Financial Feasibility of Solar Power Plant in India

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Project Appraisal & Financing for Solar P Power Projects in India

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Financial Feasibility of Solar Power Plant in India

  1. 1. Project Appraisal and Financing<br />Analyzing the Financial Feasibility of<br />Solar Power Plants in India<br />September 9th, 2011<br />Akash Jauhari<br />Institute of Management Technology<br />Ghaziabad<br />Table of Contents<br />1. Background for Solar Power related Industries in India………..................................................3-4<br /> 1.1 National Solar Mission................................................................................................3<br /> 1.2 Tax, Fiscal & Other Incentives.....................................................................................3<br /> 1.3 Photovoltaic Cell & Module Production in India........................................................4<br /> 1.4 Solar Power Value Chain & presence in India............................................................4<br /> <br />2. Analyzing Financial Feasibility of Solar PV Power Plant...........................................................5-8<br /> 2.1 Specifications of the Project.......................................................................................5<br /> 2.2 Cost Structure.............................................................................................................5<br /> 2.3 Expected Cash Flows & NPV.......................................................................................6<br /> 2.4 Sensitivity Analysis…………………………………………………………………….…………………………6-7<br /> 2.5 Scenario Analysis…………………………………………………………………………………………………..7<br /> 2.6 Foreign Investment in this Sector........................................................................…...8<br /> 2.7 Appropriate time for investment…………………………………………………………………………..8<br />3. Economics for Solar Power in India.......................................................................................9-12<br /> 3.1 Present cost levels & comparisons...........................................................................9<br /> 3.2 Key drivers for cost reduction................................................................................9-10<br /> 3.3 Grid parity with conventional power....................................................................10-11<br /> 3.4 PPA revising policy for government........................................................................12<br />4. Globally operational Solar Power Plants………………………………………………………………………….13-15<br /> 4.1 Solar Power in Germany…………………………………………………………………………….……..14-15<br />5. Key Findings & Recommendations……………………………………………………………………………………..16<br />6. Appendix…………………………………………………………………………………………………………………………17-18<br />1. Background for Solar Power related Industries in India<br />1.1 National Solar Mission<br />The National Solar Mission program was initiated by the Government as one of the 8 programs under the National Action Plan for Climate Change by the Prime Minister of India in 2008. In the month of November 2009, the Mission document was released as Jawaharlal Nehru National Solar Mission (JNNSM) and the Mission was formally launched by the Prime Minister on January 11 2010. The JNNSM is neutral to solar technologies and has provision for the development of all viable technologies. Apart from solar PV (crystalline and Thin Film), the already existing technology in India, JNNSM has the provision to develop solar thermal technology for large scale grid connected power plants. . The document emphasizes on the development of grid-connected applications, by offering feed-in tariffs for the power producers. The feed-in tariff is proposed to be extended to 25 years from the earlier duration of 10 years under the GBI Scheme.<br /> PeriodTarget Capacity   Phase I2009-121 - 1.5 GW    Phase II2013-176 - 7 GW    Phase III2017-2220 GW<br />1.2 Tax, Fiscal and other Incentives<br />Current cost structure for solar power makes it impossible to compete in open market. But to develop the technology for the future, government provides certain incentives and rebates to the industry. Such promises are necessary till the PV sector achieves parity with the conventional sources of energy. These are briefly described below:<br /><ul><li>Promised Power Purchase Agreement (PPA), currently at Rs. 15.3 per unit. Different state governments have some extra additions or discounts.
  2. 2. Tax holidays for first 10 years of operation for power producing firms.
  3. 3. Exemptions on custom and excise for goods imported required in power plants.
  4. 4. Levy of VAT at a discounted rate of 5%
  5. 5. Provision for accelerated depreciation.</li></ul>1.3 Photovoltaic cell and module production in India<br />According to data obtained from MNRE, during 2009-10, 15 companies were actively engaged in the manufacture of solar cells and 20 companies in the manufacture of PV modules. In addition, about 50 companies were actively engaged in manufacturing a variety of PV systems. The overall production in the country during 2008-09 is estimated to be over 175 MWh of solar cells and 240 MWp of PV modules. According to data obtained from MNRE, during 2008-09, 15 companies were actively engaged in the manufacture of solar cells and 20 companies in the manufacture of PV modules<br /><ul><li>84772594615</li></ul>Source: MNRE annual Presentation 2010<br />1.4 Solar power Value chain & presence in India<br />Power PlantModulesCellsWafer&IngotPolysilicon<br />Poly Silicon Wafer & Ingot Cells Modules/ Utilities Power Plants Intermediate Technology Value Stack 18 33 48 60 100 Embedded Presence in India No No Yes Yes Yes No Suppliers China China X X X USA <br />Source: EAI research, published Mar 2010<br />As clear from above table initial two steps in value chain are non-existent in India. Hence cost of setting up a Photovoltaic Power Plant in India has a higher cost. <br />2. Analyzing Financial Feasibility of Solar PV Power Plant <br />2.1 Specifications of the project<br /><ul><li>We are considering a thin film Solar PV Power Project of capacity 10MW, whose construction will start in August, 2011 and be operational by January, 2013.
