Bankability and Debt Financing for Solar Projects in India

INDIA SOLAR LIBOR DECISION BRIEF Bankability and Debt Financing for Solar Projects in India

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2 Lender’s view – risks and mitigation strategies 03

2.1 Risks related to long-term payment security 04 2.1.1 Power off-taker risk 04 2.1.2 Regulatory risks 07 2.2 Risks related to long-term plant quality and power generation 09 2.2.1 Resource data risk 09 2.2.2 Technology risks with regard to quality and performance 10 2.3 Short-term, project execution risks 13 2.3.1 Permitting and construction risks 13

3 Borrower’s view – structuring debt finance 16 3.1 A typical project financing structure in India 16 3.2 A typical project financing timeline 17 3.3 Types of debt finance 18 3.3.1 Project financing or non-recourse financing 18 3.3.2 Limited recourse financing 18 3.3.3 Refinancing 18 3.3.4 Construction finance 18 3.4 Role of bridge finance/construction finance 19 3.5 Sources of debt finance 21 3.5.1 Indian commercial banks 21 3.5.2 Non-banking financial companies 21 3.5.3 Export Credit Agencies/Investment insurance agencies 23 3.5.4 Development finance institutions 24

4 Other tools for debt financing 26 4.1 Currency hedging 26 4.2 Debt syndication 27

5 Financing documentation 28

6 Outlook 29

7 Expert’s view 30 7.1 GeoModel Solar: What makes a solar resource estimate bankable? 30 7.2 Enerparc: Bankability of solar projects – The need to look beyond financial metrics 31

8 Annexure 32 8.1 Glossary of terms 32

Figure 2 Structure of a typical State Electricity Board 06

Figure 3 CUF based on plant data from Gujarat (January to April 10 2012) 16 Figure 4 Typical cash flows and contracts managed through the SPV

Figure 4 Typical project cash flows on a timeline 17

Figure 5 Example of cash flows of a project availing construction 20 loan

Figure 6 Five year valuation of the Indian rupee against the US 26 dollar

© BRIDGE TO INDIA, 2013 KEY FINDINGS 1. According to estimates, debt bridge financing plays a key role in claims worth more than ` 2 trillion letting developers complete their (€ 30 billion/$ 40 billion)1 are projects on time. pending in debt recovery tribunals. 8. Bridge finance can be arranged Debt recovery and the legal through short-term construction enforceability of claims for any loans from financial institutions, type of non-recourse debt in India suppliers’ credit and pre-financing remains a key risk for the lenders. by EPC companies. 2. On the intermediate level, lenders 9. First movers in terms of financing have two main concerns: the first is solar projects in India have been the limited availability of irradiation Bank of Baroda, Axis Bank, ICICI data, which forms the basis for Bank, State Bank of India, IDBI projecting future revenues. The Bank and Yes Bank. second is the strength of public 10. Prominent non-banking financial power purchasing agreements companies (NBFCs) that are (PPAs) due to the weak financial open to financing solar projects health of India’s public utilities. include: L&T Infrastructure 3. According to industry sources, Finance Company (subsidiary of the margin of error for irradiation L&T Financing Holdings), Power data at specific locations could Finance Corporation (PFC), be as high as 10% and can be a Mahindra Finance, IDFC, IL&FS, significant risk from a lender’s SBI Capital Markets and Indian perspective. International Renewable Energy Development lenders insist on P90 exceedance Agency (IREDA). probability for irradiation data. 11. The US EXIM bank has been the 4. Majority of SEBs in India have most active Export Credit Agency negative net internal revenues and (ECA) in the Indian solar market. the situation is getting worse. The According to a statement in July distribution utilities’ cumulative 2012, the US EXIM bank has losses rose to ` 1.9 trillion (€ 29 approved solar project financing billion/$ 38 billion) in FY-2011 from for ` 16.5 billion (€ 250m/$ 330m). ` 1.22 trillion (€ 18 billion/$ 24 12. IFC, a member of the World Bank billion) in the year before. This puts Group, is one of the most actively the PPAs signed by them at risk. involved Development Funding 5. A preliminary review of the power Institutions (DFIs) in India. It has production data from January to provided financing for projects by 2 April 2012 by BRIDGE TO INDIA developers such as Green Infra, shows that in spite of similar Mahindra Solar, Azure Power and irradiation and temperature SunEdison India. conditions, while most of the plants 13. ADB provides financing support have a CUF of around 20%, a few under the India Solar Generation plants have achieved a CUF as high Guarantee Facility (ISGGF), under as 25% and as low as 14%. its Asia Solar Energy Initiative 6. Unavailability of non-recourse (ASEI) to promote the development financing is a critical hurdle in the of solar energy in India. Currently, expansion plans of developers as two commercial banks have they cannot continue to accumulate been approved by ADB as eligible recourse on their balance sheets. partners: L&T Infrastructure 7. Due to liquidity shortages, Finance Company Limited (India) short timelines and delayed and the Norddeutsche Landesbank disbursements of debt amounts, (abbreviated Nord/LB, Germany).

------1 € 1 = ` 65; $ 1 = ` 50 2 Refer to the July 2012 edition of the INDIA SOLAR COMPASS to read more

© BRIDGE TO INDIA, 2013 1. OVERVIEW Solar projects in India still struggle to India’s public utilities. On account raise debt finance. So far, only a small of these risks, the market is percentage of projects have attained slowly maturing: more on-ground non-recourse financing. Most have measuring stations and actual worked with either limited recourse generation data from existing Lenders have concerns or full recourse finance. Banks that plants provide a stronger set of have in the past provided non-recourse data. With respect to the strength with debt recovery and financing are either Indian commercial of PPAs, payments are sometimes the legal enforceability banks or international lenders with backed by guarantee funds and of claims in India in a development mandate. There are sometimes passed on to the several reasons why non-recourse private sector (through Renewable general. This is a finance is difficult to obtain. They relate or Solar Purchase Obligations). concern that extends to three layers of the market: For Renewable Energy Certificates to any project-related (RECs)3 the main questions hover 1. On the macro level, lenders have around the enforcement of Solar finance in India. concerns with debt recovery Renewable Purchase Obligations and the legal enforceability of (RPOs) and Solar Purchase 4 claims in India in general. This Obligations (SPOs in Tamil Nadu) , is a concern that extends to any which create the demand. The project-related finance in India. project promoter will need to be Even cross-defaulter clauses of conservative on yield assessments converting debt into equity only and evaluate the off-take and REC have a limited appeal. The best options very carefully. way for a project promoter to 3. On the project level, there can be reduce this concern is through a projects that are simply not well strong company reputation and developed. A well- developed banking relationship as well as project usually starts from the through the actual track-record perspective of the debt provider of debt repayment and future (bankability) by identifying and plans and debt requirements (the mitigating risks. The second step is On the intermediate larger the risk to future business proving viability to the lenders. Our of being labeled a “defaulter”, level, with respect report will primarily focus on steps the higher the incentive to repay for improving the bankability of the to the Indian solar the debt). Recovery of Debts projects and arranging for project market, banks have Laws (Amendment) Bill, 2011 debt. two main concerns: was passed in December 2012 in the Indian parliament. Recent Currently, a dynamic, early stage, limited availability of modifications of debt-recovery uncertain and regionally diverse rules will make it easier for banks irradiation data and regulatory environment also negatively to recover bad loans and thereby to impacts project bankability by keeping the strength of public make more non-recourse financing the transaction costs for lenders power purchasing available in the future. high and visibility low. The nature agreements (PPAs) 2. On the intermediate level, with of solar power projects – with their respect to the Indian solar market, high upfront capital requirements banks have two main concerns: and low operational costs, typical the first is the limited availability of infrastructure projects – further of irradiation data, which emphasizes the bankability challenge. forms the basis for projecting Another issue is that since many Indian future revenues. The second banks currently have excess exposure is the strength of public power to the conventional power sector, they purchasing agreements (PPAs) have very limited funds left over for due to the weak financial health of solar projects. Apart from that, interest ------3 Refer to BRIDGE TO INDIA’s decision brief on ‘REC Mechanism: Viability of Solar Projects in India’ 4 Refer to BRIDGE TO INDIA’s ‘Tamil Nadu Solar Policy Brief’

© BRIDGE TO INDIA, 2013 01 rates in India have been at an all-time secure a lower cost of debt. Even high. Solar projects financed by Indian after completely hedging for currency, banks, non-bank financial companies a project is able to derive a rate Unavailability of non- (NBFCs) and infrastructure funds end differential of around 100 basis points. up paying an interest rate of over 13% These financing sources are also recourse financing per annum. more open than commercial banks to is a critical hurdle in financing solar projects as they tap into the expansion plans Unavailability of non-recourse funds allocated for climate initiatives financing is a critical hurdle in the and/or have a mandate to promote of developers as they expansion plans of developers as exports from the host country. cannot continue to they cannot continue to accumulate recourse on their balance sheets. In As a trend, project developers and accumulate recourse addition, the high cost of financing other key stakeholders in the solar on their balance significantly adds to the cost of solar industry realize that conventional sheets. power in India as compared to more financing from banks is not the sole mature solar markets. answer to scaling up of solar power in the country. Innovative mechanisms Till the time non-recourse financing need to be worked out. Currently, this becomes more readily available in innovation is working at two levels: the Indian market, access to the right lack of liquidity is prompting project financing options will remain the developers to look for instruments key differentiator across different like suppliers’ credit and construction developers and their projects. finance to get the projects up and This is exceptionally important in running quickly (gaining speed) and at Till the time non- a competitive project allocation the same time, the high Indian interest recourse financing landscape that exists in India. rates are spurring efforts to acquire becomes more readily International financing from export debt from outside the country without credit agencies (ECAs) such as the a full or partial financial hedge against available in the Indian US EXIM bank and development currency fluctuations. market, access to the finance institutions (DFIs) such as the International Finance Coporation right financing options IFC has helped some developers will remain the key differentiator across different developers and their projects.

© BRIDGE TO INDIA, 2013 02 2. LENDER’S A lender’s role is to assess the risks the recovery of debt. Previously, a VIEW – RISKS of a project and based on these, debtor was able to get a ‘stay order’ decide whether to lend and if so, from a judicial court on recovery of AND at what terms. Project developers, assets. This prevents and delays the MITIGATION sponsors, EPC companies and other recovery of assets by the lenders or stakeholders must work towards asset recovery companies (ACRs). STRATEGIES mitigating all critical risks to be able The new bill preventsany orders by to secure financing at reasonable the courts without first hearing the terms. Lenders’ eligibility criteria refer bank or ARC. This might give more to, for example, PPA type, strength comfort to the banks at the time of of the power off-taker, long term lending and thereby reduce the cost of According to estimates, cash flows, earnings before interest, borrowing, which would significantly claims worth more taxes, depreciation, and amortization aid the development of the Indian (EBITDA5), debt service coverage infrastructure sector. than ` 2 trillion ($ 37 ratio(DSCR6), environmental and social billion/€ 30 billion) are impact and even, in some cases, anti- A few solar project developers,such as processed in DRTs in corruption due diligence. Sponsors SunEdison, Mahindra Solar, Astonfield and developers should work towards and SunBorne Energy claim to have India. meeting these criteria right from the been able to secure non-recourse outset of their project activities. debt financing for their projects in India. Convincing lenders (especially Debt recovery and the legal the Indian lenders) to provide a non- enforceability of claims for any type recourse debt is challenging. The key of non-recourse debt in India remains to achieving a non-recourse financial a key risk for the lenders. Lenders closure is to convince them that their usually have to rely on debt recovery projects’ risks are very well covered, tribunals (DRTs) for resolution and the project development process has recovery of disputed loans. According been very professionally executed, to estimates, claims worth more than the project is financially viable and ` 2 trillion ($ 37 billion/€ 30 billion) the borrower has sustainable, long- are processed in DRTs in India7. In a term plans requiring more debt in the In December 2012, situation, where recovery of assets can future. be cumbersome, banks are particularly the Indian parliament wary of negotiating non-recourse Apart from this, corporate credibility has passed the Debts terms of financing with the developers. and the ability to raise equity (for the Laws (Amendment) At the same time, however, developers project itself, the project development with a long-term strategy of solar company or an asset holding company) Bill; 2011 to strengthen asset ownership cannot continue to from prominent international financial the regulatory accumulate recourse-based debt on investors such as Goldman Sachs, and institutional their balance sheets. If such players the Blackrock Group or Apollo are unable to raise non-recourse debt, Management and multilateral financial framework related to their growth will be stifled. institutions such as the IFC can help the recovery of debt. build the case for non-recourse debt. In December 2012, the Indian In almost all the cases of non-recourse parliament has passed the Debts finance in India, debt is syndicated Laws (Amendment) Bill8; 2011 between multiple lenders, so that to strengthen the regulatory and there is only a limited exposure on a institutional framework related to single lender.

