Developing Solar Power Lessons from India’s National Solar Mission

©

T

7

REPORT

2012

© A.

MANN

A / W

WF-IN

DIA

2

AUTHORManisha Gulati

ACKNOWLEDGEMENTS The author is grateful to Mr Jeffrey Robile and to Mr Saliem Fakir, WWF South Africa, for insights into the development of solar parks in South Africa. These discussions helped in identifying issues of interest for South Africa from India’s National Solar Mission (NSM).

The preparation of this report has greatly benefitted from the interactions with several experts in India who shared their knowledge of the Indian solar power sector and discussed the status of NSM. Those who can be named are Ms Anjali Garg, IFC; Mr Balawant Joshi, the owner and director of ABPS Infrastructure Advisory Services; Dr Harish Ahuja, president of strategy at Moser Baer; and Ms Namrata Mukherjee, manager at Mercados. There are several other experts, working in public sector organizations associated with renewable energy in India and closely associated with the NSM, who wish to remain anonymous. Some experts working with developers of solar projects and financial institutions also requested anonymity. Their insights have been valuable in the preparation of this report. Special thanks to Mr Abhishek Nath of WWF’s India office for reviewing the report for its factual correctness and providing insights into up-to-date developments regarding the NSM. Finally, the author is grateful to colleagues from different WWF offices who reviewed this report and to Laura Tyrer of WWF South Africa and David le Page for editing it.

This report is an initiative of WWF South Africa, based on information available to the author. It does not reflect the formal position of WWF South Africa.

3

TABLE OF CONTENTS 1 Introduction

2 Objectives of this report

3 The context for solar power in India

3.1 Impetus for solar power

3.2 Institutional context for solar power in India

4. Salient features of India’s NSM

5. Overview of development and grid-connected solar power under India’s NSM

6. Procurement of projects under NSM

6.1 Procurement method

6.2 Reason for adopting reverse bidding mechanism

6.3 The first round of bidding

6.3.1 The outcome of bidding

6.3.2 Current status of project

6.3.3 Effectiveness of bidding mechanism and experience so far

- Irrational bids

- Award of contracts to inexperienced entities

- Financial closure of projects

- Project delays and quality

- Financial gains for developers

6.4 Second round of bidding

7. Financing of projects

7.1 Government’s payment security mechanism for NSM projects

7.1.1 Features of GOI’s payment security mechanism

7.2 Multilateral and international financing for NSM projects

7.2.1 ADB’s solar partial credit guarantee facility

7.2.2 International Finance Corporation

7.2.3 Ex-Im Bank of the US

8. Promotion of domestic industry

8.1 Outcome of domestic content policy

8.2 Concerns over policy

8.3 Supply side concerns from policy

9. Lessons and conclusions

9.1 General

9.2 Competition and private sector participation

9.3 Reverse auctios

9.4 Approach to technology

9.5 Project bankability

9.6 Promotion of domestic solar industry

6

7

8

8

9

14

17

20

20

21

21

21

23

24

24

26

27

27

27

28

30

31

32

34

34

36

37

38

39

41

42

42

43

44

44

45

46

46

4

Abbreviations ADB Asian Development Banka-Si Amorphous siliconCAGR Compound annual growth rateCEA Central Electricity AuthorityCERC Central Electricity Regulatory Commission crore Ten million (South Asian numbering, refers to rupees in this document) CSP/T Concentrated solar power/thermaldiscom Distribution company DNI Direct normal incidence (of solar radiation)DoT Department of TelecommunicationsEBITDA Earnings before interest, taxes, depreciation and amortizationEPC Export Promotion CouncilEU European UnionFIT Feed-in tariff GATT General Agreement on Trade and TariffsGBI Generation-based incentivesGETCO Gujarat Energy Transmission Corporation GHI Global horizontal incidence GoI Government of India GPCL Gujarat Power Corporation Limited GW GigawattIEC International Electrotechnical CommissionIFC International Finance CorporationIDFC Infrastructure Development Finance Corporation INR Indian rupeeIPP Independent power producerkWh Kilowatt-hourlakh 100,000 (South Asian numbering)KV Kilo voltkWp Kilowatt-peak MoU Memorandum of understandingMNRE Ministry of New and Renewable Energy Mtoe Million tonnes of oil equivalentMW MegawattNAPCC National Action Plan on Climate ChangeNSM Jawaharlal Nehru National Solar Mission NTPC National Thermal Power Corporation NVVN NTPC Vidyut Vyapar Nigam, the agency designated by the Government of India for procuring the solar power by entering into a PPA with solar power generation project developers who will be setting up solar projects under the NSM before March 2013 and who are connected to the grid at a voltage level of 33 kV and above.

5

PCG Partial credit guarantee PPA Power purchase agreementPSA Power sale agreementsPSM Payment security mechanismPSS Payment security scheme PV (solar) photovoltaicR&D Research and development RE Renewable energyREFIT Renewable energy feed-in tariffRETs RE technologies RfS Request for Selection RPO Renewable (energy) purchase obligationRREC Rajasthan Renewable Energy Corporation SEI Solar Energy Initiative SERC State electricity regulatory commission SPD Solar power developerSPSA Solar Payment Security Account SPV Special purpose vehicle STC Standard Test ConditionsTRIMS Trade-related investment measures UMPP Ultra Mega Power Projects WTO World Trade Organisation

6

1. INTRODUCTION South Africa is setting up a 5 GW solar park to help provide the country with clean and secure energy and to meet its growing demand for electricity. A solar park is a concentrated zone of solar development that includes thousands of MWs of generation capacity delivering to the grid via a single connection. One or more pieces of land in close proximity are designated and pre-permitted as a solar park where multiple power producers are pre-permitted to develop solar plants in a clustered fashion and on a predictable timeline, sharing common transmission and infrastructure (Robile, 2011).

Globally, it is believed that solar parks can streamline the development timeline for solar power projects, with government agencies undertaking land acquisition and obtaining necessary permits as well as providing common infrastructure needed to set up such plants. The latter also serves to reduce costs, particularly for the private sector, since it addresses issues faced by stand-alone projects. Further, solar parks can significantly reduce the cost of electricity from solar power due to economies of scale, use of domestically manufactured components and removal of regulatory hurdles.

The first phase of development of the South African solar park involves 1 GW by 2016 when Eskom will be ready with the power evacuation facility. Having conducted a pre-feasibility study and an indicative master plan, the government and its agencies are now conducting a full feasibility study that is credible to the global solar industry and meets all Cabinet’s criteria for approval of the concept if it is viable.

In its endeavour to design an optimal policy and regulatory framework that helps achieve multiple objectives, such as making solar power more affordable, attracting private sector investment, and fulfilling social and economic objectives of the country, South Africa can draw lessons from other countries that have sought to develop solar power on a large scale.

One such country is India. The first phase of India’s 22 GW solar power development programme, known as the Jawaharlal Nehru National Solar Mission (NSM), spanning 2010–13, aims to ramp up capacity of grid-connected solar power generation to 1 GW with private sector participation. During 2010–11, grid-connected solar power projects of 800 MW were awarded to the private sector for implementation, of which 620 MW were new projects and 84 MW were existing projects allowed to move under the NSM policy framework. Of the 800 MW projects, 234were expected to be commissioned by January 2012. During 2011–12, projects worth 350 MW were bid out. Projects were selected through a reverse bidding mechanism that required developers to bid discounts on the feed-in tariff (FIT) for solar power. At the same time, India is seeking to develop a solar industrial base through the NSM.

Given the similarities of scale of development, reliance on the private sector for project development and management, as well as the pace of developments in India, India’s experience offers lessons for South Africa. WWF is aware that it is still too early to draw definite conclusions from India’s experience or to comment on the effectiveness or success of India’s approach. But it is possible to look at the experience and trends that have emerged in India to provide some pointers to South Africa on how to structure its policy and regulatory framework for solar parks.

7

2. OBJECTIVES OF THIS REPORT Several commentaries on India’s NSM exist. Undertaking a simple review of the NSM or its experience would be repetitive and would not fulfil the precise objectives of drawing lessons in the context of South Africa’s solar park programme. Therefore, to make this exercise more meaningful, WWF South Africa spoke to experts related to the solar park programme in South Africa and identified the main areas of interest in the South African context.

These are (i) methods of procurement of solar projects, (ii) availability of finance and experience with financing of projects, and (iii) promotion of domestic industry. Consequently, this report deliberates on these three broad issues related to the grid-connected solar power projects under the first phase of India’s NSM. The overall objective is to understand the extent to which the policy has been successful in attracting the desired investment in solar power, bringing down costs and promoting the domestic solar industry. Besides the NSM, experiences from the states of Gujarat and Rajasthan are discussed. Where possible, experiences from other countries have also been highlighted.

8

3. THE CONTEXT FOR SOLAR POWER IN INDIA 3.1. IMPETUS FOR SOLAR POWERBefore discussing India’s NSM, it would be useful to understand the context and objectives for the pursuit of solar power in India. The development of solar power in India began in the context of addressing climate change while sustaining economic growth under India’s National Action Plan on Climate Change (NAPCC). The NAPCC seeks to guide India to a development path that simultaneously advances economic and environmental objectives.

The underlying objective for the development of solar power in the context of environmentally sustainable growth was that since India gets lots of sunlight, solar technologies would provide for clean generation with practically no form of emissions at the point of generation (GOI, 2008). It was with this objective that the NSM was announced as an important plank under the NAPCC. At the same time, the NAPCC recognized that solar power could help address other energy challenges, such as energy security and electrification for the energy-poor (see Box 1).

Thus, the fundamental impetus for solar power in India is addressing climate change. Energy security and 100% electrification are considered natural additional benefits that will accrue. Creating industrialization or jobs is neither a driver of solar power development nor a primary objective. But the NSM did make domestic manufacturing a focus of solar power development. A thriving domestic manufacturing base is seen as a key ingredient for making India a solar energy hub and creating the critical mass for a domestic solar industry. Choosing low-cost, high-quality domestic manufacturing rather than imported equipment and technology innovation is critical to driving down costs towards grid parity for solar. In terms of job creation, the deployment of solar systems in India being quite comparable to that in the rest of the world by 2022, the benefit of such large-scale deployment should manifest in the form of indigenous expertise, skill development and employment creation.

9

India consumed 600 Mtoe of primary energy in 2007. Coal represented the largest primary energy source, with a share of 40%. Despite a doubling of domestic coal production between 2000 and 2007, imports took an increasing share of total primary coal supply, from 9% in 2000 to 14% in 2007. The power sector in India was responsible for 36% of primary energy consumption in 2007, a share comparable to the world average of 35%.

The power sector is highly dependent on coal, which accounts for 56% of the installed power capacity. The sector consumes more than 74% of the coal produced in India. However, the share of coal is much higher in the actual generation mix. During April–December 2011, coal- and lignite-fired plants accounted for 79% of total power generation. Capacity addition has been slow, with actual capacity addition being an average of 61% of target between 2002–03 and 2010–11. While coal is an important indigenous energy resource, the coal quality is much lower than elsewhere.

The country has started seeing coal shortages for a variety of reasons. Demand for coal grew at a compound annual growth rate (CAGR) of 7–8% between 2006–07 and 2011–12, as against the production growth of 5% per annum during the same period. Coal imports by India for the power sector are expected to more than double between 2011–12 and 2016–17. This would be higher in future with the falling quality of domestic coal and planned future coal power capacity addition – over 70% of the capacity

addition planned between 2012–13 to 2017–18 is coal-based.

Given that India’s economy has been growing rapidly over the past decade, the above-mentioned problems on the supply side have led to demand consistently outstripping supply. As a result, India has seen substantial energy and peak power shortages. Between 2005–06 and 2009–10, peak deficit was over 12% and energy deficit was over 8.5%. While peak deficit reduced to 8.5% in 2010–11, energy deficit continued to be high at 10%. Some provinces saw shortages of over 20% during this period. Consequently, industries, farmers and households have invested in a substantial amount of equipment and capital in the form of captive power plants, generators, inverters, and voltage stabilizers to address issues of supply and its quality. The situation becomes worse if India’s electrification conditions are taken into account. According to the 2001 census, only 43.52% of India’s rural households were electrified. Only 60 million of the 138 million households in the country use electricity as the primary source of lighting.

Source: Remme, Trudeau, Graczyk and Taylor 2011; Central Electricity Authority India; Author

BOX 1India’s electricity challenges

10

3.2. INSTITUTIONAL CONTEXT FOR SOLAR POWER IN INDIAElectricity, in India, is under the jurisdiction of both the federal (national) and state (provincial) governments. This means that both federal and state governments have powers to legislate on the subject (except for nuclear power, which is in the domain of the federal government alone), with the federal government’s legislations prevailing in the event of a conflict between the laws of the state and those of federal government. The federal government is responsible for overall policy making, planning and co-ordination of the sector, and joint management of the electricity sector. It exercises these functions through the Ministry of Power, as well as through central agencies like the Planning Commission and Central Electricity Authority (CEA).

The state governments are responsible for power development plans within the province, including all policy decisions concerning power development within the state, as well as power tariffs at the retail end. However, state governments are under no obligation to develop or align their policies with those of the federal government, as long as they do not override the overall legislation ruling the electricity sector in the country. Regulatory aspects of the sector involving more than one state are addressed by the Central Electricity Regulatory Commission (CERC), while state electricity regulatory commissions (SERCs) take care of the same at the state level. Renewable energy (RE) is also governed by the same institutional structure.

There is no overarching RE law in India. Policies, which are not legal requirements, have been issued as and when necessary to facilitate the growth of specific RE technologies (RETs) (Gulati and Tiwari, 2011). The governing legislation for the electricity sector – the Electricity Act 2003 and the National Tariff Policy 2005 – does establish the framework for development of RE.

However, in the absence of an overarching RE law, there are separate initiatives by the federal and state governments. For instance, the NSM is an initiative of the federal government. State governments often have their own policies for different RETs or implement federal policies and guidelines for specific RETs to different degrees. They are under no obligation to co-ordinate their approaches, prices or even industrialization policies related to RE with the federal government. This is because they can fund the costs associated with their policies and incentives from their own revenue base, and are not dependent on the federal government for funds. However, the dual responsibility between the federal and state governments sometimes slows the development of RE

11

The development of RE in India is complicated by the fact that RE falls under the purview of both the federal and state governments. First, plans or targets laid down by the federal government do not always materialize, because provincial governments are under no obligation to develop or align their policies for RE with those of the federal government. Second, progress on the ground depends mainly on state-level policies and regulatory frameworks on FITs and renewable (energy) purchase obligations (RPOs), evacuation, clearances, open access, and facilitation from state nodal agencies.

