India: Proposed Guarantee Facility Solar Power Generation

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Report and Recommendation of the President to the Board of Directors

Project Number: 44941 April 2011

Proposed Guarantee Facility Solar Power Generation (India)

In accordance with ADB's public communications policy (PCP, 2005) this abbreviated version of the RRP excludes confidential information and ADB's assessment of project or transaction risk as well as other information referred to in paragraph 126 of the PCP.

CURRENCY EQUIVALENTS (as of 1 February 2011)

Currency Unit – Indian rupee/s (Re/Rs)

Rs1.00 = $0.022 $1.00 = Rs45.91

ABBREVIATIONS

ADB – Asian Development Bank ASEI – Asia Solar Energy Initiative CERC – Central Electricity Regulatory Commission CO2 – carbon dioxide DMC – developing member country ESMS – environmental and social management system GUVNL – Gujarat Urja Vikas Nigam Limited MNRE – Ministry of New and Renewable Energy NSM – National Solar Mission NTPC – National Thermal Power Corporation NVVN – NTPC Vidyut Vyapar Nigam PCG – partial credit guarantee PPA – power purchase agreement REC – renewable energy certificate RPO – renewable purchase obligation SEB – state electricity board SERC – state electricity regulatory commissions SPV – special purpose vehicle TA – technical assistance

WEIGHTS AND MEASURES kWh – kilowatt-hour m2 – square meter MW – megawatt MWh – megawatt-hour

GLOSSARY

Insolation – Insolation or irradiance is a measure of intensity and availability of sunlight in a given location which can be converted to electricity either through photovoltaic solar panels or concentrating solar thermal power technology.

NOTES

(i) The fiscal year (FY) of Indian banks and companies ends on 31 March. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 31 March 2000.

(ii) In this report, “$” refers to US dollars.

Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Director General P. Erquiaga, Private Sector Operations Department (PSOD) Director M. Barrow, Infrastructure Finance Division 1, PSOD

Team leader D. Purka, Senior Investment Specialist, PSOD Team members C. Gin, Senior Counsel, Office of the General Counsel S. Gupta, Principal Investment Specialist and Unit Head, Private Sector Operations, India Resident Mission, PSOD V. Medina, Safeguards Officer, PSOD J. Munsayac, Social Development Specialist, PSOD A. Patil, Investment Specialist, PSOD A. Porras, Safeguards Officer, PSOD B. Raemaekers, Senior Financing Partnership Specialist (Guarantees and Syndications), Office of Cofinancing Operations

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

FACILITY SUMMARY I. THE PROPOSAL 1 II. BACKGROUND AND RATIONALE 1 A. Project Identification and Selection 1 B. Sector Background 2 C. Alignment with ADB Strategy and Operations 4 III. THE FACILITY 5 A. Facility Description 5 B. Development Impact 6 C. Environment and Social Dimensions 7 D. Program Financing Plan 8 E. Implementation Arrangements 9 F. Projected Operational and Financial Performance 10 G. Guarantee Pricing 11 IV. THE PROPOSED ADB ASSISTANCE 11 A. The Assistance 11 B. Justification for ADB Assistance 12 C. Risks and Mitigation Measures 13 D. Assurances 15 V. RECOMMENDATION 15

APPENDIXES 1. Design and Monitoring Framework 17 2. India’s National Solar Mission 19 3. Pipeline of Solar Power Generation Projects 26 4. Summary Poverty Reduction and Social Strategy 29 5. Summary Environmental and Social Management System 32 6. Partner Bank Due Diligence List 37 7. Summary Guarantee Term Sheet and Project Eligibility Criteria 38

SUPPLEMENTARY APPENDIXES (available on request) A. Economic and Financial Analysis of Representative Solar Power Project B. Credit Analysis of NTPC Vidyut Vyapar Nigam C. Credit Analysis of Gujarat Urja Vikas Nigam Limited D. Due Diligence Report of Norddeutsche Landesbank – Girozentrale (Nord/LB)

FACILITY SUMMARY

Facility Description A facility whereby the Asian Development Bank (ADB) will issue partial credit guarantees (PCGs) in an aggregate amount of up to $150 million of principal (or its equivalent in Indian rupees or other foreign currency acceptable to ADB), in favor of foreign and local commercial banks lending to solar power generation projects in India. The facility will support multiple projects up to a maximum size of 25 megawatts (MW) under a solar power program with the central or state government. Under the facility, ADB will issue PCGs to guarantee scheduled payments of principal and interest under loans to be provided by foreign or local commercial banks. The PCGs will be provided without government counter-guarantee.

Classification Targeting classification: General intervention Sector (subsector): Energy (Renewable energy) Themes (subthemes): Environmental sustainability (eco-efficiency); economic growth (promoting economic efficiency and enabling business environment); capacity development (institutional development); private sector development (private sector investment) Location impact: National (high), regional (medium), rural (medium) Partnership: Foreign and local commercial banks, development partners

Environmental and Environment: FI Social Safeguards Involuntary Resettlement: FI Classification Indigenous Peoples: FI

Impact, Outcome, The outcome will be the demonstration of the profitable and sustainable and Benefits solar power generation plants under the National Solar Mission (NSM) and state power schemes, which will contribute to the growth of India’s power generation supply through low carbon resources. The impact will be successful implementation of phase I of the NSM, increased foreign direct investment by the private sector in the solar power industry and long-term cost reduction for solar power in India.

Project Borrowers Projects will be implemented by special purpose vehicle companies, and Sponsors incorporated in India, which will develop, construct, commission, and operate solar power generation projects. Project sponsors will include local and foreign investors with at least 50% of their shares held by private sector entities.

Guaranteed Select local and foreign commercial banks operating in the project Lenders finance market in India. ADB will conduct due diligence and seek the Investment Committee’s approval of each partner commercial bank to be eligible under the facility. ADB will not issue PCGs to any single lender that in aggregate would exceed 40% of the facility.

Proposed ADB A guarantee facility of $150 million backed by the ordinary capital Assistance resources of ADB. Project loans under the facility will have a term of up to 15 years (18 years in some exceptional cases) including a grace period of up to 1 year, and other terms and conditions as approved by ADB’s Investment Committee. The guarantees will partially cover nonpayment by the borrower. The net present value of the guaranteed outstanding principal and accrued interest will not exceed 50% of the loan amount for the project.

Implementation Projects will be initially screened by partner commercial banks and Arrangements assessed as to whether they are in line with ADB’s eligibility criteria for the facility. Banks will conduct due diligence in accordance with ADB’s requirements and in line with ADB policies on anticorruption, safeguards, integrity, and procurement. ADB will conduct due diligence on partner commercial banks and submit this to the Investment Committee prior to any guarantees being issued. PCGs will be materially in line with the agreed terms for the facility. Appropriate facility limits and other sub- limits on sponsors, partner banks, and projects will be maintained, unless otherwise approved by the Investment Committee.

Risks and Key risks examined and mitigated during due diligence include (i) Mitigating technology risk and equipment manufacturer risk; (ii) sponsor risk; (iii) Measures off-taker risk; (iv) regulatory risk, (v) risk sharing with partner banks, (vi) lack of technical expertise of partner banks in the evaluation of solar energy projects, and (vii) selection of partner banks. These risks will be mitigated by: (i) establishment of well defined eligibility criteria for equipment manufacturers and sponsors, (ii) appropriate structuring of the facility, (iii) the strong commitment of the government to support solar power projects, (iv) continuous involvement of ADB in the selection process of each of the partner banks, (v) parallel technical assistance provided by international solar experts, and (iv) detailed evaluation of potential local commercial banks.

Justification / ADB ADB assistance (through the facility and parallel technical assistance) Value-Added will help solar projects close affordable long-term financing, which is a necessary condition for the viability of a solar power project. ADB’s assistance will mobilize the participation of local and foreign commercial banks with little or no experience in solar energy in India. The assistance will demonstrate the commercial viability of utility-scale, grid-connected solar photovoltaic technology in India.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed guarantee facility for solar power generation projects in India. The design and monitoring framework is in Appendix 1.

II. BACKGROUND AND RATIONALE

A. Identification and Selection

2. Asian Development Bank (ADB) technical assistance (TA) supports the Ministry of New and Renewable Energy (MNRE) in the formulation and implementation of India’s National Solar Mission (NSM), announced by the Government of India in January 2010. 1 The NSM intends to commission 20,000 megawatts (MW) in grid-connected solar power generation by 2022 to help fill persistent energy shortages with diversified low-carbon power generation, secure its energy independence using indigenous resources, and become a manufacturing hub for the solar energy industry in Asia.

3. During TA implementation, ADB staff engaged the MNRE in various discussions on how to encourage private sector investment in and financing of solar projects under the NSM program. This included specific assistance on drafting a bankable power purchase agreement (and a subsequent power sales agreement with the states), transparent eligibility guidelines and selection criteria, and an enhanced regulatory framework for green energy. All parties stressed the importance of long-term financing and the impact of its cost on the levelized cost2 of solar electricity. Given the high up-front but low operating cost profile of solar power generation, the profile, tenor, and cost of debt play a significant part in optimizing costs and viability; and have been the main focus of ADB’s efforts in this area.

4. As the MNRE defined the details of the NSM program, it became clear to the project team that the first phase projects would be relatively small (2 MW–25 MW), mostly solar photovoltaic projects. Based on current cost estimates (about $3,000–$3,300 per kilowatt of installed capacity), the total costs of such projects are likely to be too small for direct ADB lending. The challenge thus became how to support the financing of multiple “small” solar projects that would demonstrate their viability in the context of India’s operating and climatic environment. ADB discussed various financing structures and support mechanisms with local and foreign commercial banks. Based on the feedback received from these banks, there is an immediate window of opportunity for ADB to make a real impact in this nascent but critically important sector, by mobilizing available commercial funds into solar projects and building capacity within the local banks on the technical and commercial risks of solar power projects. This iterative consultation process led to the design of a multi-project partial credit guarantee (PCG) facility structured to provide long-term financing and share commercial risks between banks and ADB for the first wave of solar projects. Commercial risk mitigation and extension of debt tenors are critical to ensure the bankability and viability of, and to lay the groundwork for, a sustainable solar program.

1 ADB. 2008. Technical Assistance to India for Integrated Renewable Energy Development. Manila (TA 7099-IND). This ongoing TA will fulfill ADB’s participation requirement for nonsovereign guarantee operations. 2 Levelized cost refers to the present value of the total cost of constructing and operating a generating plant over its economic life converted on an annual basis.

B. Sector Background

5. As of October 2010, installed power generation capacity in India was 167,278 MW, 64.9% of which is fired from thermal sources (coal and gas), 22.3% from hydropower, 2.7% from nuclear power, and 10.0% from renewable energy. India’s growth rates in energy consumption are much higher than the gross domestic product growth rate, reflecting an increasing share of energy investment. India’s energy sector contributes about 58% of the country’s greenhouse gas emissions.3

6. Solar energy is abundant in India, with high insolation measured at about 300 sunny days on average per year4 and estimated to be 5 billion megawatt-hours (MWh) per year of energy over India’s land area. Most regions receive 4–7 kilowatt-hours (kWh) per square meter (m2) per day; the national average is 4.5 kWh/m2/day. This rate of insolation is among the highest in the world, comparing favorably with Australia (4.7 kWh/m2/day) and ahead of the People’s Republic of China (3.4 kWh/m2/day) and Western Europe (2.9 kWh/m2/day).5 Effective unlocking of this huge potential, through photovoltaic or concentrating solar thermal power development, provides the ability to generate power on a distributed basis and enables rapid capacity addition with relatively short lead times (e.g., less than 1 year).

7. From an energy independence and security perspective, solar is the most secure of all sources since it is renewable and abundantly available. Given the large number of poor and unserved people in India, all efforts need to be made to exploit this source of energy. Solar projects can be flexibly sited within high insolation areas to avoid competing for scarce land that may have other productive uses. The acquisition of land has become a major hurdle for infrastructure development projects in India and other developing member countries (DMCs). While domestic coal-based power generation is the cheapest electricity source today, future scenarios suggest that this could change. Under current electricity deficit conditions and looming domestic coal shortages, peak energy prices could reach Rs8.50 per kWh ($0.18 per kWh) as the country begins to partly rely on imported coal to meet its energy demand. Given energy shortages, India is increasing the use of diesel-based electricity, which is both expensive (up to Rs15.00 per kWh) and polluting.

8. The NSM is an initiative of the central and state governments to promote ecologically sustainable energy growth while addressing India’s energy security challenge. It will constitute a major contribution by India to the global effort to meet the challenges of climate change. The NSM helps implement some of India’s objectives under the National Action Plan on Climate Change, which recognizes that solar energy—because of India’s tropical climate and abundant sunshine—has great potential as a future energy source and will enable the decentralized distribution of electricity production. However, solar power generation is the least developed form of renewable energy in India because of technical and financial challenges (Table 1).

3 Agence France-Presse, 2010. 4 Government of India, Ministry of Power, Central Electricity Authority. 2010. Monthly Power Sector Report: April 2010. New Delhi. 5 Conergy. 2009. Deployment Challenges for Large Scale On-Grid Solar PV Implementations. Singapore. 3

Table 1: Renewable Energy in India (MW) Source Potential Installed FY2009 Cumulative Installed Biomass 16,881 131 834 Wind 45,195 683 10,925 Small hydro (up to 25 MW) 15,000 129 2,558 Cogeneration (bagasse) 5,000 253 1,302 Waste-to-energy 2,700 4 65 Solar (under the National Solar Mission) 20,000 3 6 Total 104,776 1,203 15,690 MW = megawatt. Source: Ministry of New and Renewable Energy.

