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Summer Internship Report

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Summer Internship Report

  1. 1. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 1 | P a g e B y : S o m o b r a t a B a l l a b h “Viability Analysis of Solar Rooftop Business Model in India and Credit Rating Assessment of Solar PV Project” Submitted by Somobrata Ballabh (PGDMB16-145) In partial fulfillment for the award of the degree of POST GRADUATE DIPLOMA IN MANAGEMENT INSTITUTE FOR FINANCIAL MANAGEMENT AND RESEARCH 5655, Central Express Way, Sector 24, Sri City, Andhra Pradesh (2016)
  2. 2. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 2 | P a g e B y : S o m o b r a t a B a l l a b h Learning experience is like no other, but to learn one seeks a teacher, a guide, a mentor and I found all of these in Mr. Siva Subramanian, (Associate Director-Project Finance) who was my project guide during my internship at India Ratings and Research-Fitch Group. His guidance and support made the learning easy and enjoyable. Thank you for all things. I also express gratitude toward Ms. Divya Charen, Analyst-India Ratings and Research Ltd. for guiding and grooming me in the way of completing my project successfully I thank Mr. Bhupendra Yadav, Analyst-India Ratings and Research Ltd. for giving me his valuable insight throughout the tenure of my internship. I am grateful to Prof. Shanmugam , my internal project guide at Institute for Financial Management and Research for imparting useful knowledge and helping me refine this report. The help and support given by you has made my understanding better and can never be repaid. The guidance given by entire team of India Ratings and Research was priceless & instrumental and I thank them for providing the necessary guidance and support. I found out numerous resources from all state-level regulatory agencies in the way of doing state level and central level solar policy reviewing, as well as figuring out the cost structure and their various incentives. Particularly Delhi Electricity Regulatory Commission, Karnataka Renewable Energy Development Agency, Gujarat Energy Development Agency, Tamil Nadu Electricity Regulatory Commission. I gratefully acknowledge the support of resources that I have found from websites of various solar developers like Azure Power, Sun-Edison and Tata Power Solar. Mr. Somobrata Ballabh Roll No.: PGDMB16-145
  3. 3. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 3 | P a g e B y : S o m o b r a t a B a l l a b h The Indian solar industry has been maturing at a rapid clip, growing more than hundredfold in four years to reach over 2.6 Gigawatts (GW) of installed capacity in 2014. Coupled with successful state-level policies in Gujarat and Rajasthan, the Jawaharlal Nehru National Solar Mission (Mission or NSM) has played a pivotal role in making the industry successful. Abundant policy instruments, such as feed-in tariffs (FiTs) and accelerated depreciation (AD), have been deployed to encourage solar energy penetration. These instruments have been vital to the rapid scale-up achieved by this industry so far and are now ready for adoption on a wider scale. Further, India‘s new government has announced nationwide targets to harness solar power and enable every Indian home to run at least one light bulb by the year 2019. During the first phase of the NSM from 2010 to 2013, project proponents had to rely on self- financing to kick start projects as they grappled with a lack of experience in financing solar technology on the part of domestic banks. International lenders, with greater exposure to solar technology, led the industry in supporting capacity addition. These lenders were also able to provide financing at rates lower than those offered by domestic banks. Coupled with the falling cost of solar modules, this low-cost financing strengthened the industry by contributing to an impressive drop in the cost of solar energy even as new capacity was added. The viability gap funding (VGF) mechanism employed in the first batch of NSM Phase 2 projects in 2014 allows developers to bid for additional upfront capital required to make the project financially viable at a tariff of Rs 5.45/ kWh, at which the produced solar power can be sold. Utilizing a reverse auction to select projects and bundling solar power with the sale of traditional power to lower prices considered successful during Phase 1—have recently been proposed to be readopted for the second batch of Phase 2 projects. This report focuses on their impact on capacity addition, risk mitigation, and reduction in the cost of finance while leveraging existing policies and the viability of solar rooftop investment as well as the methodology of assessing the credit structure of solar thermal power projects while assigning the credit rating on the other hand. The framework presents policymakers and industry leaders a set of tools to use while addressing a range of barriers to industry growth.
