A brief presentation discussing the overview, current status, policy framework and financial analysis of Solar sector in India

1. January - 2012

2. Table of contents
A. Executive summary
B. Power sector overview
I. Indian power sector: Overview
II. Indian renewables sector: Overview
III. 2003 Electricity act
C. Solar sector
I. Solar potential in India
II. Jawaharlal Nehru National Solar Mission
III. Incentives offered by Government of India
IV. Solar India: Key investment highlights and concerns
V. Recent developments: Solar
D. Solar technologies: PV and CSP
E. Case study
F. Conclusion

3. Executive summary
 India’s strong economic growth, combined with country’s industrialization,
increasing population and increased access to power has led to rising demand
for power in the country
 Historically, the supply has consistently lagged the demand in the country
by c.10%, and expected to worsen further
 Government of India has set very ambitious targets to plug the gap, the big
push coming from renewables
 With the strong commitment from Government, and the various announced
incentives, the renewables, particularly solar, presents an opportunity to earn
very attractive returns over a longer time frame
 India has significant potential for generating renewable energy, particularly in
hydro, wind and solar
 This study presents a case ‘for’ and ‘against’ investing in the solar sector,
identifying the potential returns on offer taking into account the current
regulatory framework

5. Indian power sector: Overview
 India’s rapidly expanding economy is presenting many problems for the
Indian Government, not least the fact that around one third of Indians do not
currently have access to electricity
 Despite making up 17% of the world’s population, India only has a 3% share
of the world’s energy consumption
 Population growth to further increase energy demand
 India’s per capita consumption is significantly below other comparable emerging markets,
including the world average
 India’s consumption per capita of 704 kW/annum is more at par with Philippines than
China, which has a consumption per capital of 2,585 kW/annum
(kW / annum)
Consumption per capita Population growth rate
Source: World Bank, Global Insights and broker research reports.

6. Indian power sector: Overview (cont’d)
 GDP is closely related to energy production, and insufficient capacity is
currently having a negative impact on GDP growth
 GDP has grown at rates of between 6.5 – 9% per year over the past 3 years; the ability to
maintain these rates is threatened by the lack of capacity
GDP growth rate
 Demand for energy in India has continually exceeded production capacity;
with a peak historic energy shortage of 12.7% in 2009-2010
 Despite Government’s attempts to improve situation, energy gap has continued to increase
(TWh) (GW)
Generation demand and supply Peak capacity demand and supply
Source: Global Insights, CEA and broker reports.

7. Indian power sector: Overview (cont’d)
 To address this gap, the GoI has targeted an expansion of its power capacity to
342GW by 2017 from 209GW currently, through series of 5-year plans
 This equates to a yearly addition of approximately 18GW, a projection that was restated in
the Government’s 5 year plan
 Main source of power is from thermal power plants (59% of the total installed capacity)
 Hydro contributes 19%, whilst renewable accounts for 11%, nuclear for 2% and the
remaining 9% is held as captive
 Originally the expectation of the government’s current 5 year plan, covering
the period 2007 – 2012, was to add an additional 93GW of capacity across the
period, 15% of which was to be generated from renewable sources
 If the Government is to come close to meeting this target in the near future,
renewable energy technologies will play a major role in making it possible
(GW)
Targets for increased capacity vs. Actual installation Current installed capacity by type: 209.1 GW
Source: MNRE, CEA and broker research reports.

8. Indian renewables sector: Overview
 Excluding large hydro projects, renewable energy generation currently makes
up 11% of generating capacity in the country (c.23GW)
 Government targets to set up 74GW of renewable energy by 2022
 Implies that c.51GW of renewable energy capacity needs to be added over the next ten years
 Government’s commitment to the sector can be seen via its recent
performance as shown in the below table:
Technology Target for Achievement during Achievement during MW % of total
2011-12 the month of Jan-12 2011-12
Wind 2,400 101 2,023 16,179 70%
Small Hydro 350 48 258 3,300 14%
Biomass 460 25 146 1,143 5%
Bagasse 20 285 1,953 8%
Solar 200 292 446 481 2%
Waste to Energy 25 1 1 74 0.3%
Total (MW) 3,435 486 3,159 23,130 100%
 State Renewable Purchase Obligations (RPOs):
 State-wide RPOs require states to purchase up to a minimum of 10% of annual energy
requirements from renewable sources by 2012
 Scheduled to increase to 20% by 2020
Source: Ministry of New and Renewable Energy.
Note: Capacities as of 1/31/2012.