  6. 6. Life of the project is expected to be 12 years, since the technology will become obsolete after that time period
  7. 7. The cost of equity is assumed to be 15% with 50% weight age. The cost of debt is taken to be 11.5% (as per IREDA norms) with 50% weight age. Hence, the cost of capital is calculated to be 13.25%.
  8. 8. For discounting purpose, hurdle rate is taken to be 14%.
  9. 9. Power Purchase Agreement of Rs. 15.3/KWh is taken to be constant for the period of 12 years.
  10. 10. A Capacity Utilization Factor of 19% is expected from the power plant.</li></ul>2.2 Cost Structure<br />Central Electricity Regulatory Commission (CERC) has proposed the benchmark cost for PV power plants in India as following:<br />ParticularCapital cost (Rs. Cr./MWh)Percentage of total costPV Module8.3358Land0.151Civil & General0.957Mounting Structure1.057Conditioning1.611Evacuation Cost0.96Pre Operative cost1.4410Total Capital Cost14.421<br />Based on the above facts and figures, the initial setup cost for the power plant comes out to be Rs. 1220.85 million.<br />2.3 Expected Cash Flows and NPV<br />Our detailed calculations are mentioned in the appendix 1 of this report. Based on the calculations, following figures are obtained.<br /><ul><li>IRR is found to be 15%.
  11. 11. The NPV value is $64.36
  12. 12. NPV as a percentage of initial outlay is 0.05%.
  13. 13. Return on Equity is 0.11.
  14. 14. Looking at these values, we conclude that the project offers low return on investment (considering the risk). To make the solar power more financially viable, conversion efficiency needs to be substantially increased. Also, the PV power plant should not be considered as a standalone project.</li></ul>2.4 Sensitivity Analysis:<br />We attempt to determine the deviation in NPV when following three factors are changed individually: PPA, Tax and Conversion Efficiency.<br />Case 1:<br />Changing PPAs<br />PPAsProbabilityNPVsProb.*NPVOptimistic180.15304.0045.60Most Likely15.30.7064.3645.05Pessimistic100.15-407.00-61.05Expected NPV29.60<br />Case 2:<br />Changing Tax<br />TaxProbabilityNPVsProb.*NPVTax Holidays0%0.7564.3648.27Reduce incentive15%0.15-49.22-7.383Eliminate incentive30%0.10-162.79-16.279Expected NPV24.608<br />Case 3:<br />Changing Conversion Efficiency<br />EfficiencyProbabilityNPVsProb.*NPVExpected0.190.7564.3648.27Below Expected0.140.25-294.3-73.575Expected NPV-23.305<br />From the above three cases, we conclude the following:<br />1) Solar Power Projects are majorly dependent on Govt. policies/incentive. Hence some amount of risk always exists with it.<br />2) NPV or returns are highly sensitive to Conversion factor.<br />2.5 Scenario Analysis:<br />As the sector is highly dependent on government incentives, we consider three scenarios, namely, govt. Incentive continued, govt. Incentive reduced and govt. Incentive minimized. We then determine the change in the target function NPV.<br />Scenario 1Govt. Incentive continuedScenario 2Govt. Incentive reducedScenario 3Govt. Incentive minimizedPPAs15.31210Tax00.150.30Capacity Purchased (fraction of max. Capacity)10.750.50NPV64.36-528.6-811.59Probability0.80.150.05NPV*Prob.51.488-78.29-40.5795<br />Expected NPV = -68.3815 <br />From the scenario analysis, we conclude that the existence of solar power sector will be driven by Government policies; at least in the initial stages.<br />2.6 Foreign Investment in this sector:<br />To determine the return for a Spanish Firm investing in Indian Solar Power Project, we follow the foreign currency approach.<br />The required rate of return for the Spanish firm is taken to be 14%.<br />The risk free rate in Spain is assumed to be 11.5%.<br />The risk free rate in India is taken to be 11%.<br />Equation for Spain: (1 + Risk free rate in Spain)*(1 + Risk Premium) = (1 + Risk Adjusted rate in Spain)<br />Risk Premium is calculated to be 2%.<br />For India, the discounting rate is calculated to be 1.13%.<br />The NPV calculated from above data = $119.89<br />From above calculations, we conclude that the Indian Solar Power sector will be a good investment (FDI) for the European players. <br />2.7 Appropriate time for Investment<br />Following three assumptions are considered:<br />1. Poly-silicon prices coming down by 20%, thus Initial setup cost down by 12%.<br />2. CUF (conversion efficiency) going up-to 22%.<br />3. Rest of the factors remaining unchanged.<br />Calculated Values: (see appendix 2 for detailed calculations)<br />Old NPV$64.36New NPV$504.45Old IRR15%New IRR21%<br />On the basis of above assumptions and values, the appropriate time for investment would be in the next 3-4 years.<br />3. Economics for Solar Power in India<br />3.1 Present cost levels and Comparisons<br />Solar power is expensive when compared to conventional sources of power and hence, the solar market development is currently dependent on Government support.<br />During the last few years, there has explored cost reduction possibilities for been significant cost reduction in solar power. Power and the cost curves of solar power are declining. On the other hand, while there are multiple solar costs of power from conventional technology options, particularly two sources are increasing due to higher technologies viz. solar crystalline and fixed costs and rising fuel prices. Solar parabolic trough are considered<br />Moreover, there is considerable mature and likely to reach grid parity research that is underway to further faster.<br />3.2 Key Drivers for Cost reduction <br /><ul><li>Reducing Poly-silicon Prices (raw material)