9. Unfortunately, the total costs (capital and operating costs) for solar power generation are currently much higher than for thermal power stations, which are centralized and sized to reap economies of scale (e.g., 2,000–4,000 MW). One of the objectives of the NSM is to create conditions (through a rapid scaling up of capacity, technological innovation, and indigenization) that will drive down the capital costs of solar power generation toward grid parity.6 The NSM aims to achieve grid parity (peak energy) by 2022 and parity with coal-fired thermal power by 2030. As more solar capacity is installed globally, production costs for panels and other components will decrease as a result of economies of scale and manufacturers locating production facilities close to demand in Asia. This cost trajectory will depend on the scale and pace of global deployment, technology development, and transfer of knowledge. Once solar power costs approach or reach grid parity, this will facilitate the deployment of smaller and more distributed power generation stations that can serve more remote and nonurban locations where India’s poor are concentrated.

10. The objective of the NSM is to establish India as a global leader in solar energy by creating the policy conditions for rapid diffusion of technology and investment across the country. The NSM will adopt a three-phase approach, spanning the remaining period of the Eleventh Five Year Plan, 2007–20127 and first year of the 12th plan (1,000-2,000 MW of utility- scale capacity by 2013) as phase 1; the remaining 4 years of the 12th plan as phase 2 (4,000– 10,000 MW added by 2017); and the 13th plan as phase 3 (20,000 MW by 2022). The NSM will evaluate progress against plan milestones to review capacity and targets for subsequent phases based on emerging cost and technology trends, so as to protect the government from heavy subsidy exposure in case anticipated cost reductions do not materialize as expected.

11. NSM activities are currently embedded within the existing framework of the Electricity Act, 2003, but solar-specific regulatory frameworks and contractual arrangements are being established to facilitate its development. One of the key regulatory drivers for promoting solar power is a renewable purchase obligation (RPO) in which a minimum amount of electricity must be purchased from clean energy sources by power distribution companies (e.g., varies from 1.0% to 15.0% in Indian states at present). As required by the National Electricity Policy (2005), the National Tariff Policy (2006) was amended by the cabinet in January 2011 to mandate that the state electricity regulators specify a minimum amount of electricity generated by solar power that must be purchased by power distribution companies. The solar power purchase obligation for states will start at 0.25% no later than 2013 and increase up to 3.0% by 2022.

6 Grid parity refers to the cost of electricity on an Indian rupee per kilowatt hour basis, which is equivalent to the current market price for short-term power. 7 Government of India, Planning Commission. 2008. Eleventh Five Year Plan, 2007–12. Delhi.

12. The Central Electricity Regulatory Commission (CERC) has issued detailed guidelines for determining feed-in tariffs for solar power, taking into account current cost and technology trends. These will be revised on an annual basis for new projects being commissioned (although presently fixed until the end of March 2012). This will be complemented by a renewable energy certificate (REC) mechanism to allow utilities and solar power generation companies to buy and sell certificates to meet their solar power purchase obligations. In January 2010, CERC announced REC regulations that enable the interstate trading of such certificates to meet the RPOs. This will drive utility-scale renewable power generation, but it is not yet consistently in place across all states—representing a risk for solar project developers. The NSM offtake regime, with its blended tariff structure, is therefore critical in bridging the near-term competitiveness of solar with other renewable technologies. Short-term adoption is critical in achieving cost economies of scale and diffusing the technology in the long term. RPOs’ of 1%– 15% of total power purchases have been established by 18 states based on renewable potential in the state. When NTPC Vidyut Vyapar Nigam (NVVN) supplies bundled power to state utilities at the rates determined in accordance with CERC regulations, those state utilities will be entitled to use the solar part of the bundled power for meeting their RPOs under the Electricity Act, 2003. Further information on India’s National Solar Mission, power purchase schemes, and regulatory framework are in Appendix 2.

C. Alignment with ADB Strategy and Operations

1. Consistency with Strategy 2020

13. The facility is consistent with Strategy 2020, 8 which emphasizes ADB support for environmentally sustainable development and private sector development. The facility will expand ADB’s promotion of, and investment in, sound environmental management while capitalizing on its operational strength, such as infrastructure development and finance. The strategy seeks to meet the region’s growing energy demand by helping DMCs to develop environmentally friendly technologies, specifically promoting energy efficiency and the use of clean energy sources. One of the key actions is to mitigate climate change by moving DMCs onto low-carbon growth paths by (i) improving energy efficiency, (ii) expanding the use of clean energy sources, (iii) reducing fugitive greenhouse gas emissions, (iv) modernizing public transport systems, and (v) arresting deforestation. In addition, one of Strategy 2020’s goals is that ADB’s cofinanced lending will increase at a faster rate than ADB’s stand-alone financing operations, with a long-term objective of total annual direct cofinancing exceeding the value of ADB’s stand-alone financing. The facility would be consistent with this cofinancing goal.

2. Consistency with the Country Strategy

14. Approved by ADB’s Board of Directors in June 2009, the India country partnership strategy, 2009–2012 emphasizes continued and sustained infrastructure development (e.g., transport, energy, urban and water resource management).9 ADB’s energy program in India aims to enhance the impact of the government’s initiatives for demand- and supply-related programs. The planned activities include (i) developing renewable and alternative energy sources, and clean generation technology; (ii) reducing technical and commercial losses in transmission and distribution networks and facilities; (iii) strengthening interregional transmission capacity; (iv) bringing demand-side management and energy conservation into the

8 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020. Manila. 9 ADB. 2009. Country Partnership Strategy: India, 2009–2012. Manila. 5

mainstream; and (v) promoting private sector participation, while ensuring environmental sustainability, and supporting institutional strengthening to implement the reforms required by the Electricity Act, 2003. Key thematic concerns include environmental sustainability, private sector development, private sector operations, governance, and partnerships.

15. The facility complements the current lending and TA program by ADB’s South Asia Department in support of solar power projects in India. There has been close cooperation between ADB’s Private Sector Operations Department and South Asia Department on the TA program with the MNRE. In addition, ADB is preparing a $100 million loan in support of a 500 MW solar park being developed in the state of Gujarat. Additional TA is proposed for a similar solar park in the state of Rajasthan for developing solar engineering centers of excellence in local universities, funding of “smart grid” transmission management systems, and vocational educational programs in support of the solar industry in India.

3. Consistency with the Sector Strategy

16. Under ADB’s Energy Policy, ADB’s investments will focus on energy efficiency and renewable energy projects, as well as the expansion of energy access. Starting in 2013, ADB will increase its target of clean energy investments to $2 billion a year from $1 billion, in a bid to accelerate low-carbon growth and reduce greenhouse gas emissions in the region. 10 As part of the policy implementation, ADB is emphasizing private sector participation as a tool to enhance energy sector efficiency as a result of introducing increased competition and increased investable resources. The objective is to create a framework that makes investing in the energy sector a commercially viable proposition and ADB is committed to facilitate direct private sector participation.

17. The facility is also directly aligned with ADB’s Asia Solar Energy Initiative (ASEI) to (i) facilitate knowledge sharing and transfer for solar power; (ii) help develop, finance, and commission 3,000 MW of solar power generation capacity in DMCs by May 2013; and (iii) pilot test innovative financing mechanisms and risk mitigation measures specifically for solar power. The ASEI seeks to stimulate solar power development in DMCs with the goal of (i) increasing economies of scale to reduce costs and improve solar energy’s competitiveness within the grid; (ii) exploiting select DMCs’ solar radiation resources to service their fast-growing electricity demand and utilize their greater availability of land compared with most developed countries; and (iii) promoting DMCs’ potential to become global and regional manufacturing hubs for solar technology goods and equipment. ADB’s solar initiatives in India have been extensively coordinated with the energy community of practice.

III. THE FACILITY

A. Facility Description

1. Facility Rationale and Design

18. 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 (i.e., project financing). Banks rely heavily on relationships with existing borrowers to grow their lending business. This practice makes it difficult for new companies or borrowers to obtain financing on reasonable terms or without high collateralization. With solar projects being

10 ADB. 2009. Energy Policy. Manila.

relatively small and having some technical risks that cannot be easily mitigated at the present time, banks remain wary of lending to solar projects and/or lending beyond their existing corporate relationships.

19. The facility will help close these gaps by sharing credit risks with commercial lenders. Supported by parallel capacity development TA (para. 37), the facility has the twin objective of (i) making limited recourse debt financing available on reasonable terms and conditions, and (ii) extending the tenor of loans to solar projects to recoup the current high capital costs. ADB would issue PCGs to international and local lenders to cover up to 50%11 of any nonpayment by the borrowers. The PCGs would cover any default of scheduled repayments of principal and accrued interest. This is not a “first loss” guarantee, which would be paid prior to any loss sharing by the commercial banks; banks will incur losses alongside any ADB claims paid.

2. Project Borrowers and Sponsors

20. The projects to be supported under the facility are likely to be financed through special purpose vehicle companies (SPVs), established by project sponsors to build, own, and operate the assets as a stand-alone independent power producer incorporated in India. Based on the indicative pipeline of projects (Appendix 3), the SPVs are sponsored by a mix of local and foreign investors with either experience as power sector operators in India or joint venture consortia of financial investors and companies with solar power experience outside of India. The facility will only be eligible for lenders to those SPVs in which 50% or more of the shares are owned by private sector companies and sponsored by investors with acceptable experience and credit quality.

3. Outcome and Outputs

21. The outcome will be the demonstration of profitable and sustainable solar power generation plants under the National Solar Mission and/or state solar power policies. These projects will diversify the country’s energy mix, increase energy security, reduce reliance on fossil fuels, lower imports and exposure to international energy prices and exchange rate fluctuations, and decrease the emission of greenhouse gases as well as local pollutants. The amount of carbon dioxide emissions reduced is one of the indicators for the outcome, in addition to financial and operation indicators.

22. The facility will support the development of utility-scale, grid-connected solar power projects in India through long-term commercial financing. The facility will mobilize lending and develop the capacity of commercial and partner banks to undertake technical due diligence on solar projects and provide affordable longer-tenor loans, which are critical to their viability, sustainability, and replicability. The design and monitoring framework is in Appendix 1.

B. Development Impact

23. Solar power is most appropriate for off-grid and distributed electricity generation because of its modular scalability to meet small loads, ease of installation, and minimal

11 Sharing of the risks between ADB and the commercial bank ensures an equitable balance and prevents against moral hazard. This level of risk sharing is calculated on a present value basis over the life of the loan, which provides flexibility for guarantees to be structured in different ways (either a constant guarantee scheme or a back- ended scheme in which coverage is higher in the latter years of the loan) depending on the banks’ preference. The net present value of the guaranteed outstanding principal and accrued interest shall not exceed 50% of the total principal of the guaranteed loan. 7

operating and maintenance costs. As the cost of solar power equipment drops as a result of economies of scale from indigenous production and development of local capacity, solar energy will become more affordable, reliable, and accessible in the remote and underdeveloped areas of India. In essence, demand from utility-scale grid-connected solar projects in the first phase will lead to long-term cost reductions for solar power across India, including for off-grid consumers who are often bypassed in terms of sharing the benefits of development.

24. Significant capacity beyond a pilot scale needs to be developed and operated on a commercial basis in the DMCs for solar power technology to scale up. It is expected that the facility will directly leverage private sector investment for about 130 MW of projects, which would result in 205 gigawatt-hours of electricity from solar energy added to the grid in India and 1.76 million tons of carbon dioxide abated during the first 10 years of operations. The facility improves the financial viability of solar projects by extending the tenor of the loans without a commensurate increase in lending margins. This will alleviate some pressure on project cash flows to service debt and as a result, improves the returns on the private sector investor’s equity to an acceptable level. This effect will generate more investment in this nascent sector. Higher returns on equity on the first projects would, in turn, allow electricity regulators to lower the feed- in tariff levels required in the future.

25. In the medium term, commercial banks that finance projects alongside ADB will become more comfortable with solar power and have direct access to performance and operational data to understand the risks better. This will transform market risk perceptions and induce other banks to lend to the sector without ADB support or (limited) recourse to the sponsor. This hypothesis can be compared with the evolution of the wind power sector in India since 2000. Banks initially had similar concerns on wind power resources and the unproven performance of wind energy turbines in India. Now with over 14,000 MW of wind power installed in India, local commercial banks are more comfortable with the risks, understand technical parameters better, and offer long-term debt financing without recourse to parent companies. The same results can be expected (e.g., longer tenors, lower margins) once there is a track record of solar operations. The target of 4,000 MW of solar power in the second phase of the NSM (2013–2015) cannot be met without similar developments in the project finance market. Performance indicators for the medium-term impacts include the cumulative solar capacity in the country by 2015, the percentage of solar projects financed on a non-recourse basis, and the project margins charged as compared with other renewable energy projects.

26. In line with the ASEI, one of the long-term objectives is to reduce the capital costs for solar power in DMCs. This can be accomplished in India once the manufacturing of solar power components is indigenized and reaches economies of scale. Significant demand from projects for capital equipment, solar panels and modules, and experienced contractors is a prerequisite to generate investment in local manufacturing. Based on a much lower cost of labor but strong engineering and technology base, there is significant scope for manufacturing cost reductions in India. Local manufacturing will reduce the price of solar components and increase the competitiveness of solar power with other sources of energy production. Establishing a large commercial market in DMCs will stimulate global competition in the sector, further lowering prices and the cost of electricity production.