Different approaches on these fronts either provide investors with specific pockets of growth by way of the provinces with better policy, regulatory and administrative frameworks, thereby limiting the market for development, or create instability and uncertainty for long-term investment in RE. Further, the lack of co-ordination and co-operation between the federal government, federal government agencies, provincial governments, and provincial nodal agencies entrusted with the development of RE delays and restricts the progress of RE development.

To illustrate, the regulatory framework for RE at the provincial level is determined by the SERCs, which are loosely bound by the national policies and the guidelines of the CERC. This has led to several inadequacies in the development framework for RE across states. A review of the RPOs and related regulations issued over the years by different SERCs indicates significant differences in applicability and detail. A 2010 review indicated that 17 out of 28 states had enacted RPO regulations. In 2011, the number reached 20.

As far as the applicability of RPOs is concerned, a few states have mandated RPOs on open-access consumers

as well as for captive consumers. But the large majority restricts RPOs only to the electricity distribution companies (discoms). In terms of details, RPO regulations issued by different SERCs vary from specifying only the RPO targets to clearly spelling out implementation procedures and the compliance framework. Some SERCs even specified a maximum cap for RE-based procurement. Only two SERCs specified explicit penalties for non-compliance of RPOs.

On the FIT front, the variation in FITs determined by SERCs is substantial. Not only are there differences in the manner and norms for FIT determination among SERCs, but also in the extent to which these norms are explained. In some cases, these norms are not specified at all while in others, the tariff of other RE sources in the state has been adopted as a reference point. Further, many SERCs have determined FITs for limited periods without indicating the regulatory framework beyond such periods. This not only causes confusion among developers but also gives rise to regulatory uncertainty, affecting the bankability of projects.

The CERC’s regulations are expected to serve as benchmarks and reference tariffs for SERCs, and the model regulations and approaches determined by the Forum of Regulators (a body set up under the Electricity Act to harmonize the regulation of the electricity sector in India) are expected to bring about uniformity in the approach adopted by SERCs for the development of RE. But in practice, the SERCs are not bound by these guidelines or regulations. The dichotomy of approaches at the federal and provincial levels and between provinces may continue.

Source: Garg, Gulati and Tiwari (2010) and Gulati and Tiwari (2011), Author

BOX 2Impact of dual responsibility of federal and provincial governments on development of RE in India

12

BOX 3Approaches for solar power development in the states of Gujarat and Rajasthan

The case for solar power development is similar; there are different approaches for promoting solar power at the federal and state levels. Several state governments, such as those in Gujarat and Rajasthan, created solar power policies even before the NSM was announced. Post NSM, these and some other provinces have continued their own solar power-promoting policies, which are updated from time to time. The FITs determined by the SERCs and offered under these policies are very different from the FITs determined by CERC for the NSM.

In some states, the approach adopted for solar power development is completely different from that adopted under the NSM. In others, the policies provide a mix of approaches and have incorporated some aspects of the NSM (see Box 3). Even with their different approaches, the NSM and state policies are functioning in parallel and independently, without any interference from either the federal or state authorities.

Gujarat announced its solar power policy in 2009, a year before the NSM. The policy ends in March 2014. It targets a total of 500 MW of capacity, with the minimum capacity of a plant being 5 MW. The FIT provided under this policy is presented in Table 1. The policy provides two routes for setting up a solar project: (i) developers identify the location for setting up the project, and (ii) developers set up projects with the solar parks planned by the provincial government. These parks would involve power generation as well as manufacturing of solar components and would be set up on government wastelands.

Table 1: FIT under the solar power policy of the state of Gujarat, India (in INR/kWh)

PV Solar Thermal

Projects commissioned before December 2010 Years 1–12: 13Years 13–25: 3

Years 1–12: 10Years 13–25: 3

Projects commissioned before March 2014 Years 1–12: 12Years 13–25: 3

Years 1–12: 9Years 13–25: 3

Note: INR = Indian rupee; kWh = kilowatt-hour; PV = photovoltaic

Allotment of projects under both routes is on a first-come, first-served basis, though developers are required to meet certain minimum financial and technical criteria. In the case of solar parks, the provincial government-owned agency, Gujarat Power Corporation Limited (GPCL), has been made responsible for developing solar parks and leasing land therein to the developers. The provincial government-owned transmission utility, Gujarat Energy Transmission Corporation (GETCO), has the mandate to develop the transmission evacuation infrastructure from the identified interconnection points with the developers. The developers are required to fund the connection from the plant to the interconnection

point. The first development under way at the solar park is intended to be developed in two phases. Phase 1 comprises 590 MW of solar power generation facility and phase 2 has 500 MW of solar power generation, research and development (R&D) and manufacturing facilities.

In the first round of project allotments in the state, no timelines or guarantees were required from developers to sign power purchase agreements (PPAs) after allotment of projects. As a result, many developers who had been allotted projects waited for the finalization of the NSM before signing PPAs to see the FITs determined therein. Later, several developers moved to the NSM under the

13

migration scheme. Only 55% of the total projects allotted by the state in the first round eventually signed PPAs. With bidding for new projects under the NSM leading to low tariffs and the Gujarat policy offering higher front end FIT, the latter became more attractive from the point of debt servicing. This, coupled with policy amendments requiring developers to give a deposit that would be encashed in the event of failure to sign PPAs, resulted in 98% of all projects signing PPAs in the second phase of allotment of solar projects in Gujarat.

As far as project execution is concerned, land has been allotted for 176 MW so far. However, the land has not actually been leased or handed over to developers. It has only been earmarked. Most of the area remains undeveloped. The laying down of underground transmission lines in the solar park is also facing delays as GETCO does not have the expertise for this. Given these execution challenges from the state government’s end, some developers have obtained guarantees from the state government against possible penalties due to delays in project execution.

Bankability of projects remains a concern even in Gujarat, given the inadequate track record of developers and lack of performance data. Further, there is a huge resale market for PPAs awarded in the first round, with developers trying to sell projects at higher prices to international investors and developers. Besides slowing down project development, this is increasing the cost of project development and threatening to make projects unviable. In the second round, the state policy was amended to disallow changes in shareholding patterns for up to five years (except for listed companies) and to allow technical partners with equity contributions up to 49% with prior state government approval.

Finally, the allotment of projects in Gujarat without a competitive bidding process has been met with criticism. Given the low tariffs that have emerged from the bids under the NSM, there has been criticism that Gujarat is paying higher tariffs and consequently high subsidies for solar power (Panchbuta, 2011).

Rajasthan is another province endowed with large-scale solar power potential that has put in place a framework for solar power development. The policy has identified several routes for the development of solar power. The main ones are discussed below.

Bundling of solar power akin to NSMThe province proposes to develop 50 MW of PV and 50 MW of solar thermal capacity through a tariff-based competitive bidding process based on the concept of bundling solar power with equivalent capacity of conventional power. The successful bidders would set up solar plants in the province and supply equivalent amounts of power from conventional power plants located anywhere in India. The total power supplied would be purchased by the discoms in the province. The policy does not lay down the details of the competitive bidding process to be adopted

for this purpose and it is understood that this policy has yet to be developed.

Setting up plants for direct sale of power to discoms in the provinceThe policy provides for setting up solar projects for direct sale to the discoms in the province. The maximum capacity planned under this route is 200 MW up to 2013 and 400 MW between 2013–17. The capacity is proposed to be distributed equally between PV and solar thermal. Projects will be selected through the tariff-based competitive bidding process.

Promotion of manufacturing facilities Rajasthan is giving special treatment to solar power developers (SPDs) who also wish to set up solar PV manufacturing units in the state. It has set aside a specific target of 200 MW up to 2013 for such developers. To qualify under this scheme, project developers must establish solar PV manufacturing plants (thin film technology modules or crystalline technology modules involving processing from wafers stage) of minimum 25 MW per annum capacity. Further, the developers are required to source PV modules for their plants from these very manufacturing units. The selection of developers under this scheme would be through tariff-based competitive bidding.

Projects for captive use/third party salesThe province would support solar projects of unlimited capacity for captive use, third party sale or sale to other provinces for promotion of investment in the province.

Solar parksRajasthan proposes to develop solar parks of more than 1,000 MW capacity in specific areas. These parks would consist of various zones: solar power plants, manufacturing zones, R&D, and training centres. The state government agency, Rajasthan Renewable Energy Corporation (RREC), has been appointed as the nodal agency for this purpose. RREC will form a special purpose vehicle (SPV) in the form of a subsidiary company for the development of infrastructure and the management of the solar park. The SPV will formulate the rules for land allotment and sharing of development costs by power producers and manufacturers. It will also develop the initial infrastructure from funds allocated by RREC, which will be subsequently recouped from the solar power producers located in the solar parks by levying development charges. RREC is currently developing an interim master plan for the first phase. The provincial government will evolve a separate special package of additional fiscal incentives for solar industries in the solar park. Source: Government of Gujarat 2009 and 2010, Government of Rajasthan 2011, Patel 2011, Anand 2011

14

4. SALIENT FEATURES OF INDIA’S NSM The NSM, formally launched in January 2010, sets a target of 22 GW of solar power capacity by 2022, with individual targets for grid-connected and off-grid solar electricity generation, solar lighting systems and solar thermal collectors. More specifically, the NSM envisages (i) 20 GW of grid-connected installed solar capacity, comprising large PV and solar thermal power plants and smaller rooftop PV systems, (ii) 2 GW of off-grid distributed solar plants, (iii) 20 million square metres of solar collectors for low temperature applications, and (iv) 20 million solar lighting systems for rural areas. The NSM has two additional goals: (i) to promote R&D and develop trained human resources for the solar industry, and (ii) expand the scope and coverage of earlier incentives for industries to set up PV manufacturing in India.

The NSM has been divided into three phases and the Government of India (GoI) has sanctioned targets for the first phase (see Table 2). The targets for the other two phases are indicative – to be fixed based on the achievements of Phase I, reduction in solar energy prices and availability of international finance.

Table 2: Target’s of India’s NSM

Phase 1 2010 - 2013

Phase 2 2013 - 2017

Phase 3 2017 - 2022

Total

Grid-connected solar (MW) 1000 - 2000 3000 - 9000 11000 - 17000 20000Off-grid solar 200 800 1000 2000Solar thermal collectors (million m2) 7 8 5 20Solar lighting systems (million) No three part targets 20

Source: GoI 2010a

One of the key features of the NSM is that it is technology neutral. The stated reason for this approach to technology is that market conditions should be allowed to determine technology winners. Further, a technology-neutral approach would allow benefits of technological innovations to accrue. Finally, India is also keen to develop solar thermal for uses other than power generation. The experience with concentrated solar power (CSP) projects getting operationalized under the NSM would be useful from this perspective.

While the above reasons are valid and cannot be disputed, given that India had no substantial experience in solar projects when NSM was announced, the fact remains that policy makers had no capability to decide the technology that would be best suited to India. No established studies were undertaken to determine which technology could work in the Indian conditions. The country had only annual information of reasonable accuracy on solar radiation. Seasonal and monthly data on direct normal incidence (DNI) of solar radiation, with accurately established monthly, daily and hourly variations – a prerequisite for project feasibility, design and even technology choice – were not available. Given this uncertainty, the government thought it best to let the developer decide the technology and assume the associated risks. Another factor that, to some extent, prompted the technology-neutral approach of the NSM was the prevailing political economy in India. When the NSM was formulated and announced, India was coming to grips with issues of corruption in the allotment of 2G spectrum in the telecom sector. The 2G spectrum

15

corruption scandal involved GoI officials illegally undercharging mobile telephony companies for frequency allocation licences, which they used to create 2G subscriptions for cell phones. Licences were awarded on a first-come, first-served basis, which involved procedural irregularities. It was alleged that the undercharging of spectrum by eliminating market determination of prices through competitive prices had resulted in severe losses to the federal exchequer. The Central Vigilance Commission and the Central Bureau of Investigation were involved in the investigation, with the charges being filed against ‘unknown officers of the Department of Telecommunications (DoT), GoI and unknown private persons/companies’. The offices of DoT were also raided.

With these events unfolding, the underlying idea in the NSM was to avoid bias and prevent any future charges of favouritism towards any technology or business lobby. In India, there is a strong lobby for solar PV technology, since PV manufacturing had a base in India well before the NSM. At the same time, given the market potential in India, international players in the solar thermal segment were trying to build a base in India. Therefore, by adopting a technology-neutral approach, the GoI tried to maintain a non-partisan and non-political approach to solar power development. The pros and cons of this approach are discussed in Box 4.

16

India’s NSM is intended to be technology neutral, allowing technological innovation and market conditions to determine technology winners in solar power. In theory, the case for technology neutrality is strongest in the presence of information asymmetry (between the regulator and the regulated) and when there is potential for technology lock-in. The danger is that governments will pick technologies that lock the economy into a trajectory which is unnecessarily costly. In practice, these reasons make technology neutrality the right approach in the Indian context. First, at the time of formulation of the NSM, the solar power segment in India was characterized by information asymmetry, with policy makers having no way to decide the technology that would be best suited to India. Second, the outcome of the first phase of the NSM would decide the approach for the next two phases. In the event that policy makers made the wrong technology choices, India would be locked in with those technologies for several years.

Therefore, the technology-neutral approach allows India to minimize the risk of lock-in for technologies which ultimately prove to be more costly or less efficient than alternatives would have been. It allows the country to know which technologies really have the capacity to deliver and which do not. More specifically, leaving

the choice of technologies to developers, subject to performance requirements and legal constraints, can provide valuable information on which technologies are most cost-effective and appropriate in India’s context, given natural endowments, load profile and risk profile. The approach also offers flexibility in terms of technology deployment, enabling rapid response to changing market trends.

However, the technology-neutral approach also has drawbacks. The biggest risk with such an approach is that it may result in the adoption of technologies that are obsolete or breaking down. Further, given the trade-off in cost and efficiency (see Table 4) of different solar technologies, it is possible that developers will opt for technologies with low efficiency in order to be cost-competitive. A specific drawback in the case of India is that in the absence of adequate information of solar resources on regional and site-specific locations for monthly, daily and hourly variations, treating all technologies alike may lead to the selection of wrong technologies

Source: Author

BOX 4Is India right in choosing a technology-neutral approach for solar power under the NSM?