  4. 4. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 4 | P a g e B y : S o m o b r a t a B a l l a b h Page No. Page No. List of Abbreviation 5 1.11 Financials 29 1.1 Introduction 7 1.11.1 Assumptions 29 1.2 Background 8 1.11.2 Calculation for Total Generation Unit 29 1.3 Solar Energy in India 9 1.11.3 Cost Components 30 1.4 Performance of Indian Solar Sector 10 1.11.4 Project IRR Analysis for State Taken Under Considerations 31 1.4.1 National Solar Mission 10 1.11.4.1 Internal Rate of Return 31 1.4.2 Rooftop Solar 10 1.11.4.2 Debt-Equity 31 1.4.3 Technology Evolution 10 1.11.4.3 Equity IRR and Project IRR 31 1.5 Key Drivers 11 1.11.4.4 Factors Affecting IRR 31 1.5.1 Innovative Solar Rooftop Financing Model 11 1.11.5 Status of Policy/Regulations in various States 34 1.5.1.1 RESCO Model 11 1.11.6 Risk Analysis 35 1.5.1.2 CAPEX Model 12 1.12 Recommendations 37 1.5.1.3 Micro Utility Model 13 1.12.1 Commoditization of Solar Rooftop Market 37 1.5.2 Feed-in-Tariff 14 1.12.2 Encourage to Use Renewable Energy Devices/System 37 1.5.3 Viability Gap Funding (VGF) 15 1.12.3 Provide Transparent Support for grid-connectivity of rooftop solar 38 1.5.4 Subsidies 15 1.12.4 Conduct Stakeholder Meetings and More Detailed Analysis 38 1.5.5 Net Metering 15 1.12.5 Strengthen Load Forecasting by DISCOMS 39 1.5.6 RPO and REC 15 1.12.6 Emphasize on R&D to Support the Managing of Solar Power Intermittency 39 1.5.7 Initiatives Taken By Govt. 16 1.12.7 Increase Public Awareness 39 1.5.8 Uday (Ujjwal DISCOM Assurance Yojana) 16 1.13. Conclusion and Outlook 40 1.6 Key Issues in Rooftop SPV Market 19 2.1 Understanding of Credit Rating 41 1.6.1 Stiff Competition from Foreign Manufacturer and Domestic Low Capacity Utilization 19 2.1.1 Rating Assessment Service 41 1.6.1.1 Research and Development 19 2.1.2 Rating Categories and Credit Rating Analysis 41 1.6.1.2 Manufacturing 19 2.1.3 General Limitations of Credit Rating 42 1.6.2 Policy Framework 20 2.2 Project Objective 43 1.6.3 Price Reduction of Solar PV Module Mfg. Cost 21 2.3 Project Overview 43 1.6.3.1 EPC and O&M 21 2.4 Ownership and Sponsor Structure 44
  5. 5. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 5 | P a g e B y : S o m o b r a t a B a l l a b h 1.6.4 Lack of Low Cost Financing 22 2.5 Rating Evaluation Framework 45 1.6.5 Issues Related to Net-Metering 22 2.6 Financials 46 1.6.6 Resource Assessment 22 2.7 Scenario Analysis 50 1.6.7 Coordination between Centre and States 23 2.8 Risk Factors Under Consideration 51 1.7 Several Benefits of Roof Top Solar Market 23 2.9 Key Rating Driver and Rating Assignment 54 1.7.1 Easy Installation 23 1.7.2 Energy Savings 23 1.7.3 Low Space Requirement 23 1.8 Primary Survey and Market Research 24 1.9 Market Players in Indian Solar Rooftop Market 24 1.10 State Wise Policy Comparison 26 Gujarat 26 Karnataka 26 Tamil Nadu 27 Delhi 27 Andhra Pradesh 28 Haryana 28 Abbreviation List of Figures and Tables ARR Annual Revenue Requirement AD Accelerated Depreciation CAPEX Capital Expenditure Fig 1 Break Up of Gross Electricity Generation in India during 2014-15 CEA Central Electricity Authority Fig 2 Yearly Solar Irradiation Data in India (w/m2/Day) DERC Delhi Electricity Regulatory Commission Fig 3 RESCO Model Block Diagram DISCOM Distribution Company Fig 4 Growth of Solar Power in India EPC Engineering Procurement and Construction Fig 5 State-wise proposed target of 40 GW rooftop solar project PLF Plant Load Factor Fig 6 Trend in Levellised tariffs for Solar PV Plants GERC Gujarat Electricity Regulatory Commission Fig 7 Target-State of Govt. To Achieve Maximum Solar Capacity GoI Government Of India Fig 8 CERC Year Wise Solar Rooftop Capacity Target (in MW)