C. Environment and Social Dimensions

27. The facility is classified under category FI for environment, involuntary resettlement, and indigenous peoples under ADB’s Safeguard Policy Statement (2009). The partner banks will be required to establish and adopt an appropriate environmental and social management system

(ESMS). Implementation of the ESMS will ensure that the projects meet ADB’s safeguard requirements on environment, involuntary resettlement, and indigenous peoples. The partner banks will appoint suitably qualified officers to oversee environmental and social aspects of the operations and the day-to-day implementation of the ESMS.

28. For this type, size, and nature of project, no significant environmental impacts are expected. The solar power developers are required to implement mitigating measures and good construction management practice. The occupational health and safety performance of the contractors and their workers will be closely monitored during construction. ADB will coordinate with the partner banks to ensure that an ESMS satisfactory to ADB has been adopted prior to ADB issuing a guarantee for the first project.

29. Most solar projects are being sited on barren or unproductive government land in a coordinated effort by state governments. Each 5 MW solar power plant will require about 12 hectares of land. No physical displacement is expected since lands can be flexibly acquired to avoid impacts on existing villages and communities. The solar power plants will typically utilize the existing distribution substations and will be connected to the state electricity grid. If extensions of transmission lines are required, these are expected to be established along existing public road rights-of-way. Potential impacts on indigenous peoples and/or scheduled tribes will only be ascertained once specific sites for each solar power plant are identified. However, since barren and unproductive lands will be used, the impacts on scheduled tribes, if any, are unlikely to be significant.

30. Other social dimensions (e.g., gender, labor issues) of each solar power project will be analyzed as part of the environmental and social assessment to be undertaken by each SPV in accordance with the Safeguard Policy Statement and the ESMS of partner banks. The summary poverty reduction and social strategy is in Appendix 4 and a summary ESMS is in Appendix 5.

D. Financing Plan

31. With over 700 MW awarded to project sponsors in December 2010 through the National Solar Mission and an additional 965 MW allocated by the state government of Gujarat (Appendix 3), total investment costs over the next 3 years in the sector are about $4.5 billion equivalent. Assuming a debt–equity ratio of 70:30 as prescribed by the CERC tariff guidelines, $3.2 billion equivalent of debt financing will be required. Even if only half those projects materialize ($1.6 billion in debt), significant demand for financing from ADB and the facility is likely. The facility has been conservatively sized at $150 million to support 12–15 projects between 2011 and 2014, which would represent a reasonable sample of first projects to be financed. Should there be additional demand for guarantees prior to the end of the 3-year availability period, ADB can propose extending the facility through additional financing.

32. The estimated investment cost for projects to be supported under the facility is $429 million equivalent and assumes (i) a project debt–equity ratio of no greater than 70:30; and (ii) a guaranteed percentage of 50% on the total debt of the projects. ADB PCGs would, therefore, cover up to $300 million equivalent of commercial loans to projects from domestic and international commercial bank lenders. The remainder of funding will come from equity and subordinated debt (or like instruments).

E. Implementation Arrangements

33. The facility can issue PCGs over a 3-year period following Board approval. PCGs will be limited to a maximum tenor of 15 years (18 years may be considered only in exceptional cases, as determined by ADB in its sole discretion). Additional sub-facility limits on partner banks, sponsors, and projects are specified below. Any exceptions or changes to these implementation arrangements will require the prior approval of the Investment Committee.

1. Selection and Approval of Partner Commercial Banks

34. Local and/or foreign partner banks will be selected at ADB’s sole discretion. Initially, no more than five partner banks will be selected. Any additions to the number of proposed partner banks will be submitted to the Investment Committee for endorsement (It is proposed that the board of directors delegate approval authority for partner banks to the Investment Committee). ADB will require that each prospective lender submit all documentation and information as outlined in the due diligence checklist (Appendix 6). Prospective partner banks will be screened and due diligence results presented to the Investment Committee for approval based on the following factors: (i) credit standing (at least BBB– equivalent credit rating by an international rating agency or AA equivalent credit rating by a local rating agency);12 (ii) experience and capabilities in limited recourse lending in India and/or Asia; (iii) existing portfolio in the power sector; (iv) willingness and ability to make financial commitments in renewable energy required under the facility; (v) senior management commitment; (vi) staffing, management, and technical capability to implement the facility; and (vii) operating policies, guidelines, and systems in loan origination, credit assessment, and loan administration and enforcement. No more than 40% of the entire facility can be consumed by PCGs issued to the same partner bank.

2. Selection and Approval of Projects

35. Projects will be identified and selected by partner banks based on customary due diligence on project preparation, financial and commercial viability, adequate sponsor credentials and creditworthiness, and overall project risk mitigation. Projects will then be screened against eligibility criteria (Appendix 7), and banks will need to submit a due diligence report to ADB that meets all the requirements, including the projects’ compliance with ADB’s policies on anticorruption, safeguards, integrity, and procurement. Projects must have signed a long-term power purchase agreement either with the NVVN (under the National Solar Mission framework) or in compliance with an approved state solar power policy. Individual state policies will be reviewed on a case-by-case basis before PCGs are issued.13 The net present value of the outstanding guaranteed principal and accrued guaranteed interest shall not exceed 50% of the total principal of the guaranteed loan. Guarantees with the same sponsor or parent company of the SPVs shall be limited to no more than five projects or an aggregate of 30 MW, whichever limit is reached first. These limits will ensure a diversified portfolio across partner banks, sponsors, and projects.

12 International credit ratings to be from Standard & Poor’s (S&P), Moody’s, or Fitch Ratings; local credit ratings to be from CRISIL (an S&P company), Investment Information and Credit Rating Agency (ICRA), or Credit Analysis and Research Limited (CARE). 13 The project team has conducted due diligence on the solar power policy in Gujarat, the regulatory norms, the credit standing of the offtaker, and the template form of power purchase agreement.

3. Reporting and Monitoring

36. Partner banks will be required to notify ADB promptly of any loan default. Banks will be required to continuously monitor the performance of the project loans and submit annual reports to ADB that include information on disbursements and repayments, construction progress, project operating performance (as against baseline conditions), and quarterly and annual financial statements, the latter having been audited in compliance with Indian national standards. ADB will monitor the use of the PCG, portfolio quality, and compliance with ADB eligibility requirements. ADB will regularly monitor the credit quality of partner banks (through existing credit rating reports), and will conduct a review for any partner banks that are placed on negative credit watch by major credit rating agencies or have their credit rating downgraded. ADB will carry out an annual performance review of the facility to assess the average risk rating of the portfolio and monitor the performance of the facility against indicators in the design and monitoring framework (Appendix 1).

4. Technical Assistance

37. ADB is preparing separate parallel TA that will build capacity and provide technical support to the partner banks during the due diligence of private sector solar power projects. ADB will engage international engineering consultants to provide expertise and hands-on support to partner banks as they conduct due diligence on individual projects. The consultants will advise the partner banks in the areas of solar technology, insolation and irradiance studies, solar panel manufacturers, and performance warranties. Consultants will also be engaged to conduct periodic training for commercial banks and other stakeholders in several locations across India during the implementation period of the facility. ADB is coordinating the first set of training sessions with the National Renewable Energy Laboratory, part of the US Department of Energy.

5. Anticorruption Policy

38. The partner banks will be advised of ADB’s Anticorruption Policy (1998, as amended to date) and Policy on Combating Money Laundering and the Financing of Terrorism (2003). Consistent with ADB’s commitment to good governance, accountability, and transparency, the guarantee and/or loan documentation will require the project borrowers to institute, maintain, and comply with internal procedures and controls following international best practice standards for the purpose of preventing corruption or money laundering activities or the financing of terrorism, and covenant with ADB to refrain from engaging in such activities. The legal documentation will further allow ADB to investigate any violation or potential violation of these undertakings.

F. Projected Operational and Financial Performance

39. While partner banks will be primarily responsible for carrying out due diligence on the projects, ADB has carried out financial and economic analysis of a representative project to assess its viability and sustainability under different funding and operating scenarios. These results were used to structure the type and tenor of the guarantee. The financial internal rate of return of projects under CERC tariffs would be 13.2% and the weighted average cost of capital is projected to be 7.8%. The economic internal rate of return would be 20.5%, which is above ADB’s standard discount rate. The economic and financial analysis is in Supplementary Appendix A.

G. Guarantee Pricing

40. The cost of financing14 is critical to the financial viability of solar power projects (and the underlying feed-in tariff). Approximately 85% of the total costs (capital and operations) over the project’s economic life are financed up front. This is unlike financing for a thermal power project, where only 30% of the total costs are financed up front (the remainder are fuel and recurrent costs, which are financed annually through cash flow generated by operations). Without the lending experience or installed capacity to prove performance, banks will assign high risk ratings to these projects and commensurate lending margins. The PCGs effectively replace a portion of the project risk, as assessed by the lender, with ADB’s AAA credit rating. This risk mitigation will help reduce loan margins required by the partner commercial banks. The PCGs can incentivize banks to reduce the cost of debt, provided that the PCG fees do not consume the savings created by the guarantee’s risk sharing structure. Guarantee pricing has been set in line with market benchmarks, and will vary within a set band based on exposure size and tenor.

IV. THE PROPOSED ADB ASSISTANCE

A. The Assistance

1. Instrument and Amount

41. The facility will provide for ADB to issue PCGs in an aggregate amount of up to $150 million of principal (or its equivalent in Indian rupees or other foreign currency acceptable to ADB15) in favor of foreign and local commercial banks lending to solar power generation projects in India that meet the minimum eligibility criteria (Appendix 7). Under the facility, ADB will issue PCGs to guarantee scheduled payments of principal and interest under loans to be provided by foreign or local commercial banks. The PCGs will be provided without government counter-guarantee. The facility will partially cover payment default risk on loans made by approved partner banks to private sector borrowers in India implementing solar power generation projects as awarded under the National Solar Mission or an approved state government solar power policy.

2. Terms and Conditions

42. A guarantee term sheet template has been presented to prospective partner banks and a summary term sheet template is in Appendix 7. The guarantee agreement to be entered into with respective partner banks will ensure that the net present value of the outstanding guaranteed principal and accrued guaranteed interest shall not exceed 50% of the total principal of the guaranteed loan. The facility will be available for 3 years from Board approval, with project loans having a maximum tenor of up to 15 years (exceptional consideration of tenors of up to 18 years subject to agreement by ADB). A guaranteed loan may be made in Indian rupees or any foreign currency that is acceptable to the lender and ADB. The Investment Committee determines up-front fees, standby fees, and guarantee fees.

3. Compliance with Investment Limitations

43. The proposed facility will be within the country, industry, group, and single project exposure limits for nonsovereign investments.

14 Inclusive of up-front arrangement fees, commitment fees, margins over the cost of funds, and any guarantee fees. 15 Guarantees issued in currencies other than U.S. dollars will be adjusted on a quarterly basis to ensure the proposed ceiling amount for the Facility limit shall not be breached.

B. Justification for ADB Assistance

44. While solar power technologies have been commercially proven in developed markets such as Germany, Spain, and the United States, there was only 11 MW of installed capacity in India as of December 2010 (mostly installed in 2010). 16 Lenders remain concerned about the risks of solar technology performance, unproven indigenization of the technology to India’s climatic conditions, and the nascent stage of regulatory development with respect to renewable and specifically solar energy. ADB’s participation as a guarantor will help mitigate risks and leverage commercial funds into a new subsector in India. The facility leverages commercial bank loans and builds capacity at the appropriate institutions that can apply such knowledge and lessons to future lending in India.

45. ADB’s support for the facility is justified based on the following: (i) ADB assistance will play a crucial role in helping solar projects close affordable long-term financing, which is a necessary condition for the viability of a solar project. As a result of the recent banking crisis, liquidity remains limited, and local banks can rarely provide clean (or uncovered) loans for more than 8–10 years without recourse to project sponsors. Tenors required for solar power generation projects are typically longer than other energy projects.17 ADB’s PCG will share project risks with banks (to reduce the cost of financing) and extend commercial bank tenors to fund power generation plants that have high up-front investment costs, but no recurrent fuel cost. Without the cover provided by ADB’s PCG, projects may obtain finance but they will do so with the inevitable condition of having to seek refinancing after commissioning when operational performance has been proven. This is a cost-inefficient process that can be mitigated more appropriately through up-front risk-sharing arrangements.

(ii) Sponsors or developers of solar power projects expect that ADB’s participation in the financing will trigger local and/or international bank participation, additional equity investment, and further interest in the financing of solar projects. ADB’s PCG in particular encourages the commitment of local commercial banks, which have little experience in solar energy.

(iii) The facility will play a pioneering role in demonstrating the commercial viability of grid-connected solar photovoltaic technology in India. The projects will be among the first grid-connected power generation projects with a commercial component under the NSM or state schemes. Once solar power performance under Indian climatic conditions is proven, this will catalyze the deployment of larger-scale solar projects (important to generate sufficient demand for local manufacturing and economies of scale) and increase foreign private sector investment.

(iv) The facility directly achieves the strategies outlined by ADB’s energy community of practice in the ASEI for mainstreaming solar projects through (i) supporting the

16 This figure incorporates recently commissioned solar projects according to project developers and investors. 17 In 2010, the ADB Board of Directors approved long-term loans for two solar power generation projects in Thailand. ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Grant for the Solar Power Project in Thailand. Manila (loan tenor of 18 years); ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loans and Technical Assistance for the Bangchak Solar Power Project in Thailand. Manila (loan tenor of 15 years). 13

design of appropriate policy frameworks and institutional capacity development for rapid diffusion of solar energy technology for power generation; (ii) creating innovative financing mechanisms and risk mitigation measures to encourage solar power generation; and (iii) facilitating the development of large capacity solar projects that drive down solar generation costs toward grid parity.