17

5. OVERVIEW OF DEVELOPMENT OF GRID-CONNECTED SOLAR POWER UNDER INDIA’S NSM In the first phase of the NSM, India adopted a mechanism of bundling solar power with thermal power to improve the affordability of solar power. Under this mechanism, SPDs would enter into PPAs with National Thermal Power Corporation (NTPC) Vidyut Vyapar Nigam (NVVN), a wholly owned power trading subsidiary of NTPC. For each MW of solar power procured by NVVN under a PPA, it would be allocated an equivalent amount of capacity from the unallocated thermal power produced by the NTPC (see Figure 1). Thus, NVVN would procure power from solar projects set up under the NSM by entering into a PPA with them and selling bundled power to distribution utilities.

This bundled power would be procured by and sold to discoms at tariffs determined by the CERC. Besides the tariff for power procurement, discoms would have to pay a facilitation charge to NVVN. Since the price of bundled solar and thermal power would be competitive with the price of electricity purchased through the power market, discoms would be willing to buy this bundled power (see Figure 2). On the face of it, this seems to be a good solution. By purchasing this bundled power, discoms would get thermal power to meet some of the power shortage they faced. Solar plants participating under the scheme would have to be connected to transmission substations at 33 kilo volt (kV) and above.

Figure 1: Bundling mechanism for sale of solar power under India’s NSM

Note: Figure for illustrative purposes onlySource: Gulati 2010

Solar Power Developer NTPC Unallocated Power

NVVN

aX kWhX kwh

USD 0.047/unitPV: USD 0.338/unitCSP: USD 0.289/unit

UTILITY

Price of bundled power or weighted pricePV: (0.338X + 0.89X)/5X= USD 0.096/unitCSP: (0.289X + 0.189X)/5X= USD 0.105/unit

Sale price off power given ratio ofPV to CSP is 50:50 = USD 0.100/unit

18

In keeping with the technology-neutral approach of the NSM, projects under this scheme are selected in a manner that provides for the equal deployment of both PV and thermal projects in MW terms. Within these two broad technology groups, the selection of projects would be technology neutral. Existing grid-connected projects (i.e. developers who had already initiated the process of setting up solar power plants and had made arrangements for sale of power to discoms) were also allowed to move under the NSM, subject to fulfilment of the following key criteria:- Clear title and possession of land at the benchmark laid down by the government- Approval from state transmission utilities for evacuating power to the grid at 33 kV and above- Confirmation from concerned provinces/discoms for purchase of all the power from the solar power plant through NVVN- Necessary water linkage from the concerned state authorities (for CSP plants)- Letters of comfort for funding the project- Bank guarantee at INR 50 lakh (US$94k) per MW to NVVN, out of which INR 25 lakh (or US$47k) per MW was to be given at the time of signing of memorandum of understanding (MoU) and the balance of INR 25 lakh (or US$47) per MW to be given at the time of signing of a PPA- No change in equity holding permitted from signing of MoU till PPA execution- The PPAs signed by the SPDs with the discoms would remain valid under the NSM.

Figure 2: Comparative costs of solar power in India and unbundled power under NSM (in US$ per kWh)

Source: Gulati 2011, author analysis

19

Table 3: Stage-wise allocation of grid-connected projects under Phase I of NSM (in MW)

FY 2010–11 FY 2011–12

Solar PV Existing projects allowed to migrate to NSM

54

New projects awarded 150 350Total 204 350

Solar thermal Existing projects allowed to migrate to NSM

30

New projects awarded 470Total 500

Source: Government of India 2011, NTPC Vidyut Vyapar Nigam Limited a and b,Author

The allocation of solar PV capacity has been phased, with the allocation being done in two batchesover the two financial years of Phase 1, FY 2010–11 and FY 2011–12. The main reason for this phased capacity allocation is to avoid bunching of large capacities and any difficulties in achieving financial closure, since a large number of projects would be looking for funding in an area new to financial institutions in India. Given their longer gestation period, solar thermal projects covering the entire capacity of 500 MW allowed under the first phase were awarded contracts (see Table 3). The capacity of PV projects was restricted to 5 MW while the capacity of solar thermal projects was set at a minimum of 5 MW and a maximum of 100 MW. The size restriction of 5 MW was determined because of the requirement to connect projects to the transmission substations at 33 kV and above.

20

6. PROCUREMENT OF PROJECTS UNDER NSMSouth Africa proposes to develop the solar park with private sector investment. Key areas of interest for South Africa, therefore, are the method or procedure for award of contracts to private players under the NSM in India, and the outcome and effectiveness of this procurement method.

6.1. PROCUREMENT METHOD RE projects in India are typically set up under the FIT route, wherein utilities enter into PPAs with RE projects at FITs determined by the concerned SERC. The FIT is typically a generic cost plus levelized fixed tariff determ ined by the SERCs. While RETs such as wind and small hydro have seen significant development under this route, solar power did not see similar development given its high capital costs. In 2008, the GoI took up the promotion of solar power by offering production subsidies in the form of generation-based incentives (GBI) on the FIT to a total of 50 MW of solar power during the remaining period of the 11th five-year plan (2007–12). A GBI of US$0.226 per kWh was offered for PV projects and US$0.189 per kWh for solar thermal for 10 years to SPDs with a maximum aggregate capacity of 5 MW.

Under the NSM, the GoI initially intended to use a FIT-based approach wherein it would offer a fixed FIT over 25 years, set by the CERC. However, seeing the large response from the industry, it decided to adopt the competitive bidding route for the selection of projects. Competitive bidding is the preferred mode for development of conventional power projects in India (see Annexure 1). Another factor that played a part in the move towards a competitive approach for selection of solar projects under the NSM was developments in the 2G spectrum corruption scandal. Since the first-come, first-served approach for the award of 2G licences resulted in undervaluation of spectrum resources and loss to the government exchequer, the policy makers associated with the NSM found it prudent to opt for a competitive bidding approach for solar power development. This approach would allow for transparency and would withstand public scrutiny, particularly in view of the subsidy being proposed to make solar power affordable when compared to cheap coal power.

Typically, the competitive bidding approach to development of power projects in India involves award of projects on the basis of lowest bid tariff. In the case of the NSM, instead of relying purely on the lowest tariffs, the GoI adopted the reverse bidding or reverse auction mechanism, an approach that is completely new to the electric power sector in India.

Reverse auction is a method whereby private firms are required to submit bids that stipulate the minimum price or incentive level they would accept for an eligible output. The entity tasked with managing the reverse auction – typically a governmental agency – then reviews all bids and accepts the lowest ones. The appeal of the reverse auction concept is that it is designed to maximize the returns from a given expenditure of scarce public resources, and that it provides continuous incentives for further technology innovation and cost reductions.

As far as the electric power sector is concerned, this internationally common competitive bidding mechanism requires bidders to compete on the basis of price per kWh, with the ceiling price announced in advance. Each winning bidder gets the off-take price at the level that was bid. Accordingly, India’s reverse

21

bidding mechanism involved a two-stage open competitive process where prospective power producers were asked to give discounts on the solar power tariffs set by CERC. The power producers who gave the highest discounts, thereby committing to provide power at the cheapest rates, were selected. The main features of this reverse bidding mechanism are listed in Annexure 2.

6.2. REASON FOR ADOPTING REVERSE BIDDING MECHANISM Conventional economic theory holds that competitive processes such as tendering and reverse auctions should yield the most ‘efficient’ outcome. Such processes foster price discovery, leading to more accurate and reasonable prices. In the case of RE, they have proven to be a viable alternative to the traditional, administratively fixed FIT used by most developed countries. Actions foster competition and push prices down, thereby reducing tariffs for end-users and making the whole process more sustainable (The World Bank, 2010).

While the above benefits are well known and often implicit when a competitive process is adopted, in the case of India’s NSM there was unfortunately no discussion of alternative processes and why this specific reverse bidding approach was preferred. In the absence of a public debate to understand how and why reverse bidding was chosen, it is difficult to know the GoI’s objectives in using this process. But the assumed purpose of the reverse bidding has been to increase competition, lower the costs of solar power and move towards achievement of grid parity of solar power – one of the stated goals of the NSM. Another assumed purpose is the avoidance of financial pressures that might have risen if capital or tariff subsidies had been adopted.

6.3. THE FIRST ROUND OF BIDDING 6.3.1. THE OUTCOME OF BIDDING The first round of reverse auction held in FY 2010–11 received a very high response. Applications were received for capacity of 5,126 MW, which was eight times more than the target proposed to be allocated through the auction (Government of India, 2011). The range of discounts offered by bidders on CERC-determined tariffs is indicated in Figures 3 and 4. The weighted average of quoted tariffs for the selected PV projects was US$0.229 per unit, while that for the selected CSP projects was US$0.215 per unit. Figures 5 and 6 show the range of the tariffs for the selected projects in comparison to the CERC-determined tariffs.

In terms of the profile of players who were awarded projects, careful examination of the complete list of projects selected shows the absence of established players in the power and large infrastructure sectors in India. While some established players did not participate in the bidding, others were unable to win projects. New entrants without any experience in power projects dominated the list of successful candidates. In terms of technology, a significant feature of the projects is that most PV projects are based on polycrystalline silicon technology. Polycrystalline PV modules are the most used PV modules globally.

22

Figure 3: Analysis of bids received for solar PV projects in FY 2010–11 under NSM

Figure 4: Analysis of bids received for solar thermal projects in FY 2010–11 under NSM

Source: Author analysis based on bid details available

Disc

ount

s offe

red

on C

ERC

tariff

s(in

US$

/kW

h)

Source: Author analysis based on bid details available

Disc

ount

s offe

red

on C

ERC

tariff

s(in

US$

/kW

h)

23

Figure 5: Comparison of tariffs for PV projects selected in FY 2010–11 under NSM with ceiling tariffs (in US$/kWh)

Figure 6: Comparison of tariffs for solar thermal projects selected in FY 2010–11 under NSM with ceiling tariffs (in US$/kWh)

Source: Author analysis based on bid details available

6.3.2. CURRENT STATUS OF PROJECTS No comprehensive status is available on the projects that were bid out in the first round of the NSM. This is surprising for two reasons. First, given that the NSM is a government showcase programme and aims to make India a solar energy hub, a regular progress update from the government would help instil more

CERC-determined tariff = 0.289

CERC-determined tariff = 0.338

24

confidence in the programme. Second, comprehensive monthly progress reports are already available on thermal and hydro power projects (including those that are being developed by the private sector and have crossed a minimum threshold of project development and award) from the CEA.

The absence of a regular update or progress report on solar projects led to speculation that projects were not on track. There was further speculation that the government had intervened on various issues, such as financial closure, to ensure that projects met their commissioning deadlines.

Discussions with experts in India provide a mixed picture. While some maintain that projects are not on track, others are of the opinion that most projects are on track and projects that are delayed account for only 25–30% of the total capacity that was bid out in FY 2010–11. Further updates suggest that the GoI encashed the bank guarantee worth nearly INR 2 crore (or US$377,000) each from 14 project developers in January 2012 for failing to meet the commissioning deadline.

6.3.3. EFFECTIVENESS OF BIDDING MECHANISM AND EXPERIENCE SO FARIrrational bidsThe general opinion is that the tariffs that emerged through the bidding process in FY 2010–11 are unrealistic. Three factors are believed to be largely responsible for this: (i) the bid mechanism and bid parameter, (ii) the qualification criteria adopted for the selection of developers under the reverse bidding process, and (iii) quality of equipment.

As far as the choice of bid parameter goes, it is argued that competitive bidding is relatively untested in India in the power generation segment. Tariff-based auctions were first initiated in 2006, but only for thermal power projects. Attempts to use a similar approach for hydro projects have thrown up several challenges. The use of a variant, such as reverse auctions using the bid parameter of offering discounts on initial tariff and selecting developers offering the highest discount, is untested in the development of power projects.

While there is merit to the above arguments, the choice of bid mechanism and bid parameter is not particularly wrong given the twin objectives of providing cheaper power as well as achieving grid parity for solar power. The ultimate objective of the NSM, as first indicated in India’s NAPCC, is to develop a solar industry that is capable of delivering solar energy competitively against fossil options within the next 20–25 years. Further, the history of reverse auctions suggests that they work to lower costs. The bid mechanism adopted by India therefore aims to facilitate the provision of competitively priced solar power. Moreover, the bid parameter was appropriate given the high response received in the first stage of the open competitive bid. Project selection based on a first-come, first-served basis or random lots would not have ensured fair play. The approach of reverse bidding using discounts offered on a maximum or predetermined tariff also gives the advantage of lower tariffs, and eliminates some of the disadvantages of a FIT-based approach that involves a generic levelized tariff instead of taking into account the actual cost structure and project parameters for each developer. What seems to have gone wrong with this approach in India is that the reverse bidding mechanism is new to the power sector there and has been used in a new area. In the absence of experience with either the mechanism or the solar power sector, the risks were not known and

25

Brazil first held technology-specific reverse auctions for RE in 2007. In 2009, reverse auctions were held to contract wind power for delivery in 2012. In keeping with the structure of energy auctions in Brazil, contracts were awarded to projects that could supply power at the least cost. The auction saw participation from about 11,000 MW worth of projects. The initial auction price was US$105/Mega Watt Hour (MWh) and the prices of the winning bidders ranged from US$85–72/MWh. A diverse mix of investors (local and foreign private generators, manufacturers, and government-owned companies) won the contracts, and three new wind turbine factories are to be installed in the country. Given the low winning tariffs and apparent cut-throat competition, some concerns were expressed regarding the winning bidders’ ability to bring these projects to fruition.

These concerns heightened after the 2011 reverse auctions that involved wind power contracts for about 1.9 GW. The auctions saw an average contract price of US$62/MWh. These are the lowest tariffs being offered to wind generators on a market‐wide basis globally, and below wholesale electricity prices in Latin American markets. However, the viability of these prices and, hence, of the projects has been questioned on several counts. Further, it is expected that a significant proportion of these projects are likely to experience severe delay or even cancellation, for reasons outlined below.

First, it has been estimated that to achieve adequate returns, nearly half of these new projects would have to operate at considerably higher efficiency or lower cost than has been seen in other parts of the world. Up to 40% of this new capacity would result in equity returns

of below 10%. This raises the possibility of such capacity not being financed or built. Second, it is estimated that for these projects to become viable by current standards, turbine costs must fall by 15% in Brazil, or 10% below the current global average. Third, it would take exceptional wind turbine performance for the projects to be successful. The winning bidders have assumed unusually high capacity factors, with 28 out of 78 projects assuming they will reach a capacity factor of 50–61%. There is no single wind project operating at those levels in Brazil. This has also raised doubts over the bankability of projects, as debt servicing will become difficult if actual energy output is lower than expected. Overall, it is expected that projects would need to exhibit exceptional performance, dramatically lower prices for equipment, access to lower-cost capital, or a combination of these factors to be successful.

