GROUP CAPTIVE POWER PROJECTS

A group captive project must be able to supply power to a consumer at a tariff that is below the existing alternative cost of procuring power. Solar will always compete with other sources of power that can be bought using the open access mechanism. As a new SPV is created for the However, as the availability and price purpose of the project and does not yet of other sources of power may vary by have a profit on its balance sheets, it location and circumstances, we have cannot avail the benefits of accelerated not included such a comparison in our depreciation (AD) on the SPVs assets. analysis. Based on common understanding of the accelerated depreciation benefit, it does not make sense for a newly created SPV to claim the benefit as it has no existing profit on its balance sheets that it can offset against the depreciation claimed. However, one of the project developer pointed us to a Supreme Court ruling which said that accelerated depreciation can be claimed by the part or full owner of the SPV. Based on the information provided, we understand that Section 32 (I) of the Income Tax Act was amended in 1997 and there is a Supreme Court ruling from the case of Seth Banarsi Dass Gupta v. CIT 166 ITR 783, that says that based on the changes in section 32 (I) of the Income Tax Act, an owner or a fraction owner of the SPV is entitled to claim depreciation on the asset owned by a SPV. However, based on our discussion with tax experts, we do not believe that there is any viable way for a SPV to claim AD. Moreover, General AntiAvoidance Rules (GAAR) under the Direct Tax Code (DTC), which is likely to be implemented from April 2015, will make it extremely difficult for anyone to carry out financial manipulations just from the taxation perspective. The main parameters for the analysis are as follows: i F or the grid tariff for industrial and commercial consumers,we have chosen HT 33 kVA consumer tariffs for our analysis. ii L TOA transmission charges and wheeling (distribution) charges for HT 33 kV consumers were converted into `/kWh. iii T he intra state transmission and wheeling losses are considered and the percentage values have been converted into `/kWh. iv E qually, the open access charges and losses have been converted into INR/kWh. v The viable solar PPA tariff is calculated for four different REC scenarios (no RECs sold, 25% of the RECs sold, 50% of the RECs sold and 75% of the RECs sold). For each scenario, we have calculated an option with and without AD benefit. We have left out the scenario for 100% of the RECs being sold as we think that there is no realistic possibility of that happening.

Solar will always compete with other sources of power that can be bought using the open access mechanism.

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vi The equity IRR expectation is taken as 15%. vii Irradiation level has been taken as averages for each state. The following assumptions have been made for the analysis: i W heeling and transmission charges are usually given in percentage terms. We have converted it into INR/kWh for a better understanding and analysis (generation of 1.6 million units/MWp installed has been used for this conversion). ii F or all other calculations, the capacity utilization factor (CUF) for each state has been used as per CERC6. iii Size of solar power plant is 10 MW. iv R ECs traded at the floor price until 2017, post which no further REC revenue v P lant life and PPA period of 25 years vi N o escalation of the tariff throughout the PPA period vii CAPEX of ` 65 million/MW (812,500/MW, $1,083,333/MW).

viii O&M costs of ` 1 million/MW/year (12,500/MW/year, $16,667/MW/ year) ix Debt Equity ratio of 70:30 x When no RECs are sold, the concessional open access charges have been considered as follows: o Andhra Pradesh, Uttar Pradesh: transmission and wheeling charges exempted o Punjab, Madhya Pradesh:concessional wheeling losses of 2% Based on our modeling, if up to 25% of RECs are sold, group captive power plants can be viable in the following states: Delhi and Maharashtra. If 50% of the RECs are sold; group captive power plants can be viable in the following additional states: Andhra Pradesh, Karnataka, Punjab, Rajasthan and Tamil Nadu. If 75% of the RECs are solar, group captive power plants can be viable in the following additional states: Bihar Kerala and West Bengal.

If up to 25% of RECs are sold, group captive power plants can be viable in the following states: Delhi and Maharashtra.

---------------------6 http://bit.ly/mVPsSl
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Table 5-1: State-wise viability of group captive solar projects in India

Assumption on RECs being sold State Type of consumer for whom solar power through open access is viable Viable solar PPA tariff that can be offered to consumers (INR/kWh) 7.15 8.73 Only commercial 9.43 Existing tariff being paid by the consumers (INR/ kWh) Difference between existing tariff and viable solar PPA tariff (INR/kWh)

RECs not being availed (concessional charges for open access considered, where applicable) 25% of the RECs are being sold at floor prices

With AD

Delhi Maharashtra Maharashtra

7.5 9.83 9.83

0.35 1.1 0.4

Without AD

Maharashtra With AD Delhi Delhi Maharashtra Andhra Pradesh Karnataka Maharashtra 50% of the RECs are being sold at floor prices With AD Punjab Rajasthan Tamil Nadu Delhi Maharashtra Andhra Without AD Pradesh Delhi
Source: BRIDGE TO INDIA