(v) Direct ADB lending to solar projects may not always be practical, given the small size and short development and implementation timetable. The central or state government issues a solar power tariff order within the CERC guidelines and invites investors to tender for allocations based on qualifications, ability to acquire land and close financing. Investors must then deposit funds (scaled based on project capacity) into a government account to secure their performance. They are given a limited timeline (90–180 days) to acquire land, sign the power purchase agreement (PPA), and close financing. The investors’ performance funds would be forfeited if the deadlines are breached. It has proven difficult on other projects for ADB to complete its appraisal and process the transaction within this time frame. The facility is designed to work with partner commercial banks on a streamlined basis to meet financial close within the time lines.

C. Risks and Mitigation Measures

46. The facility involves risks with respect to partner commercial banks and, as the guarantees will be project-specific, to the projects themselves. While not an exhaustive list of risks, the following key issues have been examined and mitigated as appropriate:

(i) Technology risk. Photovoltaic solar panel technologies are still in the innovation stage and are rapidly changing, and often owned by companies with limited track record and weaker credit quality. Moreover, solar panel technologies have varying track record in terms of efficiency and degradation rates. This risk is mitigated to some extent by the eligibility criteria established for the selection of equipment manufacturers based on their operating track record and installed capacity. ADB consultants under the parallel TA will help validate these risks. In addition, more stringent performance and cash flow stress scenarios will be applied to the base case projections to ascertain debt servicing ability.

(ii) Sponsor risk. The projects’ key risks, i.e., technology, limited track record of equipment manufacturers, the nascent solar power sector in India, substantial long-term exposures, and relatively high leverage (i.e., up to 70% of the project costs), will be partially mitigated by the sponsors’ guarantee for completion of the project. Given the critical role of the sponsors, certain eligibility criteria related to the sponsor’s experience in the sector, the sponsor’s equity investment in the project, and solvency and liquidity ratios have been included in the program.

(iii) Offtaker risk. Projects will be exposed to nonpayment and/or non-dispatch risk from the SEBs or defaults from NVVN. Through existing TA support, ADB has been advising MNRE on drafting of the NVVN PPA, and based on continued dialogue with banks and developers, the bankability of the PPA has been improved as a result, including the security provisions and step-in rights for the lenders. There is divergence in the credit profiles of the solar power offtakers for the projects being considered under the proposed facility. The NSM projects benefit from much lower offtaker risks as NVVN, has a reasonably strong credit

profile. On the other hand, state government supported solar power projects may face higher offtaker risks given the weak credit profile of the state electricity boards. The PPAs signed with GUVNL have a slightly different tariff structure, which somewhat reduces the payment burden on distribution utilities and is expected to reduce the risk of PPA renegotiation. In addition, the PPA includes compensation payments equivalent to 3 years of revenue in the event of default or termination, which may act as a deterrent but may not essentially mitigate the underlying credit risks. In addition, the program aims to diversify exposures across various offtakers by including exposure limits.

(iv) Regulatory risk. The regulatory environment pertaining to solar power in India is still evolving and may change over the course of the program and adversely affect the viability of the projects. The central and state governments have shown a significant commitment to promote electricity supply from renewable energy sources (for energy supply diversification as well as climate change motivations) by introducing the RPO requirement, the percentage of which increases every year. The National Tariff Policy was amended in January 2011 to enact solar- specific RPOs as well, demonstrating the political will to support the National Solar Mission. Some state regulators introduced solar RPO requirements even before the policy was amended. Purchases from solar power are exempted from market dispatch orders by state regulators (i.e., “must run” status). That said, it is very likely that comparable solar technology would be more efficient and cheaper in the medium-to-long-term. This would decrease the competitive standing of the present pipeline of projects, which require higher tariffs to recover the higher technology and investment costs. This would thus expose the underlying projects and ADB to regulatory risks as offtakers may seek to renegotiate contracts and tariffs. As the credit profile of most of the state offtakers is already stressed from under-recovery of costs for conventional power, the incentive- based payments required to establish the viability of solar photovoltaic or solar thermal power projects may add to their financial burden and over time, increase the risks of nonpayment under contracted terms. This is mitigated by the strong commitment of the Government of India to solar power projects with the introduction of very robust regulatory framework.

(v) Risk sharing with partner banks. The project borrowers will ultimately be responsible for loan repayment. However, there is risk that they will be unable to service the guaranteed loans. By carefully selecting each partner bank, ADB will ensure that appropriate credit assessment and due diligence is carried out before any guaranteed loan is advanced. The proposed facility may provide a back- ended guarantee structure, with ADB providing up to 100% cover to the partner banks on the default risk of the underlying projects. For these projects, there are concerns as it may trigger a sense of complacency in the due diligence, project selection and exposure monitoring activities of the partner banks under the comfort that ADB will eventually absorb all the credit losses in the latter years of the loan tenor. This concern is aggravated by the partner banks’ limited experience in financing solar power in India and the expectations that over time, ADB will reduce its involvement in the project assessment process. To align the interests of the partner banks with that of ADB and incentivize the partner banks to exercise risk discipline in its approval and monitoring process, it was agreed that ADB’s 100% cover will be limited to the tail end of the loan and the 15

guarantee fee would be structured such that partner banks have an incentive to consider continued financial support to the projects on a stand-alone basis.

(vi) Lack of technical expertise of partner banks in the evaluation of solar power projects. The potential partner banks’ have limited technical expertise in the evaluation of solar power projects. Although the parallel TA would help build their internal capacity, these benefits may only be realized in the medium term, while the build up of exposure under the facility may occur at a more rapid pace. Some foreign banks operating in India may have some experience in the sector; however, they may not have an in-depth knowledge of the sponsors and the regulatory framework in the country. To mitigate this, operating arrangements have been established such that ADB will be actively involved in the selection of projects by each of the banks, and in the initial transactions, this involvement would be more detailed until confidence is established with the partner bank’s project selection abilities.

(vii) Selection of partner banks. ADB will rely on the partner banks for the selection, structuring, and monitoring of the projects. Although broad criteria has been established for the selection of partner banks, there is a need for ADB to conduct a more comprehensive assessment of the risk profile of local commercial banks (i.e., those without an international credit rating). Although ADB will not be exposed to any direct credit risk on the partner banks, any distress in their financial condition would divert resources and may reduce their oversight over the projects covered under the facility. This aspect is critical given the long-dated maturity and the proposed back-ended guarantee scheme. This risk will be mitigated by the detailed evaluation of the credit profile of potential local partner commercial banks both at the initial selection stage and on an annual basis.

D. Assurances

47. Consistent with the Agreement Establishing the Asian Development Bank, the Government of India will be requested to confirm that it has no objection to the proposed facility. ADB will enter into suitable guarantee agreements and other required legal documents once the proposed facility is approved by ADB’s Board of Directors and the individual partner banks are approved by ADB’s Investment Committee. These agreements will be on terms and conditions satisfactory to ADB.

V. RECOMMENDATION

48. I am satisfied that the proposed guarantee facility would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the guarantee facility for ADB to issue partial credit guarantees without government counter- guarantee, in amounts, in aggregate, of up to $150,000,000 (or its equivalent in Indian rupees or other foreign currency acceptable to ADB) from ADB’s ordinary capital resources, in favor of eligible foreign and local commercial banks lending to solar power generation projects in India, with such terms and conditions as are substantially in accordance with those set forth in this report, and as may be reported to the Board.

Haruhiko Kuroda

President

17 March 2011

Appendix 1 17

DESIGN AND MONITORING FRAMEWORK

Performance Targets Data Sources and/or Assumptions Design Summary and/or Indicators Reporting Mechanisms and Risks Impact Assumptions Successful 1,100 MW of solar Ministry of New and Stable and consistent implementation of capacity Renewable Energy regulatory policies for the phase 1 of the NSM commissioned by statistics renewable energy sector 2011; 2,000 MW by 2013 Distribution company Consistent policy decisions data and annual reports by the government for the Increased foreign 8 commercial banks National Solar Mission direct investment by undertaking Solar industrial the private sector in independent technical associations reports Risks the solar energy due diligence of solar Change of government, industry projects by 2015 Company annual reports which impacts renewable energy policies 50% share of private Central and state capital in solar industry electricity regulatory Supply of solar energy by 2015 commission orders and exceeds RPO requirements reports plus the demand for Long-term reduction in Regulated solar renewable energy levelized cost of solar photovoltaic (Rs17.9 certificates energy in India per kWh) and concentrating solar power tariffs (Rs15.3 per kWh) decrease at least 20% by 2015

Regulated ceiling for solar photovoltaic capital costs decreases from Rs169 million per MW to Rs135 million per MW by 2015 (20% reduction)

Outcome Assumptions Solar power 205,000 MWh of solar NVVN reports Plants achieve capacity generating facilities power per annum utilization factors and under India's National delivered to the state Carbon market reports energy yields within the Solar Mission and grids by 2015 estimates assumed by state power schemes Central and state financiers and investors installed and deliver Generation of at least electricity regulatory energy to the grid 1.76 million tons of commission reports Offtakers honor the CO2 emission payment and tariff reduction in total provisions in the PPAs and during the first there are no defaults by 10 years of operation SEBs (either directly or through NVVN) Loan tenors for facility supported projects are Risks extended from Solar-specific RPO orders 8–10 years to are not issued or delayed

18 Appendix 1

Performance Targets Data Sources and/or Assumptions Design Summary and/or Indicators Reporting Mechanisms and Risks 12–15 years by state regulatory commissions

Sufficient solar RPO penalty system is not enacted

The grid management systems are unable to handle the variability of energy production from renewable sources.

Outputs Assumptions Supported financing of 130 MW of solar Borrower annual reports Project agreements are solar projects power generation adhered to by third parties. capacity Guaranteed lender commissioned by annual monitoring reports Interest and participation of 2015 domestic commercial NVVN annual reports lenders, international 10–15 solar project financial institutions loans guaranteed by Distribution utility 2015 disclosures to state Risks electricity regulators ADB’s partial credit Solar project-related Technical due guarantee may be technical due diligence diligence for at least Capacity development insufficient to help lenders and capacity building 15 solar power technical assistance overcome their risk provided to partner projects for partner consultants’ reports assessment to provide and local commercial and local banks by required long-term financing banks 2015 ESMS and other relevant An ESMS is safeguard-related established by each document submissions partner bank. by partner banks

Mobilization of Debt and equity Partner bank annual affordable debt and mobilization of reports on environmental equity from domestic $300 million from and social safeguards and international domestic and compliance investors for international sources renewable energy power plants Activities with Milestones Inputs 1.1. NSM phase 1 new project allocations made (completed) ADB guarantees 1.2. NSM phase 1 projects sign PPA (completed) Foreign and local bank 2. First partner bank approved (March 2011) loans (70%) 3. Two additional partner banks approved (September 2011) Equity (30%)

Financial close for NSM phase 1 projects and projects under the state solar policies (March 2011–December 2011) ADB = Asian Development Bank, CO2 = carbon dioxide, ESMS = environmental and social management system, KWh = kilowatt hour, MW = megawatt, MWh = megawatt hour, NVVN = NTPC Vidyut Vyapar Nigam, NSM = national solar mission, PPA = power purchase agreement, RPO = renewable purchase obligation, SEB = state electricity board. Appendix 2 19

INDIA’S NATIONAL SOLAR MISSION

A. Background

1. The current power generation capacity in India is insufficient to meet demand. According to the Central Electricity Authority, the energy shortage in 2010–2011 is expected to be 10.6% (93 terawatt-hours) and the corresponding peak load deficit is expected to be 12.1% (the equivalent energy of 15 gigawatts).1 For annual gross domestic product growth of 8%, it is estimated that India will have to double its current installed capacity to over 300 gigawatts by 2017.2

2. Fossil fuels dominate the power generation mix, with coal accounting for over 50% of the power generation capacity in India. The total installed power generation capacity in India in October 2010 was 167,278 megawatts (MW). Of this, 64.9% was fossil fuel fired power plants (coal, gas, and diesel); 22.3% hydropower; 2.7% nuclear power; and 10% renewable energy.3 India’s energy sector contributes about 58% of the country’s greenhouse gas emissions.4 India is implementing a National Action Plan on Climate Change that suggests that 15% of energy could come from renewable sources by 2020.

3. India has vast solar energy potential. About 5 billion megawatt-hours (MWh) per year of energy exist over India’s land area, with most regions receiving 4–7 kilowatt-hours per square meter (kWh/per m2) per day, averaging 4.5 kWh/m2/day nationally. This rate of insolation is among the highest in the world, comparing favorably with Australia (4.7 kWh/m2/day) and ahead of the People’s Republic of China (3.4 kWh/m2/day) and Western Europe (2.9 kWh/m2/day).5 Effective unlocking of this potential will enable rapid capacity addition with relatively short lead times (e.g., less than 1 year) and no additional greenhouse gas emissions. Unfortunately, the total costs (capital and operating costs) for solar power generation are currently significantly higher that thermal power stations, which are centralized and sized (e.g., 2,000–4,000 MW) to reap economies of scale.