In China, the government introduced competitive bidding for wind farm development in 2003 to steadily ramp up new wind power capacity at the lowest possible costs. The objective of this approach was to drive down wind electricity tariffs and provide better cost estimates of wind farms in China. Accordingly, under the Wind Power Concession programme, the National Development and Reform Commission invited international and domestic investors to develop 100 MW wind farms on a potential wind site. Winning bidders were granted approval to develop the selected project site, a PPA for the first 30,000 hours of the project operation, guaranteed grid interconnection, financial support for grid extension and access roads, and preferential tax and loan conditions by the central government.

BOX 5Experience with reverse auctions for RE in Brazil and China

therefore not dealt with. At this stage, it may be interesting to note that international experience with the use of auctions for development of RE indicates similar problems of unviable bids (see Box 5).It has been argued by some that the NSM involved bid bonds and performance bank guarantees (see Annexure 2) that were high enough to curb aggressive bidding as well as penal provisions for non-commissioning of projects within the stipulated time (12 months for PV and 28 months for CSP). However, many believe that the total financial implication involved in these bonds is not a significant deterrent. Further, local developers could potentially drag their heels for years before paying these penalties. More importantly, there is little precedence in India for the enforcement and effectiveness of penal provisions under government-tendered projects.

26

The issue of qualification criteria adopted for the selection of developers is discussed in more detail in the next section. The point here is that the entities that have procured PPAs are new entrants without experience in this sector. It is largely believed that these new entrants have underestimated or even overlooked the costs, risks and complexities involved in setting up solar power projects in order to provide high discounts on the CERC tariff and so procure projects, consequently resulting in unsustainable tariffs.

In terms of the quality of equipment, it is believed that in order to get projects under the NSM, developers – particularly those that are new entrants in the PV segment and those using the polycrystalline silicon technology – have resorted to contracting inferior quality equipment, in many cases without assurances or guarantees, at lower prices as compared to standardized equipment. These low prices have enabled them to offer higher discounts on the ceiling tariff. Though quality requirements and warranties have been specified for PV modules in the bid conditions, sub-standard variants of certified modules are being sold under the same certification. Further, there is scope for using other sub-standard components and poor installation practices.

Award of contracts to inexperienced entitiesThe qualification criteria for developers were such that inexperienced entities procured projects in the first round of reverse bidding. This problem is more pronounced with PV. As may be seen from Annexure 2, the eligibility criteria were more or less net worth, bank guarantee or bid bond based without emphasis on experience. In the case of PV, there were no qualifications of eligibility requirements. The technical eligibility criteria pertain more to the project than to the prospective developer. This opened up the market for anyone who wanted to participate in the bidding process. Consequently, the new entrants included knitwear firms, animation companies, and water pump manufacturers. In the case of some of these entities, no website or contact details could be found (Pearson 2010). It is understood that many of these inexperienced entities that have procured PPAs do not even have reliable irradiation data or proper feasibility studies.

The first round of bidding saw the award of 200 MW of capacity to two projects. The winning bid prices were significantly lower than any previous wind farm price in China as well as below the long-run marginal costs. The projects had difficulty obtaining financing, and project construction was delayed. The subsequent round of bidding from 2004 to 2006 awarded an additional 2 GW of capacity. The prices for the winning projects ranged between 4.6–6.2 US cents/kWh as against the current average cost of 6.3–8 US cents/kWh in China. Consequently, there was concern in the wind power

industry that the bidding process had resulted in prices that were too low to be financially viable. As a result, there were reduced incentives for developers to invest in the industry, which was at a nascent stage. Further, the number of companies participating in the bids fell from the first to the second round, contrary to expectations that the number of participants would grow with the programme’s increased visibility and the ‘success’ of the first two concessions.

Source: Bloomberg New Energy Finance (2011), Maurer and Barroso (2011), Early (2011)

27

Financial closure of projectsA direct consequence of the combination of unreasonable tariffs and inexperienced developers was the delay in financial closure of projects. There were reports to suggest that many projects actually did not achieve financial closure by the deadline of July 9, 2011 as required under the PPA. The information available from different reports pertains to different periods of time, and differs. But what is clear is that projects have faced difficulties and delays in achieving financial closure.

Some reports suggest that only 17 out of 30 PV projects and two out of seven CSP projects achieved financial closure by the end of June 2011 (Economic Times, 2011). A report in July 2011 suggested that roughly half the projects had failed to secure funds (pv magazine, 2011). According to Ex-Im Bank (2011), about US$3.2 billion of Indian projects found it difficult to get loans from commercial banks. However, there also were reports quoting the GoI that all projects had achieved financial closure. Some experts in India maintain that the GoI was not forthcoming in disclosing information on the status of financial closure of projects prior to or near the deadline of July 9, 2011. This led to widespread belief that the majority of projects did not achieve financial closure by the deadline.

Besides unrealistic tariffs and the absence of a track record for developers, there are issues of non-availability of proper pre-feasibility reports and reliable irradiation data on the part of developers. In the absence of reliable irradiation data, it is difficult to calculate the generated output and, therefore, the return on investment. These factors, coupled with the fact that solar power is a new area for India and that the risks associated with the technology or project development are not known, deterred financial institutions from funding solar projects.

Project delays and qualityA major concern emerging from the developers’ lack of experience and the use of low-cost, inferior quality equipment is that developers may have overemphasized project cost and hence price (by offering low bids to procure projects) over other essential elements of safety and quality. This may lead to poorly executed projects, low efficiency and, finally, low project performance.

Financial gains for developersThere are believed to be instances when promoters of the projects sold off their majority shares to another entity after signing PPAs with NVVN. There is speculation that developers acquired projects with the objective of making quick returns and were not serious bidders. Hence, they also did not emphasise project quality and workmanship in their bids. Under the bid conditions, the promoter was required to retain only 26% equity in the project. Drawing lessons from this experience, the GoI increased the requirement for equity by the promoter to 51% for at least a year after the plant is commissioned in the case of the second batch of projects being awarded. If after a year the developer feels that it is not profitable, the project can be sold off.

28

6.4. SECOND ROUND OF BIDDING The second round of projects were awarded in FY 2011–12 amidst the above criticisms of the first round of bidding for projects in FY 2010–11 and the overall scepticism around these projects. Given that the entire capacity of thermal projects had been awarded in FY 2010–11, only PV projects were awarded in FY 2011–12 (see Table 3). The capacity restriction of 5 MW from the first round of bidding was increased to 20 MW and bidders were allowed to bid for a total of three projects with a total capacity of 50 MW (see Annexure 2 for details of bid conditions for this round). The bidding took place in November and December in 2011 and since few details are available, the objective here is to look at the outcome of biddings and, to the extent that it is possible, understand tariff trends.

Despite criticisms that tariffs from the first round of bidding were unsustainable, the second round of reverse bidding yielded tariffs lower than those seen in the first round (see Figure 7). Moreover, the lowest bid tariff in this round is 50% lower than the benchmark tariff of US$0.29/kWh fixed by the CERC. The main reasons for these low tariffs are the choice of technology and availability of concessional finance, both of which are interlinked. Unlike the first round where projects were mostly based on polycrystalline silicon technology, the technology choice in the second round was largely amorphous silicon (a-Si). This choice is the outcome of factors such as the absence of indigenization requirements for panels made from thin films (discussed later in the paper), lower costs of a-Si panels as compared to the crystalline silicon panels (see Table 4) (primarily due to the lower efficiency of a-Si) and availability of concessional finance in the form of suppliers’ credit for a-Si panels.

Figure 7: Comparison of tariffs for PV projects selected in FY 2011–12 under NSM (in US$/kWh)

Source: Author analysis based on bid details available

29

Table 4: Advantages and disadvantages of different solar PV technologies Monocrystalline Polycrystalline Thin Film –

Amorphous

silicon

Thin Film –

CdTe

Thin Film –

CIGS

Status More than

25 years of

historical

operating data

More than

25 years of

historical

operating data

Proven roll-

to-roll high

throughput

More than

10 years of

historical

operating data

Efficiency* 12–19% under

Standard Test

Conditions

(STC)

10–14% under

STC

manufacturing 9–11% under

STC

8–12% under

STC

Cost of manufacture (2010) 2.4 US$/Watt 2.15 US$/Watt 5–8.5% under

STC

1.15 US$/Watt 1.75 US$/Watt

Balance of systems cost Low Low 1.35 US$/Watt High; due to

low efficiency

High; due to

low efficiency

Land requirement Requires less

land/ kilowatt-

peak (kWp)

Requires less

land/kWp

High; due to

low efficiency

Impact due to shade High High Requires more

land/kWp

Low, reliable

output even

under low light

conditions

Low, reliable

output even

under low light

conditions

Impact of high temperature

environment

High; less

output in high

temperature

environment

High; less

output in high

temperature

environment

Low, reliable

output even

under low light

conditions

Low; better

performance

in high

temperature

environment

Low; better

performance

in high

temperature

environment

Materials usage NA High Low; better

performance

in high

temperature

environment

Low Low

Others NA Low • •

•

• Glass on

glass frames;

chances for

breakage

higher

Notes: * The efficiency of different technologies as stated by different organizations/institutions/researchers may vary. NA – Not availableSource: AES Solar Energy Pvt. Ltd., India (2010); Indian Semi-Conductor Association (2008); Temple and Tao 2010–11

30

The requirements for indigenous content in projects under the NSM are discussed later in this report. To provide a quick overview of the issue here, the second round of bidding mandates that the cells and modules for crystalline silicon technology have to be domestically manufactured. But no such rule exists for panels made from thin films. This has prompted developers to choose a-Si technology, which allows them the choice of suppliers as well as lower costs. With the leading a-Si manufacturers in the world being US-based, and the US Ex-Im Bank supporting these manufacturers through concessional finance (see the discussion on financing later in this report), the developers in India using a-Si technology also have access to concessional financing.

Besides the aforementioned factors, the lower tariffs in the second round of bids is also being attributed to the drop in solar module prices owing to the global market supply scenario. Economies of scale, coupled with the global recession in 2008 that saw a significant slowdown in the European solar power market and resulted in the oversupply of modules, have triggered a sharp decline in module prices. China’s expansion of its solar manufacturing space has also contributed to the lowering of costs. Further, international SPDs are using low tariffs as a market entry strategy for India because most developed countries are curtailing incentives offered for solar power, thereby offering few opportunities for solar projects.

While these reasons are valid, they also prevailed during the first round of bidding. Therefore, the predominant factor behind the lower tariffs realized in the second round of bidding seems to be the choice of technology and the accompanying concessional finance. What is interesting to note is that a-Si technology is a subject of much debate and speculation internationally, given that one of the largest manufacturers of this technology globally, Applied Materials, stopped its production line for this technology in 2010.

The winning developers are those who are relatively experienced and established in the development and operation of solar projects from participating in state government schemes, or who have projects from the first round of bidding. Some even have prior experience in the area of conventional or RE power projects. It is widely believed that the increase in project size allowed in this round provided for economies of scale, thereby attracting these established players.

The general belief is that given that, tariffs reflect the low costs associated with a-Si technology and the availability of concessional finance, as well as the experience of winning bidders, projects awarded in this round are likely to be more successful than those awarded in the first round.

31

7. FINANCING OF PROJECTS Solar technologies are characterized by high capital costs, thereby necessitating large amounts of equity and debt funding. This raises concerns about the availability of finance for solar projects. While a few projects may be easy to finance, domestic financial institutions in emerging markets often find it difficult to finance large-scale development of solar power projects. Further, given that solar power is a relatively new technology, commercial financial institutions are not willing to invest in these projects given the risks and uncertainties. Public funds have competing uses and therefore cannot always be used to subsidize large-scale solar power development. The costs on the public exchequer of large-scale subsidies can also be quite substantial.

Given the above issues with financing of solar power, it would be of interest to examine the experience in India with regard to financing of the NSM projects. The major areas of interest here are the extent and form of government support made available for projects, innovations in financing solar projects, and the availability of multilateral and international finance for such projects.

7.1. GOVERNMENT’S PAYMENT SECURITY MECHANISM FOR NSM PROJECTS The GoI has put in place a payment security scheme (PSS) for solar projects under the first phase of the NSM. The scheme, which takes the form of a fund known as the Solar Payment Security Account (SPSA), will serve as a guarantee and risk mitigation strategy for solar projects, helping financial closure of the projects. The motivations for the creation of this payment security mechanism (PSM) are (i) to address the payment-related risks arising from the cash-strapped financial position of discoms and the inability of NVVN to absorb these risks, (ii) the inadequate payment security mechanism provided for in the PPAs, and (iii) to cover the risks emanating from new technologies.

One of the main concerns for the power sector in India since the early 1990s is the alarming deterioration of the financial health of discoms. The increase in losses of discoms between 1991–92 and 2001–02 led to several reforms for improving their commercial viability. However, the situation once again started worsening between 2005–06 and 2008–09 (see Figures 8 and 9). It has been reported that losses would have reached US$12.8 billion at the end of FY 2010–11.

32

Figure 8: Losses without subsidy for power distribution utilities in India (US$ billion)

Figure 9: Cash losses of power distribution utilities in India before subsidies received from concerned state governments (US$ billion)

Source: Gulati (2011) Source: Gulati (2011)

The weak financial position of discoms created heightened concerns about their ability to make payments to NVVN and, in turn, to solar power producers. These concerns were also raised during the stakeholder discussions and consultations held by the GoI while formulating the guidelines for development of grid-connected solar power projects under NSM. Given that debt servicing by generation project developers is dependent on payments from utilities, and that solar power is much more expensive than either the average tariff or the cost of short-term power procured by utilities (see Figure 2), financial institutions also expressed concerns about lending to these projects. Another pressing fact was that though NVVN has a reasonably strong credit profile, its balance sheet is too small to absorb payment risks from solar projects. Balance sheet support from NTPC, its parent company, is also not envisaged. A report by the World Bank (2010) that examined the barriers to solar power development in India supports these concerns. It says that all developers interviewed by the World Bank for that report were of the opinion that if NVVN fails to pay the tariff amount, there should be another mechanism, such as the creation of a special fund, to pay the developers on time for electricity delivered.