  6. 6. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 6 | P a g e B y : S o m o b r a t a B a l l a b h JNNSM Jawaharlal Nehru National Solar Mission Fig 9 Solar PV Price Trend (in USD) MNRE Ministry of New and Renewable Energy Fig 10 Solar Capacity Addition Trend (in GW) IREDA Indian Renewable Energy Development Agency Ltd. Fig 11 Sector Wise Sanctioned and Commissioned Small Scale Solar Project MW Mega Watt Fig 12 Yearly Solar Irradiation Rate Gujarat KWh Kilo Watt Hour Fig 13 Yearly Solar Irradiation Rate Karnataka KWp Kilo Watt Peak Fig 14 Yearly Solar Irradiation Rate Tamil Nadu SPV Solar Photovoltaic Cell Fig 15 Yearly Solar Irradiation Rate Delhi REC Renewable Energy Certificate Fig 16 Yearly Solar Irradiation Rate Andhra Pradesh GBI Generation Based Incentive Fig 17 Yearly Solar Irradiation Rate Haryana RPO Renewable Purchase Obligation Fig 18 State Wise Various DISCOM’s Tariff Rate and Their Calculated IRR CUF Capacity Utilization Factor Fig 19 State wise Analysis of CUF and IRR SNA State Nodal Agency Fig 20 Solar Tariff Rate Towards Grid Parity IRR Internal Rate of Return Fig 21 Forecasted Analysis of Financial Trend DCR Domestic Content Requirement Fig 22 Debt Repayment Schedule Trend CUF Capacity Utilization Factor Table 1 Financial Assumptions RESCO Renewable Energy Service Company Table 2 Operational and Technical Details CAPEX Capital Expenditure Model Table 3 5 MW Rooftop Solar Panel Deployment Cost COD Commencement of Development Table 4 Risk Analysis For Investors or Financers PPA Power Purchase Agreement Table 5 Risk Analysis for Utility PV Photo Voltaic Table 6 Risk Analysis for Consumers O&M Operation and Maintenance Table 7 Rating Scale Classification DSCR Debt Service Coverage Ratio Table 8 Scenario Analysis CFADS Cash Flow Available After Debt Service INR Indian Rupees SPP Special Purpose Project SPV Special Project Vehicle EPC Engineering , Procurement and Contract
  7. 7. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 7 | P a g e B y : S o m o b r a t a B a l l a b h 1.1 Introduction India‘s solar market, especially solar photovoltaic (Solar PV) has significant growth after the launch of Jawaharlal Nehru National Solar Mission in 2010, with an installed capacity of more than 3 GW in just four years. The Government of India is determined towards achieving 100 GW of grid connected solar power capacity by 2020, of which 40 GW would be deployed through decentralized and roof-top solar projects. Rooftop solar PV would play a prominent role in meeting energy demands across segments. It has already achieved grid parity for commercial and industrial consumers, and fast becoming attractive for residential consumers as well. As a result, multiple state governments have taken necessary steps to kick-start implementation of rooftop solar PV projects. Policies formulated by Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commission (SERC) have enabled adoption of renewable energy. In this report we will analyze and see the regarding the business model viability of Rooftop Solar PV across various states in India.