Only commercial Industrial & commercial Only commercial

7.91 6.33 7.04 8.61 5.6 6.36 7.09 6.04 5.93 6.51

9.83 6.6 (industrial), 7.5 (commercial) 7.5 9.83 6.28 7.00 9.83 6.58 6.25 7.00 6.6 (industrial), 7.5 (commercial) 9.83 6.28 6.6 (industrial), 7.5 (commercial)

1.92 0.27 (industrial), 1.17 (commercial) 0.46 1.22 0.68 0.64 2.74 0.54 0.32 0.49
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Without AD

Only commercial

Industrial & commercial Only commercial Industrial & commercial

5.51 7.79 6.27 6.22

1.09 (industrial), 1.99 (commercial) 2.04 0.01 0.38 (industrial), 1.28 (commercial)

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Assumption on RECs being sold

State State

Type of consumer for whom solar power through open access is viable Industrial & commercial

Viable solar PPA tariff that can be offered to consumers (INR/kWh) 4.78

Existing tariff being paid by the consumers (INR/ kWh)

Difference between existing tariff and viable solar PPA tariff (INR/kWh)

Andhra Pradesh Bihar Delhi Maharashtra Punjab With AD Rajasthan Karnataka 75% of the RECs are being sold at floor prices Kerala Tamil Nadu West Bengal Haryana Uttar Pradesh Delhi Punjab

5.3 (industrial), 6.28 (commercial) 5.5 (industrial), 5.5(commercial) 6.6 (industrial), 7.5 (commercial)

0.52 (industrial), 1.5 (commercial) 0.23 (industrial), 0.23 (commercial) 1.91 (industrial), 2.81 (commercial)

5.27 4.69 6.27 5.22 5.11 Only commercial 5.54 6.04 5.69 5.87 5.54 5.63 Industrial & commercial 5.4 5.89

6.33 (industrial), 0.06 (industrial), 9.83(commercial) 3.56 (commercial) 6.33(industrial) , 1.11 (industrial), 6.58(commercial) 1.36(commercial) 5.50 (industrial), 0.39 (industrial), 6.25(commercial) 1.14 (commercial) 7.0 6.5 7.0 6.2 5.85 6.0 6.6 (industrial) , 7.5 (commercial) 6.33 (industrial), 6.58 (commercial) 7.0 9.83 7.0 6.28 1.46 0.46 1.31 0.33 0.31 0.37 1.2 (industrial), 2.1 (commercial) 0.44(industrial), 0.69 (commercial)
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Without AD Karnataka Maharashtra Tamil Nadu Andhra Pradesh

Source: BRIDGE TO INDIA

Only commercial

6.25 6.97 5.77 5.45

0.75 2.86 1.23 0.83

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5.7 RISKS
Open access charges are subject to change every year. In such a scenario, assessing the financial viability of a long term project always has an element of uncertainty attached.
Apart from all the generic risks associated with solar power projects (refer to our report called, Bankability and Debt Financing for Solar Projects in India (April 2013) for details)7, there are some risks specific to the group captive model. These risks can be categorized as follows:

BRIDGE TO INDIA believes that the overall deficit in power availability will continue to increase and that tariffs will continue to rise over the medium and long-term. However, structural shifts may occur on specific locations. iii B ankability of the off-taker In case one of the power consumer stops buying power from the group captive project and no other consumer is willing to step in, this amount of power might have to be sold to the power distribution company at the Average Pooled Purchase Cost (APPC) of power, probably at a lower price. Some of the projected revenue would be lost.

Even though the RPO mechanism itself might pick up, if states are serious about implementation, the REC market will still remain subdued as the difference in the cost of solar power and the cost of an REC