The PSMs provided for in the PPAs were also considered inadequate security against defaults by utilities. The PSM provides for a 6-month letter of credit backed by an escrow mechanism in the power sale agreements (PSAs) signed between NVVN and utilities. Further, NVVN’s payment liability under the PPA is limited to payments realized from utilities after exhausting these payment security measures. In other words, NVVN has no obligation to make payments to a developer if a utility fails to make payments to NVVN under their agreements with NVVN. Thus, the entire payment risk is passed on to the developer, with NVVN only acting as a go-between. This places the project cash flow under risk. Another point to note is that there is no ‘take or pay’ obligation on NVVN under the PPA. This means that NVVN is under no obligation to make payments to the developer, irrespective of whether the buyer actually purchases the power.

33

The above issues deterred financial institutions from investing in solar projects (in addition to issues such as profile of developers and low tariffs). Another factor that affected the funding of solar projects was that the risks associated with solar projects, especially those pertaining to technology and performance, were not fully understood under Indian conditions. Therefore, there was also a need to hedge the technology risk arising from solar projects.

7.1.1. FEATURES OF GOI’S PAYMENT SECURITY MECHANISMThe SPSA will be financed from gross budgetary support by the GoI and will be implemented by the Ministry of New and Renewable Energy (MNRE), the line ministry for RE in India. The PSM will be available for all projects under the NSM, thereby covering all discoms/states that are off-taking power from these projects. Gross budgetary support of up to US$9 million (see Figure 10) has been estimated for the implementation of the PSS based on a default probability of 35% and capacity utilization factors on a normative basis. No other details have been provided by the GoI for determining the extent of gross budgetary support.

Figure 10: Funds requirement pattern under the PSS for the first phase of NSM (US$ million)

Source: Government of India 2011

The main features of the PSS are as follows:• The PSS is a fallback arrangement and is to be accessed only when the payment security provisions available in the PSA have been exhausted. As per provisions of the PPAs signed between solar power projects and NVVN, NVVN will raise a provisional bill on the last day of the month. Discoms will get 2% rebate if payment is made on the next working day. Due date of payment is 30 days from the date of billing. In the event that payment is not made by the 30th day, NVVN can invoke the letter of credit followed by the default escrow agreement to mitigate the immediate payment liability. In case the default persists without replenishment of

34

the letter of credit or escrow, NVVN can divert and sell the bundled power to a third party through bilateral negotiations or in the spot/short-term market. • If the amount realized from the sale of power in the market (over and above NVVN trading margin, transmission charges and other regulatory and administrative costs incurred in the supply of bundled power to a third party) is lower than the tariff of bundled power, the difference will be paid from the SPSA. If there are delays or shortfalls in payment from the SPSA, NVVN will be compensated for delayed payment at rates similar to those provided under the PPA signed by NVVN with SPDs.• NVVN will open a separate account called SPSA for implementing and operating the PSS. NVVN will be provided with a management fee of 1% for funds handling.• An amount equal to half the estimated annual corpus for the financial year will be deposited into the SPSA in two instalments, on 1 January and 1 July of every year.• The balance in the SPSA will be reviewed every six months and, if found to be less than six months of the balance worked out for the financial year, will be replenished promptly by MNRE to hold at least six months of the balance for the year. In the case of an emergency, the SPSA administrator will have the flexibility to approach MNRE for an earlier disbursal of subsequent tranches for the financial year.• A fund management committee will oversee the overall implementation of this scheme and will be empowered to issue any directions to remove any difficulties with regards to its implementation.

Though the PSS is a security mechanism for SPDs and financiers against the risk of default from solar power procuring discoms, there is scepticism in India that the PSS may serve as an incentive to default. The availability of federal funds as a payment guarantee may provide leeway for some provinces/discomsto purposely default on payments to NVVN.

7.2. MULTILATERAL AND INTERNATIONAL FINANCING FOR NSM PROJECTS There have been no credit lines or financing facilities from multilateral financing institutions or international financial institutions for solar projects at the country level in India. But multilateral financing is available, directly at a project basis, subject to projects meeting the funding criteria of the concerned institutions, or indirectly under loans advanced to financial institutions in India. Similarly, financing is available (and has been accessed) from international financing institutions in the form of suppliers’ credit. The Asian Development Bank (ADB), the International Finance Corporation (IFC) and the US Ex-Im Bank are the main institutions funding solar projects in the above manner.

7.2.1. ADB’S SOLAR PARTIAL CREDIT GUARANTEE FACILITYThe ADB has a programme called the Asian Solar Energy Initiative (SEI) whereby it will finance 3,000 MW by mid-2013 in developing Asia, with India, Thailand and China being perceived as the short-term opportunities. Under the SEI, ADB has come with a risk-sharing scheme through a partial credit guarantee (PCG) facility to commercial banks to support solar projects in India (under the NSM or the state government policies). Under this facility, ADB will issue PCGs in an aggregate amount of up to US$150

35

million of principal (or its equivalent in Indian rupees), in favour of foreign and local commercial banks lending to solar power generation projects and upon approval as eligible partners by ADB under this scheme. The PCGs will be provided without government counter-guarantee.

One of the main reasons for the provision of PCGs is that the projects coming up in the first phase of the NSM (average size of 5 MW) are too small for direct funding by the ADB. At the same time, the current funding environment in India would provide limited support for solar projects. As far as energy and infrastructure projects are concerned, commercial banks in India typically lend against fixed asset collateral or, if insufficient, against corporate guarantees as opposed to the cash flow and debt service capacity of the project. Further, the consideration of sponsor background makes them rely heavily on relationships with existing or large borrowers when financing energy and infrastructure projects. This practice makes it difficult for new companies or borrowers to obtain financing on reasonable terms or without high collateralization. Coupled with the technical risks associated with solar projects, the financing practices for energy and infrastructure projects have meant that banks remain wary of lending to solar projects and/or lending beyond their existing/large corporate relationships.

The ADB was therefore looking for a way to support the financing of viable multiple small solar projects. ADB discussed various financing structures and support mechanisms with local and foreign commercial banks. These discussions led to the design of a multi-project PCG facility structured to provide long-term financing and to share commercial risks between banks and ADB for solar projects. Solar power project developers are required to contact ADB’s partner commercial banks after ensuring that they meet the eligibility criteria laid down by ADB. It is expected that these PCGs will address lenders’ concerns around credit risks and the long tenors required for viability of solar power projects. It is further expected that ADB’s participation in the NSM will trigger local and/or international bank participation, additional equity investment, and further interest in the financing of solar projects in India. In particular, it will encourage local commercial banks, which have little experience in solar energy, to finance these projects.

The main features of ADB’s solar PCGs for India are as follows:• Maximum amount covered under PCG: The present value of the debt service obligations guaranteed by

ADB cannot exceed 50% of the project’s debt. This allows for structuring of the PCG to meet the needs of different lenders, i.e., uniform cover versus higher levels of cover in later years of loan tenor.

• Eligibility for PCG facility: Solar power projects built and operated by independent power producers (IPPs) which are at least 50% privately controlled and owned, have signed a long-term PPA either under the NSM or under a separate declared state solar powered policy, and meet the ADB solar PCG eligibility criteria (see Box 6).

• Eligibility criteria for lenders under the PCG facility: Prospective financial institutions will be screened by the ADB based on a number of factors such as credit standing (at least BBB- equivalent long-term credit rating by international credit rating agency or AA equivalent long-term credit rating by an acceptable local credit rating agency); experience and capabilities in limited recourse lending in India/Asia; existing portfolio in the power sector; willingness and ability to make financial commitments in RE in India; staffing, management and technical capability; and operating policies, guidelines, and systems in loan origination, credit assessment and loan administration and enforcement.

• ADB will rely primarily on commercial banks’ due diligence on sponsors, project financial viability, engineering, procurement and construction contracts, and operation and maintenance arrangements.

• ADB will rely primarily on commercial banks’ due diligence on sponsors, project financial viability, EPC contracts, and operation and maintenance (O&M) arrangements.

36

7.2.2. INTERNATIONAL FINANCE CORPORATIONUnlike the ADB, the IFC does not have a dedicated fund or scheme for funding solar projects. The funding is part of IFC’s regular investment activities and involves a mix of debt, equity and quasi-equity investments. Also, IFC has not restricted its funding to only the NSM projects. It finances all types of solar projects, not just grid-connected projects. Some players that have received funding from IFC in the past few years include NDPL Solar, Applied Solar, Azure Power, SunBorne Energy LLC, Mahindra Solar One Private Ltd and Sapphire Industrial Infrastructures Private Limited (a subsidiary of Moser Baer).

Besides direct funding, IFC is also funding solar projects as part of its climate change strategy of partnering with financial intermediaries to scale up the impact of climate change projects in India. It has provided a long-term climate change loan equivalent to US$75 million to a specialized infrastructure financing institution, the Infrastructure Development Finance Corporation (IDFC), for investments in RE and cleaner production/energy efficiency projects. One of the main objectives of this loan is to facilitate IDFC’s entry in solar energy space. Under this loan, IFC will also help the IDFC develop knowledge and risk assessment capabilities in the solar energy sector.

• Projectshouldbeagreenfieldsolarpowergeneration of not less than 2 MW and not more than 15 MW (maximumpoweroutputonanalternatingcurrent basis).Allprojectsdesignedforaninstalledcapacity of ] greater than 16 MW but less than or equal to 25 MWwillgenerallyfollowthesamecriteriabutwillbe subjecttofinalreviewbyADBonacase-to-casebasis.

• ProjectswillutilizeeithersolarPV(crystallineorthin film)orconcentratedsolarthermaltechnologythat hasbeeninstalledandoperationalatequivalent capacityorgreaterforatleast12monthspriortothe guaranteeapplicationdate.

• Project’sfeasibilitystudy,detailedprojectreport and/orbusinessplanhavebeenpreparedand includesolarirradiationdataanalysisforthe proposedprojectsite;commercial,economicand financialviabilitybasedonP50,P75andP90levels ofirradiationresources;andenvironmentaland socialassessmentofimpactsandmanagementplans.

• Majorequipmentmanufacturersfortheproject(e.g. panelmanufacturers)musthavebeeninoperation foraminimumofthreeyearspriortoguarantee applicationdateandhaveaminimumof50MW aggregatenetcapacityinstalledworldwide.

Project sponsor criteria- Minimumequityrequiredforfinancingoftheproject shouldnotexceed20%ofthesponsors’networth. Basedonthelastthreeyears’consolidatedaudited financialresults,sponsors’averageEarningsBefore Interest,Taxes,DepreciationandAmortization (EBITDA)tointerestofatleasttwotimesand averagelong-termdebttoEBITDAofnomorethan threetimes.[idon’tunderstandthispoint–needsto becheckedbysomeonewhodoes]- Minimumthreeyears’experienceinnonconventional energyorconventionalpowergenerationsectors.• Guaranteelimits- Maximumloantenorsof15yearsforNSMprojects and12yearsforprojectswhereGujaratUrjaVikas NigamLimitedistheoff-taker(inthestateof Gujarat).- Thenetpresentvalueofthedebtserviceobligations (outstandingprincipalandaccruedinterest) guaranteedbyADBshallnotexceed50%ofthetotal principaloftheguaranteedloan.

Source:ADB2011

BOX 6Eligibility criteria for solar power projects under ADB’s PCG facility

37

7.2.3. EX-IM BANK OF THE US The only international financing institution that has so far been funded projects under the NSM is the Export-Import Bank of the US (Ex-Im Bank). Ex-Im Bank is the official export-credit agency of the US with a mandate to fill gaps in export financing, primarily for exports to emerging markets; to strengthen US export competitiveness; and to create and maintain US jobs. It provides a variety of financing mechanisms, including loan guarantees, export-credit insurance and direct loans.

Ex-Im Bank is authorized by the US Congress to lend as much as US$100 billion to help finance projects that buy US goods and services, but that have not secured private sector funding. It has a mandate to increase support for RE and other environmentally beneficial exports, with 10% of its authorizations to be dedicated to these. Under this mandate, it can provide repayment terms of up to 18 years for RE projects, offer capitalization of interest during construction, and support local costs up to 30% of the US scope of supply. In April 2010, it announced a ‘Solar Express’ product to provide streamlined financing for US exports to small solar energy projects.

In keeping with its mandate to finance US exporters as well as promote RE, Ex-Im Bank is working with US manufacturers to enable them to access competitive financing for equipment supply to solar projects being set up under India’s NSM and the state policies. The main idea is to enable these manufacturers to compete with their Chinese counterparts. Thus, the idea behind financial support from Ex-Im Bank is not so much to support the solar projects being set up under the NSM as to support US manufacturers and boost US exports. Further, besides enabling the fulfilment of the mandate to enhance support for RE, this support could have been prompted by the current economic context in the US. Nevertheless, this financial support has taken the form of suppliers’ credit for SPDs in India and provided them with concessional financing for their projects.

The loan tenure is 16.5 years and its repayment is based on the cash flows generated by the sale of electricity to NVVN. During FY 2010–11, Ex-Im Bank assisted in financing US solar energy exports to four projects in India. The number is likely to go up with the second round of bids under the NSM.

38

8. PROMOTION OF DOMESTIC INDUSTRYBesides expanding electricity generation though solar power, South Africa is also keen to stimulate the accompanying local solar technology industries to serve this demand. This is based on the belief that local manufacturing would make solar power affordable in the long run by limiting the cost of imported equipment and providing the benefits from economies of scale (Department of Minerals and Energy, Republic of South Africa 2003). Local manufacturing would also create jobs.

As indicated earlier, promoting domestic manufacturing and building an industrial base for solar technologies is one of the objectives under India’s NSM. In view of this, the NSM has mandated a certain level of indigenization for solar projects. Solar PV projects based on crystalline silicon technology selected in the first round of bidding during FY 2010–11 were mandated to use modules manufactured in India. Import of the cells which make up the module was allowed. For the second round of projects awarded during FY 2011–12, the domestic content requirement was extended to include modules and cells for crystalline silicon technology. However, PV modules made from thin film technologies or concentrator PV cells are allowed to be sourced from any country, provided the technical qualification criterion is fully met. In the case of solar thermal, the NSM makes it mandatory for developers to ensure 30% of local content in all projects.