  8. 8. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 8 | P a g e B y : S o m o b r a t a B a l l a b h 1.2 Background Currently with a GDP growth of over 7%, India is one of the fastest growing economies in the world. Ensuring adequate viability of energy is a crucial requirement for sustaining economic growth. The growth in total energy requirement of the Nation is expected to be at the rate of 5.7% and 5.4% per year in the 13th year plan. However the country is not able to meet its electricity demand in the recent several years, thereby constraining the economic growth. Despite the significant investments in power sector, India‘s energy shortage projected at 2.1% in 2015-16 (Source: Business Standard). Even per capital electricity consumption in the country is less than half of the world average. As efforts are made to improve the living standards and to make electricity available to the entire population, the energy requirements are expected to rise further. While it is important to increase the electricity generation in line with the increased demand, it is also important to consider the means for increasing such generation. In 2014-15 renewable energy sources contributed to only 5% in the total electricity generation. 76% 5% 1% 3% 10% 5% Fig:1 Break Up of Gross Electricity Generation in India during 2014-15 Coal Gas Diesel Nuclear Hydro Renewable Growth of Renewable Energy With climate change concerns taking the center stage in the domestic and international policy arena, renewable energy has become an important agenda of India‘s energy planning process. To this effect the government has set aggressive targets, and has put in place several incentives and policy initiatives at the Central and State levels for both grid-connected and off-grid renewable energy. The installed capacity mix for electricity generation has undergone significant capacity change in the recent years with the share of renewable energy capacity reaching at 13% in FY15.Source: Bridge to India
  9. 9. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 9 | P a g e B y : S o m o b r a t a B a l l a b h 1.3 Solar Energy in India Utilization of Huge Potential With 250-300 sunny days in a year, about 5000 trillion KWh of energy is incident on an annual basis over India‘s land area with most parts receiving 4-7 kWh per sq. m per day. Recently a study carried by National Institute of Solar Energy (NISE) estimated that the country has a total solar power generation potential of 748.9 GW. In comparison, the total installed capacity of solar energy at the end of June 2015 is 4061 MW-a mere 0.5% of the overall potential. 0 1 2 3 4 5 6 7 8 Rate(w/m2/Day) Months Fig: 2 Yearly Solar Irradiation Data India (w/m2/Day) Gujarat Karnataka Tamilnadu Delhi Andhra Pradesh Haryana Source: NASA RET Screen Data
  10. 10. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 10 | P a g e B y : S o m o b r a t a B a l l a b h 1.4 Performance of the Indian Solar Sector 1.4.1 National Solar Mission To tap the solar potential in the country, India has embarked on an ambitious plan under the Jawaharlal Nehru National Solar Mission (JNNSM), targeting to achieve an installed capacity of 20,000 MW of solar power by 2022. However after realizing the vast potential and fast technology growth, this target was revised to 100,000 MW to be achieved by 2022. Under JNNSM phase I, a total of 960 MW of solar projects were awarded Apart from these grid connected large scale plants, small scale and rooftop plants of capacity less than 2 MW each were also allotted under GBI scheme under the Rooftop PV and small Solar Power Generation Program (RPSSGP). Under Phase II (Batch I), a total of 750MW of capacity was allocated, which was equally divided between projects with domestic content requirement and open category projects. Under the State policy framework, Gujarat has been the key state which has developed around 1000 MW of solar power since the announcement of Gujarat has been the key state which has developed around 1000 MW of solar power since the announcement of Gujarat Solar Policy in July 2009. 1.4.2 Rooftop Solar Spaces that are yet to be utilized on rooftop and around buildings are carrying the huge potential for generating the solar power. Small quantities of power generated by each individual household, industry building, commercial buildings or any other type of building can be used to fully or partially fulfill the requirement of the building occupants and surplus, if any, can be fed into the grid. 1.4.3 Technology Evolution Crystalline Silicon (c-Si) has been the preferred technology for manufacturing Solar PV across the globe. The thin film technology, which initially emerged as a low cost option has been steadily losing market share over the years due to decline in prices of crystalline silicon, and accounted for only 11% of the global PV market at the end of 20117. On the contrary, in India, during phase I of JNNSM, nearly 70% of the PV installations were based on thin film technology.