4. The Jawaharlal Nehru National Solar Mission (NSM), launched in January 2010, is an initiative of the central and state governments to promote ecologically and economically sustainable growth in solar power generation by creating an enabling policy and regulatory framework. The NSM is one of eight national missions outlined in the National Action Plan on Climate Change.6

B. Objectives and Targets

5. The objective of the NSM is to establish India as a global leader in solar energy by creating the policy conditions for its diffusion across the country as quickly as possible. The immediate aim of the mission is to focus on setting up an enabling environment for penetration of solar technology in the country both at centralized (utility-scale, grid-connected) and decentralized (off-grid, rural electricity supply) levels. The mission will adopt a three-phase

1 2011, Load Generation Balance Report 2010-11, Central Electricity Authority, Ministry of Power. 2 2009, Powering India: The Road to 2017, McKinsey & Company. 3 2010, Monthly Power Sector Report: October 2010, Central Electricity Authority, Ministry of Power. 4 2010, Agence France-Presse, Quoting a report from the Ministry of Environment, Government of India. 5 2009, Development Challenges for Large Scale on-grid Solar PV Implementations, Singapore, Conergy (Referencing International Energy Agency Greenhouse Gas R&D Program, Gloucestershire, UK. 2003) 6 The other seven national missions cover enhanced energy efficiency, sustainable habitat, water, sustaining the Himalayan ecosystem, green India, sustainable agriculture, and strategic knowledge for climate change.

20 Appendix 2 approach, spanning the remaining period of the Eleventh Five Year Plan, 2007–20127 and the first year of the 12th plan (up to 2012-13) as phase 1, the remaining 4 years of the 12th plan (2013–2017) as phase 2, and the 13th plan (2017–2022) as phase 3. The targets for the deployment across application segments are in Table A2.1.

Table A2.1: National Solar Mission Targets Target for Phase 1 Target for Phase 2 Target for Phase 3 Application segment (2010–2013) (2013–2017) (2017–2022) Solar collectors 7 million m2 15 million m2 20 million m2 Off-grid solar applications 200 MW 1,000 MW 2,000 MW Utility grid power (including rooftops) 1,000–2,000 MW 4,000–10,000 MW 20,000 MW M2 = square meters, MW = megawatt, Source: Ministry of New and Renewable Energy. Jawaharlal Nehru National Solar Mission: Towards Building Solar India.

C. Policy and Regulatory Framework

6. To achieve the NSM objective, it is critical to create a policy and regulatory environment that provides a predictable incentive structure that enables rapid and large-scale capital investment in solar energy applications and encourages technological innovation and lowering of costs. NSM activities are currently embedded within the existing framework of the Electricity Act, 2003; National Electricity Policy, 2005; and the National Tariff Policy, 2006 (and as amended in December 2010). However, in the long run, sector-specific legal and regulatory frameworks will be established for the development of solar power.

1. Electricity Act, 2003

7. The Electricity Act, 2003 has been a major step toward liberalizing the power market in India along the value chain, encouraging competition and attracting private investment. Under the act’s part VII section 61(h), the promotion of cogeneration and electricity generation from renewable sources is identified as a consideration in the establishment of tariff regulations, allowing the Central Electricity Regulatory Commission (CERC) to establish a preferential tariff for renewable energy.8 Further, the “open access” provision allows licensed renewable energy power generators access to transmission lines and distribution systems and only requires that the generators pay a wheeling charge for the use of the transmission lines and a fee to the load dispatch center.

2. National Electricity Policy, 2005

8. The National Electricity Policy, 2005, stipulates the need for increasing the share of electricity from nonconventional sources and allows for the state electricity regulatory commissions (SERCs) to establish a preferential tariff for electricity generated from renewable sources to enable them to be cost-competitive.9 Section 5.12.3 of the policy encourages the development of cogeneration facilities and allows for SERCs to promote arrangements between

7 Government of India, Planning Commission. 2008. Eleventh Five Year Plan, 2007–12. Delhi. 8 Ministry of Power. 2010. The Electricity Act, 2003. http://www.powermin.nic.in/acts_notification/electricity_act2003/pdf/The%20Electricity%20Act_2003.pdf 9 Ministry of Power. 2010. The Gazette of India: Extraordinary Part I – Section 1. http://www.powermin.nic.in/whats_new/national_electricity_policy.htm Appendix 2 21 co-generators and distribution companies interested in purchasing excess electricity through a competitive bidding process.

3. National Tariff Policy, 2006

9. The National Tariff Policy announced in January 2006 mandates each SERC to specify a renewable purchase obligation (RPO) with distribution companies in a time-bound manner. These purchases are to be made through a competitive bidding process. The objective of this policy is to enable renewable energy technologies to compete with conventional sources. Section 6.4 of the National Tariff Policy calls for the relevant commission to establish preferential tariffs with distribution companies for the purchase of electricity from nonconventional technologies.10 The National Tariff Policy mandates that each SERC specify RPOs by distribution companies in a time-bound manner. Given the magnitude and importance of the activities under the NSM, solar-specific amendments have been made to these RPOs. In January 2011, the union cabinet approved the proposal from the Ministry of Power to amend the National Tariff Policy to fix a percentage of energy purchase from solar power under the RPOs. The solar power purchase obligation for the states will start at 0.25% (by 2013) and increase up to 3% by 2022.

4. Renewable Purchase Obligations

10. As of December 2010, 18 states have established RPOs or have draft regulations under consideration (Table A2.2) with RPO requirements ranging from 1% to 15% of total electricity generation. Solar RPOs have also been specified in most cases, and it is expected that the state level tariff orders will be modified to conform to the minimum solar power purchase obligations specified by the Ministry of Power.

Table A2.2: State Renewable Purchase Obligations

State Order date RPO (per annum) Solar RPO (per annum) Andhra Pradesh 6 Jul 10 5% 0.25% Bihar 2 Aug 10 1.5% (for FY2011, 2.5% for FY2012, 0.25% (for FY2011, 0.5% for FY2012, 4.0% for FY2013) 0.75% for FY2013) Chhattisgarh 9 Nov 10 5% (for FY2011, 5.25% for FY2012, 0.25% (for FY2011-FY2013) 5.5% for FY2013) Gujarat 17 Apr 10 5% (for FY2011, 6% for FY2012, 7% 0.25% (0.5% in FY2012; 1% in for FY2013) FY2013) Haryana 8 Jul 10 1% 0.25% (for FY2011; 3% for FY2022) Himachal 12 Mar 10 10.1% (annual increase of 1% until 0.1% (until FY2013) Pradesh FY2013) Karnataka 11 Feb 08 10% Kerala 23 Nov 10 3% (for FY2010, with annual 0.25% increase of 0.3% until a maximum RPO of 10%) Madhya Pradesh 7 Nov 08 10% Maharashtra 3 Mar 10 6% (annual increase of 1% until 0.25% (for FY2011–FY2013; 0.5% for FY2014; 9% for FY2015 and FY2014–FY2016)

10 Ministry of Power. 2010. Tariff Policy. http://www.powermin.nic.in/whats_new/pdf/Tariff_Policy.pdf.

22 Appendix 2

State Order date RPO (per annum) Solar RPO (per annum) FY2016) Manipur 26 Apr 10 1% (for FY2011 and FY2012; 2% for 0.25% FY2013) Mizoram 26 Apr 10 5% (for FY2011; annual increase of 0.25% 1% until FY2013) Orissa 16 Mar 10 5% (for FY2012; annual increase of 0.5% (for FY2012; annual increase of 0.5% until FY2016) 0.25% until FY2016) Punjab 24 Nov 06 3% (for FY2011 with a view to achieve 10% by FY2020) Rajasthan 7 Mar 07 7.45% (for FY2010, 8.5% for FY2011, 9.5% for FY2012) Tamil Nadu 28 Apr 10 14% (for FY2011) Tripura 16 Sep 10 1% (for FY2011, 1% for FY2012, 2% 0.1% for FY2013) Uttar Pradesh Draft 4% (for FY2011, 5% for FY2012, 6% 0.25% (to increase to 1% by FY2013) for FY2013) Uttarakhand 6 Jul 10 4% (for FY2011, 4.5% for FY2012, 0.025% (for FY2012; 0.05% for 5% for FY2013) FY2013) West Bengal 10 Aug 10 2% (for FY2011, 3% for FY2012, 4% for FY2013) FY = fiscal year, RPO = renewable purchase obligation. Source: Indian Renewable Energy Development Agency Limited. Solar Energy: Compendium of Regulations & Tariff Orders of CERC, SERC and Policies of State Governments, http://www.ireda.gov.in/Solar/DATA/ Tariff%20order/Title.pdf; various sources and state information.

5. Tradable Renewable Energy Credits

11. The availability of renewable energy sources differs across states. In some states (such as Delhi), the potential for harnessing renewable energy compared with the demand for energy is very small. In other states such as Tamil Nadu (wind), Rajasthan (solar) or Himachal Pradesh (hydro), it is very high. This variability offers opportunities for interstate trading in the form of renewable energy credits (RECs).

12. In January 2010, CERC announced the terms and conditions for a tradable REC program. Under this program, the renewable energy generators will have two options: (i) sell the renewable energy at a preferential tariff fixed by the concerned Electricity Regulatory Commission, or (ii) sell the electricity generated and the environmental attributes associated with the generation, separately.11 On choosing the second option, the environmental attributes can be exchanged in the form of a REC. The price of the electricity component would be equivalent to the weighted average purchase cost to the distribution company, including short- term power purchase but excluding renewable power purchase cost. CERC will issue the RECs and the value of one REC will be equivalent to 1 MWh of electricity delivered to the grid from renewable energy sources.

13. The RECs can be traded only on power exchanges approved by CERC within the band of a floor price and a ceiling price to be determined by CERC. The floor price is determined by

11 CERC. 2010. “CERC Announces Renewable Energy Certificate (REC) Regulation—A Step Forward for Green Energy Promotion.” Press Release (18 January). Appendix 2 23 keeping in view the minimum requirements for ensuring the viability of the renewable energy projects set up to meet the RPO targets. This viability requirement covers loan repayment and interest charges, operation and maintenance expenses, and fuel expenses in the case of biomass and cogeneration projects. The ceiling price is derived based on the highest difference between the cost of generation for the renewable energy technologies and/or renewable energy tariff and the average power purchase cost for the respective states. Based on the above principles, CERC has specified the following floor and ceiling prices for the RECs (Table A2.3). These prices shall remain valid up to FY2012.

Table A2.3: Floor and Forbearance Prices for Renewable Energy Certificates (Rs/MWh) Applicable Renewable Energy Certificate Floor Price Ceiling Price Solar 12,000 17,000 Non-solar 1,500 3,900 MWh = megawatt-hour, Rs = Indian rupees. Source: Central Electricity Regulatory Commission. 2010. Determination of Forbearance and Floor Price for the REC Framework. Petition No. 99/2010 (Suo Motu). New Delhi (1 June).

6. Power Purchase Agreements

14. The NSM promotes a more affordable tariff through a power purchase agreement (PPA) framework that bundles solar power with unallocated thermal power produced by the National Thermal Power Corporation (NTPC).12 NTPC will then sell the power to the state electricity boards (SEBs) through NTPC Vidyut Vyapar Nigam (NVVN)—NTPC’s power trading subsidiary (Figure A2.1). In February 2010, CERC announced a feed-in tariff for FY2011 of Rs17.9 per kWh for photovoltaic and Rs15.3 per kWh for concentrated solar power, and declared that the PPAs would have a validity of 25 years. When NVVN supplies bundled power to state utilities at the rates determined in accordance with CERC regulations, those state utilities will be entitled to use the solar part of the bundled power for meeting their RPOs under the Electricity Act, 2003.

12 NTPC is a regulated central power utility, majority owned by the Government of India. While 85% of the capacity of its power plants is contracted through long-term PPAs, 15% is reserved by the Ministry of Power to be allocated and sold by the NTPC to energy-deficient states on an annual basis. This is considered NTPC’s “unallocated” power.

24 Appendix 2

Figure A2.1: Power Sales and Power Purchase Agreement Architecture

SERCs

  1,000 MW Thermal NTPC 1,000 MW Thermal RPO Obligation Single PPA + 1,000 MW Solar  NVVN SEBs Solar 1,000 MW Solar (e.g., multiple projects) SPVs Multiple PPAs Payment Equity Debt Security Mechanism

Investors Lenders

NTPC = National Thermal Power Corporation, NVVN = NTPC Vidyut Vyapar Nigam, PPA = power purchase agreement, RPO = renewable purchase obligation, SEB = state electricity board, SERC = state electricity regulatory commission, SPV = special purpose vehicle. Source: MNRE.

15. In addition to NVVN, certain states such as Gujarat have developed a regulatory framework for solar power. In Gujarat, the Gujarat Electricity Regulatory Commission devised a solar power procurement tariff regime. Under this regime, Gujarat Urja Vikas Nigam Limited (GUVNL) will enter into 25-year power purchase agreements with private developers for offtake of solar power. The tariff will be fixed at Rs15 per kWh for the first 12 years and Rs5 per kWh for the remaining 13 years. The GUVNL PPA includes several notable aspects, including termination payments under certain events of default.

D. Institutional Arrangements for Implementing the National Solar Mission

16. It is envisaged that the NSM will be implemented by an autonomous Solar Energy Authority embedded within the existing structure of the Ministry of New and Renewable Energy. The authority secretariat will monitor technology developments, review and adjust incentives, manage funding requirements, and execute pilot projects. The authority will report to the Prime Minister’s Council on Climate Change on the status of its program.

17. The broad contours of the autonomous and enabled authority would comprise the following:

(i) A steering group, chaired by the minister for new and renewable energy and composed of representatives from all relevant ministries and other stakeholders, will be set up to oversee the overall implementation of the NSM. Appendix 2 25

(ii) An executive committee, chaired by the secretary of the Ministry of New and Renewable Energy, will periodically review the progress of implementation of the projects approved by the Mission Steering Group. (iii) An empowered Solar Research Council headed by an eminent scientist will advise the mission on all research and development, technology, and capacity building related matters. (iv) A director, with the rank of an additional secretary, will head the authority secretariat and be responsible for day-to-day functioning as well as achieving the goals laid out in a time-bound manner.