During the formulation of the policy guidelines for the first round of grid-connected projects under the first phase of the NSM, mixed views emerged on this subject. Many developers were of the view that the domestic content requirement should not be included in the first phase. They felt that the first phase should focus on having the best quality equipment and components at competitive rates in order to successfully achieve the target of 1,000 MW. This would also enhance local knowledge about implementation of solar power projects in India. The second phase could then build on learning from the first phase and could integrate domestic content for the solar projects (The World Bank 2010).

Some developers were also of the opinion that though the domestic content criteria could be met, India did not have knowledge or experience in installation and commissioning of such MW-size grid-connected solar power plants (The World Bank 2010). On the other hand, Indian solar cell and module manufacturers supported the domestic content policy. Firstly, this policy gave them a captive market, given that it was increasingly difficult for them to compete with the low-cost Chinese companies. And secondly, Europe – India’s major export market for solar cells and modules – was exhibiting a significant slowdown on solar power due to the global financial crisis.

It is interesting to note that other countries – such as Canada (see Table 5), China (see Box 7), Australia (see Box 8), Argentina and Italy – also encourage local procurement for solar and other RE projects. Some of these countries have been able to stimulate domestic manufacturing through such policies. However, this requirement needs to be pursued only after serious thought and with caution.

39

8.1. OUTCOME OF DOMESTIC CONTENT POLICYIn India, the policy for indigenization of solar projects has been only partially successful in the overall context of creating a domestic solar manufacturing base in India. There are three broad reasons for this. First, the policy for indigenization is component specific for PV and value specific for thermal. This has allowed thermal projects to source equipment and works other than the main technology from India, thereby not adding to the solar specific manufacturing base in the country. Second, in the case of solar PV, the indigenization requirement has differed by technology. In the first round of bidding, with bidding being based on polycrystalline silicon technology, domestic manufacturing did get a boost. However, with the focus shifting to a-Si technology in the second round of bidding, wherein domestic content was not mandatory, the domestic manufacturing base of crystalline silicon technology was affected.

Local content requirements have been in place in China’s wind power industry for many years. Wind farm projects approved by the National Development and Reform Commission (NDRC)[add to abbreviation list] during the Ninth Five-Year Plan (1996–2000) required that wind turbine equipment purchased for these projects contain at least 40% locally made components. Beginning in 2003, NDRC launched a programme to auction wind farm concessions that mandated 50% local content in 2003 and increased the local content requirements to 70% in 2004, where it remains today. In selecting the winning projects under these concessions, local content percentages (above the minimum standards of 50–70%) were given a weighting of 20% in evaluating bids in 2005. This weighting was increased to 35% in 2006. In addition, a 70% local content requirement now applies not only to the government-run wind concessions, but to all wind farms being developed in China. These local content requirements are causing foreign firms interested in selling wind turbines in China to develop a manufacturing strategy that will allow them to meet these requirements. Consequently, many leading international

wind turbine manufacturers are either establishing local manufacturing facilities or assembly facilities for Chinese-made components. Local content requirements currently mandate a certain fraction of domestic manufacturing, but they do not promote a comprehensive form of technology transfer that includes the transfer of know-how or of intellectual property rights. Consequently, foreign wind turbine manufacturers can meet current content requirements by developing a Chinese manufacturing base without necessarily involving Chinese-owned firms in wind turbine design and assembly activities, and so can maintain control over key intellectual property and technical know-how.

It is interesting to note that the domestic content mandates for wind power helped China significantly. By 2009, out of the world’s top ten wind manufacturers, three were Chinese.

Source: Lewis 2007); Deshmukh, Bharvirkar, Gambhir and Phadke 2011

BOX 7Local content requirement in China’s wind power industryprojects under ADB’s PCG facility

Table 5: Local content requirement for solar projects by the province of Ontario, Canada

Source: Ontario Power Authority 2010

From 10/01/2009 From 01/01/2011Projects > 10 kW 50% 60%Projects < or = >10 kW 40% 60%

40

This policy has led to the creation of a manufacturing base that can cater to only one type of technology. Third, given that the policies of state governments do not mandate indigenization of projects, the manufacturing base that is developing in the country is rather small. Given the uncertainty around the second and final phases of the NSM and what they entail in terms of indigenization requirements, and the success of state government policies in creating a market for solar power and the technology choices that would evolve in future, manufacturers are not keen to set up large capacities around any particular technology. An important outcome of the indigenization policy was that domestic manufacturers of crystalline silicon modules in India raised module prices after the finalization of the policy and before the first round of bidding. This shows that in the absence of an adequate domestic manufacturing base, the initial stages of an indigenization programme can create monopolies, so raising prices. Moreover, in a scenario where technologies have been neither specified nor proven, if the indigenization policy is not equally applicable to all technologies, the technologies where domestic content is mandated stand to lose due to the absence of a level playing field.

Australia has launched a Solar Flagships programme as part of the Australian Government’s AUS$ 4.5 billion Clean Energy Initiative (announced in the May 2009 Budget), with the objective of providing the foundation for large-scale grid-connected solar power in Australia and creating up to 1,000 MW of solar power generation capacity. The other objectives of this programme include the development of a solar industry in Australia. The first selection round of this programme was held in 2000 with the objective of selecting one solar thermal and one PV project, with a target of 400 MW of combined solar generation capacity across both projects. While there was no mandate for domestic content in these projects by way of components or value, the criteria against which project proposals were evaluated for value for money included Australian industry participation. The provisions of industry participation are as follows:

Inclusion of Australian industry participation, including participation by small and medium-sized enterprises, with such participation indicating higher merit.

Merit will be awarded to projects that include a greater portion of Australian industry participation, including small and medium-sized enterprises, throughout the project value chain.

Merit may be demonstrated by: a) providing a clear and comprehensive Australian

industry engagement strategy, outlining how the applicant plans to:

(i) maximise Australian industry involvement in the project;

(ii) expand real and sustainable employment opportunities in the Australian solar industry;

(iii) increase export and uptake of Australian renewable energy technology, including by way of licensing of technology intellectual property

b) documentary evidence of agreements with suppliers and subcontractors to provide Australian-sourced project goods and services; and

demonstration of innovative or optimised business models and processes for the deployment of large-scale solar in Australia.

Source: Australian Government 2009Source: Government of India, 2010

BOX 8Australia’s domestic content provisions for the solar industry

41

8.2. CONCERNS OVER POLICYCountries such as the US have viewed the requirement of local sourcing of equipment in India as ‘trade-restrictive domestic content mandates’ and formally raised the issue with the GoI as well as with the World Trade Organization (WTO) (Business Standard, 2011 and Economic Times, 2011). It is interesting to note here that the US itself has domestic content requirements for solar projects funded under its American Recovery and Reinvestment Act, better known as the stimulus package, which stipulates that public projects that receive funding must use American-‘made’ products (Shiao 2010). The view in India, however, is that public procurement is outside the purview of India’s WTO and other international obligations. NVVN being a public sector entity, procurement of solar power by NVVN from the projects that are mandated to use domestically manufactured equipment is in the nature of public procurement (Government of India, 2010b). But it may be useful to point out that local content requirements in other sectors in India have previously been contested at the WTO (see Box 9).

Local content requirements in the case of solar projects in Canada have also been questioned. Japan has lodged a formal complaint against the province of Ontario, Canada, at the WTO for establishing a FIT programme in which projects with local equipment will be given higher tariffs (see Box 10). Subsequently, the European Commission also filed a similar complaint stating that the programme is illegal under global trade rules because it gives an unfair advantage to local producers.

The experience of India and Canada indicates that the possibility of potential conflicts with international trade rules needs to be given careful consideration prior to finalizing policies on local sourcing requirements for solar projects. These rules need to be carefully examined and understood in the context of South Africa’s international trade agreements.

The experience of India and Canada indicates that the possibility of potential conflicts with international trade rules needs to be given careful consideration prior to finalizing policies on local sourcing requirements for solar projects. These rules need to be examined and understood carefully in the context of South Africa’s international trade agreements.

In 2001, the US and the European Union (EU) won a dispute at the WTO against India’s local content requirements in passenger car production. India’s regulations required auto manufacturers serving India to sign MoUs that imposed local content requirements on signatories. The MoU required the signatories to use no more than 50% imported content in passenger car production by the end of the third year of the MoU, and no more than 30% imported content by the end of the fifth year. The US and EU took this up with the WTO, citing

violations of the National Treatment on Internal Taxation and Regulation, General Agreement on Trade and Tariffs (GATT) and trade-related investment measures (TRIMs). The WTO dispute settlement panel decided that India’s practices indeed violated the cited WTO agreements. India appealed this finding but subsequently withdrew its appeal. In November 2002, one year after the ruling, India informed the WTO that it had fully complied with the recommendations of the dispute settlement panel.Source: Lewis, 2007

BOX 9India’s experience with local content requirements in the auto sector

42

8.3. SUPPLY SIDE CONCERNS FROM POLICYAnother aspect that deserves consideration is the supply side impacts of mandating local sourcing requirements for solar projects. India lacks a robust manufacturing base for the components and systems that are key for solar systems. There are no players in the metallurgical silicon, semi-conductor silicon, and wafering space (Subramanya 2010). Consequently, the industry is largely dependent on imports of these components. While the domestic content requirements will eventually give a boost to the production of these components, in the interim there is a possibility that import dependence on components may affect local production, thereby derailing projects due to a lack of local production capacity and expertise.

The FIT programme, created by the province of Ontario’s (Canada) Green Energy Act in 2009, states that the Ontario Power Authority will buy electricity from solar and wind energy producers at above-market rates as long as it is generated with a set proportion of Canadian-made equipment or services. In September 2010, Japan complained to the WTO against the province of Ontario that the latter’s REFIT programme was inconsistent with Canada’s obligations under GATT 1994 because the regulations/requirements appeared to accord less favourable treatment to imported equipment than to like products originating in Ontario. Further, the FIT programme applied measures that appeared to require the use of equipment for RE generation facilities supplied from Ontario in specified amounts or proportions, so affording protection to Ontario production of such equipment, contrary to the principles of GATT 1994. Japan also claimed that the measures appeared to be

inconsistent with the TRIMs agreement and with the provisions of GATT 1994.Finally, Japan alleged that it appeared that a subsidy was granted under the measures because there would be a financial contribution or a form of income or price support, and a benefit was thereby conferred. This subsidy would be a prohibited subsidy under the SCM Agreement because it appeared to be provided ‘contingent … upon the use of domestic over imported goods’, and thus was contingent upon the use of equipment for RE generation facilities produced in Ontario over such equipment imported from countries such as Japan.

Subsequently, the US and the EU joined consultations with Canada on this issue. Proceedings on this issue are currently under way with the Director-General of WTO establishing a panel for these proceedings.

Source: World Trade Organization 2011

BOX 10Japan’s complaint to WTO against the province of Ontario, Canada’s domestic content require-ments in the FIT programme

43

9. LESSON AND CONCLUSIONSIndia has embarked on an ambitious solar power development programme at the central government level. Initially prompted by concerns around climate change, solar power development is now being looked at as a route to energy security as well as a means to achieve the goals of energy access. Besides these objectives, India has larger ambitions to become a solar power hub by becoming not just a generation hub but also a solar manufacturing hub. To this end, it has imposed requirements for domestic content in the case of certain technologies.

For the first phase of the programme, India used the reverse auction approach to award projects to the private sector. Though well-known and used internationally, the reverse auction approach is new to the electricity sector in India. This approach not only attracted investments in the generation of a form of energy that is highly capital intensive and hence expensive, but also dramatically reduced the cost of producing this energy and moving it towards grid parity. However, there is concern over the viability of tariffs, project performance and even basic project operations. Projects have faced difficulties in terms of achieving financial closure, prompted by concerns of unrealistic tariffs and the absence of a track record for developers.

At the same time, no innovations or new financial products have been created for the purpose of financing projects. The payment security mechanism created by the GoI is not a financing solution but a risk mitigation strategy aimed at addressing risks arising from a financially unviable distribution sector and inadequate payment security provisions in the PPAs.

As mentioned, it is still too early to draw definite conclusions from India’s experience or comment on the effectiveness or success of India’s approach. But it is possible to look at the experience and trends that have emerged in India to understand, in a broad sense, how to move towards solar power development, particularly when the private sector is involved. The lessons have largely been grouped according to the different issues that have been examined in this report, besides some generic issues, and are discussed below.

9.1. GENERALWhen the NSM was announced, India lacked experience and expertise in the development of solar projects. This was true not just for the government agencies, but also for the domestic private sector, financial institutions, and allied services such as consultants. The country lacked reliable irradiation data and know-how for solar project development. Given these limitations, India decided to rely completely on the private sector to show the way. Judging by the tariffs that have emerged, this strategy may be called successful. However, given the uncertainty around project development and performance due to unviable tariffs, inexperienced developers and poor quality, as well as the debate around the technologies chosen by developers, this strategy may prove to be risky in the long run. Solar power is cost-intensive and involves technologies that are not always well understood in terms of their suitability and performance. Suboptimal performance or outright failure may result in an undue burden on the consumers as well as the national exchequer, or leave the country with stranded assets that cannot be salvaged.

44

Two broad lessons can be learnt from this. The first is that initiatives for solar power development must be preceded by adequate groundwork and understanding of the complexities of the sector by the government and its agencies. Second, the approach chosen for the development of solar power needs to be carefully examined for its risks, be it the method for awarding and developing projects, the regulatory framework for developers, or the technology. India’s experience has also highlighted the importance of ensuring transparency in monitoring the progress of projects. Little information has been available from the GoI or NVVN on the progress of projects. Consequently, there has been much speculation that projects are not on track, fuelling concerns about the unviability of projects in the wake of low tariffs.

On the positive side, India’s experience indicates that experimenting in the early stages of the market with relatively small capacity can provide valuable lessons for solar power development. Solar power being a new area for almost all countries, it is normal that countries will go through a learning or testing phase to identify what works for them. Moreover, each country will have its own objectives for choosing a particular approach. What is important is to use these lessons to design effective policies when the implementation is done on scale. The dangers of not doing so can be very high and can erode confidence in the country’s solar development programme.

9.2. COMPETITION AND PRIVATE SECTOR PARTICIPATION The competitive approach adopted in India for development of solar power has resulted in tariffs which, if actually realized by way of project performance, will have a significant bearing on the course of solar power development globally. However, these tariffs do not provide confidence in terms of long-term sustainability. They have emerged under conditions of aggressive bidding by inexperienced developers, reliance on a technology that is the focus of much debate internationally, and global glut in demand and oversupply. Consequently, they don’t provide confidence in a sustainable or long-term reduction in the cost of solar power.