  11. 11. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 11 | P a g e B y : S o m o b r a t a B a l l a b h This was mainly due to the following reasons: a) Absence of mandatory domestic content requirement (DCR) for thin film viz-a-viz crystalline silicon b) Availability of low-cost, long tenor debt from the EXIM bank of the United States (US) for purchase of thin film cells and modules from US Domestic manufacturers in the country have struggled to be competitive in a volatile and rapidly declining price environment led by foreign suppliers. However, in line with the global trends, the crystalline silicon technology is now regaining prominence in the Indian market too. Setting aside a fixed quantum of projects to be compulsorily under domestic content requirement category by the Govt. has been a major influential factor behind this change. 1.5 Key Drivers 1.5.1 Innovative Solar Rooftop Financing Model To promote the solar financing activities, recently there was a proposal of one financing model for Rural Energy /Electricity namely RESCO model. On the other hand for the domestic or small scale consumer of the solar energy the model that is being followed is CAPEX model. A new Local Micro Utility Model is also being followed by the domestic consumers now-a- days. 1.5.1.1 RESCO Model The inherent business model of a RESCO is different from a solar component manufacturer or a system integrator and the framework herein captures the same. A RESCO would set up the solar power project and then monetize the energy produced as compared to a system integrator, who would install the project and be involved in the execution and implementation of the project for another RESCO. The framework proposed for assessing RESCOs is given below: Promoter Track Record Project Management Capability Demand-Side Risk Financial Strength
  12. 12. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 12 | P a g e B y : S o m o b r a t a B a l l a b h Fig: 3 RESCO Model Block Diagram Benefits of RESCO Model:  RESCO designs, builds, finances and operates the equipment and takes on the performance risk of the project.  Various solar park Agency signs PPA with the Renewable Energy Service Company (RESCO) and PSA with DISCOM  RESCO with experience and good balance sheet can easily get funding, not a burden on Solar Park Agency  Technical expertise of RESCO and better O&M of project. 1.5.1.2 CAPEX Model In CAPEX model the entire system is owned by the rooftop owners. Responsibility of O&M for the system life time (usually 25 years) is also with the rooftop owner. Developer is responsible for installing the system and initial 2 years of O&M. In this case the developers are selected through a system-cost based reverse bidding. Selected bidders are offered 30% subsidy on the system cost (exclusive of taxes). Solar PV Supplier Renewable Energy Service Company IREDA / FIs Solar Module De MNRE DISCOM Local Govt.Supply & Install Agreement PPA Loan Application Subsidy
  13. 13. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 13 | P a g e B y : S o m o b r a t a B a l l a b h For consumers having adequate manpower/expertise for O&M, rooftop access concerns, availability of funds upfront, CAPEX model is better. Consumer in states that have net metering regulations can take the benefit of the same in case they have substantial excess generation. It is the most common business model for solar deployment. However this model is a continuous improvement model where by developing specific, standardized solar kits for specific customer types. Furthermore consumers can purchase these kits from suppliers and get them installed by the local community installer. 1.5.1.3 Micro Utility Model Third-party solar developers could rent roof space from building owners in a designated area, install PV systems and sell the power generated to the rooftop owners or the DISCOMs at a pre-negotiated tariff. The project developers would particularly target those consumers who might not have the resources or would be unwilling to invest in rooftop solar. Developers can offer building owners a lease income on their rooftop space. This model allows project developers to bundle rooftop space in community and thereby minimizing the legal, commercial and technical cost by increasing the size of individual plants. This makes the model especially useful for deployment of solar residential consumers. 2 14 38 506 1,6862,180 3,744 0 2000 4000 6000 8000 10000 FY09 FY10 FY11 FY12 FY13 FY14 FY15 MW Year Fig:4 Growth of Solar Power in India Source: MNRE Website These innovative financing measures in solar rooftop promulgate the capacity that is proposed to be achieved through deployment of 40GW of rooftop solar projects and 60GW through large and medium scale projects. According to estimates of MNRE, the total investment in setting up 100 GW will be around Rs. 6,00,000 crore. In the first phase, the Government of India is providing Rs. 15,050 crore as capital subsidy to promote solar capacity addition in the country.