------5 The EBITDA of a project company gives an indication on the operational profitability of the business, i.e. how much profit does it make with its present assets and its operations on the products it produces and sells, taking into account possible provisions that need to be carried out. 6 The debt service coverage ratio (DSCR), also known as “debt coverage ratio,” (DCR) is the ratio of cash available for debt servicing to interest, principal and lease payments. 7 Article: MINT-Revitalize debt tribunals: Supreme Court tells government. 8 The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011.

© BRIDGE TO INDIA, 2013 03 In a non-recourse project financing term payment security. A payment structure, the plant assets themselves delay or default can make a project serve as a basis for the repayment unviable and possibly eliminate a of the loan. Thus, a proper and project owner’s ability to structure the Over time, mature predictable forecast of the power debt. production is of utmost importance. solar markets with a Other influencing parameters can Currently, most off-taker and payment strong debt recovery be a sound technical planning, the risks are still directly associated with framework, such as experience and track record of the the various solar polices in place in EPC contractor, reliable irradiation India. For most FiT-based projects, Germany and the US measurements, conservative financial a government entity is the off-taker. have moved towards modeling and availability of operational As an example, NTPC VidyutVyapar data from a plant close to the chosen Nigam (NVVN), a government-owned mostly non-recourse location of the project at hand. power trading company, has been the financing at very high off-taker for projects allocated under debt to equity ratios. Over time, mature solar markets with a the National Solar Mission (NSM). strong debt recovery framework, such Similarly, Tamil Nadu Generation and as Germany and the US have moved Distribution Corporation (TANDEGCO) towards mostly non-recourse financing is the off-taker forprojects allocated at very high debt to equity ratios. In under Tamil Nadu’s state solar policy. India, too, the perception of risk is While the NVVN can be considered a expected to change as the market credible off-taker, as it is an Indian matures and lenders are able to refer AAA rated company with a healthy to a larger body of performance and balance sheet, TANGEDCO cannot be other statistical data to assess project considered a low-risk off-taker as it performance. is in poor financial health and has a track-record of delayed and defaulted In any case, to be able to secure payments to wind power generators While the NVVN can be financing at competitive terms, the in the state. The selection of a PPA considered a credible project developers, EPC companies signing authority and payment security and other stakeholders need to do all measures such as payment guarantee off-taker, TANGEDCO they can to mitigate the risks at the funds together determine the risk cannot be considered project level. associated with payment security. a low-risk off-taker as This section deals with the project Apart from the bankability of the PPA it is in poor financial risks from a lender’s perspective and signing authority, the exact terms health and has a track- looks at steps that can be taken to under the PPA itself are equally mitigate them. The risks have been crucial. For example, the PPA in record of delayed and broken down into three categories: (i) Gujarat does not explicitly guarantee defaulted payments to long-term risks related to payment that all the power produced will be wind power generators security, (ii) long-term risks related bought by the off-taker. to power generation and (iii) short- in the state. term risks related to delays in Going forward, the government-entity- commissioning. backed PPAs are slowly giving way to private third-party PPAs. These PPAs 2.1 RISKS RELATED are partially driven by the increasing commercial viability of solar power in TO LONG-TERM India and may avail additional benefits PAYMENT SECURITY under mechanisms such as the REC mechanism or Viability Gap Funding 2.1.1 Power off-taker (VGF). In addition, Solar RPOs and SPOs in Tamil Nadu) on various private risk obligated entities also drive private The power off-taker risk is the most PPAs. crucial from the perspective of long

© BRIDGE TO INDIA, 2013 04 For private PPAs, each off-taker will markets, such as Spain or the Czech have to be judged on a case-to-case Republic. basis. This will initially push up the transaction costs. If power is sold Mitigation strategy on site (captive model) rather than For state policy-backed Project selection should be done through the grid, the dependency only after undertaking an in-depth PPAs that are usually on the buyer will be very high. This assessment of the off-taker. For state is a significant risk. On the other signed with the state policy-backed PPAs that are usually hand, many private entities are in distribution companies signed with the state distribution significantly better financial shape companies (DISCOMS), it is important (DISCOMS), it is than most state utilities. Also, a strong, to assess the financial health of the underlying commercial logic to buying important to assess the counterparty. solar power can be a better safeguard financial health of the against payment default than the Each Indian state has a State mere political will behind a solar counterparty. Electricity Board (SEB), representing policy, which might quickly fade, if the the state’s power generation, financial strain on the government transmission and distribution (central or state, as the case may be) companies. becomes too much. This is a lesson that has been learned from European

Figure 1: State-wise net internal revenues for 2009-10 (in ` Million) Net internal revenue (` million) - Positive 11,260 Andhra Pradesh 9,180 West Bengal Net internal revenue (` million) - Negative 8,060 Gujarat 7,240 Maharashtra 1,900 Goa 730 Meghalaya 660 Chhatishgarh -10 Tripura -260 Pondicherry -330 Arunachal Pradesh -790 Manipur -1,060 Assam -1,130 Nagaland -1,160 Kerala -1,210 Uttarakhand -1,320 Sikkim -1,980 Mizoram - 4,850 Himachal Pradesh -6,990 Bihar -8,340 Uttar Pradesh -11,400 Karnataka -13,820 Punjab - 17,170 Jharkhand -22,880 Jammu & Kashmir -32,420 Haryana -32,530 Madhya Pradesh -80,900 Tamil Nadu -112,090 Rajasthan © BRIDGE TO INDIA, 2013 © BRIDGE TO

Source: Annual Report 2011-12 on The Working of State Power Utilities & Electricity Departments – Planning Commission of India

Source: BRIDGE TO INDIA

SEB The distribution utilities’ cumulative Power Power Power distribution generation transmission losses rose to ` 1.9 companies company company trillion (€ 29 billion/$ PPA signing © BRIDGE TO INDIA, 2013 38 billion) in FY-2011 authorities Source: BRIDGE TO INDIA from ` 1.22 trillion (€ 18 billion/$ 24 billion) in the year before. This Typically, DISCOMS are heavy loss The sound financial health of the makers. Data on the financial health of Gujarat PPA signing entity, Gujarat Urja puts their PPAs at risk. individual DISCOMS (can be more than Vikas Nigam Limited (GUVNL), which one per state) is not easily comparable. is responsible for the generation, For that reason, the Planning transmission, and distribution of Commission of India shows the losses electricity in the state, has gone a or profits made on the level of the long way in creating interest amongst SEBs. They give a good indication of investors and lenders in solar projects the finances of the electricity sector in the state. Andhra Pradesh also in a state and thus the financial ability received a decent response owing of the states PPA signing authority to to the relatively better health of honor PPA payments. DISCOMs. On the other hand, Tamil Nadu received an interest for just 499 A majority of the SEBs have negative MW out of the 1,000 MW offered in net internal revenues and the situation January 2013 under its solar policy, Tamil Nadu received is becoming worse. The distribution primarily due to the poor financial an interest for just utilities’ cumulative losses rose to ` health of its PPA signing entity 499 MW out of the 1.9 trillion (€ 29 billion/$ 38 billion) (TANGEDCO). Debt financing for in FY-2011 from ` 1.22 trillion (€ these projects will likely happen on a 1,000 MW offered in 18 billion/$ 24 billion) in the year recourse basis. January 2013 under before9. This puts their PPAs at risk. In the past, states have been bailed A public PPA should have the following its solar policy, out by the Government of India in an features to be bankable: primarily due to the irregular manner. Now, the central 1. The term of the PPA should be poor financial health of government has offered to bail them longer than the debt repayment out systematically for perhaps the last period (debt repayment period for its PPA signing entity time through a debt restructuring. rupee term loans is usually 8-12 (TANGEDCO). In return, states are asked to raise years). tariffs on a regular basis to put their 2. The off-taker should commit power industry on a stable economic to buying all the solar power footing. However, it is expected that produced. The total power many states will not even go ahead production should be governed with the restructuring as political by Capacity Utilization Factor compulsions might not allow them to (CUF)10 or Performance Ratio (PR)11 increase tariffs as proposed under the limits12. restructuring mechanism. 3. Payment security should be

------9 Article: State power boards seek extension of reform programme deadline - Mint 10 Capacity Utilization Factor(CUF) =Energy measured (kWh) / (365 x 24 x installed capacity of the plant) 11 Performance Ratio (PR) of a plant for a period of time =Energy measured(kWh)/(Irradiance(kWh/m2) on the panel x Active area of PV module(m2) x PV module efficiency) 12 The CUF and PR measures ensure that the plant is only producing the power it is supposed to and there is no excess capacity or any excess supply of power through other sources of energy.