9. 2003 Electricity Act
 2003 Electricity Act introduced a number of reforms to the Indian power
market, essentially opening up the electricity market up to the private sector
 These changes included:
 removing the requirement to obtain a license to set up a generation plant
 providing more open access to the transmission networks, and,
 introducing competition for the distributors by providing open access to
consumers
 Under the legislation electricity generators can either sell to the local State
Electricity Board under a 15-20 year PPA or negotiate custom PPAs with
industrial customers
 Merchant contracts tend to be shorter in duration (5-10 years) but are usually
much more lucrative
 The state and central government sectors dominate
the market in terms of ownership of power
generating assets
 However, since the liberalization of the energy
markets, the private sector has grown from 11% to
presently c.21%
Source: Broker research reports.
Ownership of power generating assets

11. Solar potential in India
 India presents a great potential for solar
power
 India receives solar energy equivalent to
over 5,000 trillion kWh per year, far more
than its total energy consumption
 Daily average solar energy incident varies
from 4 - 7 kWh per sq. m. depending on the
location and time of the year
 Irradiation data suggests that 0.5% of
India’s land area under solar PV could meet
all electricity needs of the country in 2030
 Rajasthan and north Gujarat receive highest
annual radiation with over 6 kWh/sq meter
 Andhra Pradesh, Maharashtra, and Madhya
Pradesh receive radiation of 5-6 kWh/sq m
 But, still comparable to European
countries with a high solar installations,
such as Spain and Italy
Source: MNRE website, PV Group and broker research reports.

12. Jawaharlal Nehru National Solar Mission
 Launched in Jan 2010 by honorable Prime Minister Dr. Manmohan Singh,
JNNSM is a major initiative of the Government of India and State Governments
to establish India as a global leader in solar energy
 Aims to install 20GW of solar capacity by 2022 in addition to 2,000 MW of off-
grid solar power
 Mission will adopt a 3-phase approach:
 Phase 1: Spanning the remaining period of the 11th Plan and first year of the
12th Plan (up to 2012-13)
 Phase 2: remaining 4 years of the 12th Plan (2013–17)
 Phase3: 13th Plan (2017–22)
 Proposed roadmap:
S. No. Application segment Target for Phase I Target for Phase 2 Target for Phase 3
(2010-13) (2013-17) (2017-22)
1. Solar collectors 7 million sq meters 15 million sq meters 20 million sq meters
2. Off grid solar Applications 200 MW 1,000 MW 2,000 MW
3. Utility grid power, including roof top 1,000 - 2000 MW 4,000 - 10,000 MW 20,000 MW
 First batch of projects allotted for Phase 1 included 150 MW of Solar PV and
470 MW of Solar Thermal
Source: MNRE website, Wikipedia.

13. Renewable incentives offered by GoI
 Preferential FiTs offered to renewable energy plants connected to state electricity grids
Feed-in-tariffs  PPA’s signed for long period ensuring reduced risk and easier to forecast revenue stream
(FiT)  Considers the cost of capital and aims to provide a high per-tax equity IRR
 Successfully implemented in various European countries
 Provided to support power projects connected to distribution grid of state utilities
Generation based  Maximum amount of GBI applicable for a solar project determined after deducting PPA rate
incentives (signed with state utility) from a notional amount of Rs. 17.91 per kWh
 CERC reference tariff of Rs. 5.5 per kWh implies a GBI of Rs. 12.41 per kWh for solar
 80% accelerated depreciation during the initial years of operation, providing effect to
Accelerated substantial tax benefits and strong cash flow profile
depreciation  In parallel with the GBI’s in a mutually exclusive manner
 Option to either avail accelerated depreciation or GBI, but not both
 Project developers applicable for a 10 year tax holiday
Preferential tax
rates  However, a minimum alternate tax (MAT) of 18.5% applicable during the period, as
compared to the corporation tax rate
 Genco’s can opt for feed-in-tariff revenue structure or the REC structure
Renewable energy
 Incentives of 1 REC per MWh which can be sold in the open markets
certificates (REC)
 Solar REC banding fixed at Rs. 12 per kWh – Rs. 17 per kWh
 Carbon credits issued by the Clean Development Mechanism board for emissions reduction
Carbon emission achieved under the rules of Kyoto Protocol
reductions (CER)
 Developed western markets but Indian markets are still far behind
Source: MNRE data, other web-based available data.

