Finance, Other, solar

Solar industry hit by purchase obligation norms, funding issues

According to reports, Renewable Purchase Obligation (RPO), funding for solar projects and active participation by States are key issues that need to be addressed in Phase II of the Jawaharlal Nehru National Solar Mission (JNNSM).

Industry players feel these are the main hiccups that may dampen the Centre’s ambitious solar plan, which is likely to be unveiled shortly.

“There should be strict penalties for not meeting RPO. Every State should fulfil the obligation. Otherwise, there are no buyers for electricity produced from solar projects,” said Managing Director of a PV solar modules manufacturer, requesting anonymity.

According to the RPO norm, every electricity distribution utility, captive or open access, must buy a part of their electricity needs from renewable sources.

The electricity distribution utilities’ bad financial health is the primary reason why they don’t buy power from renewable sources. However, the recent restructuring scheme unveiled for the utilities is expected to improve things, he said.

“Successful implementation of the JNNSM needs formulation of favourable policy framework to overcome technology, finance, infrastructure and regulatory barriers, such as the RPO,” said K. Subramanya, former Chief Executive Officer of Tata BP Solar.

Solar project developers say they face critical problems while seeking loans from banks or financial institutions. Cheaper funding in the form of external commercial borrowings or buyers-suppliers credit from overseas is not available to domestic cell makers, which affects the viability of projects.

At present, each megawatt of solar power costs around Rs 9 crore. “Solar projects are low-risk and low-return investments. The returns take about 10-15 years to flow in. If funding is not at a desirable rate and conducive to the internal rate of return, it’s difficult to raise debt. The sector should be included in the priority sector of banking,” the executive said.

In the second phase, the Government proposes to follow a viability gap funding model. The scheme provides financial support in the form of grants, one-time or deferred, to infrastructure projects undertaken through public-private partnerships with a view to making them commercially viable, says the draft policy issued by Ministry of New & Renewable Energy.

“High penetration of solar power requires substantial funding support from banking and financial institutions. More importantly, there is the need to address the issue of dumping of thin film modules,” added Subramanya.

Nearly, 10-12 States, including Gujarat, Tamil Nadu, Chhattisgarh, Karnataka, Andhra Pradesh and Kerala have come up with ambitious models to install solar electricity generation capacity.

The companies involved in the sector claim that photovoltaic cells work in diffused sunlight, too. This means States that get less sunlight and heavy rains can also install solar panels.

The National Solar Mission envisages installation of around 10,000 MW utility scale and 1,000 MW off-grid solar power projects by the end of the second phase.

The 12th Plan also targets capacity addition of 10,000 MW of grid connected solar power in India. Of this, 4,000 MW would be developed under the Central scheme and 6,000 MW under various State-specific schemes.



One thought on “Solar industry hit by purchase obligation norms, funding issues

  1. Our Sincere Views / Suggestions / Comments on the “JNNSM Phase-II, Policy Document – WORKING DRAFT”

    Viability Gap Funding under Phase II of JNNSM will have following FURTHER disadvantages in addition to the ones mentioned by you, instead we propose the INTEREST SUBSIDY.

    a). Disadvantages:

    1). The capacity per year till 2017 is pegged at 3000 MW (approx). Thus, VGF will make a large corporate game and only at few clusters or solar parks, the 750 to 1000 MW will be sanctioned to large corporate companies thereby small entrepreneurs who want to develop their local area with 25 to 100 MW will be deprived. It may be noted that in 2009, Govt alloted 100 MW solar pv project to Reliance Power out of total capacity of 150 MW, which is not the Entrepreneur promotion, but, to promote few large corporate companies who have the access to such policy or decision making, which defeats the basic democratic principles of Policy Creation.

    2). If the project size is 25 to 100 MW per taluka with well laid out grid, it will also help to maintain the grid even if few MW fail. Incase of large project size of 300MW or over, we need to draw the results from USA, where the cloud movements have created haphazard plant characteristics and we can’t run the grid to the new villages, if small projects, through the NATIONAL POLICY OF ENTREPRENEURSHIP FUNDING, we can promote local entrepreneurs and fund them through Clean tech fund with Interest subsidy to make the Promoters responsible to maintain the plant (even if it is sold in between) to receive the Interest against assured Generation (till the repayment of debt), instead of UP FRONT payment of VGF in two years, which will be written off with Accelerated Depreciation (which is easy for large corporate to account in books, thus, government will get less corporate tax collections!!), hence, the creation good quality NATIONAL assets will be a big question, which is also mentioned by you.