© BRIDGE TO INDIA, 2013 06 ensured through a revolving If the power is sold under a private monthly letter of credit (LOC). PPA, on-site under a captive model,a However, such a LOC is only clause to sell the plant under pre- useful for ensuring short term defined terms in case the contract is Payment security payment security and the overall to be terminated before the end of the should be ensured PPA structure should preferably PPA or a build operate own transfer be backed by a dedicated fund, (BOOT) model can reduce the risk. (For through a revolving especially if the PPA signing such plants, also other risks related to monthly letter of credit authority is a loss making entity. right of way, lease of land, liquidation (LOC). However, such 4. The tariff mentioned in the PPA, preferences of the land/building vs. should be approved by the state liquidation preferences of the power a LOC is only useful electricity regulatory commission plant, etc. have to be addressed.) for ensuring short (SERC)13. In general, the more dependent 5. A course of action for a default term payment security customers are on the power sold, the by either the power producer or stronger their willingness to abide by and the overall PPA the off-taker should be clearly the PPA. Thus, the larger economics structure should outlined. of the power industry in India should preferably be backed 6. The litigating authority to resolve be considered. Key questions are: by a dedicated fund. any issues should be fixed for how long will the demand/supply gap cases where the SERC may not be continue to exist and will the price of the litigating authority. alternative power (grid power, open 7. During any litigation, payment access power, etc.) rise or fall? should typically not be held up. The power producer or the procurer A strong ‘Plan B’ for an alternative off- can be asked to submit bank taker is a significant advantage. Having guarantees in lieu of payments alternatives becomes significantly being made during the litigation easier, if the project is grid connected period. The procedure for this (i.e. is not captive). Alternatives could should be specified in the PPA be: sale of power to trading companies, itself. other private PPA customers or A strong ‘Plan B’ for an DISCOMS. For private PPAs, developers will alternative off-taker is need to ensure the bankability of A more long-term way of managing a significant advantage. each off-taker by conducting a due individual payment risks would be Having alternatives diligence (assets, liquidity, business through building a portfolio of PPAs prospects, etc.). For public companies, across different buyers. becomes significantly information is publically available. easier, if the project is For private limited companies, one 2.1.2 Regulatory risks can either ask the company to provide grid connected (i.e. is attested copies of previous financial The regulatory environment in India not captive). statements and verify them using the with respect to solar power is still services provided by the Ministry of in flux and is expected to remain Corporate Affairs (MCA), to access so for at least a couple of years. the publically available statements Policy initiatives are not all equally by paying a minimal processing fee. transparent, financially sound and Typically it would be advisable to sign implementable. private PPAs with large and financially As an example, the REC mechanism14 sound companies or institutions. In at the national level and the SPO addition, an escrow account or letter of mechanism15 in Tamil Nadu are both credit covering a reasonable payment dependent on demand that has to be period will help. induced through implementation of ------13 Release of funds for payment of monthly tariffs is only permissible after SERC has approved the tariffs. Moreover, such an approval by an independent body provides payment security irrespective of a change in government. 14 Refer to the BRIDGE TO INDIA’s decision brief, ‘REC Mechanism – Viability of solar projects in India’ to read more. 15 Refer to BRIDGE TO INDIA’s, ‘Policy Brief- Tamil Nadu Solar Policy 2012’ to read more.

© BRIDGE TO INDIA, 2013 07 the obligations. Given that each Indian thelong term demand for solar state has a different approach towards RECs as it depends largely upon implementing these obligations and the enforcement of RPOs. a different degree of earnestness in 3. State DISCOMS that are the The floor price of the implementing them; it is extremely primary source of demand have RECs, i.e., ` 9,300/MWh difficult to ascertain the actual huge losses on their balance resulting demand for solar power or sheets and without any penalties, till 2017, is significantly RECs. have little reason to buy the more higher than the expensive solar power or RECs. All evidence currently suggests that 4. Currently, it is much more generation cost of the implementation of obligations is economical for any obligated entity solar power in almost nowhere near the aimed-for levels. to set up a plant or buy solar power Moreover, the floor price of the RECs, all parts of the country. through a private PPA, rather than i.e., ` 9,300(€ 143/$ 186)/MWh till buying RECs even at the floor 2017, is significantly higher than the price. The floor price is only valid generation cost of solar power in until 2017, post which it will likely almost all parts of the country. This fall significantly, whereas plant casts doubt on the future demand lifetime and most PPA periods are for RECs. Lenders are very wary of upwards of 15 years. lending to projects that require REC revenue to achieve viability. 5. Many developers are convinced that the REC mechanism can Projects that are looking for the provide considerable upside to third-party sale of power also have to their projects, thereby, making deal with charges for interconnection, them viable. However, lenders are wheeling, transmission and cross not comfortable with lending to subsidy that also vary by factors such such projects. Due to this, a large as voltage levels, location and off- number of projects have not been taker. The financial impact of these able to come out of their planning charges can vary from ` 0.50 stage. Currently, it is much (€ 0.007/$ 0.01)/kWh to ` 2.00 For any projects under the REC, (€ 0.03/$ 0.04)/kWh, depending on developers should try to maximize more economical for 16 the project . Ascertaining the exact the realization of revenue through the any obligated entity to quantum of these charges can be tariff in the PPA. Ideally, the revenues set up a plant or buy a challenge as most regulations from the PPA should be able to serve solar power through regarding them are framed with large interests and repayment of the loan. conventional power plants in mind. Lenders might be comfortable with a a private PPA, rather bankable private PPA at a viable tariff than buying RECs even Mitigation strategy using additional revenues from the REC mechanism only as an upside. at the floor price. Project selection should be based on an in-depth understanding of At the time of planning, one should themarket conditions and clarity also have maximum clarity on on policy or regulation. An investor the requirement of permits and should understand the following applicability of cross subsidy, wheeling, issues before making an investment transmission and power banking decision: charges. A developer would need 1. The high price of RECs is only valid to scrutinize the publicly available till 2017. According to BRIDGE regulatory documents and then work TO INDIA, the floor price of RECs closely with the state DISCOM, SERC beyond that could be as low as and the connecting substation to ` 2,000 (€ 30.8/$ 40)/MWh17. ascertain such charges at the time of 2. There is uncertainty regarding project planning.

------16 Refer to ‘The Project Development Handbook’ decision brief by BRIDGE TO INDIA. 17 Refer to the ‘REC mechanism: Viability of Solar Projects in India’ decision brief by BRIDGE TO INDIA

© BRIDGE TO INDIA, 2013 08 their concentrated solar power (CSP) 2.2 RISKS RELATED projects under phase one of the NSM. TO LONG-TERM PLANT QUALITY Comparing global horizontal The error margin in AND POWER irradiation data for a single DNI data considered location using different data GENERATION sources at the time of planning Charanka solar Lat 23.9078401, has been cited as one 2.2.1 Resource data risk park /Source Long 71.2029348 of the key reason by Irradiation data from most sources Meteonorm 1952 2 some developers who available in India is based almost kWh/m /year entirely only on satellite data. Nasa 1884 have cancelled their 2 According to industry sources, the kWh/m /year CSP projects under margin of error for specific locations 3-Tier 1940 phase one of the NSM. could be as high as 10% for some kWh/m2/year commonly used global satellite based SolarGIS 2008 data traditional sources such as NASA- kWh/m2/year © BRIDGE TO INDIA, 2013 © BRIDGE TO SSE and WRDC. Source: BRIDGE TO INDIA

Meteonorm is a combination of Ground based measuring stations have satellite and ground based data. In only recently been installed under the places where irradiation measurement Center for Wind Energy Technology is not available for an area of 200km (C-WET), an initiative by the Ministry of around the selected location, it uses New and Renewable Energy (MNRE). satellite information. If the nearest site Therefore, there is very little ground is more than 30km away, a mixture measured irradiation data available in of ground and satellite information is the country till date. A network of 51 used. However, the satellite covers a Solar Radiation Resource Assessment period of just three years (2003-2005) (SRRA) stations have been installed Ground based and there are less than 15 locations in the first phase and the real-time in India for which Meteonorm uses data is now available from these measuring stations ground data and this data too cannot stations.18 However, the timeframe have only recently been be considered as high quality. for historical data collection till date installed under the is still very short. Equally, the actual Most satellite data available only generation data of operational plants Center for Wind Energy covers 10 years as compared to the 20+ is only available for just over a year. As Technology (C-WET), years in mature markets. According a result, it is still difficult to reliably an initiative by the to Acira Solar, a technical consulting predict the performance of projects. company based in India, satellite The uncertainty of performance MNRE. based irradiation sources use monthly predictions is a risk for lenders and averages of Linke Turbidity function they would cover this risk by charging and have no credible methodology a higher rate of interest and assuming to correct this based on ground a discount on the projected generation, measurements. Also, traditional when determining the viability of a Satellite based data usually has a low project. resolution, i.e., the data will appear constant over large areas. This can Mitigation strategy be as high as 30-40 kms for some sources. In fact, the error margin in It is important to quantify the direct normal irradiation (DNI) data uncertainty in performance prediction considered at the time of planning has models. For solar projects, irradiation been cited as one of the key reason by can be a key source of uncertainty. some developers who have cancelled Majority of financial institutions

------18 Solar Radiation Resource Assessment (SRRA) – C-WET

© BRIDGE TO INDIA, 2013 09 require a solar resource risk 2.2.2 Technology risks assessment report by an independent consultant. The report should describe with regard to quality the Exceedance probability19 at 90% and performance confidence, or “P90”. Some institutions Ideally, irradiation data Indian lenders in particular are wary are even more cautious and require for more than 10 years about technology risks as funding P95, P98, or even P99. This has solar projects is new for them and should be considered prompted the industry to obtain TMY many are still uncomfortable with based not only on P50 but also P90. for accurate prediction the technology. Many players in the module industry, especially those in models. For India, such Higher the uncertainty in solar newer thin film technologies such as data is available from resource data, the higher will be CdTe and CIGS, have lesser on-ground the difference between P50 and P90 SolarGIS and 3TIER. experience than a typical module and values. High uncertainty results in plant lifecycle (25+ years). Hence, lower values of the P90 solar resource project developers often cannot refer estimate. The evaluation of uncertainty to long-term generation data of in solar data is therefore critical. their chosen module. Field data on module failure rates and performance Ideally, irradiation data for more than degradation rates in India is also 10 years should be considered for limited. Under such circumstances, accurate prediction models. For India, a selection of modules, inverters, such data is available from SolarGIS BOS components and construction and 3TIER. As the data from SolarGIS practices that do not meet adequate and 3TIER is available in real-time, internationally prevalent quality it can be combined with ground- standards such as IEC 60364, IEC measured data. Such a process results 61557 and IEC 61730, would put the in a 10+ years dataset with accuracy bankability of a project at risk. Field data on of a ground sensor. This is the best way to mitigate risk in solar resource Available performance data from module failure rates assessment. and performance solar projects under the NSM and degradation rates in Figure 3: CUF based on plant data from Gujarat (January to April India is limited. 2012) 30 2

201 25 April

to 20 y ar

nu 15 CUF (%) Ja r

) fo 10 F (% CU

t 5 an Pl

0 INDIA, 2013 © BRIDGE TO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Projects Source: BRIDGE TO INDIA ------19 Exceedence probability is usually calculated in terms such as P50/P75/P90. Here, a “PXX” denotes the annual energy production level that is reached with a probability of XX%. Hence, P95 means that there is a chance of 5% that the P95 level will not be reached. P50 of course is the base case, as there is a 50:50 chance it will be exceeded.