  14. 14. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 14 | P a g e B y : S o m o b r a t a B a l l a b h 1.5.2 Feed-in-Tariff Almost all the states have notified feed in tariff for solar power plants. This paved the way for utilities to procure electricity through solar power projects and also formed the basis for having tariff based competitive bidding. 2000 1000 700 1100 3200 1600 320 450 800 2300 800 2200 4700 1000 2000 2300 3500 2000 350 4300 2100 600 608 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 MW States Fig:5 State-wise proposed target of 40 GW rooftop solar project 18.44 17.91 15.39 10.39 8.75 7.72 7.04 17.14 14.95 12.94 9.35 7.87 6.95 6.35 0 2 4 6 8 10 12 14 16 18 20 INR/Unit Fig: 6 Trend in Levellised tariffs for Solar PV Plants Without AD With AD Source: CERC Tariff Data Source: MNRE Website
  15. 15. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 15 | P a g e B y : S o m o b r a t a B a l l a b h 1.5.3 Viability Gap Funding (VGF) The capital cost subsidy is offered in the form of VGF by the Government. It is provided to the project developers in order to help them reach a viability threshold at a pre-fixed tariff. 1.5.4 Subsidies In addition to incentives for utility scale projects, the NSM has set a target of allocating 40 GW of grid-connected rooftop solar projects by offering subsidies. The Ministry of New and Renewable Energy (MNRE) provides up to 15% capital subsidy for roof top systems (off- grid) and for projects up to 500 kW. A few states in India such as Kerala, Tamil Nadu and Uttarakhand have announced an additional state subsidy of 20% on top of the MNRE subsidy. This can be significant financial driver for smaller projects. 1.5.5 Net Metering To support distributed generation of solar energy, several state governments are incentivizing rooftop solar systems through net metering schemes. Several states such as Andhra Pradesh, Uttarakhand, Tamil Nadu, Karnataka and West Bengal have finalized net metering policies. Net-metering based rooftop solar projects would facilitate self-consumption of electricity generated and allow for feeding the surplus into the network of the distribution licensee. 1.5.6 RPO and REC In the interest of long term development of renewable energy sector, the Central & State Electricity Regulatory Commissions have taken the initiative to promote renewable energy by specifying minimum renewable energy procurement obligations as per the provisions of Electricity Act 2003 and other policies. In addition, Central Electricity Regulatory Commission has introduced a market for tradable Renewable Energy Certificates (RECs) as an alternative mechanism for fulfilling RPO. It is aimed at addressing the mismatch between availability of RE resources in a state and the (Renewable Purchase Obligation) RPO. Under the REC mechanism, developers are eligible to receive one certificate for every 1,000 kWh of renewable electricity fed into the grid. Obligated entities can buy these certificates to fulfill their obligation.
  16. 16. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 16 | P a g e B y : S o m o b r a t a B a l l a b h 1.5.7 Initiatives taken by Govt. Much of the India‘s installed solar capacity is ground mounted, with rooftops accounting for only a little over 7% of the total. However, the government is making concerted efforts to promote the segment. A number of states have come forward to support the center‘s plan and are encouraging rooftop solar plants based on solar net metering policy.  Uttar Pradesh and Odisha each plan to install 20 MW of roof top solar projects by 2017 and 2018 respectively.  Meanwhile Karnataka and Tamil Nadu have set ambitious targets of achieving 400 MW and 300 MW of rooftop capacity respectively.  In addition, Haryana has made it mandatory for buildings with an area of over 500 square yards to install rooftop solar systems.  Madhya Pradesh and Punjab have allocated 5 MW and 65 MW of rooftop projects respectively to various developers.  The government has also finalized amendments to the Electricity Act, 2003, as per which the cross subsidy surcharge on open access renewable energy consumers will be waived. The concept of renewable generation obligations for coal-based power generators is being introduced as well.  Moreover the cumulative solar purchase obligations on an all-India level will be increased from 3% to 10.5%. Meanwhile, the floor and forbearance prices for solar renewable energy certificates were revised downwards to drive up their demands. 1.5.8 UDAY (Ujwal DISCOM Assurance Yojana) The Union Cabinet chaired by the Hon‘ble Prime Minister Shri Narendra Modi, has given its approval to a new scheme moved by the Ministry of Power - Ujwal DISCOM Assurance Yojna or UDAY. UDAY provides for the financial turnaround and revival of Power Distribution companies (DISCOMs), and importantly also ensures a sustainable permanent solution to the problem. UDAY is a path breaking reform for realizing the Hon‘ble Prime Minister‘s vision of affordable and accessible 24x7 Power for All. It is another decisive step furthering the landmark strides made in the Power sector over the past one and a half years, with the sector
  17. 17. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 17 | P a g e B y : S o m o b r a t a B a l l a b h witnessing a series of historic improvements across the entire value chain, from fuel supply (highest coal production growth in over 2 decades), to generation (highest ever capacity addition), transmission (highest ever increase in transmission lines) and consumption (over 2.3 crore LED bulbs distributed). The weakest link in the value chain is distribution, wherein DISCOMs in the country have accumulated losses of approximately Rs. 3.8 lakh crore and outstanding debt of approximately Rs. 4.3 lakh crore (as on March, 2015). Financially stressed DISCOMs are not able to supply adequate power at affordable rates, which hampers quality of life and overall economic growth and development. Efforts towards 100% village electrification, 24X7 power supply and clean energy cannot be achieved without performing DISCOMs. Power outages also adversely affect national priorities like ―Make in India‖ and ―Digital India‖. In addition, default on bank loans by financially stressed DISCOMs has the potential to seriously impact the banking sector and the economy at large. Salient Features  States shall take over 75% of DISCOM debt as on 30 September 2015 over two years, 50% of DISCOM debt shall be taken over in 2015-16 and 25% in 2016-17.  Government of India will not include the debt taken over by the States as per the above scheme in the calculation of fiscal deficit of respective States in the financial years 2015-16 and 2016-17.  States will issue non-SLR including SDL bonds in the market or directly to the respective banks / Financial Institutions (FIs) holding the DISCOM debt to the appropriate extent.  DISCOM debt not taken over by the State shall be converted by the Banks / FIs into loans or bonds with interest rate not more than the bank‘s base rate plus 0.1%. Alternately, this debt may be fully or partly issued by the DISCOM as State guaranteed DISCOM bonds at the prevailing market rates which shall be equal to or less than bank base rate plus 0.1%.
