Partnership to Advance Clean Energy - Deployment (PACE-D) Technical Assistance Program Renewable Energy Finance in India April 16, 2013 New Delhi
Overview of Renewable Energy in India Break up of installed power generation capacity • India’s renewable energy potential is more 2% 1% than 3,000 GW o Less that 1% of this potential i.e. 27 GW has 9% Coal been harnessed so far Hydro 12% o Renewable energy accounts for 12% of Renewable energy current installed capacity (211 GW) Gas 57% Nuclear 19% • Government of India has set aggressive Oil targets: o Achieve 15 percent of power consumption Source: CEA * As on 31 st December 2012 to be generated from renewable energy sources by 2020, Potential vs Installed Capacity • Current is a mere 5 percent o 33.4 GW of additional renewable energy 1460 2000 capacity by 2017 as defined in the draft 12th Potential (GW) FYP of the Planning Commission • Translates to an additional need for Installed Capacity 23 18.3 (GW) USD 39 billion till 2017 14 4.2 3.5 1.2 Solar Wind Biomass Small Hydro Page 2
Existing Instruments for Financing Renewable Energy • Policy Instruments – Tax Incentives • Income Tax Exemption under section 80 IA • Accelerated Depreciation – Feed-in Tariffs – Renewable Energy Certificates – Subsidies – Generation Based Incentives – National Clean Energy Fund • Commercial Financing Instruments – Debt Finance (local currency loans, foreign currency loans, supplier credit, construction finance, take-out finance) – Equity Finance – Mezzanine Finance – Partial Risk Guarantee Facilities Page 3
Key Findings – Grid Connected Renewable Energy • Present Situation – Solar and wind preferred technologies • Biomass suffers from fuel risk, leading to low appetite of financial institutions • Hydro has long lead time, getting clearances is an issue • Wind preferred due to low capital cost, and low fuel & technology risks • Solar has been driven on initial euphoria, but both banks and equity investors struggling with low returns from projects due to high capital costs. Low fuel and technology risks continue to be drivers. – Financing participation from public and private sector institution (domestic and international) • Key issues with finance for grid-connected projects – Lack of tax efficient structures (e.g. business trusts, REITs, master limited partnerships) to incentivize wide base of investors to invest in renewable energy – Lack of robust framework for Renewable Energy Certificates (RECs) and enforcement of Renewable Purchase Obligations (RPO) – Policy bottlenecks (inadequate feed-in tariffs, cross subsidy charges, delay in subsidies etc) and other risks ( fuel, technology, off taker) – Lack of a well-defined exit strategy for Investors – Substantial investment required for scale up of the sector Page 4
Key Findings – Off-Grid and Rural Renewable Energy • Present Situation – Few companies and projects in the space – Success dependent on local factors – Financing driven more by “impact investors” than “financial investors” • Key issues with finance for off-grid projects – Low financing requirements due to small size of projects act as a deterrent – Lack of replicability and scalability – Subsidies are delayed and often difficult to obtain – Specific to rural off-grid • Unpredictable power consumption patterns in rural areas • Low creditworthiness of fuel suppliers or off-takers • Few examples of successful business models – Specific to commercial off-grid • RESCOs usually too small, limited balance sheet size to attracted funding • Off-taker risk a key element in determining bankability • Several policy issues and uncertainties Page 5
Potential Options for Innovative Financing Mechanisms Fiscal Mechanisms • Tax Efficient Trusts • Tradable Accelerated Depreciation (AD) Tax Credits Policy Mechanisms • Use of Infrastructure Debt Fund for Renewable Energy • Market maker organization for RECs (can be useful for off-grid RE in case REC benefits are extended to off-grid RE) Financial Mechanisms • Green Bonds • Formation of an high net worth individuals (HNI) Off-Grid Renewable Energy Fund • Risk Insurance Schemes Page 6
1. Tax Efficient Trusts Type of Mechanism: Fiscal Trusts and Master Limited Partnerships (MLP) are tax efficient structures which can be publicly traded and thus have access to capital market liquidity – Can used for attracting capital into Structure of a Master Limited Partnership renewable energy assets • Examples of Tax Efficient Structures – Singapore Business Trusts – Master Limited Partnerships – Real Estate Investment Trusts • Advantages – Tax benefits (“pass through” entities) – Superior returns – Extract Cash Flows from Assets – Liquidity through listing – Shariah law compliance Page 7
2. Tradable Accelerated Depreciation Credits Type of Mechanism: Fiscal • The Accelerated Depreciation (AD) benefits cannot are not available to most independent power producers (IPPs): – Renewable energy projects are normally capital intensive, with low taxable profits – The benefit of AD can only be utilized when the company that owns the RE asset has enough profits from other businesses – The RE project also needs to be held within the same company that is generating the profits • Tradable AD tax credits will be certificates available to generators eligible for accelerated depreciation, in lieu of the accelerated depreciation benefit – The certificates will be freely tradable and usable – The price at which these certificates will be sold will be market determined, but normally at a 5- 10 percent discount to the face value • Advantages – This mechanism is an extension of the already existing AD benefit – The mechanism ensures parity amongst all classes of renewable energy investors – Export tax credits (also known as duty drawback) through which Value Added Tax (VAT) exemption in provided on certain categories of exported goods, have been in existence Page 8
3. REC Market Maker Type of Mechanism: Policy • RECs are not generally factored in by banks and other financial institutions in their evaluation of projects due the risk of unsold RECs. • The REC Market Maker (RMM) will be a government funded body that ensures liquidity in the market for Renewable Energy Certificates (RECs) – buyer of last resort in case of unsold RECs and a seller of last resort in case of a short supply of RECs – pre-established price at which RMM will purchase and sell RECs – spread between the sale and purchase price of RECs will enable RMM to generate profits and reduce its reliance on government funds, in order to assure sustainability – entities eligible to sell to RMM or buy from RMM should have submitted valid un-cleared sale/purchase bids in the REC trading session • Advantages – The RMM will resolve a major barrier to financing of REC based renewable energy projects by providing price certainty to developers and financial institutions Page 9
4. Use of Infrastructure Debt Fund for Renewable Energy Type of Mechanism: Policy • The Government of India in 2011-12 has allowed setting up of Infrastructure Debt Funds • IDFs allow tapping of long term low cost debt from Insurance and Pension Funds and other long term investors (both domestic and foreign) for infrastructure projects • The IDF-NBFC can take-out upto 85% of the existing debt Structure of IDF - NBFC of projects with commercial operations of more than one year • While the structure was introduced in 2011 and applies to all infrastructure assets, it has not been used for RE – Buyout guarantee from project authority required – RE projects have project authorities (state electricity boards) that are governed by each state • Applicability to JNNSM? Page 10
5. Green Bonds (Climate Bonds) Type of Mechanism: Financial 45 40 Climate Themed Bonds Bonds issued for financing projects that 35 directly contribute towards climate change USD Billions 30 25 mitigation 20 – Can be issued in the form of 15 10 corporate bonds or portfolio bonds. 5 – US$ 6 trillion or more of debt will be needed to 0 finance low carbon infrastructure across the globe between 2010 and 2020 • Advantages – Tap domestic and foreign capital to finance renewable energy assets. – Underlying projects will be operational with stable cash flows, and therefore offer relatively low risk for investors. – Ease up funding constraints of equity and debt investors and allow them to fund new assets. – Proven history of international issuances and existing markets for such bonds Page 11
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