© BRIDGE TO INDIA, 2013 10 Gujarat Solar Policy shows that there suppliers bring to the table. In times of is a significant variance in terms of market consolidation and insolvencies energy yield (kWh/KWp), PR or CUF (such as now), it is especially levels of projects located in similar important to check the financial health Regular breakdowns irradiation locations. A preliminary of the suppliers as their insolvency due to faults in BOS review of the power production data can leave critical equipment without a in Gujarat from January to April 2012 proper guarantee cover. components can by BRIDGE TO INDIA20 shows that in not only increase spite of being in similar irradiation and Many project developers in India split temperature conditions, while most of EPC contracts and some also take the recurring costs the plants have a CUF of around 20%, on a part of the EPC responsibility on maintenance of some plants have achieved a CUF as themselves to save costs. In such a structures, electrical high as 25% while a few are as low scenario, no single EPC would be able as 14%. These CUF numbers have to provide performance guarantees for equipment and wiring, been calculated based on the energy the plant as a whole. This reduces the but can also result in injected into the grid. bankability of the project. significant losses in Mitigation strategy This goes to show that many projects power generation over are performing lower than expected. Most of the technical risks can be the plant lifetime. Generation data for projects under mitigated through selection of the right the NSM in Rajasthan shows similar EPC partner or, if the contract is split, variations in project performances21. by sound technology selection at the This variation is primarily due to time of project planning. Identifying a component selection, engineering and capable O&M contractor (sometimes construction. the EPC) during the plant operation is also essential. Lenders usually have In India’s extremely competitive PV a preferred-suppliers-list that is used landscape, cost reduction is a major to determine the bankability of the point of concern for developers to be projects. Globally, c-Si cell/module able to offer winning tariffs. However, technology has a market share of this needs to be managed in a about 85% as it is the most mature comprehensive manner. Just using the technology and has a proven track right modules and inverters but simply record. Purely from a technology point Many project reducing the overall plant cost, can of view, lenders are more comfortable developers in India take the emphasis away from using with c-Si as the risk profile for the the right balance of system (BOS) technology is lower. However, in India, split EPC contracts components and sound construction. more than half of the installed PV and some also take Regular breakdowns due to faults in projects have used thin-film modules. on a part of the BOS components can not only increase There have been several regulatory, the recurring costs on maintenance of commercial and technical factors such EPC responsibility structures, electrical equipment and as domestic content requirement, themselves to save wiring, but can also result in significant export finance and presumably better power production in hot climates, costs. In such a losses in power generation over the plant lifetime. Those plants with a which have influenced this shift. This scenario, no single below average CUF will struggle to be has given Indian lenders significant EPC would be able to profitable. exposure to thin-film technology.

provide performance The technical capability and financial It is preferable to select EPC guarantees for the health of project developers, EPC contractors with significant experience plant as a whole. companies, module suppliers, inverter of executing projects in India and suppliers and O&M contractors are internationally. Technical aspects also of significance to the lender. A of the plan and designs provided large part of the bankability rests on by the EPC contractors should be the track record and guarantees these carefully reviewed by experts at the

------20 Refer to the July 2012 edition of the INDIA SOLAR COMPASS to read more 21 MNRE - net exported power for the month of December 2012

© BRIDGE TO INDIA, 2013 11 developer’s end or by third party and safety standards can ensure plant technical consultants such as quality and performance over time. Lahmeyer International, SGS and TUV Some of the international standards Rheinland. for utility-scale, grid-connected solar PV projects are as follows: Adherence to international quality International standards for utility-scale, grid-connected solar PV projects Equipment Standards (Applicable Standard description IEC/equivalent BIS standard) c-Si PV IEC 61215 modules / IS 14268 Thin film PV IEC 61646 Design qualification and type modules approval CPV IEC 62108 modules & PV modules assemblies IEC 61730 – 1 PV module safety qualification (construction) IEC 61730 – 2 PV module safety qualification (testing) IEC 61701 Salt mist corrosion test for PV modules Power conditioner IEC 61683, IEC 60068 2 Efficiency measurements units (PCUs)/ (6,21,27,3,7,78) Inverters IEC 60189, IS5 694 / IS General tests and measuring 1554, IS/IEC 69947 methods for PVC insulated cables used for working Cables voltages up to and including 1100 V-DC, UV resistance for outdoor installations Switches / Circuit IS/IEC 60947 part I, II, III General requirements for Breakers / EN 50521 connectors safety Connectors Junction Boxes / IP 65 (for outdoor use) General requirements Enclosures / IP 21 (for indoor use), IEC 62208 Solar PV system IEC 62124 PV standalone system design design verification Other electrical IEC 60364 – 5 – 52 : 2001 Selection and erection of equipment electrical equipment and wiring systems Safety equipment EN 62305 -4: 2005 Protection against lightning Commissioning IEC/EN 62446:2010 Grid connected photovoltaic and inspection system- Minimum requirement for system, commissioning and inspection Performance Ratio Photovoltaic system measurement performance monitoring- IEC 61724 Guidelines for measurement © BRIDGE TO INDIA, 2013 © BRIDGE TO and data exchange INDIA BRIDGE TO Source:

© BRIDGE TO INDIA, 2013 12 The solar manufacturing industry is going through a consolidation phase 2.3 SHORT- and many module manufacturers TERM, PROJECT are expected to either shut down or EXECUTION RISKS It would be wise to be acquired. A supplier’s financial negotiate terms for due diligence based on balance sheets, operating profit/loss, debt, 2.3.1 Permitting and the EPC provider to shipments, etc. should be carried out construction risks and previous settlement of claims and furnish a performance There is no comprehensive list for the mechanisms used by the suppliers permits and clearances required guarantee for at least to cover guarantees and warrantees to construct a solar power plant in the first two years of should be checked and compared. India as they vary by location and the plant operation. off-take. The process of acquiring the Most projects in India have not insisted necessary permits and clearances can on performance guarantees from be complicated and time consuming the EPC provider as it comes at an and can cause unexpected delays22. additional cost. Internationally, such For example, a 125 MW project by guarantees are structured in such a Mahagenco in Maharashtra has been way that the EPC pays a penalty to the delayed by well over a year due to plant owner, if the plant performance issues related to land use. The penalty ratio of the plant is lower than a certain for delays in most policy-based pre-decided limit (typically starting projects is extremely high and can from around 85% and accounting for have a significantly negative financial degradation thereafter). impact, sometimes making projects completely unviable. Some projects This, to a large extent, is not possible such as CCCL Infrastructures Ltd., in India as almost all EPC contracts Camelot Enterprises Pvt. Ltd. and are split up to save costs and EPC Some projects such as Karnataka Power Corporation Ltd. companies do not command enough under batch one of phase one of the CCCL Infrastructures margins to be able to cover such NSM lost up to ` 100m (€ 1.54m, $ 2m) risks. However, it would be wise to Ltd., Camelot due to delays to their 5 MW projects. Enterprises Pvt. Ltd. negotiate terms for the EPC provider to furnish a performance guarantee for Timely acquisition of land can be and Karnataka Power at least the first two years of the plant another key hurdle. Land in India operation, especially for the comfort Corporation Ltd. under usually has multiple owners and the of the lenders. It is also suitable to records are often not well maintained. batch one of phase one appoint the EPC contractor as the There have been several instances O&M contractor. This will allow all of the NSM lost up to ` where disputes over the ownership guarantees to be covered by a single 100m (€ 1.54m, $ 2m) of land have started on the verge entity. due to delays to their 5 of its acquisition. The disputesthen are resolved through litigation or Third-party insurance from MW projects. through an out-of-court-settlement. international companies such as In such cases, many developers prefer Solarif and Solar Insure for output to shift the plant location to avoid generation can also be considered. potential delays in land acquisition. This comes at a cost and such For example, most projects under insurances are so far not popular in batch one of phase one of the NSM did India. However, getting an insurance not actually get built at the location post the project commissioning can be proposed at the time of bidding. of help while restructuring the debt to improve terms. In the past, many project developers have waited until the last moment to place orders in the hope of getting

------22 To read more about permits and clearances, refer to ‘The Project Development Handbook’ by BRIDGE TO INDIA

© BRIDGE TO INDIA, 2013 13 the best prices in a market where project would not have an adverse equipment costs have been falling impact on its surroundings. steeply. This has not been a successful 3. Planning department: The project strategy for most developers as in will normally require prior approval Many project many cases it resulted in losses due from the relevant planning developers have waited to delays and fines, when they could department of the municipal not successfully close purchase corporation at the town and district until the last moment conversations on time. In Gujarat levels. for example, for some projects, a to place orders in the 4. Archaeological department: large part of the delay was due to the Consultation and approval from hope of getting the developers waiting till the last moment the relevant archaeological to place orders, in order to avail the best prices. This has department will confirm that the maximum benefit of the falling module not been a successful land acquired for the project is not prices. Plans to construct plants at of historical significance. strategy for most the last moment where thwarted by developers as in many excessive monsoon rains in 2011. 5. Fire safety authority: Consultation and approval from the relevant cases it resulted in The situation was made worse by a shortage of labor two months before authority may be required with losses due to delays the commissioning deadline due to the respect to fire safety requirements festival season of Diwali. during construction and operation and fines. of the project. Mitigation strategy 6. Forest department: Consultation and approval from the relevant The easiest way to get all the permits forest authority may be required and clearances in place is to set up to ensure that the land is not a project in a government-backed reserved by the forest department. solar park, where these are usually As an example, the Mahagenco taken care of a priori. Since there is project in Maharashtra was no comprehensive list of clearances delayed because of the forest required for projects being set up department’s claim on the land outside an official solar park, it is a designated for the plant. Consultation and developer’s responsibility to work with different government offices to 7. Pollution control board: Consent approval from the obtain all the necessary documents. from the local pollution control relevant forest Apart from working with the MNRE board may be required with respect to wastewater management and authority may be and the state renewable departments, developers also need to work with the noise emission control, particularly required to ensure following departments, to ensure that during the construction phase of that the land is not all the requirements are being met23: the project. reserved by the forest 1. District land and revenue 8. Irrigation department: In addition department (Tehsil): All to confirming that land is not department. documentation related to land subject to any relevant reservation, purchase, hold and lease related consultation with the irrigation documentation is done by department may ensure water this district level department. availability during construction and Clearance for an approach road, operation. allotment of government land and 9. Industrial development conversion of land for industrial corporation: Early consultation use are also the responsibilities of with such authorities at the state the land and revenue department. level may yield indirect benefits 2. District advisory committee to the project, depending on (Deputy Commissioner/Collector/ various initiatives taken up by District Magistrate): A clearance local governments for industrial may be required from the district development. As an example, land collector confirming that the conversion to industrial status

------23 Reffered from the IFC Guidebook - Utility Scale Solar Power Plant

© BRIDGE TO INDIA, 2013 14 may be cheaper for some locations be hired who can ensure that all where land has been earmarked the paperwork is in order and that for industrial development as no issues can arise out of multiple compared to some other locations ownership or land grab. Legal experts Specific approval for where the land is earmarked for usually charge around ` 2,00,000 grid interconnection is agricultural use. (€ 3,000/ $ 4,000) for services related 10. Local governing bodies to the facilitation of land acquisition. required from the local (Panchayats): In some areas, substation of the state a project may fall under the Soil testing and all the necessary due DISCOM. Approval jurisdiction of governing bodies diligence with regard to the availability for small villages. Consultation of the interconnection point, grid may also be needed with these local bodies is key to capacity and grid availability should be to access power from getting consent for the project done at the time of the site selection. the grid during the from the local population. Their approval can facilitate work in the Most international EPC construction phase. construction and operation phases. contractsconsist of penalties such as liquidated damages for delay and 11. State DISCOMS (local substation): under performance. These penalties Specific approval for grid are usually expressed in terms of a interconnection is required from percentage of the contract price. the local substation of the state DISCOM. Approval may also be However, EPC companies working needed to access power from at the prevalent rates in the Indian the grid during the construction market would not be able to take on phase. This normally specifies and such liabilities. A developer should confirms the point and voltage level ensure that a maximum liability is of connection. Electrical design accepted by the EPC contractor and inspection and approvals ensure that this is backed by a letter of credit safety on all electrical installations. (LoC) or at least a corporate guarantee The approvals are likely to be Legal experts usually in case of large EPC companies. charge around ` mandatory requirements of the public works department of the The EPC must manage the 2,00,000 state in which the plant is built. construction schedule efficiently so These are required throughout the (€ 3,000/ $ 4,000) for as to not cause any delays and the project execution life cyclefrom developer must ensure that equity services related to pre-construction to post- disbursement is available as and when the facilitation of land commissioning of the project. required for the timely completion of acquisition. the project. To avoid legal hassles in land acquisition, a local legal expert should