14. Solar India: Key investment highlights
Long term PPA’s offers a predictable and stable cash flow
Quasi-regulated sector 
profile, emphasizing the low risky nature of the sector
With the world economies focusing on carbon free
Global initiatives 
environment, the need for renewables becomes more strong
Sector strongly backed by the GoI, underlined by various
Government support 
incentives offered aimed at providing high IRR’s
High EBITDA and Net income margins, characterized by low
High margin 
working capital, supports the financial case for renewables
Oversupply and severe competition among solar component
Reducing costs 
providers pushing costs down
Oversupply and severe competition among solar component
Abundant supply 
providers pushing costs down

15. Solar India: Key concerns
 Strongly reliant on Government, which has been marred with
 Reliability on GoI red-tapism and criticized for slow pace of reforms
 Delayed payments from  Cash constrained and highly leveraged IPPs may find it
difficult to cope with the slow and infrequent payments from
SEB’s the State Electricity Boards
 High levels of debt on Government as a result of funding
 Risk of policy changes renewable subsidies can lead to reduction in incentives, as is
currently the case with various European economies
 Despite various technological achievements in the sector, the
 High initial costs initial setting up costs of solar plants is still very high, with
grid parity levels still far from reality

16. Recent developments: Solar
 In December 2010 the GoI announced the winners of its first solar auction
with around 610MW awarded to 35 winners
 Auction had bids for c8.0x the capacity offered
 c.470MW of total capacity was solar thermal, whilst the remainder was
solar PV
 First auction widely criticized due to
 small size of the projects (maximum of 5MW)
 irrational bidding, largely due to the auction rules, whereby project
developers that were offering to sell electricity at the cheapest rates
were selected
 In August 2011 the GoI invited companies to register for the second national
auction to award licenses to build 350MW of solar PV by 2013
 Some modifications made to the rules and guidelines, including, maximum
size of each project increased from 5MW to 20MW, and each bidder could
win as much as 50MW of total capacity
 In December 2011, MNRE announced generation based incentives (GBI) of Rs.
12.41 per kWh
 Quantum of GBI is kept fixed, as a difference of the CERC tariff (Rs. 17.91 per
kWh) and a reference tariff of Rs. 5.5 per kWh
Source: Ministry of New & Renewable Energy and broker research reports.

18. Solar PV: Technology overview
Solar PV value chain
 Solar Photovoltaic (PV) is a method of generating electrical power by
converting solar radiation into direct current electricity using semiconductors
that exhibit the photovoltaic effect
 Employs solar panels composed of a number of solar cells containing a
photovoltaic material
 Materials presently used for photovoltaics include monocrystalline silicon,
polycrystalline silicon, amorphous silicon, cadmium telluride, and copper
indium gallium selenide/sulfide
 PV panels based on crystalline silicon modules encountering competition by
thin-film based solar panels, which are relatively cheaper but less efficient
Source: Wikipedia and web.

19. Solar thermal: Technology overview
Solar thermal flow chart
 In solar thermal energy plants, solar radiation is concentrated by mirrors or
lenses to obtain higher temperatures – a technique called Concentrated Solar
Power (CSP)
 Solar thermal panels transfer the sun's heat, as opposed to generating
electricity
 Most popular application is to heat water, which then subsequently generates
electricity
Source: Wikipedia and web.