9.3. REVERSE AUCTIONSThe advantages of reverse auctions are many: they are cost-effective for consumers, they complement renewable portfolio standards and RE credit markets, create competitive bidding for support mechanisms such as subsidies, and promote further cost reduction, driving renewable technologies closer to grid parity. More importantly, they are far superior to administrative hearings or bilateral negotiations, which are not necessarily efficient and are more vulnerable to corruption. However, there are multiple challenges with implementation.

As the experience in India indicates, reverse auctions can rapidly reduce solar tariffs, driving solar power towards grid parity. But they are susceptible to gaming through under-bidding and sub-standard quality, risking project delivery, operating performance and financial closure of projects. It is therefore of utmost importance to ensure that there is no gaming and to reduce the risk of failure in auctions. This can be done by:• establishing high entry and exit barriers: preconditions that involve high minimum financial criteria or establish developer experience by way of past experience with similar projects or

45

similar technology; proper design of project completion guarantees; and financial repercussions for delays, non-performance and underperformance,• ensuring the use of commercialized technology, and• setting a minimum or floor tariff below which projects cannot receive contracts.

The above solutions may not be easy to implement and have drawbacks. For instance, setting high entry and exit barriers contradicts the argument that governments should help create a competitive auction by facilitating the entry of as many bidders as possible (The World Bank 2010). Moreover, such barriers could limit market access for or discriminate against smaller but capable firms or new private investors. Such firms typically don’t have access to large volumes of capital, and may have trouble meeting minimum criteria since financing occurs later in the project development process. These developers might also be deterred by the cost of mounting a bid. In India too, stringent qualification criteria and insistence on past experience in the sector would have limited competition by favouring established and large players who would also have an advantage because of their balance-sheet strength.

Therefore, there is a trade-off in having high barriers to entry and exit for participants. If the new entrants are able to fulfil their contractual obligations, their success would make the industry more competitive and lead to further reduction of costs. Alternatively, if they fail, the downside of going ahead with inexperienced players would be very high. The process would be deemed ineffective due to the failure to award projects to established and experienced players, even if it was at a higher off-take price. Nevertheless, if the government’s objective is to promote smaller distributed projects or specific technologies, it could consider creating separate auctions for those project types or at least different bands within the auction programme by way of different scales and technologies.

Then there is the difficulty of determining the appropriate level at which to set the floor tariff. Also, the setting of a floor may lead to all tender participants bidding at the floor level, thereby eliminating the market-clearing nature of a reverse bidding system or the very benefits of the competitive process. There are no clear solutions to the above issues. The design of the auction and its rules has to be set carefully in view of the larger solar power objectives of the country.

9.4. APPROACH TO TECHNOLOGYNatural conditions such as temperature, weather factors (dust, fog and rainy days) and radiation vary from country to country. Consequently, the optimal choice of technology could vary for each country, despite the superiority of certain technologies in terms of efficiency. Given that solar power is a new area for most countries, at early stages of development it can only be theoretically evaluated for best match to local needs. It cannot be known for certain which technologies would ultimately be the most efficient by way of cost and performance.

India was faced with precisely this predicament when the NSM was drawn up. The lack of experience with technology and the absence of know-how on solar power, not just among the policy makers but for the country at large, made India adopt an approach where market conditions would determine technology winners. On the positive side, this approach offers flexibility in terms of technology deployment, enabling rapid response to changing market trends. In the long term, it would allow those technologies to emerge

46

that are most cost-effective and appropriate given the country’s natural endowments and load profile. It would also allow the country to reap the benefits of technological innovations. On the negative side, this approach may result in the market picking the wrong technology winner. Under a competitive bidding scenario, specifically, developers may opt for technologies with low efficiency in order to be cost-competitive.

Therefore, it is important that technology options are carefully examined and understood so that the government can intervene appropriately in the larger interests of the country if seemingly wrong choices are being made.

9.5. PROJECT BANKABILITYThe bankability of PPAs is critical to a favourable investment climate for the NSM. The government needs to create a robust payment mechanism and a speedy dispute resolution process to ensure investor confidence and accelerate project implementation

9.6. PROMOTION OF DOMESTIC SOLAR INDUSTRYMandating domestic consent for solar projects serves the cause of promoting the development of domestic industry, encouraging foreign investment, and facilitating potential cost reductions for solar power. This in turn will strengthen energy security, allow a country to move up the value chain by adopting best technologies in collaboration with global technology leaders, and lead to the creation of a robust solar power supply chain, jobs, skills development, and opportunities for financial institutions. Such a policy may lead to higher deployment costs in the short term due to the infancy of the domestic industry and a lack of exposure to international competition, but the long-run benefits would be significant.

However, the formulation of such a policy must consider the following aspects:• There must be clarity on the long-term approach for solar power development. The absence of a long-term approach could be indicative of a limited market size for solar power or uncertainty in terms of the market size for specific technologies. Under such circumstances, investors would refrain from investing in manufacturing despite policy provisions. • Domestic content rules can add significant supplier risks for projects if the local market for equipment, components and expertise is still developing. Timely delivery of equipment may become an issue, thereby affecting project execution timelines. Project developers may also have to invest significant time and energy in the evaluation of alternative component and equipment suppliers in order to fulfil local content requirements.• If enforced, the policy must be equally applicable to all technologies being considered by the country.• Policy must be examined in the context of country-specific international trade agreements.• If enforced, the policy must be equally applicable to all technologies being considered by the country.• Policy must be examined in the context of country specific international trade agreements.

47

ANNEXURE 1 - PROCUREMENT OPTIONS FOR POWER PROJECTS IN INDIA Until the mid 2000s, distribution utilities (referred to as utilities through the rest of the paper) adopted first-come, first-served arrangements to procure power from IPPs and entered into a MoU with IPPs to set up power projects and procure power from them. The MoU was followed by a PPA that determined the tariff for power procurement. The PPA and tariff were typically approved by the electricity regulatory commission in the concerned state. Often, the MoUs and PPAs were standardized contracts. After enactment of the Electricity Act 2003 that aims to bring about far-reaching reforms in India’s power sector, the GoI issued guidelines that mandate utilities to enter into future generation capacity contracts through tariff-based competitive bidding. These rules are, however, applicable only for thermal power procurement. Hydro power has been kept out of the purview of these rules given the complexities involved with hydro projects (this is discussed later in this section).

Consequently, two routes have been adopted for the setting up of thermal power generation projects under tariff-based competitive bidding. These are termed Case 1 and Case 2 approaches.

In Case 1 instances, the procuring electric distribution utility calls for supply bids from interested IPPs without getting into issues of location of project, technology involved, or fuel used. The IPP has the freedom to decide the quantity of power offered to the procuring utility. The remaining power can be offered to another procuring utility through the same route or sold as merchant power.

In Case 2 instances, the utility specifies the location of the project and provides fuel (in the form of captive coal mines or coal block allocations) and invites bids from IPPs. Under this model, the utility or its representative agency creates an SPV that is responsible for initial project activities, such as preliminary studies; land acquisition and resolution of relief and rehabilitation issues; and tie-ups of necessary inputs such as obtaining water, fuel, statutory clearances and power evacuation facilities. The SPV also conducts the bidding process and awards the project. The SPV itself is transferred to the winning developer. Both routes involve award of projects on the build own operate basis after selecting IPPs on the basis of pre-defined technical considerations. The above approaches are followed at the state levels. At the central government level, the Case 2 approach has taken the form of the Ultra Mega Power Projects (UMPP) initiative. Power generated by these projects is also sold to electric distribution utilities at the state level.

Though the procurement of power projects in the above fashion is widely referred to as bidding, the Case 2 and UMPP routes are auctions while the Case 1 route is tendering. The difference is that under the Case 2 and UMPP routes, the SPV created by the procuring agency(s) undertakes all the project development work and is then transferred to the IPP offering to generate power at the lowest tariff. However, in the Case 1 approach, IPPs respond to tenders issued by utilities for power procurement and then set up their own generation assets or supply power from an existing asset.

For hydro power projects, sites identified for the setting up of projects are auctioned to IPPs on the basis of parameters such as lowest quoted tariff, payment of an upfront premium to the state government by the IPP over a specific minimum threshold, quantum of ‘free’ power offered from the project to the state government, extent of equity offered by the IPP in the project to the state government, or a combination of these.

48

ANNEXURE 2 - QUALIFICATION CRITERIA FOR BIDDERS IN THE FIRST ROUND OF SOLAR PROJECTS AWARDED UNDER THE NSM

Solar PV projects Solar thermal projects

Financial criteria • Net worth of the company equal to or greater than the value calculated at the rate of INR 3 crore (~US$566K) or equivalent US$ per MW of project capacity

• Computation of net worth to be based on unconsolidated audited annual accounts of the company

• For the purpose of the computation of net worth, the best year in the last four years to be considered

• Annual audited accounts from FY 2006–07 to FY 2009–10 to be submitted

• Net worth of the company equal to or greater than the value calculated at the rate of INR 3 crore (~US$566K) or equivalent US$ per MW of project capacity up to 20 MW. For every MW additional capacity beyond 20 MW, additional net worth of INR 2 crore (~US$377K) to be demonstrated.

• Computation of net worth to be based on unconsolidated audited annual accounts of the company

• For the purpose of the computation of net worth, the best year in the last four years to be considered

• Annual audited accounts from FY 2006–07 to FY 2009–10 to be submitted

Technical Criteria PV modules used in projects must qualify to the latest edition of any of the following International Electrotechnical Commission (IEC) PV module qualification test or equivalent standards of the Bureau of Indian Standards:- Crystalline silicon solar cell modules – IEC 61215- Thin film modules – IEC 61646- Concentrator PV modules – IEC 62108 PV modules must qualify to IEC 61730 for safety qualification testingPV modules to be used in a highly corrosive atmosphere throughout their lifetime must qualify to IEC 61701

• Only new plant and machinery to be used• Developer to fulfil either of following

requirements:- Developer is a technology provider who has

either experience in design and engineering of at least 1 MW capacity solar thermal power plant, having been in operation for at least one year on the specified cut-off date, or obtained at least one financial closure of a solar thermal power plant of at least 50% of the proposed capacity based on the proposed technology.

- Developer has a tie-up with a technology provider fulfilling above technology requirements.

- Developer is an EPC contractor/power generating company having experience in engineering, erection and commissioning of at least 100 MW capacity conventional thermal power plant and a tie-up with a technology provider fulfilling above technology requirements.

- Developer has a tie-up with an EPC contractor having experience in engineering, erection and commissioning of at least 100 MW capacity conventional thermal power plant and a tie-up with a technology provider fulfilling above technology requirements.

- Developer is an EPC contractor having experience in engineering, erection and commissioning of at least 1 MW capacity solar thermal power plant and a tie-up with a technology provider fulfilling above technology requirements. Developer has a tie-up with an EPC contractor having experience in engineering, erection and commissioning of at least 1 MW capacity solar thermal power plant and a tie-up with a technology provider fulfilling above technology requirements.

Minimum equity to be held bythe Promoter

• No change in the shareholding in the company developing the project permitted from the date of submitting a Request for Selection ( RfS) till the execution of the PPA

• Listed companies excluded from this provision• After execution of PPA, the controlling shareholding (i.e. at least 26% of the voting rights) in the

company developing the project to be maintained for a period of one year after commencement of supply of power

49

Financial Closure • Project to achieve financial closure within 180 days from the date of signing PPA• No extension to be granted for achieving this milestone• At this stage, developer to (i) provide evidence of possession of requisite land for project

development, (ii) fulfil requisite technical criteria, and (iii) specify plan for meeting the requirement for domestic content.

• Performance bank guarantee to be encashed in case of delay in achieving above condition and project award to be cancelled

Bank Guarantees • Earnest money deposit of INR 20 lakh per MW (~US$38K) along with response to Request for Selection

• Bid bond on graded scale along with response to Request for Proposal

Discount offered on CERC-determined tariff

Amount of bid bond applicable for every INR paisa of discount on CERC-determined tariff (per MW)

INR US$

< = 10% 10,000 189

> 10% and < = 15% 20,000 377

> 15% and < = 20% 30,000 566

> 20% and < = 25% 40,000 755

> 25% 50,000 943

Performance bank guarantee of INR 30 lakh per MW (~US$57,000) at the time of signing of PPA

Project Commissioning •Project to be commissioned within 12 months of the date of signing of PPA

• Performance guarantee to be encashed in case of failure to achieve this milestone in the following manner:

- Delay up to 1 month – 20% of total guarantee- Delay of more than 1 month and up to 2

months – 40% of total guarantee - Delay of more than 2 months and up to 3

months – remaining guarantee- Delay beyond 3 months and up to 6 months –

developer to pay liquidated damages at rate of INR 100,000 (~US$1887) per MW per day of delay

- Delay beyond 6 months – PPA to be terminated

• Project to be commissioned within 28 months of the date of signing of PPA

• Performance guarantee to be encashed in case of failure to achieve this milestone in the following manner:

- Delay up to 1 month – 20% of total guarantee- Delay of more than 1 month and up to 2 months

– 40% of total guarantee - Delay of more than 2 months and up to 3

months – remaining guarantee- Delay beyond 5 months and up to 8 months –

developer to pay liquidated damages at rate of INR 1,00,000 (~US$1887) per MW per day of delay

- Delay beyond 8 months – PPA to be terminated

Source: Government of India 2010a

50

REFERENCES 1. AES Solar Energy Pvt. Ltd., India. Presentation on 5MW Solar PV Project in Jodhpur, Rajasthan. 2010. New

Delhi.2. Anand, M. ‘Execution challenges facing solar projects in Gujarat.’ EQ International, pp. 34–35. July/August

2011.3. Asian Development Bank. India Solar Generation Guarantee Facility. 2011a. Available at http://beta.adb.org/

site/funds/single-partner-trust-funds/india-solar-generation-guarantee-facility. Accessed on December 5, 2011 at 11.30 a.m.

4. Asian Development Bank. Key Terms and Conditions for the India Solar Power Generation Guarantee Facility (Guarantee Facility). 2011b. Available at http://www.adb.org/projects/documents/india-solar-power-generation-guarantee-facility-key-terms-and-conditions. Accessed on December 5, 2011 at 11.30 a.m.

5. Australian Government. Solar Flagships Program Round 1 Information Guide for Applicants. 23 December 2009. Available at http://www.ret.gov.au/resources/Documents/solar_flagship/Solar%20Flagships%20Information%20Guide%20for%20Applicants.pdf.