© BRIDGE TO INDIA, 2013 15 3. BORROWER’S From the point of view of the project The project financing structure VIEW – promoter looking for debt funding revolves around the creation of the STRUCTURING (the borrower), the challenge in project company. For all policy-based India has so far been to obtain debt projects in India, this company needs DEBT FINANCE funding at all, and if so at reasonable to be set up under the Companies Act, terms(interest rate, moratorium, loan 1956. It serves as a special purpose period, non-recourse, etc.). Also, debt vehicle (SPV) that holds all of the had to be available in time to meet project’s funds, assets, contracts and commissioning deadlines. This is often obligations. Typically, the sponsor complicated by the time taken for a puts in 30-40% equity and the lender A special purpose lender’s due diligence. puts in 60-70% debt. All the cash-ins vehicle (SPV) holds all and cash-outs of the project are then 3.1 A TYPICAL managed from the SPV’s cash reserve of the project’s funds, and revenue. The project cash flow assets, contracts and PROJECT needs to service construction and O&M obligations. Typically, FINANCING cost, principal and debt repayment, debt service reserve account (DSRA)24 the sponsor puts in STRUCTURE IN and dividends to the sponsors. 30-40% equity and the INDIA lender puts in 60-70% Figure 3: Typical cash flows and contracts managed through the debt. All the cash- SPV ins and cash-outs of Sponsor (same as the project are then developer in most Lender/s Off-taker Indian project) managed from the SPV’s cash reserve and 30% Equity Dividends Loan 70% debt Principle PPA Monthly Power revenue. Agree- for term + Interest payments supply ment loan

Project company/Special purpose Vehicle (SPV)

EPC Performance O&M Generation REC trade agreement guarantee agrement guarantee and and ane payments revenue payments

O&M Power EPC company exchange

Supply Suppliers’ Supply agreement credit agreement and and Optional payments payments Only for REC Other projects Module equipment supplier suppliers © BRIDGE TO INDIA, 2013 © BRIDGE TO INDIA BRIDGE TO Source:

------24 The DSRA is usually funded up to a dynamic target balance. The target balance for the DSRA includes both the interest and principal repayment amounts. This might be set at three (3), six (6), nine (9) or twelve (12) months or may even be a fixed amount.

© BRIDGE TO INDIA, 2013 16 Other aspects, such as the finalization 3.2 A TYPICAL of the choice for modules, inverters PROJECT and other BOS componentsand the FINANCING mobilization of resources to begin the civil work at the site can run in TIMELINE parallel. This means that it usually takes at least five months from the There are three pre-requisites for a signing of the PPA until the actual loan project to be eligible for financing: amount is disbursed to the project. Pre-requisites for eligibility for financing of a project Requirement Timeline PPA For most projects under the policies, a pre-development and bidding process takes upto eight months. During this, developers need to discuss their projects with possible lenders to understand the interest rates that can be made available through a single source or a syndicated source (rupee loan, foreign currency loan or a combination). The interest rate will have a significant impact on the feed-in tariff that can be proposed. Land25 A clear holding of land is necessary for the loan to be processed. Typically,it takes up to three months to get a free holding of the land. This can be faster if the land is in a solar park. EPC letter of The EPC needs to have assessed the land and signed an LOI that will be submitted to the lender to intent (LOI) begin the application process. During the course of the lending application process, the EPC will need to submit the final drawings and plans. This takes atleast another one month. The lender’s counsel then scrutinizes all the documents, including the technical drawings and plans. This can take up to another one month. © BRIDGE TO INDIA, 2013 © BRIDGE TO Source: BRIDGE TO INDIA

Figure 4: Typical project cash flows on a timeline

Equity

Cash-outs/ expenditure

Debt disbursement

Revenue from operations

Debt repayment

1 year moratorium INDIA, 2013 © BRIDGE TO INDIA BRIDGE TO Source: t s

es pmen g of oc lo n pr rk ve epayment epayment epayment Signin wo rporation of V A e-de co Operation/ Debt r Operation/ Debt r In SP Pr Construction Disbursement of debt PP Operatio Commissioning/ Operation Bidding Land acquisition/ Beginning civil Construction Construction Operation/ Debt r Month 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

------25 To read about land acquisition and prices, refer to BRIDGE TO INDIA’s ‘Project Development Handbook’ © BRIDGE TO INDIA, 2013 17 from default by the existence of a co- 3.3 TYPES OF DEBT signer, which is typically the sponsor FINANCE or the parent company with a healthy balance sheet. However, this puts the 3.3.1 Project finance or company balance sheets at risk and Most of this non- the burden of the project failing or non-recourse financing under-performing falls on to the co- recourse financing Project finance is the long-term signer. has come from financing of solar projects, based on their projected cash flows rather Almost all the projects in India so far international than balance sheets of the project have been developed using limited sources of finance or sponsors. Usually, a project financing recourse financing. However, there investment advisory structure involves a number of equity are limitations with respect to the investors, known as sponsors, and a amount of exposure to solar projects and fund syndication lender, a syndicate of lenders or other a balance sheet can take. In addition, agencies like SBI lending institutions that provide loans many promoters already have strongly Capital Markets. to the project. Non-recourse loans leveraged balance sheets from are securitized by the project assets expanding other business activities. and paid entirely from the cash flow, rather than from the general assets 3.3.3 Refinancing or creditworthiness of the project sponsors. The decision to finance Refinancing takes place when a is largely dependent on the risk project has already received debt but assessment and expected cash flows decides, or needs, to replace existing of the project. Project lenders are debt arrangements with new ones. given a right to dispose all the project Several solar projects in India have assets to secure debt and are able required refinancing as the deadlines to assume control of a project, if the for financial closure and project project company cannot comply with commissioning sometimes do not Several solar projects the loan terms. allow the developers to access the in India have required most suitable sources of finance. refinancing as the Very few solar projects in India have Moreover, post construction the risk is been able to secure complete non- considerably reduced, which can make deadlines for financial recourse financing. Most of this better terms of loan available. non-recourse financing has come closure and project Refinancing a loan can have the from international sources of finance commissioning following benefits: or investment advisory and fund sometimes do not syndication agencies like SBI Capital 1. To take advantage of a better allow the developers Markets. interest rate. 2. To consolidate multiple loans into to access the most 3.3.2 Limited recourse one loan. suitable sources of 3. To switch from recourse based financing finance. debt to a non-recourse based debt. So far, lenders in India are not entirely 4. To reduce the monthly repayment comfortable with Indian solar projects, amount by increasing the term of as there is little track record of the loan. performance of projects in the country. 5. To reduce or alter risk. E.g. Apart from other risks related to switching from a variable-rate permitting, construction, operations, of interest loan to a fixed-rate of regulations, policies and off-takers, interest loan. Indian banks, with little exposure to such projects, still consider them as a technology risk. To provide debt to 3.3.4 Construction such projects, lenders seek additional finance collateral apart from the project Mezzanine and/or bridge financing are assets; the lender is further protected types of short term debt financing that

© BRIDGE TO INDIA, 2013 18 are often vital to help keep projects locations. In such a situation, on track with regards to timelines. a developer may require more They can help smaller developers time to construct. The due solve liquidity issues. The available diligence from the lender’s liquidity can be used to negotiate end can also take longer. Projects availing better terms of purchase. For example, Some developers will face this a module supplier may be willing to problem in Tamil Nadu and international financing quote a lower price if a large part of Andhra Pradesh. typically require the payment is being made in advance. c. A developer may be allocated bridge financing as the Bridge financing is especially relevant, a project capacity that is larger if there is a shortage of liquidity for than what the developer may disbursement of the the procurement of components or be able to commission in debt amount can take construction and the lender providing the provided timeframe. For the term loan is expected to take a as long as nine months example, a developer may long time to conclude the due diligence have bid for multiple projects in some cases. and/or disburse the complete amount to increase the chances of of the project debt. Bridge financing allocation but may be allocated from financial institutions is typically a capacity that is larger more expensive than a term loan. than planned and difficult to complete, given the resources Projects availing international available. There was no upper financing typically require bridge limit on capacity allocation financing as the disbursement of the in Tamil Nadu and there was debt amount can take as long as nine an upper limit of 200 MW per months in some cases. For Indian developer in Andhra Pradesh. projects, this has mostly been available 4. There is a delay in land acquisition, through suppliers’ credit,backed by EPC selection or vendor finalization a letter of credit/bill of exchange or that may lead to a delay in the final through short-term construction term loan disbursement. finance from a financing institution. 5. Disbursement of the borrowing At this early stage amount is scheduled to take longer of the market, the 3.4 ROLE OF than the typical disbursement. For example, foreign currency typical project finance BRIDGE FINANCE/ CONSTRUCTION borrowing (FCB) in some cases structure and the can take up to nine months typical project finance FINANCE for disbursement as their due At this early stage of the market, the diligence period may be longer. timeline can in most typical project finance structure and 6. Excess liquidity is required to get cases not be followed. the typical project finance timeline better terms of purchase on plant can in most cases not be followed. equipment. For example, a module Below are some possible reasons fora or inverter supplier may be willing deviation. to provide attractive purchase 1. Policy determined deadlines and terms for an advance payment. timeframes are too short for 7. Better terms of debt with respect successfully commissioning the to interest rates can be achieved allocated project.This may happen if the debt is disbursed after because of the following reasons: plant commissioning (as the risk a. The policy allows for too little of a commissioned project is time. For example, the Tamil significantly lower than a project Nadu state policy allows for 10 under development or under months for commissioning as construction). compared to 12 to 18 months for most other policies. In all of the above cases, a source of short term funding is required before b. The capacity allocated may the disbursement of the term loan. be distributed over multiple Bridge financing for the construction

© BRIDGE TO INDIA, 2013 19 period has proved to be a key tool to is usually available from most keep a large number of Indian projects lenders at a higher interest rate. on track with regards to timelines. The differential is usually of about Construction finance can be of the 100 basis points. Disbursement following types: is much quicker. The developer Supplier’s credit 1. Equity - A developer may put in needs to be in possession of land equity to meet the requirement and a Letter Of Intent from the is usually given by of funds.This is the quickest and EPC companyto be considered for module manufacturers easiest option. However, not all the bridge financing by an institution. whose components are developers have sufficient cash In such a situation, the EPC and even those who do, might needs to take an additional risk of worth around 40% of prefer using a short-term debt spending resources on design and the total project cost. instrument. planning, before they know that the project debt has been closed. As supplier’s credit is 2. Pre-financing by EPC companies – Pre-financing by EPC companies 4. Supplier’s credit – Supplier’s treated as a short term is prevalent in Europe and the credit is not a debt instrument debt, it is usually used US, but has hardly been used but is used to ease the cash flow to lower the upfront in India. Even in these regions, strains during the construction construction finance is provided period. It is usually given by equity requirement of only by certain EPCs that are large module manufacturers whose the project. in size and for certain customers components are worth around where the risk is considered low. 40% of the total project cost. As In India, it is extremely rare for supplier’s credit is treated as an EPC to provide pre-financing a short term debt, it is usually for construction. This is primarily used to lower the upfront equity due to the low margins for EPCs in requirement of the project. Due India. to the oversupply of modules in the market, some form of 3. Bridge finance from a financial suppliers‘credit has been made institution – Bridge financing

Figure 5: Example ofEq cashuity flows of a project availing construction loan Cash -outs/ expenditure

