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Legalese | March 2016

Sunshine in the Solar Sector

That stemming climate change needs urgent attention and decisive action, is not news. The need for clean energy is being felt like never before and as a country with the third largest carbon footprint and a population of over a billion, India needs to find solutions.

Paradoxically though, in a country with the fourth largest coal reserves, per capita electricity consumption is abysmally low and a significant number of Indians either have little or no access to electricity, while others face challenges in accessing uninterrupted and reliable electricity supply. The significance of the largely untapped renewable energy (RE) potential in India-particularly solar-is therefore hard to miss. In its report on India´s Renewable Electricity Roadmap 2030, Niti Aayog estimates India´s solar potential to be in excess of 10,000 GW.

The Indian government has set ambitious targets-100 GW of solar energy by 2022; compared with the present total installed solar capacity of 3 GW, the task seems herculean. The National Solar Mission (NSM) is running behind schedule as well. The Indian Government however is stepping on the gas with a massive push for RE generally, and solar energy in particular. In December 2014, it announced a scheme for developing solar parks and ultra-mega solar projects. At least 25 such solar parks across states, each with a capacity of 500 MW and more, with a total central financial assistance of about $675 million are planned over a period of five years.

The scheme envisages various modes of implementing these solar parks-either through the designated state nodal agencies or the Solar Energy Corporation of India (SECI), or through a joint venture of the two, or by private solar developers in collaboration with the relevant state government. The Cabinet Committee on Economic Affairs (CCEA) has also approved the setting up of more than 2,000 MW of grid-connected solar photovoltaic projects by solar power developers on build-own-operate (BOO) basis, with viability gap funding under Batch III of the second phase of the NSM. Replicating the success of the Charanka Solar Park in Gujarat and the Bhadla Solar Park in Rajasthan is clearly a priority for the government.

Towards improving evacuation of renewable power to load centres, the CCEA has recently also cleared the creation of 48 new grid sub-stations by installing over 7,800 circuit kilometres (ckm) of transmission lines in seven states, namely Andhra Pradesh, Gujarat, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, and Rajasthan. The cost of this much needed project is expected to be met to the extent of 40 per cent by way of a grant from the National Clean Energy Fund, while states are required to contribute 20 per cent of the project cost. The balance is envisaged to be met through debt financing from German development bank KfW.

The Indian Government´s emphasis on solar energy has been met with positive response from states, and the state of Andhra Pradesh and the newly formed state of Telangana are emerging as front runners in taking this initiative forward at the state level. Both have clear solar policies in place and are pursuing this opportunity aggressively. While Andhra Pradesh´s policy sets a goal of 5 GW of solar energy in the next five years-half of which is envisaged to be set up in the form of solar parks in line with the central government´s policy-the Telangana policy does not set a target but does demonstrate a resolve for harnessing the solar potential of the state. Both states provide incentives such as exemption from electricity duty and also from cross-subsidy surcharge for solar energy consumed within the respective states, while the Telangana policy additionally provides for a single window clearance (modalities of which are still to be notified though) and a number of incentives and concessions, including exemptions from land ceiling statutes to the extent of land required, 100 per cent refund of value added tax, refund of stamp duties paid for purchase of land for solar power projects, assurances of process of applications for pollution control clearances within a week of application, grant of registration of the project as a ´factory´ for the purposes of labour compliances within a week of application, etc.

The top three states in terms of installed solar capacity, namely Rajasthan, Gujarat, and Madhya Pradesh will need to be on their toes with Andhra Pradesh and Telangana snapping at their heels. Indeed, tenders are expected for development of solar power projects in an ultra-mega solar park in Rewa, Madhya Pradesh, which could potentially be one of the biggest solar power facilities in the world.

Although these efforts should have a positive impact on investor sentiment-especially foreign investor sentimentû and encourage investments in this space, debt financing for solar projects in India has been in a bottleneck, with Indian banks either having limited capacity or appetite or both. The proposal by the Minister for Power, Coal, and New and Renewable Energy Piyush Goyal, to denominate solar power purchase agreements (PPA) with distribution companies (discoms) in US Dollars could therefore be a game changer.

The proposal is expected to enable developers to access cheaper foreign debt which in turn could result in a dramatically lower solar power tariff. To explain, debt from Indian banks and financial institutions generally cost around 12-13 per cent, while the cost of foreign debt is about the same after aggregating LIBOR, credit default spread, interest rate hedge, and currency risk hedge, the last component accounting for almost 4-4.5 per cent.

A US Dollar denominated PPA, which therefore obviates the necessity of the hedging cost, opens up the possibility of borrowing cost dropping to 6-7 per cent, translating in lower solar tariff. While, of course, this does not do away with the necessity of a hedge per se, it is proposed that a hedging cost of Rs 0.90 or about 1.5 cents will be added to the tariff to provide for depreciation in the value of the Indian rupee. With this, the final tariff could be in the region of Rs 4.50 or 7.5 cents, significantly lower than the current solar tariff of Rs 6-7. This power can then either be sold directly to the discoms or can be bundled with power from conventional sources. The proposal is still being considered by the government, but it does certainly seem to have the potential of significantly improving the contribution of solar energy in the electricity mix if it sees the light of day.

The Indian Government is also exploring global partnerships to advance the development and adoption of clean technology, including solar power. For instance, a memorandum of understanding (MoU) geared at establishing institutional linkages and bilateral cooperation on RE has been executed on April 10, 2015 with the Government of France. The Governments of India and the USA have also unveiled their new initiative ´Promoting Energy Access through Clean Energy (PEACE)´, envisaging the creation of a ´Pace Setter Fund´ which is intended to provide early-stage grant funding to promote the commercialisation of innovative off-grid technology solutions. Global partnership frameworks have also been established between India and Denmark, Iceland, Australia, and Spain, each.

While smart, out-of-the-box solutions can create opportunities for a solar revolution, leveraging other accessible contemporary funding sources is important. Close on the heels of the first-of-its-kind domestic issue of the Indian rupee denominated green bonds aggregating about $160 million by Yes Bank, the EXIM Bank of India launched a five-year green bonds issue of $500 million in March, 2015. This is significant for a number of reasons: it was the first US Dollar denominated green bond offering from India, the first benchmark-sized green bond out of Asia in 2015, and the third ever green bond issuance out of Asia. Significantly, the EXIM Bank was looking at raising only $250 million, but it garnered double that amount thanks to an over-subscription by more than three times. Although in this particular case, EXIM Bank will use the proceeds to fund eligible green projects in countries including Bangladesh and Sri Lanka, green bonds are an attractive fundraising avenue for RE initiatives generally and particularly solar projects in India. A prediction therefore of the possibility of Indian issuance of overseas securities meeting environmental criteria surging to $1.5 billion annually in the next two to five years should inject excitement in this immensely potent sector.

India seems intent on aligning itself with the sun. Positive intent appears to be coupled with beginnings of decisive action. Steps being taken by NTPC to buy 15 GW of solar energy on behalf of the MNRE, its commitment to add another 10 GW of solar capacity itself, the PTC seeking to call bids from solar project developers on behalf of MNRE, coupled with enthusiastic response from the Indian private sector, including Adani Power´s plans to set up a 1 GW solar park in Tamil Nadu and a 10 GW solar park in Rajasthan should strengthen the belief in India´s solar future. Apollo will be smiling.

Author: This article has been authored by Upendra Joshi and Swathy Ramanath, Khaitan & Co.

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