26 Appendix 3

PIPELINE OF SOLAR POWER GENERATION PROJECTS Size of Project Project Site Name of Project Company (MW) Project Type Location Aatash Power Private Limited 5 Photovoltaic Gujarat Abellon Clean Energy Limited 3 Photovoltaic Gujarat AES Solar Energy Private Limited 5 Photovoltaic Rajasthan AES Solar Energy Private Limited (US) 15 Photovoltaic Gujarat Alex Astral Power Private Limited 25 Photovoltaic Gujarat Alex Solar Private Limited 5 Photovoltaic Orissa Alex Spectrum Radiation Private Limited 5 Photovoltaic Rajasthan Alpha Green 1 Photovoltaic Gujarat Ambit Advisory Services Private Limited 5 Photovoltaic Gujarat Amrit Animation Private Limited 5 Photovoltaic Rajasthan APCA Power 5 Photovoltaic Gujarat Aravali Infrapower Limited 5 Photovoltaic Gujarat Asahi Energy Pvt. Limited 5 Photovoltaic Gujarat Aston Field Solar (Rajasthan) Private Limited 5 Photovoltaic Rajasthan Astonfield Solar (Gujarat), US 25 Photovoltaic Gujarat Avatar Solar Private Limited 5 Photovoltaic Gujarat Azure Power (Punjab) Private Limited 2 Photovoltaic Punjab Azure Power (Rajasthan) Private Limited 5 Photovoltaic Rajasthan Azure Power Limited (US) 15 Photovoltaic Gujarat Backbone Enterprises Limited 5 Photovoltaic Gujarat Bhaskar Green Power Private Limited 5 Photovoltaic Rajasthan Camelot Enterprises Private Limited 5 Photovoltaic Maharashtra CCCL Infrastructure Limited 5 Photovoltaic Tamil Nadu Claris Lifesciences Limited 2 Photovoltaic Gujarat Clover Solar Private Limited 2 Photovoltaic Maharashtra Coastal Projects Limited 5 Photovoltaic Karnataka Coastal Projects Private Limited 25 Photovoltaic Gujarat Comet Power Private Limited 5 Photovoltaic Rajasthan Commonwealth Business Technologies (UK) 10 Photovoltaic Gujarat Corner Stone Energy Private Limited 5 Photovoltaic Gujarat DDE Renewable Energy Limited 5 Photovoltaic Rajasthan Dreisatz GmbH (Germany) 25 Photovoltaic Gujarat El Technologies Private Limited 1 Photovoltaic Gujarat Electrical Manufacturing Company Limited 5 Photovoltaic Uttar Pradesh Electromech Maritech Private Limited 5 Photovoltaic Rajasthan Emami Cement Limited 10 Photovoltaic Gujarat EMCO Limited 5 Photovoltaic Gujarat Entegra Limited 1 Photovoltaic Rajasthan Enterprise Business Solutions (US) 5 Photovoltaic Punjab Environmental Systems Private Limited 5 Photovoltaic Gujarat Essar Limited 1 Photovoltaic Gujarat Euro Solar Limited 5 Photovoltaic Gujarat Finehope Allied Energy Private Limited 5 Photovoltaic Rajasthan Ganges Entertainment Private Limited 25 Photovoltaic Gujarat GHI Energy Private Limited 10 Photovoltaic Gujarat Gujarat Industries Power Corporation Limited 10 Photovoltaic Gujarat Global Wedge India Private Limited 2 Photovoltaic Gujarat GMR Gujarat Solar Power Private Limited 25 Photovoltaic Gujarat Gujarat Power Corporation Limited 10 Photovoltaic Gujarat Green Infra Solar Energy Limited 10 Photovoltaic Gujarat Greentech Power Private Limited 5 Photovoltaic Rajasthan Appendix 3 27

Size of Project Project Site Name of Project Company (MW) Project Type Location GSPC Pipavav Power Company Limited 5 Photovoltaic Gujarat Gujarat Mineral Development Corporation Limited 10 Photovoltaic Gujarat Harsha Engineers 1 Photovoltaic Gujarat Hiraco India Private Limited 20 Photovoltaic Gujarat India Solar Ray Power Private Limited 10 Photovoltaic Gujarat Indian Oil Corporation Limited 5 Photovoltaic Rajasthan Integrated Coal Mining Limited 9 Photovoltaic Gujarat Jaihind Projects 5 Photovoltaic Gujarat JSW Energy 5 Photovoltaic Gujarat Karnataka Power Corporation Limited 5 Photovoltaic Karnataka Kemrock Industries and Exports 10 Photovoltaic Gujarat Khaya Solar Projects Private Limited 5 Photovoltaic Rajasthan Kiran Energy Solar Power Private Limited 20 Photovoltaic Gujarat Konark Gujarat PV Private Limited 5 Photovoltaic Gujarat Krishak Bharati Corporative Limited 5 Photovoltaic Gujarat Kunvarji Energy Systems Private Limited 5 Photovoltaic Gujarat Lanco Solar Private Limited 35 Photovoltaic Gujarat Maharashtra Seamless Limited 5 Photovoltaic Rajasthan Maharashtra State Power Generation Company Limited 4 Photovoltaic Maharashtra Mahindra Solar One Private Limited 5 Photovoltaic Rajasthan MBH Power 1 Photovoltaic Gujarat Mi GmbH (Germany) 25 Photovoltaic Gujarat Millenium Synergy Limited 10 Photovoltaic Gujarat Monnet Ispat & Energy Limited 25 Photovoltaic Gujarat Mono Steel (India) Limited 10 Photovoltaic Gujarat Moser Baer Limited 15 Photovoltaic Gujarat Moser Baer Photo Voltaic Limited 5 Photovoltaic Rajasthan Newton Solar Private Limited 5 Photovoltaic Rajasthan NKG Infrastructure Limited 10 Photovoltaic Gujarat Northwest Energy Private Limited 5 Photovoltaic Rajasthan OPG Energy Private Limited 5 Photovoltaic Rajasthan Oswal Woollen Mills Limited 5 Photovoltaic Rajasthan Peerless Consultancy Services Private Limited 5 Photovoltaic Gujarat PLG Power Limited 40 Photovoltaic Gujarat Precious Energy Limited (Moser Baer) 15 Photovoltaic Gujarat Precision Technik Private Limited 5 Photovoltaic Rajasthan Punji Lloyd Infrastructure Limited 5 Photovoltaic Rajasthan Rajesh Power Services Private Limited 1 Photovoltaic Gujarat Rasna Marketing Services Private Limited 1 Photovoltaic Gujarat Refex Refrigerants Limited 5 Photovoltaic Rajasthan Responsive Sutip Limited 25 Photovoltaic Gujarat Rithwik Projects Private Limited 5 Photovoltaic Andhra Pradesh Roha Dyechem Private Limited. 25 Photovoltaic Gujarat S. G. Green Park Energy Private Limited 5 Photovoltaic Gujarat Saidham Overseas Private Limited 5 Photovoltaic Rajasthan Saisudhir Energy Limited 5 Photovoltaic Andhra Pradesh Sand Land Real Estate Private Limited (First Solar) 25 Photovoltaic Gujarat Saumya Construction Private Limited 2 Photovoltaic Gujarat Solar Semiconductor Private Limited 20 Photovoltaic Gujarat Solitaire Energies Limited (Moser Baer) 15 Photovoltaic Gujarat Som Shiva (Impex) Limited 1 Photovoltaic Gujarat Steering Gear (India) Limited 5 Photovoltaic Gujarat

28 Appendix 3

Size of Project Project Site Name of Project Company (MW) Project Type Location Sun Clean Renewable Power Private Limited 25 Photovoltaic Gujarat Sun Edison Energy India Private Limited 25 Photovoltaic Gujarat SunEdison Energy India Private Limited 5 Photovoltaic Rajasthan Sunkon Energy Private Limited 10 Photovoltaic Gujarat Surana Telecom and Power Limited 5 Photovoltaic Gujarat Swiss Park Vanijya Private Limited 5 Photovoltaic Rajasthan Talma Chemical Industries Private Limited 25 Photovoltaic Gujarat Tata Power Company Limited 25 Photovoltaic Gujarat Tathith Energies (USA) 5 Photovoltaic Gujarat Taxus Infrastructure & Power Projects Private Limited 5 Photovoltaic Gujarat Top Sun Energy Limited 5 Photovoltaic Gujarat Torrent Power Limited 25 Photovoltaic Gujarat Toss Financial Services Private Limited 2 Photovoltaic Gujarat Unity Power Limited (Videocon Group) 5 Photovoltaic Gujarat Universal Solar System 2 Photovoltaic Gujarat Vasavi Solar Power Private Limited 5 Photovoltaic Rajasthan Videocon Industries Limited 5 Photovoltaic Maharashtra Viraj Renewables Energy Private Limited 5 Photovoltaic Rajasthan Waree Energies Limited 20 Photovoltaic Gujarat Welspun Solar AP Private Limited 5 Photovoltaic Andhra Pradesh Yantra eSolarindia Private Limited 5 Photovoltaic Gujarat Zeba Solar (Portugal) 10 Photovoltaic Gujarat Subtotal of Photovoltaic Projects 1,134

Abengoa Limited (Spain) 40 Thermal Gujarat ACME Telepower Limited 10 Thermal Rajasthan ACME Telepower Limited 45 Thermal Gujarat Adani Power Limited 40 Thermal Gujarat Aurum Renewable Energy Private Limited 20 Thermal Gujarat Cargo Motors 25 Thermal Gujarat Corporate Ispat Alloys Limited 50 Thermal Rajasthan Dalmia Solar Power Limited 10 Thermal Rajasthan Electrotherm Limited 40 Thermal Gujarat Entegra Limited 10 Thermal Rajasthan Godawari Power and Ispat Limited 50 Thermal Rajasthan Infrastructure Development Finance Corporation 10 Thermal Gujarat KG Design Services Private Limited 10 Thermal Gujarat KVK Energy Ventures Private Limited 100 Thermal Rajasthan Lanco Infratech Limited 100 Thermal Rajasthan Megha Engineering and Infrastructures Limited 50 Thermal Andhra Pradesh NTPC Limited 50 Thermal Gujarat Rajasthan Sun Technique Energy Private Limited 100 Thermal Rajasthan Sun Borne Energy Technologies Gujarat Limited 50 Thermal Gujarat Welspun Urja Limited 40 Thermal Gujarat Subtotal of Thermal Projects 850 USA = United States, UK = United Kingdom Source: NVVN

Appendix 4 29

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country: India Project Title: Solar Power Generation Guarantee Facility

Lending/Financing Financial Intermediary Department/ Private Sector Operations Department Modality: Division: Infrastructure Finance Division 1

I. POVERTY ANALYSIS AND STRATEGY A. Links to the National Poverty Reduction Strategy and Country Partnership Strategy The India country partnership strategy, 2009–2012 of the Asian Development Bank (ADB) will continue to emphasize infrastructure development (e.g., transport, energy, urban, and water resource management). ADB’s energy program in India aims to enhance the impact of the government’s initiatives for demand- and supply-related programs. The planned activities include (i) developing renewable and alternative energy sources, and clean generation technology; (ii) reducing technical and commercial losses in transmission and distribution networks and facilities; (iii) strengthening interregional transmission capacity; (iv) bringing demand-side management and energy conservation into the mainstream; and (v) promoting private sector participation, while ensuring environmental sustainability, and supporting institutional strengthening to implement the reforms required by the Electricity Act, 2003. The project is also directly aligned with ADB’s Asia Solar Energy Initiative (ASEI) to (i) facilitate knowledge sharing and transfer for solar power; (ii) help develop, finance, and commission 3,000 megawatts (MW) of solar power generation capacity in developing member countries (DMCs)by March 2013; and (iii) pilot test innovative financing mechanisms and risk mitigation measures specifically for solar power. The ASEI seeks to stimulate solar power development in DMCs in Asia with the goal of (i) increasing economies of scale to reduce costs and improve solar energy’s competitiveness within the grid; (ii) exploit select DMCs’ solar radiation resources, service their fast growing electricity demand, and utilize their greater availability of land compared with most developed countries; and, (iii) promote DMCs’ potential to become global and regional manufacturing hubs for solar technology goods and equipment.

The guarantee facility will mobilize commercial financing to an estimated 150 MW of solar power, which will help diversify the country’s energy mix. The facility will provide credit guarantees in favor of commercial banks that will extend credit to multiple special purpose companies that intend to develop small-scale solar power generation projects. The projects will increase the reliability and availability of electricity in areas where it is located. This will increase economic growth through increased commercial and/or enterprise activities, and more opportunities can be tapped from this development at state, local, and community level. B. Poverty Analysis Targeting Classification: General Intervention Key issues. The projects that will be covered under the guarantee facility will indirectly contribute to poverty reduction. The projects will contribute to the country’s poverty reduction effort on three main fronts: (i) the operation of the projects will add needed electricity to the grid for use by the state population and promote economic activities; as the projects operate, they contribute to the state tax system, where tax revenue can be streamed to promote poverty reduction activities; (ii) the projects will tap a renewable energy source, thereby displacing potential reliance on imported fuel sources and will create outright savings and foreign exchange savings that could be utilized for other productive purposes; and (iii) during its construction, operation, and maintenance phases, the project will provide job opportunities to local communities and promote economic activities in the vicinity. Design features. The guarantee facility will provide credit guarantees in favor of commercial banks that will extend credit to independent power producer borrowers that intend to develop small-scale solar power generation projects. Projects will include solar power generation facilities in India with an installed capacity of not less than 2 MW and not more than 25 MW that are connected to the relevant state electricity grid. Projects that will be guaranteed by the facility will have a direct and material impact to poverty reduction efforts.