Construction debt disbursement Equity Revenue from operations Cash -outs/ expenditure Debt repayment

Construction debt disbursement debt

Revenue from operations Disbursement of term loan

Debt repayment Long term

Disbursement of term loan t 1 year construction loan Shor f o t / n f t f term s g/ eb o o of SPV oa / l d or ment f ment ment of ion oces ay ay n ay at lopmen pr rk tion ep ion/ ion io ion/ sement cquisition sement ep ep ve ca at at a r at at r truction truction - rpor de - A Signing ns e co Construction Commissionin Construction Oper Debt Oper Oper loan / r cons Disbur Land Appli term Construction co Oper Debt civil wo Beginning Bidding Pr In PP Disbur Month 2 4 6 8 1001 12 14 6 18 20 22 24 26 28 30 © BRIDGE TO INDIA, 2013 © BRIDGE TO

Source: BRIDGE TO INDIA

© BRIDGE TO INDIA, 2013 20 available by almost all module the successful financial closure of a suppliers in India. Such a credit is number of projects under phase one usually made available at interest of the NSM and projects under the rates of around 8%, backed by a Gujarat solar policy, the banks are letter of credit. garnering more confidence in the solar Some of the first projects backed by preferential FiTs under a PPA structure. This is a reason banks to finance solar 3.5 SOURCES OF for healthy skepticism amongst the projects in India have lenders. But, a change in government DEBT FINANCE policy through the introduction of VGF been the Bank of under the NSM might act as a set back There are various sources for debt Baroda, Axis Bank, for the banks that are becoming more finance available in the Indian solar confident. A concern is the excessive ICICI Bank, State Bank market. They vary with respect exposure of many Indian banks to the of India, IDBI Bank and to speed, cost (interest rate), lending criteria, risk perception infrastructure sector at large. Yes Bank. and motivation. Finding the right source of debt financing is one of 3.5.2 Non-banking the key competitive advantages in financial companies an increasingly commoditized solar market. Non-bank financial companies (NBFCs) are financial institutions 3.5.1 Indian commercial that provide banking services without meeting the legal definition of a banks bank, i.e. they do not hold a banking The majority of solar projects in license. There are more than 34,000 India have been financed by Indian NBFCs operating in India but not all commercial banks. Some of the first of themare willing to finance solar banks to finance solar projects in India projects as their industry focus varies. Some of the prominent have been the Bank of Baroda, Axis Some of the prominent NBFCs that NBFCs that are open Bank, ICICI Bank, State Bank of India, are open to financing solar projects IDBI Bank and Yes Bank. Almost all include: L&T Infrastructure Finance to financing solar of the disbursed loans in India so far Company (subsidiary of L&T Financing projects include: L&T have been backed by the promoters’ Holdings), Power Finance Corporation (PFC), Mahindra Finance, IDFC, IL&FS Infrastructure Finance balance sheets. Banks provide long- term project debt, which might be and SBI Capital Markets. Company (subsidiary syndicated by combining multiple of L&T Financing banks and/or other sources of finance. The procedure, interest rates and As discussed in detail in Chapter 2 expectations with regards to IRR and Holdings), Power of this report, Indian banks are still DSCR for NBFCs is similar to that of Finance Corporation wary of financing solar projects on a the Indian banks. The tenure of loans (PFC), Mahindra non-recourse basis. However, after is usually longer - NBFCs focusing on Finance, IDFC, IL&FS and SBI Capital Financing details for Indian commercial banks Markets. Prominent banks Interest rates Debt- Loan DSCR Time- financing the equity tenure expec- line sector ratio tation SBI, ICICI Bank, 10.25% (RBI Base)26 30:70 9 – 12 Approx. 3 Axis Bank, Yes + years 1.40 months Bank, IDBI Bank 2.75 - 4.25% (Mar- gin) =13-14.5% © BRIDGE TO INDIA, 2013 © BRIDGE TO Source: BRIDGE TO INDIA ------26 The base rate is as of 25th January 2013 and subject to change. In most likelihood, the rates are to be revised downward from here.

© BRIDGE TO INDIA, 2013 21 infrastructure offer loans for up to 15 largest state-run lender to electricity years. The time until the disbursement utilities. The company is also India’s of debt through some NBFCs tends largest NBFC. PFC is known to have to be shorter than those of the banks, already provided debt of more than ` as the scrutiny and disbursement 2 billion (€ 300m/$ 400m) to different IDFC holds an equity procedure is more focused and renewable energy projects and intends streamlined for power projects. to further sanction around ` 1.5 billion stake in a prominent (€ 230m/$ 300m). The company has developer, Green NBFCs can be of the following types: also started a subsidiary, Power Infra, it has also been Finance Green Energy Ltd., in July 2012 Infrastructure funds to broaden its exposure to renewable involved with at least energy projects. The subsidiary is Infrastructure funds are specialized 18 projects with a expected to begin operations by March NBFCs focusing on infrastructure 2013 and plans to offer a discount of cumulative capacity of investments. It is useful to categorize 50 basis points on interest rates to 100 MW. them separately as most of them are renewable projects. actively involved with solar investments in India. They often provide both equity Investment banks and debt to companies for building their project pipelines. Among Indian Investment banks typically syndicate infrastructure funds, IDFC has so far debt from multiple sources and make been the most prominent in the solar it available to the borrower under sector. While IDFC holds an equity a single contract. Among Indian stake in a prominent developer, Green investment banks, SBI Capital Markets Infra, it has also been involved with (SBICAPS) has been a prominent at least 18 projects with a cumulative player in financing solar projects. In capacity of 100 MW. Some of the most instances, foreign banks that developers that IDFC has assisted are not comfortable with lending to include Mahindra Solar, SunEdison, a developer directly may be open to Kiran Energy, GMR Solar, AES Solar lending to such Indian investment and Videocon Solar. Some other banks for a portfolio of similar Among Indian prominent infrastructure funds in India projects. This debt is then passed on investment banks, include SBI Macquarie, IL&FS and to the developers with a margin and Taurus Infrastructure Fund. a hedging charge. The actual lending SBI Capital Markets to the developer takes place based (SBICAPS) has been Dedicated power sector financing on RBI guidelines. SBICAPS has been a prominent player involved with the financing of projects The Power Finance Corporation and developed by Tata Power Co., Kiran in financing solar Rural Electrification Corporation Energy, Sunborne, Alex Astral and projects. are the two leading public finance Acme Tele Power. Other investment companies dedicated to India’s banks operating in India include the power sector. Both are financing Bank of America, Barclays Capital, solar projects in India. PFC is India’s BNP Paribas, Lazard, Credit Suisse, etc. Financing details for NBFCs Prominent NBFCs Interest Debt – Loan DSCR Timeline financing the rates equity tenure expecta- sector ratio tion L&T 10.25% 30:70 9 – 15 Approx 2-3 months Infrastructure (RBI Base) years 1.35 Finance Company, or + PFC, SBICAPS, 2.00% IL&FS Financial – 2.75% Services, (Margin) Mahindra Finance =12.25- 13.00% © BRIDGE TO INDIA, 2013 © BRIDGE TO Source: BRIDGE TO INDIA

© BRIDGE TO INDIA, 2013 22 3.5.3 Export Credit Solar, Reliance, Punj Lloyd, Tatith Solar Energy and Universal Solar Systems. Agencies/Investment insurance agencies Despite being a popular option for finance, borrowing from the US EXIM The US EXIM bank has An export credit agency (ECA) or bank poses certain limitations for investment insurance agency is usually projects. The total consideration of been the most active a government-backed institution project cost for debt can only be a ECA in the Indian solar that supports exporters of a given maximum of 30% over and above country by reducing the cost of risk/ the cost of imports from the US. As market. According to debt associated with cross-border this financing option is usually based a statement in July transactions. The financing can take on module imports and prices for 2012 by the bank, it the form of direct debt support and/ modules account for only around 40% or credit insurance and guarantees. A of the total project cost, the developer has approved financing primary objective of ECAs is to further will need to club a US EXIM loan with worth ` 16.5 billion (€ the exports (modules, inverters, EPC) another source of finance, thereby 250m/$ 330m). from the host country for solar projects potentially increasing the cost of in India. Export credit agencies use procuring debt. The timelines for three methods to provide funds to an financial closure for projects under importing entity: different policies in India range from six to eight months. Typically, the US 1. Direct lending - This is the simplest EXIM bank can take between six to structure, whereby the loan is nine months to process loan requests, conditional upon the purchase of straining developers’ execution goods or services from businesses timelines. in the country of the ECA.

and/or Developers aiming for a US EXIM loan usually have to arrange for alternative 2. Financial intermediary loans - The bridge financing to carry on the export–import bank lends funds procurement and construction work to a financial intermediary, such before the disbursement of the debt To qualify for US EXIM as a commercial bank, that in turn amount. The long processing time is loans the funds to the importing financing, the project attributed mostly to the lengthy legal, entity. developer must import technical and financial due diligence modules and in some and/or undertaken by the bank. Further, the due diligence can increase transaction 3. Interest rate equalization - A cases other equipment costs by as much as ` 45m (€ 0.7m/$ commercial lender provides a 0.9m). from the US. loan to the importing entity at below market interest rates, and US EXIM financing is a viable option in turn receives compensation only for projects that are larger than 10 from the export–import bank for MW. Such projects can bear the high the difference between the below- transaction costs. Further, to qualify market rate and the commercial for US EXIM financing, the project rate. developer must import modules and in some cases other equipment from The US EXIM bank has been the most the US. This is different from the terms active ECA in the Indian solar market. and conditions of European banks, According to a statement in July 2012 which would finance the project even by the bank, it has approved financing if the manufacturing facility is outside worth ` 16.5 billion (€ 250m/$ 330m). the country as long as the majority It is known to have approved financing shareholding company is from the for at least a 130 MW of solar PV and lender country. US EXIM also requires 100 MW of CSP in India. These projects the project developer to use a US- belong to developers like Acme based cargo vessel for shipping, which Telepower, Azure Power, Mahindra can be expensive.