  15. 15. Improving Efficiency (CUF)
  16. 16. Economies of Scale
  17. 17. Shifting of production units to Cheaper Cost Centers (China & India)</li></ul>The solar crystalline PV technology dominates the market for solar PV installations globally. Dynamic cost reductions have accelerated deployment of Solar C-Si (crystalline silicon) technology in the recent past. The module prices have dropped from around USD 3-4 per W about two years back to under USD 1.5-1.8 per W today. Consequently, the proportion of module prices in the total system price has come down significantly. The corresponding price of electricity which was upwards of INR 25 has dropped to around INR 13per unit.<br />Source: KPMG sector report May 2011<br />3.3 Grid Parity with Conventional power<br />Base scenario – Conventional Energy<br />The historical year-on-year growth rate in LCP for India in the last decade has been more than 4 percent. Going forward, the rate of increase in LCP for States would depend on internal efficiency drives towards reducing losses. Hence, States with very high loss levels today will see a relatively lower increase in LCP growth, assuming that they will improve their efficiency levels. Accordingly, we have assumed the LCP for states with low AT & C losses (less than India’s loss levels (~29 percent)) to grow at 4 percent, with moderate AT & C losses (greater than India’s loss levels but less than 50 percent) to grow at 3 percent, and for others with high AT & C losses (greater than 50 percent) at 2 percent.<br />[Source: PFC report on performance of state power utilities]<br />Level zed Cost Comparison of Utility-scale PV and Conventional Power at Grid-<br />As shown in the exhibit above, the grid from solar power with the level zed parity is likely to happen between 2019 and 20. Here, the solar utility corresponding year. Similar to what we band represents the margins – have shown in the grid parity difference between cost and price - that projections for small-scale applications, are likely to vary depending on the we expect certain states like Rajasthan bargaining power of the developers. We to achieve grid parity well before the have compared the level zed tariffs rest of India.<br />3.4 PPA Revising Policy for Government<br />Current PPA of Rs 15.3 per unit is unrealistic, and thus cannot be sustained forever. As the cost for producing Solar PV power comes down, there is a probability that government will revise its PPA policy. Eventually when PV power achieves parity with conventional energy, PPA policy will be taken back. Looking at global scenario, PPAs stand at about 25% margin to cost of producing power. Taking the concept forward we calculate expected PPA from government<br /> 2011201220132014201520162017201820192020PV Cost (INR/Watt)11.610.749.959.218.527.887.266.696.165.67PPA expected 13.412.411.510.79.99.18.47.77.1<br />4. Globally Operational Solar Power Plants<br />Globally, Europe has taken the lead and has already installed significant solar based capacity. Germany is the largest solar market globally with total installations of around 17,000 MW. In fact, solar PV provided 12 T-Wh (billion kilowatt-hours) of electricity in Germany in 2010, about 2 percent of total electricity in that country2. A point to note is the fact that the solar isolation in Germany, at about 3.15 units per sq. meter per day, is very low when compared to India’s average of 5.50 units per sq. meter per day<br />Source: KPMG sector report, May 2011<br />Global annual installations - Germany is the market leader Globally, the solar PV market had installations of more than 17,000 MW in 2010 recording a growth of more than 3 130 percent over 2009 . While India’s share at around 1 percent is very low at present, it is likely to increase substantially in the future.