30 Appendix 4

II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis Land acquisition and involuntary resettlement. Most solar projects are being sited on barren or unproductive government land in a coordinated effort by state governments. A 5 MW solar power plant will require about 12 hectares of land. No physical displacement is expected since lands can be flexibly acquired to avoid impacts on existing villages and communities. Partner banks extending credit to special purpose vehicles (SPVs) for developing solar power projects will be assisted in establishing their own environmental and social management systems (ESMSs) to ensure that projects are screened for involuntary resettlement impacts and relevant plans are prepared in accordance with national laws and ADB’s Safeguard Policy Statement (2009). For some projects where land has been acquired through expropriation or purchased through negotiations, the ESMS for each commercial bank or lender will require a social compliance audit, including on-site assessment, to (i) identify past or present concerns related to impacts on the involuntary resettlement, and tribal communities that may be considered indigenous peoples; (ii) determine whether actions were in accordance with ADB’s safeguard principles and requirements and to identify and plan measures to address outstanding compliance issues.

Impact on indigenous peoples and/or scheduled tribes. Potential impacts to indigenous peoples and/or scheduled tribes can only be ascertained once specific sites for projects are located. All mitigating measures that will address direct and indirect impacts on indigenous peoples/scheduled tribes will be addressed following the ESMS.

Labor, gender, and other social issues. No significant issues pertaining to labor, gender, and other social issues are expected. The construction phase of projects is relatively short compared with other power generation infrastructure. Influx of population as a result of the project is unlikely. Social dimensions of each solar power project will be analyzed as part of the environmental and social assessment to be undertaken by each SPV in accordance with the Safeguard Policy Statement and agreed ESMS. The ESMS of each partner bank will contain requirements for SPVs to include compliance with core labor standards in the bidding documents for civil works contracts.

Each partner bank will establish an ESMS following the ESMS arrangements and the Safeguard Policy Statement. The ESMS satisfactory to ADB shall be adopted and established by each partner bank prior to ADB issuing a guarantee for the first project. B. Consultation and Participation 1. Provide a summary of the consultation and participation (C&P) process during project preparation. Consultations were conducted with other international financial institutions and other international and local commercial banks that may be interested in becoming a partner bank. During project design, the levels of participation will mainly include information sharing and consultation, and the requirements to undertake such activities will be detailed in the ESMS. If social safeguard plans are required for a project, another meaningful consultation will be undertaken to ensure that the contents of such plans, including grievance redress mechanism, are understood by the affected persons or communities. State mandated public hearings for projects may be initiated by state agencies. It is also envisaged that stakeholders’ engagement will be ongoing during the entire life of a project, which may become part of a project company’s corporate social responsibility program.

2. What level of C&P is envisaged during the project implementation and monitoring? Information sharing Consultation Collaborative decision making Empowerment 3. Was a C&P plan prepared for project implementation? Yes No Details of the projects’ consultation and participation activities will be detailed in the environmental assessment reports that will be prepared. C. Gender and Development Gender Mainstreaming Category: Some gender benefits 1. Key issues. Solar power projects have the potential to engage or employ local women on tasks such as installation of solar panels, operation, and maintenance. In general terms, the positive economic impact of the new energy source will have a ripple effect on women who run small and medium-sized enterprises. 2. Key actions. Measures included in the design to promote gender equality and women’s empowerment—access to and use of relevant services, resources, assets, or opportunities and participation in decision-making process: Gender action plan Other actions or measures No action or measure Gender considerations, particularly related to job opportunities, will be further clarified during consultation activities and will be incorporated in the overall project design, as appropriate. Employee engagement (including contractors) will include gender non-discrimination and equal opportunity for qualified locals. This item shall be defined in the ESMS.

Appendix 4 31

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS Significant/Limited/ Strategy to Address Plan or Other Measures Issue No Impact Issue Included in Design Involuntary resettlement Limited. Barren and If there are involuntary Resettlement plan unproductive government impacts, a land acquisition Resettlement land will be utilized by the and resettlement plan will framework projects. be prepared following the Environmental and established ESMS. social management system arrangement No action

Indigenous peoples Limited. Projects may be If there are impacts on Indigenous peoples located in states where there indigenous peoples and/or plan are indigenous peoples scheduled tribes, plans will Indigenous peoples and/or scheduled tribes. be prepared following the planning framework established ESMS. Environmental and social management system arrangement No action Labor Limited. During project Information will be Plan construction, operation, and included during Other action Employment maintenance, job consultation activities. The No action opportunities opportunities may be ESMS of each partner Labor retrenchment available to locals, subject to bank will include required qualifications. requirements for SPVs to Core labor standards include compliance with core labor standards in the bidding documents for civil works contracts. Affordability No impact. The electricity None Action from the projects will be No action evacuated in existing state grid and pricing will be governed by established regulatory systems. Other Risks and/or None None Plan Vulnerabilities Other action No action HIV/AIDS Human trafficking Others (conflict, political instability, etc.) IV. MONITORING AND EVALUATION Are social indicators included in the design and monitoring framework to facilitate monitoring of gender and social development activities and/or social impacts during project implementation? Yes No Reports on the implementation of environmental and social mitigation measures—including those relevant to social safeguards, gender, labor, and other social development activities—will be included as part of the guaranteed lender’s annual environmental and social performance reports, which will include project environmental and social monitoring reports.

32 Appendix 5

SUMMARY ENVIRONMENTAL AND SOCIAL MANAGEMENT SYSTEM

A. Introduction

1. This section includes an overall description of the guarantee facility and the nature of business operations or business activities of its existing and likely future portfolio. It also discusses the nature of the projects that may be financed by the partner banks using Asian Development Bank’s funds.1

B. Environmental and Social Management Policy and Applicable Requirements

1. Policy

2. The environmental and social management policy of [name of partner bank] was approved by the Board of Directors (or signed by ...... [the President], or indicate other position/designation) on ………. [date/month/year] and states that:

3. The objectives of the environmental and social management system are: (i) To avoid, and when avoidance is not possible, to minimize and mitigate adverse impacts of projects on the environment and affected people; and (ii) To maximize opportunities for environmental and social benefits.

4. [Name of partner bank] continually endeavors to ensure and enhance effective environmental and social management practices in all its activities, products, and services with a special focus on the following: (i) Ensuring that applicable environmental and social safeguard requirements, as defined below are met for all projects;2 (ii) Financing projects only when they are expected to be designed, constructed, operated, and maintained in a manner consistent with applicable environmental and social safeguard requirements, as defined below; (iii) Integrating environmental and social risk into its internal risk management analysis; (iv) Ensuring appropriate consultation and transparency in its project company’s activities; (v) Working together with project companies to put into practice applicable environmental and social safeguard requirements; and (vi) Promoting projects with environmental and social benefits.

5. This policy will be communicated to all staff and operational employees of the company.

2. Applicable Environmental and Social Safeguard Requirements

6. [Name of partner bank] will ensure that: (i) All projects using ADB funds are screened against the prohibited investment activities list of the ADB Safeguard Policy Statement (2009);

1 This is a template which will be modified with each partner bank under the facility. 2 The term “projects” is used in this document to mean business activities financed in part and in full by [name of bank/lender] using ADB funds.

Appendix 5 33

(ii) All projects using ADB funds with potential significant environmental and/or social impacts are reviewed and evaluated against safeguard requirements 1–3 of the ADB Safeguard Policy Statement; and (iii) All projects are reviewed and evaluated against the national laws, regulations, and standards on environment, health, safety, involuntary resettlement and land acquisition, indigenous peoples, and physical cultural resources.

C. Environmental and Social Management Procedures

1. Screening and Categorization

7. At an initial stage of identifying a project, the environmental and social safeguard manager3 (or other designated staff) of the partner bank will apply ADB’s prohibited investment activities list. If the project involves a prohibited activity, the special purpose vehicle company (SPV) will be informed that the project will not be considered. Otherwise, the environmental and social safeguard manager (or other designated staff) will indicate the applicable environmental and social safeguard requirements for the project.

8. At the project identification stage, the environmental and social safeguard manager (or other designated officer) will work with the SPV4 to make a rapid assessment of the likely environmental and involuntary resettlement impacts and effects on indigenous peoples. The environmental assessment checklist and social safeguard screening checklist are designed to guide the deal team of the partner bank in the rapid assessment of impacts. The checklists are used to determine the significance of potential environmental and/or social impacts associated with the project.

9. Once the checklists and the verification work are completed by the deal team of [name of partner bank], the project will be classified as one of the following categories: category A (with potential significant environmental and/or social impacts), category B (with less significant environmental and/or social impacts), or category C (with minimal or no impacts).

10. The deal team of [name of partner bank] will take care to assure that the SPV is fully aware of the applicable requirements as summarized in Table A5 that the project is expected to comply with. For projects with potential significant environmental and/or social impacts, the deal team will advise the SPV that (i) safeguard requirements 1–3 of the ADB Safeguard Policy Statement will apply, including preparation of an environmental impact assessment report and an environmental management plan, a resettlement plan, and/or an indigenous peoples plan; and (ii) the SPV shall submit these reports to [name of partner bank] for review. [Name of bank/lender] will also submit these reports to ADB for review.

3 The environmental and social safeguard manager (or other designated staff) can be a full-time officer or a consultant of [name of guaranteed lender]. 4 The SPVs will be sponsored by consortia of reputable and creditworthy Indian power developers and solar power system integrators, which have established track records in developing and/or commissioning solar power generation facilities.

34 Appendix 5

Table A5: Safeguard Requirements Involuntary Category Environmental Resettlement Indigenous People (Risk Rating) Safeguards Safeguards Safeguards Category A (with Comply with Comply with Comply with potential significant (i) safeguard (i) safeguard (i) safeguard impacts) requirement 1 of the requirement 2 of the requirement 3 of the ADB Safeguard Policy ADB Safeguard Policy ADB Safeguard Policy Statement, including Statement, including Statement, including environmental impact resettlement plan indigenous peoples plan assessment preparation preparation and preparation and and submission; and submission; and submission; and (ii) national laws (ii) national laws (ii) national laws

Category B (with less Comply with national Comply with national Comply with national significant impacts) laws and ADB’s PIAL laws and ADB’s PIAL laws and ADB’s PIAL

Category C (with Comply with national Comply with national Comply with national minimal or no impacts) laws and ADB’s PIAL laws and ADB’s PIAL laws and ADB’s PIAL

ADB = Asian Development Bank, PIAL = prohibited investment activities list. Source: ADB. 2009. Safeguard Policy Statement.

2. Environmental and Social Assessment, Planning, and Management

11. Environmental and social assessment. The SPV to identify potential direct and indirect environmental and social impacts on and risks to physical, biological, socioeconomic (including land acquisition, involuntary resettlement, and indigenous peoples impacts), and physical cultural resources; and determine their significance and scope, in consultation with stakeholders, including affected people and local community stakeholders. The assessment process will be based on current information, including an accurate project description, and appropriate environmental and social baseline data. The environmental and social assessment will consider all potential impacts and risks of the project on physical (location); biological (including habitat concerns); socioeconomic (including involuntary resettlement and indigenous peoples impacts as well as occupational and community health and safety issues related to installation and decommissioning, waste disposal, and recycling of solar photovoltaic equipment); vulnerable groups and gender issues; and impacts on livelihoods through environmental media and physical cultural resources in an integrated way.

12. Labor and gender and development issues will be addressed by the SPV during the design of projects using ADB funds. Specifically, the SPV will (i) include gender analysis as part of the environmental and social impact assessment, (ii) conduct meaningful consultations that include women, and tailored to the needs of disadvantaged and vulnerable groups; (iii) ensure that the SPV’s contracts with civil works contractors, subcontractors, and other providers of goods and services include provisions to employ local labor whenever possible and ensure compliance with core labor standards where it is not inconsistent with national laws.

13. Environmental and social safeguards planning and management. The SPV will prepare an environmental management plan, resettlement plan, and/or indigenous peoples plan that address the potential environmental and social impacts and risks identified by the environmental and social assessment.

Appendix 5 35

14. When conducting the environmental and social assessment and preparing the plans, the SPVs will conduct meaningful consultations with affected people. Each SPV will establish a grievance mechanism, which will be described in the safeguard plans.

3. Due Diligence of Partner Banks

15. The environmental and social safeguard manager (or other designated staff) of the deal team of [name of partner bank] will undertake environmental and social due diligence. Depending on the complexity of the project, due diligence can be a desk review (for category C projects), based on a site visit (for category B projects), or a full-scale review conducted by qualified staff in charge of environmental and social safeguards, or by consultant(s) (for category A projects). The SPV must provide all requested information to the deal team, and should be able to demonstrate responsiveness with regard to the applicable environmental and social safeguard requirements. A due diligence report will be prepared for category A and B projects and the results of the due diligence will be reflected in the report to the approving committee of [name of partner bank], which will take into account these issues in approving the project.

16. For a project using ADB funds and likely to be classified category A for any of its environment, involuntary resettlement, or indigenous peoples impacts, [name of partner bank] will refer the project to ADB and provide a copy of the due diligence report to ADB, and submit the draft environmental impact assessment report, resettlement plan, and/or indigenous peoples plan to ADB for review and clearance before the project is approved by [name of partner bank].