6. Bloomberg New Energy Finance. ‘Brazil Poised for Major Growth in Wind Capacity – If Costs Drop or Efficiencies Rise. Wind developers under‐bid their natural gas rivals in Brazil’s recent power contract auctions, but serious tests lie ahead.’ August 31, 2011. Sao Paulo and London. Accessed on November 20, 2011 at 2.30 p.m.

7. Business Standard. ‘US concerned over domestic content requirements in India’s solar sector.’ July 17, 2011. Available at http://www.business-standard.com/india/news/us-concerned-over-domestic-content-requirements-in-indias-solar-sector/442942/. Accessed on November 20, 2011 at 3 p.m.

8. Central Electricity Authority, India. Monthly review of the power sector. 2010 and 2011. New Delhi. 9. Climate Spectator. ‘Brazil stirs the funding debate.’ Bloomberg New Energy Finance, 8 September 2010.

Available at http://www.climatespectator.com.au/commentary/brazil-stirs-funding-debate. Accessed on November 20, 2011 at 2.45 p.m.

10. Department of Minerals and Energy, Republic of South Africa. White Paper on the Renewable Energy Policy of the Republic of South Africa. Pretoria. 2003.

11. Deshmukh, R. Bharvirkar, R. Gambhir, A. and Phadke, A. Analysis of International Policies In The Solar Electricity Sector: Lessons for India. Prayas Energy Group, Pune, India, and Lawrence Berkeley National Laboratory, CA, USA. 2011

12. Early, C. ‘Low cost wind projects from recent auction “may not be built”.’ Windpower Monthly Magazine. September 29, 2011.

13. Economic Times. ‘Half of firms awarded solar projects yet to achieve financial closure.’ June 30, 2011. Available at http://articles.economictimes.indiatimes.com/2011-06-30/news/29721711_1_solar-projects-national-solar-mission-financial-closures

14. Ex-Im Bank. ‘Indian Solar Sector to Benefit from US EXIM Lending.’ August 16, 2011. Available at http://www.newenergyindia.org/index.php?option=com_content&view=article&id=41:indian-solar-sector-to-benefit-from-us-exim-lending&catid=1:latest-news. Accessed on December 5, 2011 at 11.00 a.m.

15. Garg, A. Gulati, M. and Tiwari, N. Moving Towards Low Carbon Economy: The Need for Renewable Energy Solutions - Renewable Energy in India: Capability, Challenges, and Prospects. India Infrastructure Report 2010: Infrastructure Development in a Low Carbon Economy. 3i Network; Oxford University Press. New Delhi. 2010

16. Government of India, Prime Minister of India. National Action Plan on Climate Change. New Delhi. 2008. 17. Government of Gujarat, Energy and Petrochemicals Department. Solar Power Policy -2009. G.R. No. SLR-11-

2008-2176-B. 2009.18. Government of Gujarat. Initiatives of Gujarat for implementation of the Solar Power Projects. Presentation

made at Conclave on JNNSM. New Delhi. 2010. 19. Government of India, Ministry of New and Renewable Energy. ‘Jawaharlal Nehru National Solar Mission –

Guidelines for Selection of New Grid Connected Solar Power Projects.’ 2010a. New Delhi. 20. Government of India, JNNSM. Recommendations of Committee set up for promotion of Manufacturing in

Solar Energy in India. 2010b. New Delhi.21. Government of India, Ministry of New and Renewable Energy. Annual Report 2010–11. New Delhi.22. Government of India, Ministry of New and Renewable Energy. Note No.29/5/2010–11/JNNSM(ST). 2011. New

Delhi.23. Government of Rajasthan, Energy Department. Rajasthan Solar Energy Policy, 2011. No.F.20(6)Energy/2010.

April 19, 2011.

51

24. Gulati M. ‘The Jawaharlal Nehru National Solar Mission: Implementation Issues on Bundling Scheme.’ Presentation at the Infraline Round Table on ‘National Solar Mission. April 7, 2010. Delhi.

25. Gulati, M. ‘Power Distribution: Being driven to insolvency by a governance crisis.’ IDFC Policy Group Research Paper. Mumbai. 2011.

26. Gulati, M. and Tiwari, P. Development of renewable energy in India: Role and effectiveness of electricity regulators. Renewable Energy Law and Policy Journal. 2/2011

27. IDFC. India Solar Policy: Elements Casting Shadow on Harnessing the Potential. No. 1, November 2011. Mumbai

28. Indian Semi-Conductor Association and National Manufacturing Competitiveness Council. Solar PV Industry Global and Indian Scenario. 2008. Bangalore and New Delhi.

29. Lewis, I J. ‘A Review of the Potential International Trade Implications of Key Wind Power Industry Policies in China.’ Paper prepared for the Energy Foundation China Sustainable Energy Program. 2007. Available at http://www.resource-solutions.org/pub_pdfs/China.wind.policy.and.intl.trade.law.Oct.07.pdf.

30. Maurer, T. A. Luiz and Barroso, A. Luiz. ‘Electricity Auctions: An Overview of Efficient Practices.’ The International Bank for Reconstruction and Development/The World Bank. 2011. Washington, DC

31. NTPC Vidyut Vyapar Nigam Limited. List of selected projects. Available at http://www.nvvn.co.in/Selected%20Projects%20List.pdf.

32. NTPC Vidyut Vyapar Nigam Limited. List of selected projects under JNNSM Phase I Batch II, Available at http://www.nvvn.co.in/BatchII_Selected_Projects.pdf.

33. Ontario Power Authority. microFIT Domestic Content. undated. Available at http://bit.ly/aHMljW. Accessed on January 18, 2012 at 3.35 p.m.

34. Patel, N. ‘Solar Energy – Gujarat Perspective.’ Presentation made at Conference on Solar PV Market in India: Driving Solar Forward, January 27–28, 2011. New Delhi.

35. Panchabuta-Renewable Energy and Cleantech in India. 2011. Gujarat Solar Power Policy – Debate over lack of competitive bidding. March 18. Accessed on November 14, 2011

36. Pearson, O N. First-Time Solar Producers May Imperil Indian Projects. Dec 20, 2010. Available at http://www.bloomberg.com/news/2010-12-19/first-time-solar-producers-may-imperil-india-s-push-for-renewable-energy.html Accessed on November 5, 2011 at 9.25 a.m.

37. pv magazine. Exclusive India update: Solar projects without financing will be cancelled’ July 12, 2011. Available at http://www.pv-magazine.com/news/details/beitrag/exclusive-india-update--solar-projects-without-financing-will-be-cancelled_100003641/. Accessed on December 4, 2011 at 12.20 p.m.

38. Remme, U. Trudeau, N. Graczyk, D. and Taylor, P. Technology Development Prospects For The Indian Power Sector. International Energy Agency. 2011. Paris

39. Robile, J. 2011. South African SOLAR PARK PROJECT UPDATE. Presented at Energex Africa 2011. 8 June 2011

40. Shiao, MJ. The Great Solar Trade Wall. Do trade walls and disputes help or hurt domestic solar markets? December 21, 2010. Available at http://www.greentechmedia.com/articles/read/the-great-solar-trade-wall.

41. Subramanya, K. National Solar Mission – Manufacturing Challenges. Presentation made at Solar Energy Conclave, New Delhi on Jan 11, 2010.

42. Temple, S and Tao A. ENF Future PV Technologies Review (3rd edition) 2010–11. ENF.CN.43. The World Bank. ‘Report on Barriers for Solar Power Development in India.’ 2010. New Delhi. 44. World Trade Organization. ‘Canada – Certain Measures Affecting the Renewable Energy Generation Sector.’

Dispute Settlement: Dispute DS412. 2011. Available at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds412_e.htm. Accessed on January

18, 2012 at 4.14 p.m.

FOOTNOTESi. Manufacturers of solar technology components may find it attractive to manufacture locally with large-scale demand and a supportive

environment. Enhanced domestic production would serve to lower costs.ii. Discussions with Mr Jeffrey Robile, Programme Director, Solar Parks, South Africa.iii. CERC is the regulator under the Government of India that is empowered to regulate generating companies owned or controlled by the

central government, generating companies other than those owned or controlled by the central government if such generating companies enter into or otherwise have a composite scheme for generation and sale of electricity in more than one state, inter-state transmission of electricity and inter-state trading of electricity.

iv. The installed capacity of solar power in 2009 was only 6 MW and this entire capacity was PV-based.v. NTPC is India’s largest power generator and regulated power utility with the majority shareholding owned by the GoI. 85% of its

generation capacity is contracted through long-term power purchase agreements and 15% is reserved by the Ministry of Power, GoI, which allocates this power to states that are energy deficient states. This 15% generation capacity available to the GoI to allocate at its discretion is commonly referred to as NTPC’s unallocated power.

52

vi. Given the longer gestation period of solar thermal projects, selection of projects for the entire capacity of 500 MW, less capacity of migrated projects, was done in FY 2010–11.

vii. Other incentives have also played a role.viii. The United Kingdom, Brazil, Argentina, Peru, Uruguay, Mexico and Honduras have used this mechanism specifically for clean energy.

Ontario (Canada) and California (US) are other examples. The more talked about ones in the last two years include the California Public Utilities Commission’s Renewable Auction Mechanism, the reverse auctions in China for solar projects and the reverse auctions in Brazil.

ix. No public government records are available on this subject. Further, no such alternatives were discussed or reasoned by the GoI at public debates or stakeholder discussions.

x. The exchange rate of 1 US$ = 53 INR as on December 31, 2011 has been used for conversions throughout this paper.xi. The first status report from GoI appeared only in March 2012, some time after the deadline for commissioning of projects awarded in the first

round of bidding. xii. December 2011xiii. Annual solar data available in India show that few regions in India have high direct normal Incidence (DNI) of solar radiation suitable for

CST, but global horizontal incidence (GHI) levels are high and spread over several regions and thus more suitable for solar PV. Further, while solar PV technology is very flexible in the context of any topography, CST has to be set up on a flat topography to ensure high levels of efficiency. Also, land requirement is large for grid-connected solar PV projects. The absence of proper feasibility reports on behalf of developers providing information on the correlation between the proposed sites and the technology selected by developers means project risks are very high and often not commensurate with the returns. (IDFC 2011).

xiv. The performance of solar projects is highly dependent on the incidence of solar radiation. Quality solar radiation data with a very high degree of accuracy and with a high level of confidence is an essential prerequisite for choice of technology, project development and viability of the project. Information on DNI of solar radiation is required for CST, and GHI is required for solar PV. Presently, good quality annual information with a fairly high degree of accuracy is available, which is good for framing broad policies. However, planning for projects requires seasonal and monthly information, while project development, assessing project feasibility and designing projects require monthly, daily and hourly data with a high level of confidence. Typical meteorological year data may not be always appropriate as they are mostly city-based and not for remote areas where the project sites are located. Ground measurement of meteorological monthly/daily/hourly data at the regional level, as well as within a few kilometres of proposed sites, needs to be collected over a statistically acceptable time period to provide developers and lenders the confidence desired. Inaccuracy in solar resource estimation affects expected future returns of the project. (IDFC 2011)

xv. Technology choice is strongly correlated with the size, type and variability of solar resource. However, these data were not well established in India. Further, solar technologies are at early stages of deployment and development in India, and therefore carry higher risks of performance. Globally, too, solar technology is an emerging and rapidly developing segment.

xvi. Other factors that have been cited include the unavailability of non-recourse funding, lack of long-term funds given the requirement of solar power projects, rising interest rates, and dearth of equity. It would be useful to point out that these factors are not applicable only to solar power projects and have a bearing on all infrastructure projects. These have therefore been kept out of this discussion. It has also been noted that the lack of awareness and understanding of solar technologies among financiers has deterred them from funding these projects.

xvii. Discussions with experts in India.xviii. It is important to note that efficiency alone is not enough to judge the merits of a solar PV technology. A low-efficiency

module that is also low cost can be quite economical and competitive.xix. It is, however, interesting to note that the lowest bidder in the second round of bidding is Solaire Direct, the second largest solar power

company in France. The latest PV support schemes of the French government propose to severely curtail incentives for solar power, including a potential annual cap of 500 MW. The French company has a pressing need to expand its market presence. With India providing such an opportunity, the company is keen to establish itself in India.

xx. Taken from press reports quoting Dr Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, Government of India. No public documents provide estimates of these losses for FY 2010–11.

xxi. The author has participated in several discussions, consultations and events related to the NSM, and was present during several discussions where these concerns were raised by developers as well as financial institutions.

xxii. Even in the case of diversion, the defaulting discom is not absolved of the liability to pay capacity charges.xxiii. A PCG guarantees scheduled payments of principal and interest under loans provided by commercial banks. Therefore, it covers lenders for

any non-payment by a project on the guaranteed portion of the scheduled principal and interest payments, thereby providing comprehensive coverage for all commercial and political risks for a specified portion of the debt financing for a project.

xxiv. ADB has sized the PCG facility at US$150 million to support 12–15 projects between 2011 and 2014, which according to the ADB would represent a reasonable sample of first projects to be financed.

xxv. Several states in India have come up with their own policies for the promotion and development of solar power. Gujarat and Rajasthan are the notable ones.

xxvi. Based on discussions with experts in India.xxvii. Ex-Im Bank follows a financial year beginning in October. The period here refers to October 2010 to September 2011.xxviii. Based on discussions with experts in India.xxix. The author worked in a financial institution which is the largest stakeholder in a renewable energy development company in India. The

author has therefore been privy to such information, though data cannot be cited for this.xxx. Though solar radiation data in India are available from many different sources such as the National Renewable Energy Laboratory USA,

METEONORM and 3TIER, these data sources have their limitations (The World Bank 2010). The government needs to have its own set of databases that is approved and certified so that the bankability issue of data can be resolved.

xxxi. The focus here is specifically on IPPs since solar power projects under the NSM and state policies are being set up by the private sector. Utilities also procure power from the power stations owned and operated by generation companies (gencos) [add to abbreviation list] that were state-owned and central government-owned on the basis of a PPA. For state-owned gencos, the entire power produced from a project is procured by the utility in the concerned state. For central government-owned gencos, the quantum of power allotted to utilities is determined by a specific formula developed by the GoI and is primarily based on the demand supply imbalances in different states. Recent reforms have mandated that even central government-owned gencos would have to participate in tariff-based auctions or bidding to set up projects.

xxxii. The International Electrotechnical Commission is the international standards and conformity assessment body for all fields of electrotechnology.

53

©

T

7

REPORT

2012