  18. 18. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 18 | P a g e B y : S o m o b r a t a B a l l a b h 200 4800 5000 6000 7000 8000 9000 0 2000 4000 6000 8000 10000 Capacity Year Fig: 8 CERC Year Wise Rooftop Solar Capacity Target (in MW) Source: KPMG “The Rising Sun” 2015 Report and JNNSM Data Fig: 7 Target-State of Govt. to Achieve Maximum Solar Capacity
  19. 19. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 19 | P a g e B y : S o m o b r a t a B a l l a b h 1.6 Key Issues in Rooftop SPV Market 1.6.1 Stiff Competition from Foreign Manufacturer and Domestic Low Capacity Utilization 1.6.1.1 Research and Development MNRE has issued policy guidelines for ‗Research, Design, Development, Demonstration (RDD&D) and Manufacture of New and Renewable Energy‘ in 2010 to make the industry competitive and to make renewable energy generation supply self-sustainable and profitable. MNRE has raised budgetary support of Rs.920 core for R&D during the 12th Plan Period with continued emphasis on cost reduction and efficiency improvement. 1.6.1.2 Manufacturing One of the objectives of JNNSM is to take a global leadership role in manufacturing in solar sector (across the value chain) with a target of 4-5 GW equivalent of installed capacity by 2020. The mission objectives included setting up of dedicated manufacturing capacities for poly silicon material to annually manufacture about 2 GW of solar cells. As per MNRE, the country had 52 PV manufacturers as of June, 2014. While the installed cell manufacturing capacity stood at 1216 MW, the operational capacity is only 240 MW. Similarly, the nameplate PV module manufacturing capacity is 2348 MW, whereas the operational capacity is only 661 MW11. In case of solar cells, although the domestic C-Si PV cell capacity of 1.2 GW is comparable to overall PV installations during FY2014, the cell manufacturers also experienced low capacity utilization. This is because module manufacturers prefer imported PV cells on account of their low costs.
  20. 20. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 20 | P a g e B y : S o m o b r a t a B a l l a b h 1.6.2 Policy Framework Along with several other policy frameworks, one of the key initiatives taken by Govt. is to take a clear stance against the anti-dumping (ADD) duty in August 2014. The Ministry of Finance did not act on the recommendations made by the Ministry of Commerce for imposing ADD on the import of solar cells and modules. That said, the government is clearly committed to support the domestic PV manufacturing industry. Under JNNSM Phase II Batch I, 50% of the allocated capacity was reserved under the Domestic Content Requirement (DCR) category. The strategy worked well for local manufacturers since it created demand for their output. The government announced other tenders and schemes as well, especially for DCR based projects. Earlier this year, NTPC Limited reportedly issued three tenders to set up a total capacity of 750 MW. This capacity will be developed in batches of 250 MW in three states. As per the tender specifications, the companies selected to develop the projects following the completion of the bidding process will have to use the solar PV modules manufactures in India. At the macro level, the Union Budget 2014-15 resolved a long-pending issue related to the inverted duty structure for solar component imports. Under the indirect tax proposal, the government extended a concessional basic customs duty of 5% for the machinery and equipment required for setting up solar energy projects. Further Union-Budget 2015-16 announced as excise duty cut on round copper wires and tin alloys used in the manufacturer of solar PV ribbon (used in solar cells), subject to the certification by the Department of Electronics and Information Technology. The availability of a financial incentive up to 25% of the capital cost of the module manufacturing facilities under the Modified Special Incentive Package Scheme is also likely to attract manufacturing investments in the solar PV space.