22. Key assumptions and rationale
 PPA tariff:  INR 5.5 / kWh  As per latest MNRE announcement
 Merchant power prices:  INR 5.8 / kWh  Average of 2008-09, 2009-10, 2010-11
 GBI:  INR 12.41 / kWh  As per latest MNRE announcement
 REC:  INR 14.5 / kWh  Average of floor and forbearance price
 Capital cost / MW:  INR 169 million  As per CERC guidelines for 2010-11
 Capacity utilization factor:  19%  As per CERC guidelines for 2010-11
 Debt / Equity ratio:  70:30  As per CERC guidelines for 2010-11
 Debt interest rate:  13.4%  As per CERC guidelines for 2010-11
 Debt repayment period:  10 years  As per CERC guidelines for 2010-11
 Tax rate  MAT @ 18.5% (1st 10 yrs)  As per CERC guidelines for 2010-11
 34% thereafter
 Return on Equity  15%  Assumptions for the base case
 Construction period  18 months  Assumptions for the base case
 Depreciation  7.0% (1st 10 yrs)  As per CERC guidelines for 2010-11
 1.3% thereafter
 O&M expenses % of sales  10.0%  Assumptions for the base case
 O&M expenses escalation  2.0%  Assumptions for the base case
 Interest on W.C.  12.89%  As per CERC guidelines for 2010-11

23. Key financials

24. Cash flow statement

25. Free cash flow analysis

26. Sensitivity analysis
Equity value sensitivity to IRR and Capex / MW Equity value sensitivity to CUF and IRR
Capex / MW
Target IRR
Equity value sensitivity to CUF and Capex / MW IRR sensitivity to CUF and Capex / MW
Capex / MW
Capex / MW

28. Key assumptions and rationale
 PPA tariff:  INR 5.5 / kWh  As per latest MNRE announcement
 Merchant power prices:  INR 5.8 / kWh  Average of 2008-09, 2009-10, 2010-11
 GBI:  INR 9.81 / kWh  As per latest MNRE announcement
 REC:  INR 14.5 / kWh  Average of floor and forbearance price
 Capital cost / MW:  INR 153 million  As per CERC guidelines for 2010-11
 Capacity utilization factor:  23%  As per CERC guidelines for 2010-11
 Debt / Equity ratio:  70:30  As per CERC guidelines for 2010-11
 Debt interest rate:  13.4%  As per CERC guidelines for 2010-11
 Debt repayment period:  10 years  As per CERC guidelines for 2010-11
 Tax rate  MAT @ 18.5% (1st 10 yrs)  As per CERC guidelines for 2010-11
 34% thereafter
 Return on Equity  15%  Assumptions for the base case
 Construction period  18 months  Assumptions for the base case
 Depreciation  7.0% (1st 10 yrs)  As per CERC guidelines for 2010-11
 1.3% thereafter
 O&M expenses % of sales  10.0%  Assumptions for the base case
 O&M expenses escalation  2.0%  Assumptions for the base case
 Interest on W.C.  12.89%  As per CERC guidelines for 2010-11

29. Key financials

30. Cash flow statement

31. Free cash flow analysis

32. Sensitivity analysis
Equity value sensitivity to IRR and Capex / MW Equity value sensitivity to CUF and IRR
Capex / MW
Target IRR
Equity value sensitivity to CUF and Capex / MW IRR sensitivity to CUF and Capex / MW
Capex / MW
Capex / MW

34. Concluding remarks
 The Government commitment and current regulatory framework presents an
attractive opportunity in the Indian renewables space
 As can be seen with the above cases, the solar sector offers high rates of return
in the current scenario
 Evidently solar thermal, with better capacity utilization factors and lower cost
of construction, seems to offer better rate of return
 With the rising global competition among solar component manufacturers
and, thus, the oversupply, the prices of solar PV have gone down significantly
and presents an opportunity for outperformance
 However, high reliance on Government and the slow pace of reforms, as
evidenced by the past performance, is in itself one of the biggest inherent risks
 Thus, as with any other sector, solar sector comes with a mixed bag of ‘pros’
and ‘cons’, but the recent rush from private equity players to develop the
renewable energy sector says something more about the positive side of the
story