17. For partially existing and/or constructed and operational projects and for which land acquisition is ongoing or has been completed by the local government or purchased through negotiated settlements, the partner bank will require the SPV to conduct an environmental and social compliance audit, including on-site assessment, to identify past or present concerns related to environmental, land acquisition, and involuntary resettlement and indigenous peoples impacts. Where noncompliance is identified, the audit report and the corrective action plan will be prepared by the SPV and submitted to the partner bank prior to approval of the project. The environment and social compliance audit report, including corrective action plan, if any, will be made available to the public through the ADB website in accordance with ADB information disclosure requirements.

18. All project loan agreements will contain appropriate environmental and social covenants requiring the project to be in compliance in all material respects with the applicable environmental and social safeguard requirements as defined herein.

4. Compliance Monitoring and Reporting

19. After a category A or B project is approved, the environmental and social safeguard manager (or other designated staff) (i) communicates with the project and confirms from time to time that the SPV is undertaking the obligations of compliance with all applicable environmental and social safeguard requirements; and (ii) [name of partner bank] will promptly report to ADB any actual or potential breach of the compliance requirements after becoming aware of it. For a category A project, the environmental and social safeguard manager (or other designated staff) will visit the site to monitor the implementation of environmental management plan, resettlement plan, and/or indigenous peoples plan.

36 Appendix 5

20. Environmental and social performance will be evaluated on an annual basis. The benchmark for performance will be the ongoing compliance against the applicable environmental and social safeguard requirements. [Name of partner bank] will ensure that the SPV prepares and submits an annual environmental and social monitoring report, and will review and assess the SPV’s performance on environmental and social safeguard issues as well as gender, labor, and other social development activities.

21. The partner bank will prepare and submit to ADB an annual environmental and social performance report on the status of implementation of the ESMS. If the report or ADB’s reviews conclude that the ESMS is not functioning, the partner bank will submit and agreed with ADB to implement a corrective action plan. The report will also summarize the results of the annual environmental and social performance of category A and B projects based on reports prepared by the SPV.

D. Organizational Responsibilities, Resources, and Capacity

1. Organization and Responsibilities

22. The environmental and social safeguard manager (or other designated staff) reports to the [chief executive officer] of [name of partner bank]. The manager has oversight for environmental and social issues, ensures the resources are made available for environmental and social management, and should sign and submit the annual environmental and social performance report to ADB. The manager should ensure that the ADB is notified if and when the responsible staff has been changed or replaced with new staff.

2. Resources and Capabilities

23. The environmental and social safeguard manager (or other designated staff) should work with the management of [name of partner bank] to ensure that adequate resources have been committed to allow for the effective implementation of this ESMS policy and procedures. The manager will need to be technically qualified to be able to carry out the screening and due diligence or able to review the work carried out by consultant(s). The manager should attend ADB-sponsored or approved environmental and social safeguard training related to compliance and monitoring activities. [Name of partner bank] should also maintain a pool of qualified environmental and social consultants who can be called upon to assist in conducting environmental and social reviews as appropriate.

Appendix 6 37

PARTNER BANK DUE DILIGENCE CHECKLIST

Item Information to Review Organizational Organization chart of the bank List of all stockholders owning more than 3% of issued share capital, including details of any stockholders who may be related, and the type of ownership (corporate, individual proprietorship; and whether private or state-owned) Overall growth strategy Financial Audited financial statements and annual report for the last 3 full fiscal years and any interim financial statements Review of prudential regulations (capital adequacy, nonperforming loans, single-borrower and related-party borrower limits) Loan portfolio Loan portfolio, by sector or business line Loan portfolio, by retail or wholesale Risk management Risk governance structure or chart of the bank Credit policy and procedures Credit approval process Risk rating guidelines Loan monitoring guidelines and process Overview of management information systems and reporting Operational risk Environment and social Adequacy of partner bank’s environmental and social management system Capacity and commitment for environmental and social management of projects Portfolio management and Loan classification, nonperforming loans, and provisioning provisioning Human resources List of senior management and short curricula vitae List of key personnel associated with project finance and solar power sector, and short curricula vitae Overview of credit training provided Program-specific Strategy for the solar power sector and targets Portfolio limits for the solar power sector Any risk rating guidelines, credit policy, and procedure modifications specific to the solar power sector Source: ADB staff.

38 Appendix 7

SUMMARY GUARANTEE TERM SHEET AND PROJECT ELIGIBILITY CRITERIA

A. Guarantee Facility Purpose: For the guarantor to issue partial credit guarantees (PCGs) in the aggregate equivalent amount of up to $150 million1 to guaranteed lenders making guaranteed loans to part finance eligible solar power projects Guarantor: Asian Development Bank (ADB) Guaranteed lender: Any commercial financial institution acceptable to the sponsor(s), borrower(s), and the guarantor Project sponsor: Any eligible solar power project developer acceptable to the guaranteed lender(s) and guarantor Borrower: Any legal entity established and operating under the laws of India that is controlled and owned by project sponsors and responsible for the construction, commissioning, and operation of an eligible solar power project and for the repayment of the guaranteed loan Eligible solar power Solar power electricity generation facilities in India that shall: projects: (i) be built and operated by independent power producers that are at least 50% privately controlled and owned; and (ii) have signed a long-term power purchase agreement (PPA) under the Jawaharlal Nehru National Solar Mission (NSM) or under a separate declared state solar policy (e.g., Gujarat); and (iii) meet the ADB guarantee facility eligibility criteria (unless otherwise agreed in advance by ADB).

B. Guaranteed Loans Loans: Loans guaranteed by the guarantor under the guarantee facility made by the guaranteed lenders to respective borrowers for the financing of eligible solar power projects. Tenor: Up to 15 years (door-to-door) from the date of the loan agreement and an amortization schedule that provides for an average loan life of no more than 10 years. Currency: A guaranteed loan may be denominated in Indian rupees (Rs), euro (€), US dollars ($), or any other currency acceptable to the borrower, guaranteed lender, and guarantor. Principal: The principal amount of any guaranteed loan may vary but must be compliant with maximum debt–equity ratio for the project.

1 $150 million includes guaranteed principal only. Guaranteed interest to be added.

Appendix 7 39

Covenants, As per the lenders’ and guarantor requirements, including a undertakings, change of ownership clause and a certification by the representations and borrower regarding the use of loan proceeds under the warranties, events of guaranteed loans. Guaranteed loans must be compliant with default, conditions ADB’s Safeguard Policy Statement (2009) and all other precedent: relevant ADB policies.

C. Partial Credit Guarantee

Form of contract of Guarantee against nonpayment of principal and interest by guarantee: the borrower Guarantee term The term equal to the tenor of the guaranteed loan. In case of a back-ended PCG: from the later of (i) 8 years from date of signing of the PCG or (ii) if at such point in time, a default has occurred, the moment such defaults have been cured; until maturity of the guaranteed loan. Guaranteed amount: The guaranteed percentage of all or any portion of one or more scheduled principal and interest payments that are not paid for the duration of the waiting period Guarantee percentage: Up to 50% on a net present value basis2 over the duration of the guaranteed loan, but the actual percentage in any given year to be agreed between the guaranteed lender(s) and the guarantor, subject to due diligence acceptable to the guarantor on each eligible solar power project. 100% cover shall only be permitted after year 9 of the loan tenor. Demand payment At the option of the guarantor, either in accordance with the scheduled payments or on an accelerated basis, in each case following a demand determination period of up to 30 days after the filing of a demand by the guaranteed lender(s). Demands can be made during the waiting period. Subrogation, transfer, As a condition to payment of a demand, while the guarantor and assignment of may require the guaranteed lender(s) to transfer and assign rights: all rights related to the portion of the guaranteed loan for which payment has been made, the guarantor will at all times automatically subrogate to such guaranteed lender’s rights. Guarantee fees: Up-front fees, standby fees, and annual guarantee fees are determined on a case-by-case basis subject to further internal ADB approvals and in accordance with ADB policies.

D. ADB Eligibility Criteria under the Guarantee Facility

1. To be eligible for support under the guarantee facility, the eligible solar power generation project should be a new (greenfield) solar power generation of not less than 2 megawatts (MW)

2 The net present value of the guaranteed outstanding principal and accrued interest shall not exceed 50% of the total principal of the guaranteed loan.

40 Appendix 7 and not more than 15 MW3 and meet the following minimum criteria. All projects designed for an installed capacity of greater than 16 MW but less than or equal to 25 MW will generally follow the same criteria but will be subject to final review by ADB on a case-to-case basis.

2. Exceptions to these criteria may be proposed by any guaranteed lender but require prior review and consent by ADB:

(i) Construction of a new (greenfield) solar power generation plant in India that will be connected to the relevant state electricity grid at a voltage greater than 11 kilovolts. Projects will utilize either solar photovoltaic (crystalline or thin-film) or concentrated solar thermal technology that has been installed and operational of equivalent capacity of greater for at least 12 months prior to the guarantee application date. (ii) The borrower has received a letter of intent from NTPC Vidyut Vyapar Nigam (NVVN) under the National Solar Mission or has signed a power purchase agreement with the relevant state government under a separate state Solar Power Policy. Copies of the signed PPA should be submitted with all other project documentation. (iii) The project’s feasibility study, detailed project report and/or business plan have been prepared and include the following aspects among others: (a) technical design containing the proposed solar technology, including equipment specifications for all major equipment; (b) information that demonstrates the proposed technology has been in commercial operation for at least 12 months in at least one verifiable site of equivalent capacity or greater prior to the guarantee application date; (c) solar irradiation data analysis for the proposed project site; (d) commercial, economic, and financial viability (based on P50, P75, and P90 levels of irradiation resources); (e) operation and maintenance plans and availability of spare parts; (f) reasonable access to the nearest transmission connection and/or substation has been described and cost estimated; (g) detailed description of the proposed site, water requirement for construction and operations, and a description of the land acquisition process; (h) environmental and social assessment of impacts and management plans, and report on planned and completed consultation and participation activities; and (i) comprehensive risk analysis. (iv) Independent due diligence on the project has been carried out by the guaranteed lender(s) (applicant), which addresses the following; (a) Assessment of the creditworthiness of the proposed sponsors. The minimum equity required for financing of the project should not exceed 20% of the sponsors’ net worth. Based on the last 3 years’ consolidated audited financial results, sponsors’ average EBITDA to interest of at least two times and average long-term debt to EBITDA of no more than three times. (b) Sponsor criteria of minimum 3 years’ experience in nonconventional energy sector or conventional power generation sector.

3 Maximum power output on an alternating current basis.

Appendix 7 41

(c) Technical and engineering review of the feasibility study and/or detailed project report. (d) Commercial review of relevant engineering, procurement, and construction; turnkey supply and/or erect contracts; supplier warranties and performance guarantees (including degradation of output wattage of not more than 10% after 10 years and 25% after 20 years), etc. (e) Assessment of the credit profile and track record of manufacturer and/or suppliers and terms of warranty coverage. Major equipment manufacturers (e.g., panel manufacturers) must have been in operation for a minimum of 3 years prior to guarantee application date and have a minimum of 50 MW aggregate net capacity installed worldwide. (f) Review of the borrower’s financial viability and financial model, including sensitivity analysis, to ensure that cash flow projections forecast that the debt can be serviced in downside scenarios. (g) Disbursement, procurement, and implementation plans, including monitoring and reporting. (h) Integrity or “know your client” assessment of prospective sponsors of the project. (i) Design of a security package acceptable to ADB.

(v) Funds from the guaranteed loan must be applied to eligible project costs and expenditures to equipment and services provided by firms in ADB’s member countries.4 (vi) Loan terms and conditions by the guaranteed lenders that establish: (a) Maximum loan tenors of 15 years (average life of no more than 10 years) where NVVN is the offtaker and 12 years (average life of no more than 8 years) where GUVNL is the offtaker. (b) Dedicated 6-month debt service reserve account in favor of the lenders. (c) Either equal principal amortization payments or a tailored principal amortization schedule in which the average life of the loan does not exceed 10 years. (d) Financial covenants that require the maintenance of adequate debt service coverage (e.g.,1.2x as an event of default), leverage ratios (70:30 at each drawdown request and at each interest payment date), and acceptable test conditions for dividend payouts (including a debt service coverage ratio of 1.3x for the past four quarterly payment dates or two semiannual payment dates);5 (e) Share retention by sponsors of at least 51% for a minimum of 2 years after commercial operations and financial performance have been proven; consent required for the sale of shares below 51% thereafter. (f) A completion undertaking by the project sponsors in favor of the lenders until commercial operations has been declared by the lenders’ engineer. (g) An event of default being: i. the insolvency and/or winding up of the solar panel manufacturer which supplied the project (unless alternative arrangements for replacement of performance warranty); and

4 The list of ADB members can be found at http://www.adb.org/About/membership.asp. 5 Other similar financial covenant structures may also be considered with prior approval of ADB. Borrowers may also benefit from guarantee from affiliate or parent companies in the event indicative financial covenants cannot be met.

42 Appendix 7

ii. breach of financial covenants for three consecutive semiannual or quarterly periods. (h) Depending on market availability of derivative products, hedging of the interest, and foreign exchange risk (if applicable). (i) Conditions precedent to first disbursement, including: i. all material consents, licenses, and permits obtained in relation to the construction phase of the project; ii. all regulatory loan approvals, as relevant; iii. acceptable opinions from external legal counsel and report of lenders’ engineer; iv. confirmation of the establishment of a debt service reserve account; v. payment of all required lender’s and guarantor’s fees; and vi. evidence of appropriate insurance in place. (j) Other customary affirmative and negative covenants as agreed with ADB.