Prominent Interest rates Debt- Loan DSCR Timeline banks equity tenure expectation financing the ratio JBIC has already sector US EXIM 0.7% (LIBOR27) Up to 9 – 16 Approx. 1.45 5-6 extended a line of + 3.5% (350- 80%based years months credit to ICICI bank to 400 BIPS28) on value promote the financing (Margin)+ 6.5% of imports (Hedging) of solar power in India = 10.7% © BRIDGE TO INDIA, 2013 © BRIDGE TO and it is expected to Source: BRIDGE TO INDIA start playing a more Considering a large number of development and many DFIs actively Japanese module manufacturers provide financing for solar energy. DFIs important role in the looking to sell in India, the Japan Bank sometimes use the same tools as ECAs market in the future. for International Cooperation (JBIC) is to carry out their loan disbursement, also looking to play a significant role in i.e., through direct lending, financial the market. JBIC has already extended intermediary loans and interest rate a line of credit to ICICI bank to promote equalization. The main DFIs active the financing of solar power in India in the Indian solar market are the and it is expected to start playing a Asian Development Bank (ADB), the more important role in the market in International Finance Corporation the future. (IFC), Overseas Private Investment Corporation (OPIC), Germany’s Other key export credit agencies/ KreditanstaltfuerWiederaufbau (KfW) export insurance agencies are: Euler and DEG andthe Indian Renewable Hermes Kreditversicherungs-AG Energy Development Agency (IREDA). (Germany), China Export & Credit Insurance Corporation (China), IFC, a member of the World Bank IFC has been Nippon Export and Investment Group, is one of the most actively actively involved in Insurance (Japan), Korea Trade involved DFIs in India. Apart from Insurance Corporation (South providing advisory services to providing debt to Korea), Swiss Export Risk Insurance state governments and investing in solar projects and (Switzerland), Export Finance and companies at a corporate level, IFC project development Insurance Corporation (Australia), has been actively involved in providing OesterreichischeKontrollbank AG debt to solar projects and project companies. It has (Austria), Export-Import Bank of development companies. It has done done so for projects Malaysia Berhad, (Malaysia), Export so for projects by developers such as by developers such as Development Canada (Canada), Green Infra, Mahindra Solar, Azure Hong Kong Export Credit Insurance Power and SunEdison India. Green Infra, Mahindra Corporation (Hong Kong). Solar, Azure Power and ADB is also actively involved in 3.5.4 Development financing solar in India. It provides SunEdison India. financing support under the India Solar Finance Institutions Generation Guarantee Facility (ISGGF), under its Asia Solar Energy Initiative Development Funding Institutions (ASEI) to promote the development of (DFIs) are multilateral or unilateral solar energy in developing member funding agencies, which provide countries. Apart from providing debt credit in the form of higher risk loans as per ADB’s LIBOR-based lending and loan guarantees in developing facility towards solar transmission countries. DFIs have a mandate infrastructure in Gujarat, ADB also to provide finance to the private considers direct financing and/ sector for investments that promote or guarantees for projects greater ------27 London Inter Bank Offered Rate 28 Base points 1/100 © BRIDGE TO INDIA, 2013 24 than 25 MW. Reliance Power’s 100 Germany’s KfW and DEG are also MW CSP plant has been partially looking at the Indian solar market. financed with both debt and equity In their respective first deals, KfWis participation by ADB. Under ISGGF, involved in lending to a 125 MW project ADB provides partial credit guarantees by Mahagenco in Maharashtra and ADB aims to support (PCGs) available to local and foreign DEG has provided ` 680m (€ 11m/$ commercial banks that finance private 13.6m) risk capital in the form of 3 GW of solar power sector solar power plants in the Compulsory Convertible Debentures capacity in developing country. This guarantee covers up to (CCDs) to Azure Power. 50% of the payment default risk on member countries by bank loans made to project developers. The Indian Renewable Energy May 2013. Currently, two commercial banks have Development Agency (IREDA) is a been approved by ADB as eligible development funding institution partner banks: L&T Infrastructure but operates as a NBFC under the Finance Company Limited (India) administrative control of MNRE for and the NorddeutscheLandesbank providing term loans for renewable (abbreviated Nord/LB, Germany). energy and energy efficiency projects. ADB aims to support 3 GW of solar IREDA has received a ` 13 billion power capacity in developing member (€ 200m/$ 260m) line of credit from countries by May 2013. KfW for a broad mandate of promoting renewable power in India but has not The Overseas Private Investment been particularly active in financing Corporation (OPIC) is the U.S. utility scale solar projects till date. government’s development finance IREDA also provides loans to other institution. OPIC aims to support solar banks at interest rates as low as 2-5% in India by providing investors with so as to incentivize them to finance financing, guarantees, political risk renewable projects. insurance, and support for private equity investment funds. OPIC claims Other key DFIs include: Japan IREDA has received a that it has committed ` 55 billion International Cooperation ` 13 billion (€ 200m/ (€ 0.8 billion/$ 1.1 billion) to the Agency (JICA), U.K Department $ 260m) line of credit renewables sector globally last year for International Development and nearly one-quarter of ithad been Cooperation (DFID), Netherlands from KfW for a broad earmarked for India. However, it does Development Finance Company (FMO), mandate of promoting not seem that a significant part of it the European Bank for Reconstruction renewable power in has actually made it to India yet. OPIC and Development (EBRD), the is known to have been involved in European Investmet Bank (EIB) and the India but has not been financing of projects by Azure Power Islamic Development Bank (IsDB). particularly active in and Sun Edison in the country. financing utility scale solar projects till date. Financing details for Development Finance Institutions Prominent Interest rates Debt- Loan DSCR Time- banks equity tenure expect- line financing ratio ation the sector IFC, OPIC, OPIC 25:75 9 – 16 Approx. 6-7 ADB, DEG 2.5% (US Treasury rate) + 2.5 years 1.45 months -3% (Margin/ 200 BIPS) + 6.5% (Hedging) = 11.5-12% Some other DFIs 0.7% (LIBOR29) + 3.5% (Margin - 350-400 BIPS30) + 6.5% (Hedging) = 10.7% © BRIDGE TO INDIA, 2013 © BRIDGE TO Source: BRIDGE TO INDIA ------29 London Inter Bank Offered Rate 30 Base points 1/100

© BRIDGE TO INDIA, 2013 25 4. OTHER TOOLS 4.1 CURRENCY can cause significant losses (or profit) FOR DEBT to the developer. Factors like a high FINANCING HEDGING current account deficit in India, policy From a borrower’s perspective, the key stagnation, low capital in-flows and concern while looking for debt finance strengthening of the US dollar in the is the interest rate. Difference in total wake of the Euro zone crisis have led interest paid per MW during the course to the depreciation of the Indian rupee of a 10 year loan due to 1% decrease in by 24% since January 2011. Difference in total interest rate can be as large as ` 3.5m interest paid per MW ($ 70,000/€ 54,000). They can look The slide of the rupee to record lows at the lending sources in two broad during the course of a will have a negative impact on the categories: Rupee term loan (RTL) balance sheets of the developers 10 year loan due to 1% and external commercial borrowing that have relied on un-hedged or decrease in interest (ECB). A rupee term loan will have a partly hedged overseas borrowing for base rate as determined by the RBI projects under batch one of phase rate can be as large as and the margin charged by the lender. one of the NSM and projects under ` 3.5m ($ 70,000/ ECBs can have varying base rates as phase one and two of the Gujarat € 54,000). determined under LIBOR, EURIBOR, Solar Policy. The principal and interest US Treasury or other country specific payments are to be made in the base rates. These are typically lower currency of the loan and the revenue than the RTL interest rates. is in the weakening Indian rupee. This nullifies the cost advantage they In a bid to receive better terms of debt, enjoyed through a lower cost of capital. many developers such as Azure Power, Developers looking to avail finance in Acme Telepower, Green Infra, Punj any international currency often hedge Lloyd, Reliance, SunBorne and Sun againstsuch currency risk. Most ECAs Edison have opted for US dollar based mandate a currency hedge for at least loans from institutions such as EXIM, the first few years of the debt service OPIC and IFC. term.

The revenue from the projects is in Hedging strategies might vary from Indian rupees but the repayment for player to player. Some developers international borrowing would be in have other business interests that Most ECAs mandate a US dollars. For such borrowings, are involved in the export of goods currency hedge for at any fluctuation in the exchange rate from India. Such developers can get of the Indian rupee to the US dollar least the first few years of the debt service Figure 6- Five year valuation of the Indian rupee against the US dollar term. INR / USD 56

41 © BRIDGE TO INDIA, 2013 © BRIDGE TO

36 1st 1st 1st 1st 1st 1st Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Source: BRIDGE TO INDIA

© BRIDGE TO INDIA, 2013 26 a natural hedge against currency several tranches (segments) of fluctuations. However, based on different loans. The aim of structuring industry interviews, we think that the the project’s debt is to seek the exposure from ECBs should be either optimum finance conditions for Even most limited to around 40% or protected each of these tranches in the light international financing through hedging. Many developers of the requirements of the project. A sources would like have played to the rhetoric that the syndicated loan is one that is provided rupee is at its all-time low and fully by a group of lenders and is structured, to involve a local hedging an ECB might not be the best arranged, and administered by one lender as a part of the strategy for them.But again, the ‘all- or several commercial banks or lending agreement. time low’ rhetoric was there since the investment banks known as arrangers. rupee touched ` 50/$ and from there In such a situation we have seen a further 10% downturn Typically, investment banks such as there is a need for debt to ` 55/$. SBICAPS syndicate the loan from syndication. multiple sources and bring it together 4.2 DEBT under one agreement. A significant number of projects in India are SYNDICATION known to have opted for debt from a In many cases, lenders are not willing consortium of lenders. For example, to take on the complete risk of the at least ACME Telepower, SunBorne, project themselves. This is particularly Azure Power and Welspun are known true in case of non-recourse financing. to have opted for project debt from a Even most international financing consortium of lenders. sources would like to involve a local lender as a part of the lending agreement. In such a situation there is a need for debt syndication. A debt is often broken down into

© BRIDGE TO INDIA, 2013 27 5. FINANCING For a developer, it is important 3. Engineering, Procurement and DOCUMENTATION to understand the process and Construction (EPC) plan documentation requirements of a 4. Interconnection/evacuation plan lender. 5. Operation and maintenance (O&M) plan Corporate finance applications typically are ~100 pages, whereas project 6. Project financing plan finance applications can reach 200-300 7. Detailed list of estimated project pages. costs including soft costs 8. Pro-forma financial model Typical required information about the with projected annual financial borrower includes: statements for term of debt 1. Description of the borrower and 9. Currency risk abatement plan related or commonly-owned 10. Project schedule companies (with financial information) Typical project details required: 2. Qualifications of the buyer with 1. PPA contract respect to the PV or energy sector 2. Detailed technical designs 3. Three years of audited financial 3. Detailed technical feasibility statements of the promoting studies (related to design of company project) 4. A recent credit report 4. EPC contract 5. A recent creditor bank reference 5. Description of EPC’s experience 6. Available debt ratings with this type of project 6. Evidence of compliance with Typical terms for balance-sheet quality and safety standards backed financing are: 7. Environmental assessment/study, Note: These terms are for the if needed borrower and related or commonly- 8. Environmental management plans owned companies for construction and operation, if 1. Three years of audited financial needed statements 9. O&M contract 2. Positive operating profit over last 10. Description of O&M provider’s two years experience with this type of project 3. Positive net income over last two 11. Land-control documentation (e.g. years land-lease contract) 4. Positive cash flow from operations 12. Interconnection/evacuation (latest year) contract 5. EBITDA/DSCR- greater than 150% 13. Acquisition list 6. Total liabilities/total net worth - 14. Supply contracts for all significant less than 175% components 7. Bank exposure/total net worth - 15. Shareholder agreement for the less than 40% SPV, if applicable 16. Draft with status or final copies Project plans should include: of all other contracts, permits, 1. PPA documentation licenses and approvals related to 2. Permitting and regulatory approval the project. list with status of each

© BRIDGE TO INDIA, 2013 28 6. OUTLOOK The availability of debt finance for Many projects in India have been solar projects has improved over the constructed below the required past two years. For projects under standards because of the lack of phase two of the NSM and in Andhra experience at the developers’ end, Pradesh, debt finance is expected to short and stiff deadlines and an be more readily available than before. extremely price competitive landscape. However, it is expected that developers Some lenders who have lent to projects will continue to face issues in securing so far might have to bear the brunt finance for projects in Tamil Nadu and of payment defaults as some such Rajasthan primarily due to the poor projects could fail. long term payment security in the states. In the short to medium term, Developers in India realize that debt is likely to be mostly recourse they cannot continue to accumulate based. recourse based debt to grow their project portfolios. The developers Developers in India have relied on that do not have an Indian parent various forms of bridge financing company and cannot leverage assets structures to solve their liquidity and balance sheets to accumulate issues. This is expected to continue in debt should look to find alternative the short term. In the medium term, means to access non-recourse finance developers are expected to seek more to achieve their planned portfolio diverse options, especially outside growth. In the short to medium term, India, for financing their projects. As lenders will continue to be wary of the lenders do not necessarily prefer providing non-recourse debt to solar complicated financing structures, the projects. However, project development trend for bridge financing is expected companies such as Azure Power, to reverse in the long term. The Mahindra Solar, SunBorne, Sun Edison deadlines for project commissioning and Astonfield among others have are expected to become more uniform already managed to arrange non- and the execution timeline is expected recourse finance from international to reduce due to a streamlining of and in some cases even Indian lenders. project development processes. This Going forward, only developers that will make financial structuring for debt continue to be able to access non- much simpler. recourse debt financing will be able to grow.