<br />4.1 Solar Power in Germany <br />German Renewable Energy Act<br />(DENA, 2011) reports that as of January 2011, around 17% of electricity, 8% of heat and 6% of fuel used in Germany is generated from renewable sources, further reducing Germany’s energy imports. In addition, 110 million metric tons of CO2 emissions were cut due to the use of renewable energies only during 2010. The renewable energy industry employs today more than 350,000 people in Germany (up from 30,000 people in the year 1998) and is home to several world market leaders like Enercon, Nordex and Repower in the wind industry and Q-Cells, Schott Solar and SolarWorld in the solar industry. Germany is today among the world’s three major renewable energy economies (Renewable Energy Network 21, 2011). Due to its success, the German Renewable Energy Act can serve as an archetype of similar legislation in other countries<br />The three main principles<br />The three main principles of the EEG are:<br />Investment protection through guaranteed feed-in tariffs and connection requirement: Every kilowatt-hour that is generated from renewable energy facilities receives a fixed feed-in tariff. Furthermore, the network operators must feed in this electricity into the grid preferentially to the electricity generated by conventional sources (nuclear power, coal and gas). Renewable energy plant operators receive a 20 year, technology specific, guaranteed payment for their produced electricity. In particular, small and medium-sized enterprises SMEs have been given new access to the electricity market, along with private land owners. The Federal Ministry for Environment, Nature Conservation and Nuclear Safety (2010) argues that anyone who produces renewable energy can now sell his ‘product’ for a 20-year fixed price.<br />No charge to Germany’s public purse: as of today, the promotion of renewable electricity is still necessary. The EEG rates of remuneration clearly show what electricity from wind, hydro, solar, bio and geothermal energy actually cost. Unlike fossil fuels, there are no external costs such as damages to the environment, the climate or human health. The remuneration rates are not subsidies as such since they are not paid for by taxes. On the contrary, the “polluter pays principle” (OECD, 2006) is distributed to the consumer: who consumes more pays more. The remuneration rates are paid for by every consumer with the electricity bill.<br /> Innovation by falling feed-in-tariffs: periodically lowering rates of remuneration for new plants (digression of 1% per year) exerts cost pressure on manufacturers. Thus, technologies are becoming more efficient and less costly<br />Payment scheme<br />The EEG also differentiates between technologies such that each renewable energy source (RES) receives a different payment guaranteed price according to its generation cost, ranging from 3.58 - 9.67 €-Cents per kilowatt-hour for hydropower to 35.49 – 51.7 €-Cents per kilowatt-hour for solar power (Rickerson, et al., 2007; Hirschl, 2008). Solar power recompense in the first half of 2011 ranges from 21.11 - 28,74 €ct/ kWh depending on installation size and form, with a further decrease of 9% to 15% foreseen in June, 2011<br />Largest German photovoltaic power stations (20 MW or larger)PV Power stationNominal Power(M-Wh)Production(AnnualG-Wh)CapacityfactorNotesFinsterwalde Solar Park80.7Phase I completed 2009,phase II and III 2010 Strasskirchen Solar Park54570.12Lieberose Photovoltaic Park53530.112009Kothen Solar Park452009<br />5. Key Findings & Recommendations<br /><ul><li>Solar PV plants presently have large Initial Outlays, which considerably reduce the returns on the investments. Moreover the deviations of the NPV from expected value in case of a change in PPA, tax structure and CUF, as the measure the risk, are also found to be substantially high.
  18. 18. The Sector is highly driven by Government support, hence any Scenario where Government reduces or minimizes the incentives proves to be destructive to return & risk profile of the project. However, possibility of such a development is expected to be low.
  19. 19. Reducing Poly-silicon prices, increasing efficiency and economies of scale are expected to drive down the Initial outlay of project and hence increase the return. Thus considering the supply-demand gap in India energy market and reducing cost of PV, Solar power plants are expected to be lucrative in long term. We thus recommend Global players to invest with some delay of about 3-4 years with improved technology and reduced cost.
  20. 20. Further to reduce cost in India, players should focus on manufacturing poly-silicon wafers indigenously, developing technology tailored for Indian conditions, and joint venture with technology providers to improve efficiency. Backward and forward integration will also help to increase the margins for the firms.
  21. 21. Going by example of Germany, world leader in PV technology, we expect PPA offered in India to decrease to about Rs 10.7 by 2015 and Rs. 7.8 by 2019, with reducing cost structure of PV power. As per data available we expect PV power to reach grid parity by 2020. Hence after 2020 we expect PV power to compete with other sources of energy without any Government support, and contribute about 7% of energy demand of the nation. </li></ul>Appendix 1<br />Appendix 2<br />

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