INDIA Partnership to Advance Clean Energy - Deployment (PACE - D) Technical Assistance Program Financing Renewable Energy in India: A review of current status and recommendations for innovative mechanisms October 2013 This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of Nexant, Inc. and do not necessarily reflect the views of USAID or the United States Government. This report was prepared under Contract Number AID-386-C-12-00001. INDIA Partnership to Advance Clean Energy - Deployment (PACE - D) Technical Assistance Program Financing Renewable Energy in India: A review of current status and recommendations for innovative mechanisms October 2013 This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of Nexant, Inc. and do not necessarily reflect the views of USAID or the United States Government. This report was prepared under Contract Number AID-386-C-12-00001. INDIA Partnership to Advance Clean Energy - Deployment (PACE - D) Technical Assistance Program Financing Renewable Energy in India: A review of current status and recommendations for innovative mechanisms October 2013 This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of Nexant, Inc. and do not necessarily reflect the views of USAID or the United States Government. This report was prepared under Contract Number AID-386-C-12-00001. Table of Contents Executive Summary......................................................................................................1 1. Potential for RE in India ........................................................................................5 1.1 Current Scenario ............................................................................................5 1.2 RE Potential ...................................................................................................5 1.3 Drivers of RE..................................................................................................7 2. Policy Support for RE in India ..............................................................................9 2.1 Tax Incentives ..............................................................................................10 2.2 Feed-in Tariffs ...............................................................................................12 2.3. Renewable Energy Purchase Obligations ....................................................13 2.4 Renewable Energy Certificates (RECs)........................................................14 2.5 Subsidies......................................................................................................15 2.6 Generation Based Incentives .......................................................................18 2.7 Including Off-grid RE Projects in Priority Sector Lending.............................18 3. Business Models for RE Projects In India..........................................................19 3.1 Grid Connected RE ......................................................................................19 3.2 Rural Electrification Projects ........................................................................23 3.3 Commercial and Industrial Off-grid RE Projects...........................................23 4. Commercial Financing Instruments for RE in India .........................................25 4.1 Debt Instruments.........................................................................................25 4.2 Equity Finance .............................................................................................34 4.3 Mezzanine Finance ......................................................................................36 4.4 Partial Risk Guarantee Facilities...................................................................37 4.5 Rural Off-grid Financing ...............................................................................40 5. Barriers to RE Finance in India ...........................................................................43 5.1 Policy Level Barriers.....................................................................................43 5.2 Market Based Barriers .................................................................................46 Table of Contents Executive Summary......................................................................................................1 1. Potential for RE in India ........................................................................................5 1.1 Current Scenario ............................................................................................5 1.2 RE Potential ...................................................................................................5 1.3 Drivers of RE..................................................................................................7 2. Policy Support for RE in India ..............................................................................9 2.1 Tax Incentives ..............................................................................................10 2.2 Feed-in Tariffs ...............................................................................................12 2.3. Renewable Energy Purchase Obligations ....................................................13 2.4 Renewable Energy Certificates (RECs)........................................................14 2.5 Subsidies......................................................................................................15 2.6 Generation Based Incentives .......................................................................18 2.7 Including Off-grid RE Projects in Priority Sector Lending.............................18 3. Business Models for RE Projects In India..........................................................19 3.1 Grid Connected RE ......................................................................................19 3.2 Rural Electrification Projects ........................................................................23 3.3 Commercial and Industrial Off-grid RE Projects...........................................23 4. Commercial Financing Instruments for RE in India .........................................25 4.1 Debt Instruments.........................................................................................25 4.2 Equity Finance .............................................................................................34 4.3 Mezzanine Finance ......................................................................................36 4.4 Partial Risk Guarantee Facilities...................................................................37 4.5 Rural Off-grid Financing ...............................................................................40 5. Barriers to RE Finance in India ...........................................................................43 5.1 Policy Level Barriers.....................................................................................43 5.2 Market Based Barriers .................................................................................46 5.3 Barriers to Rural Off-grid Projects ................................................................47 List of Tables 5.4 Barriers to Commercial Off-grid Projects .....................................................49 5.5 Gaps and Needs in RE Financing.................................................................49 Table 1: Business Models for Grid-Connected RE Projects ......................................... 21 6. Suggestions for Innovative Financing Mechanisms for Table 2: Prominent FIs Providing Rupee Term Loans to RE Projects............................ 26 RE in India............................................................................................................53 Table 3: Mutual Benefits of Lease Financing to FI and Project Developer ................... 33 6.1 Fiscal Mechanisms ......................................................................................54 6.2 Policy Mechanisms ......................................................................................59 Table 4: Characteristics of Infrastructure Debt Funds in India...................................... 61 6.3 Financing Mechanisms ................................................................................60 Acronyms .....................................................................................................................73 References....................................................................................................................77 Annex A: Summary of Solar Reverse Bidding Programs...............................................79 Annex B: Capital Subsidy for Grid Connected Biomass Power Projects and Bagasse Cogeneration Projects .............................................................................80 Annex C: Capital Subsidy for Grid Connected Gasifier Projects....................................81 Annex D: Capital Subsidy for Biomass Gasifier for Industrial Use ................................82 Annex E: Capital Subsidy for Grid Connected Biogas Projects .....................................83 Annex F: Capital Subsidy for Off-Grid