i A nnual revision of open access charges and rules Open access charges and rules are often unclear. On top of this, they are subject to change every year. In such a scenario, assessing the financial viability of a long term project always has an element of uncertainty attached. The risk is heightened in a scenario where iv Risk associated with RECs The utilities feel threatened because REC market in India has not their high paying customers move developed as hoped. Even though to other power procurement the RPO mechanism itself might sources. We have already seen pick up, if states are serious about utilities in the US complaining implementation, the REC market about the impact of solar power on will still remain subdued as the their business. In the same manner, difference in the cost of solar power the threat perception among Indian and the cost of an REC (essentially utilities may also increase, which solar without power) has may result in higher open access increased significantly. While solar charges. This risk might be reduced power is now available for thirdby the overall policy support for party sale at ` 7 8/kWh (0.09 solar power and the power deficit in 0.10/kWh, $0.12 0.13 /kWh), India. the base price of an REC, where the obligated entity does not even ii Structural changes in the power get the power component is priced supply More secure availability of at a minimum rate of ` 9.3/kWh power can be a significant driver (0.12/kWh, $0.16/kWh). Moreover, for consumers opting for power under current regulations, most purchases from group captive REC demand is still expected only plants. The South Indian states towards the end of the financial of Andhra Pradesh and Tamil year, when some obligated entities Nadu, for instance, have very high are looking to meet their RPOs for power deficits. As a result, the the given year. The cash-flow for the cost of power on the open access project has to be managed carefully, market regularly reaches as high especially with respect to a debt as ` 8/kWh. However, structural repayment plan. Developers should, changes such as the connection of therefore, only assume a limited the southern grid to the northern sale of RECs in their financial grid, which is expected soon, can calculations and within that too, the significantly alter the demand revenue should be expected to be and supply situation and thus the largely concentrated towards the prices on the open access market. end of the financial year.
---------------------7 http://bridgetoindia.com/our-reports/india-solar-decision-briefs#
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5.8 CONCLUSION
Currently, the sale of power through the group captive and open access mechanism is viable without RECs only in Delhi and Maharashtra.
Based on the above analysis, BRIDGE TO INDIA thinks that the group captive model is viable in some states with/without RECs. Even in the states where it is viable, it might not be the best option for the power consumer as solar power would still need to compete with other available sources of power. The key benefit of the group captive model is that it provides a good way for solar project developers to reach the needed scale, it helps reduce the PPA risk by having multiple off-takers and it also helps reduce legal risks as the asset can be located outside of the power consumers premises, vis-vis a single customer captive project, where the project is typically located at the customers premises. In a number of states, a group captive plant might be able to sell solar power at tariffs of around ` 5.50 7.00/ kWh (0.06 0.07/kWh, $0.09 0.12/ kWh),up to 50% of the RECs can be sold. Currently, the sale of power through the group captive and open access mechanism is viable without RECs only in Delhi and Maharashtra. Until now, none of the solar projects have taken group captive route. States such as Andhra Pradesh, Karnataka, Punjab, Rajasthan and Tamil Nadu would become viable, if 50% of the RECs can be sold at the floor price till 2017.

open access charges. We expect this trend will continue. If CERC allows RECs to be availed along with these concessional charges, as Andhra Pradesh has petitioned it to , the equation would change considerably in favor of the group captive model over co-located projects. ii I n the above analysis, no escalation has been considered. However, most industry observers believe that power prices in India will continue to rise. In the wake of debt-structuring plans for the state distribution companies, drastic upward tariff revisions can be expected. We have already seen upward tariff revisions in excess of 30% in states such as Tamil Nadu and Uttar Pradesh over the last year alone. If a developer can convince power consumers to agree to an annual increment in the price of solar power even lower tariffs can be offered to the consumers.

The key to the short to medium term success for such projects is regulatory support in terms of lower open access charges for solar power plants.

Several projects for third-party sale of power are currently being planned across India under the group captive model. Judging by the tariffs being offered, many of these projects are expected to be considering an overly optimistic scenario for the revenue through RECs. We expect that such projects will not see the light of the day as it will be extremely difficult for them to arrange debt. Whether or not group captive projects become mainstream in India is still an open question. Compared to the projects on the power There are several scenarios with a consumers location, currently, the slight deviation from the above analysis open access charges are too high to that can help this model become a provide for any real benefit of scale. more viable business proposition. The key to the short to medium term These are as follows: success for such projects is regulatory support in terms of lower open access i An encouraging development is charges for solar power plants. Most that open access charges are new policies, are already taking the being waived off under most new steps in this right direction. If more solar policies. We have already states follow this trend, we can expect noted this in Andhra Pradesh to see an increased viability for the and Uttar Pradesh, where open group captive model in the future. access charges have been waived off entirely. Madhya Pradesh and Punjab also offer concessional

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6. ANNEXURE

6.1 GLOSSARY OF TERMS

AD Accelerated Depreciation ADD- Anti-dumping duties APPC Average Pooled Purchase Cost CAPEX Capital Expenditure CERC Central Electricity Regulatory Commission CSP Concentrated Solar Power CUF Capacity Utilization Factor DCR- Docmestic Content Requirement DISCOM State Distribution Company EPC Engineering, Procurement and Construction FiT Feed-in-Tariff IPP Independent Power Producers LoI Letter of Intent LTOA Long Term Open Access MTOA Medium Term Open Access MNRE Ministry of New and Renewable Energy NHPC National Hydro Power Corporation NSM Jawaharlal Nehru National Solar Mission O&M Operation and Maintenance OPEX Operational Expense PoC Point of Connection PPA Power Purchase Agreement PV Photovoltaic REC Renewable Energy Certificate RfS Request for Selection RLDC Regional Load Dispatch Centre RPO Renewable Purchase Obligation SERC State Energy Regulatory Commission SLDC Regional Load Dispatch Centre SPV Special Purpose Vehicle STOA Short Term Open Access SECI Solar Energy Corporation of India

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BRIDGE TO INDIA is a consulting company with an entrepreneurial approach based in New Delhi, Munich and Hamburg. Founded in 2008, the company focuses on renewable energy technologies in the Indian market. BRIDGE TO INDIA offers market intelligence, strategic consulting and project development services to Indian and international investors, companies and institutions. Through customized solutions for its clients, BRIDGE TO INDIA contributes to a sustainable world by implementing the latest technological and systemic innovations where their impact is the highest.

Contact contact@bridgetoindia.com www.bridgetoindia.com Follow us on facebook.com/ bridgetoindia www.bridgetoindia.com/blog

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