© BRIDGE TO INDIA, 2013 29 7. GUEST data is required. Use of hourly TMY ARTICLE 7.1 WHAT MAKES A (Typical Meteorological Year) data is SOLAR RESOURCE also acceptable provided inter-annual ESTIMATE variability is calculated from a multi- BANKABLE? year time series dataset. Low uncertainty proven by validation: The last 2 years in the Indian solar It is important that the data source is industry have been a learning phase. proven to be accurate by independent One of the lessons learned has been GeoModel Solar is the developer and experts. Many data providers claim to the importance of having a bankable operator of the SolarGIS database. We offer solar data with low uncertainty. solar resource assessment. Below we help our clients reduce uncertainty However, SolarGIS is the only data describe the best practices to follow in in solar energy investments by source that has been independently order to ensure that banks do not have delivering bankable solar resource validated with high-quality ground doubts about solar resource potential data and reports required in planning, measurements from India that are at a project site. financing and operation of solar power available in public domain (from plants. Our company brings 13 years C-WET). Other international data Long time record (minimum 10 of experience in solar energy, and comparison studies also position years): Variation in global radiation has delivered bankable assessment SolarGIS as the most accurate in India can be as high as 10% from of solar resource and PV electricity database on the market. year to year. Only 1-2 years of ground yield for more than 260 projects in 5 measurements are not enough for continents. In 2011, by introducing Use of ground-measured data: Recent proper climate characterization. The SolarGIS in India we achieved improvements in satellite-derived general rule is to use solar radiation an important milestone towards data brought about by us have made data that covers continuously a reducing uncertainty of solar resource the use of ground-measured data period of at least 10 years. The most estimates in India. irrelevant for small PV projects (size important for India are the recent approx. < 5 MW). For large projects years, as increasing air pollution in the it can be useful to have 12+ months last two decades has likely affected of local measurements to reduce Phone: +421 2 492 12 491 solar resource. SolarGIS data is uncertainty by 1-3%. However, if Fax: +421 2 492 12 423 available for any location in India for ground measurements are used, it [email protected] a period of more than 14 years (1999 must be quality controlled by an expert http://geomodelsolar.eu until today). to ensure that there are no errors in the data. In India, where there is high High spatial and temporal resolution: air pollution, ground sensors must be Detailed data is required to accurately cleaned optimally every day in order to represent local climatic features. The obtain a reliable verification dataset. industry standard is to use data with level of spatial detail 4 km x 4km or Continuity of data: SolarGIS database better. SolarGIS data represents a is updated every day, thus the recent spatial resolution of 250 m x 250 m and data can be used for evaluation of a 30-minute measurement frequency. PV project performance after 1 or 2 years of operation. Advantage is that Many consultants still use monthly the same source of solar data can be data or synthetic hourly data for PV used for longterm prediction and later energy simulation. However, to obtain a for verification of the actual power bankable estimate of energy potential, production. hourly (or more detailed) time series

© BRIDGE TO INDIA, 2013 30 plants and bring in certain measures 7.2 BANKABILITY to ensure that project financing and OF SOLAR investments are linked to ensuring that PROJECTS – THE the asset performs to its peak capacity NEED TO LOOK throughout its life. BEYOND FINANCIAL Bankability of solar projects in certain METRICS mature solar markets like Europe are linked not just to project IRR, DCSR and financial risks but also to product Over the last 10 years, since the Enerparc is a global solar businesses and engineering quality of the asset. German market opened the doors for with interests in solar project Interest rate and terms of financing FiT based investments for photovoltaic development, investment, EPC and vary based on the assessed “quality” of projects, many interesting variants EPCM contracts, operation and the asset build. The need of the hour in have been globally adopted. Some of maintenance and energy trading. As Indian solar business is also to bring the models like capital subsidies for a project developer and asset owner in similar metrics of assessing project identified projects in the UK were not we own more than 380 MW of solar financing viability. very successful and some FiT models projects in our balance sheet. We have without any upper limit on capacities, executed more than 800 MW of solar Owing to the diverse spread of equity such as the one adopted in Spain led to projects as an EPC and have 400 MW financers and related expectations, runaway installations which in the end of solar projects under long term one of the practical ways of ensuring resulted in curtailment of the market. operation and maintenance contracts. project asset and build quality is to link Apart from this we trade our energy this to debt financing. Learning from history, the FiT driven of 250 MW of solar power daily on the As part of the assessment of investment opportunities that India • energy exchange. project debt financing, in addition framed as part of phase one of the In India, Enerparc Energy Pvt. Ltd. has to traditional risk and reward NSM was successful in preventing business interests in asset ownership, assessment, the following needs uncontrolled capacity addition, limited investments (IPP) and EPC for grid to be considered as additional exchequer burden and rationalized connect photovoltaic projects. “quality” metrics linked to project project return on investment through bankability and terms of debt bidding, still providing enough impetus financing for the PV industry to gain a foothold in +91 80 4022 4085 Technology selection, its field India and grow. • [email protected] performance and longevity of www.enerparc.com usage Taking a cue from the NSM phase 1, Design methodology and various state governments have also • processes adopted, benchmarked launched their own solar policies, against upcoming standards albeit with certain variants in the Major components used and its modus operandi of licensing and • ‘bankability’ from past experience awarding project development rights, and actual field performance with mixed success rates evidenced. • Contractor track record for projects installed; actual Two years down the road, since performance of these projects the inception of grid connect solar versus committed ones support programs and 1.2 GW later, A standardized methodology for one can look at the success of the • Performance Ratio or uptime NSM as the full half of the glass. The guarantees other half can be considered as the projects conceived which could not If bankability of products, project build take off owing to lack of financing and design is considered as a metric or were commissioned but are in debt financing assessments going underperforming owing to quality, forward, the solar installations in our engineering, construction or choice of sunny but energy starved nation will materials issues. continue to bask in the glory of their performance for decades to come. The need of the hour is hence to look at function over mere form. To look at We can then truly have the cake and the quality of the performance of solar can eat it too. © BRIDGE TO INDIA, 2013 31 8. ANNEXURE GLOSSARY OF TERMS ASEI - Asia Solar Energy Initiative

ADB - Asian Development Bank

ARC - Asset Recovery Company

BOS - Balance of System

BOOT - Build Operate Own Transfer

CdTe - Cadmium Telluride

CUF - Capacity Utilization Factor

C-WET - Center for Wind Energy Technology

CCD - Compulsory Convertible Debentures

CSP - Concentrated Solar Power

CIGS - Copper Indium Gallium Selenide

c-Si - Crystalline Silicon

DRT - Debt Recovery Tribunals

DSCR - Debt Service Coverage Ratio

DSRA - Debt Service Reserve Account

DFI - Development Funding Institution

DNI - Direct Normal Irradiation

EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization

EPC - Engineering, Procurement and Construction

EBRD - European Bank for Reconstruction and Development

EIB - European Investment Bank

ECA - Export Credit Agency

ECB - External Commercial Borrowing

FiT - Feed-in Tariff

FCB - Foreign Currency Borrowing

GUVNL - Gujarat Urja Vikas Nigam Limited

ISGGF - India Solar Generation Guarantee Facility

IREDA - Indian Renewable Energy Development Agency

IDFC - Infrastructure Development Finance Company

IL&FS - Infrastructure Leasing and Financial Services Limited

IRR - Internal Rate of Return

IEC - International Electrotechnical Commission

IFC - International Finance Corporation

IsDB - Islamic Development Bank

JICA - Japan International Cooperation Agency

KfW - Kreditanstalt fuer Wiederaufbau

L&T - Larsen and Toubro

LoC - Letter of Credit

LOI - Letter of Intent

MCA - Ministry of Corporate Affairs

MNRE - Ministry of New and Renewable Energy

NASA-SSE - National Aeronautics and Space Administration - Surface Meteorology and Solar Energy

NSM - National Solar Mission

NBFC - Non-banking Financial Company

Nord/LB - Norddeutsche Landesbank

NVVN - NTPC Vidyut Vyapar Nigam

O&M - Operations and Maintenance

OPIC - Overseas Private Investment Corporation

PR - Performance Ratio

PFC - Power Finance Corporation

PPA - Power Purchasing agreement

REC - Renewable Energy Certificate

RPO - Renewable Purchase Obligation

RTL - Rupee Term Loan

SPO - Solar Purchase Obligation

SRRA - Solar Radiation Resource Assessment

SPV - Special Purpose Vehicle

SBI - State Bank of India

SBICAPS - State Bank of India Capital Markets

DISCOMS - State Distribution companies

SEB - State Electricity boards

SERC - State Electricity Regulatory Commission

TANDEGCO - Tamil Nadu Generation and Distribution Corporation

US EXIM Bank - The Export-Import Bank of United States

DFID - U.K Department for International Development Cooperation

VGF - Viability Gap Funding

WRDC - World Radiation Data Centre

© BRIDGE TO INDIA, 2013 33 HOW BRIDGE TO INDIA BRIDGE TO INDIA provides services Our unique combination of adapting along the project development an international quality and local- CAN SUPPORT value chain. Our approach to project knowledge makes us the right YOU development is to make projects partners for executing your solar ‘profitable’ and ‘bankable’. projects.

CONSTRUCTION & IDENTIFICATION DEVELOPMENT OPERATION

Site identification Project registration Site supervision & assessment

Techno-commercial Bid strategy Quality management feasibility studies preparation

Detailed Project Report (DPR) Stakeholder Land securitization preparation management

Power Purchase Cost controlling Agreement (PPA) facilitation and reporting

Management of permits and approvals

Renewable Energy Certificates (REC) consulting

Technology evaluation & selection

EPC tendering and selection

Project structuring and documentation

If you would like to discuss our project development services, please contact:

Mr. Akhilesh Magal Head of Project Development [email protected] +91 813 033 0011 + 91 (11) 46 08 15 79

© BRIDGE TO INDIA, 2013 34 BRIDGE TO INDIA is a key knowledge disseminator on the Indian solar market. Having tracked the market since 2010, our regularly BUILD published analysis reaches more than 62,000 readers from various YOUR segments of the global solar industry. BRAND

MORE THAN 60,000 READERS THROUGH DOWNLOADS 2,000 READERS THROUGH PHYSICAL DISTRIBUTION

OUR REPORTS

INDIA SOLAR COMPASS October 2012 Edition

Market Dashboard A snapshot of the market’s fundamentals Latest Market In-sights An analysis of the policies, projects, industry and finance A Key Question Answered How will viability gap funding under phase two of the NSM impact the market? Outlook Quarterly projections for the Indian solar PV market