    3). Interest subsidy for 12 years of Term Loan, instead of Viable Gap Funding of 20% or 40%:

    a1). For a 750 MW Project at a CAPEX of Rs. 7.5 Crore/MW = 750 x 750 = Rs. 5625 Crore. (Total project cost i.e an assumption on lower side).

    20% VGF support costs an immediate budget CASH out flow of Rs. 0.2 x 5625 = Rs.1125 Crore (within the project period of 2 years max) to the Government.

    Please refer to CERC guidelines to calculate ROE, IRR, LCOE and COG (Cost of Generation). One can infer that interest subsidy for 12 years against assured generation will bind the promoters to create good assets, buy national products, support Indian Finance Institutions (hence safe mechanism for Banking structure and their jobs).

    If SBI interest rate is 13% (which can be reduced for Infrastructure projects) and to sell the power at Rs. 5 or 6/kwh, if the project interest rate works out to be 3% (rupee term), the Government shall pay the interest subsidy of 10% (=13 – 3) on a 70% Debt (0.7 x 5625 = Rs. 3937.5) i.e 0.1 x 3937.5 = Rs. 393.75 crore (interest subsidy) in the first year and in the second year it gets reduced due to the payment of the Capital of 3937.5/12 = Rs.328.125 Crore.

    However, one may argue that Government will be paying more subsidy through Interest subsidy mechanism when compared to VGF, but, the huge amount of Clean tech fund collected by Government through KfW or such international organisations etc, at a very low interest rate of 2.5% (after hedging it may be a total of 6%) can be used to reduce this burden (i.e government can think of paying a differential of 3 to 5% instead of 10% as illustrated earlier!!), thus, the payout can be reduced. Further, the rupee value of interest burden after 3 to 5 years, is a discounted value, hence, we get the deflation / devaluation / discount factor benefits apart from less cash out flow from the YEARLY Government budget, while having a control on payments against Performance of the Project despite equity selling or change of ownership of the project developers.!!

    But, the GREAT ADVANTAGE will be that the promoter or the project developers will ensure a good quality national asset and need to prove the performance for at least debt period of 12 years out of 25 years of Plant life !! and that too to ensure low cost LCOE tariff.

    4).If three large corporate co bid, the capacity of 3000 MW will almost be benefited / Sanctioned to three or four companies of the Country rather promoting Hundreds of small and medium Entrepreneurs through National policy. Is this Democratic?? Why wealth creation and distribution be limited to few, why not to large population base to honour democracy, sovereignty and economic wealth distribution to many small players thus, avoid car-telling of power tariff in future or creating a large company who may in turn dictate the policy making, which will be a threat to the nation’s democracy, in future, as is happening in many other countries.

    5). The smaller the project size in rural area, the local employment generation, increase of RURAL GDP can be ensured through the POWER OF SMALL ENTREPRENEURS, thus, load on URBAN CITIES can be reduced or exodus of village people can also be reduced by augmenting localised solar IRRIGATION PUMPING or Cold Storage at these location to increase economic activities. Thus, local governments (Gram Panchyat / Zilla Parishad etc) can have say in deciding the need of power for the local use too (community development) with good number of local job creation for the sustainability through training and skill development to ensure Inclusive growth through SMALL and MEDIUM Entrepreneurs, rather than 4 or 5 large corporate companies for the entire INDIA with a sudden monetary benefits on CAPEX Subsidy, which was a failure in case of Biomass power projects.

    6). The interest subsidy will also bring down the CAPEX as one can select the Winner of the bid, which is based on low CAPEX with low Interest subsidy request, thus, the load on the Government can be reduced, otherwise, VGF will be an UP FRONT take away for which the next monitoring team will not have any Control or say, if there are any failures of the large project or non performance or less generation or defunct part of the large project…..

    Therefore, it is better to Support Phase II of JNNSM with Interest subsidy rather than VGF to create good quality national assets at many places by creating an eco system to create many / good entrepreneurs at rural level with good quality EPC companies with a clause of Assured Energy Generation for which the plant is designed.

    7). The governments in power can also verify the test reports of various officers in tenure who might have certified the project completion (despite few lacuna, which happened in the recent Rajasthan solar PV projects of the false issuance of Completion appeared in News Papers, TV, magazines etc.) thus, the inspection and reverification over the years, ensures the development of good quality projects.

    Posted by praveen Kulkarni | December 20, 2012, 2:18 pm

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