  21. 21. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 21 | P a g e B y : S o m o b r a t a B a l l a b h 1.6.3 Price Reduction of Solar PV Module Mfg. Cost The continued panel price reduction and the volatility of legislative policies make it difficult to predict the future price movements of solar PV module. Nonetheless this actually leads to the lifting of customer sentiment regarding the solar rooftop PV deployment irrespective of domestic or commercial purpose. 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 1-Jan-11 1-May-11 1-Sep-11 1-Jan-12 1-May-12 1-Sep-12 1-Jan-13 1-May-13 1-Sep-13 1-Jan-14 1-May-14 1-Sep-14 1-Jan-15 1-May-15 1-Sep-15 Price Months Fig: 9 Solar PV Price Trend (in USD) 0 50 100 150 200 250 Capacity Year Fig: 10 Solar Capacity Addition Trend (in GW) Source (Fig: 7 & 8) Bloomberg New Energy Finance 1.6.3.1 EPC and O&M Amid the volatility in prices, most players globally have expanded their presence in the value chain and have geographically diversified their sales. In line with global trends India is witnessing increasing participation from players having both manufacturing and project development capability. The domestic market has increasingly witnessed greater participation from firms having EPC as well as in- house solar module manufacturing capability. A number of module manufacturers are active in downstream segments i.e. both as EPC services and O&M. Solar EPC contractors have gained prominence in the emerging solar energy market as project developers with limited experience in solar segment have relied heavily on their EPC contractors to support their projects.
  22. 22. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 22 | P a g e B y : S o m o b r a t a B a l l a b h 1.6.4 Lack of Low Cost Financing India is one of the most costly countries in the work for RE financing. The country suffers from high interest rates and banks are still skeptical about financing solar projects, particularly in the absence of any risk-reducing mechanisms. Export credit agencies, multilateral financial institutions and some non-banking financial institutions accounted for the bulk of debt financing over Phase I of JNNSM. The continuing risk aversion of Scheduled Commercial Banks remains one of the key hurdles for successful implementation and scale- up of JNNSM. Further, the crowding out effect of concessional sources of financing in the form of supplier‘s credit and direct lending by development banks, without the availability of any concessional lines of credit for SCBs, poses a problem. 1.6.5 Issues Related to Net-Metering A clear regulatory and policy framework is an important element for promotion of rooftop solar PV under the net metering arrangement. Currently, many states provided clarity on the regulatory & policy framework for installing rooftop solar systems under net-metering, which creates a major bottleneck for promotion of net-metering. However, the rooftop solar segment faces challenges in the form of: o Capacity limit for rooftop installations under net-metering regulations o Local grid integration restrictions under net-metering arrangements o Treatment of surplus energy at the end of settlement period as per the regulation/policy o Limited incentives/subsidy for rooftop installations o Lack of consumer awareness about installation procedures and incentives 1.6.6 Resource Assessment Project structuring and feasibility assessment is dependent on information about resource viability. Limited availability of data on solar irradiation level, land availability, water availability, grid loading and availability, etc. create a major hurdle in mapping the project feasibility.
  23. 23. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 23 | P a g e B y : S o m o b r a t a B a l l a b h 1.6.7 Co-ordination between Centre and States Increasing the adoption of solar power will depend upon the ability of different RE focused institutions together with state and central governments to overcome various issues & challenged and to undertake/facilitate implementation of renewable energy projects. In absence of an established framework for coordination between the state agencies and MNRE administered institutions (Solar Energy Corporation of India (SECI), Solar Energy Center(SEC) and Indian Renewable Energy Development Agency (IREDA) etc.), a clear mapping of responsibilities between the various agencies does not exist in the public domain. This has caused confusion amongst other stakeholders and consequently, delays. 1.7 Several Benefits of Rooftop Solar Market 1.7.1 Easy Installation Rooftop solar PV systems can be installed and permitted faster than any ground mounted system as inter connection and site eligibility norms for rooftop systems are easier to execute. These systems provide a clean, quiet visually unobtrusive power source and also improve the reliability of power supply without the need to establish long-distance transmission lines associated with large-scale solar generation plants. 1.7.2 Energy Savings Rooftop solar PV systems on unused roof tops can also lead to potential savings on grid electricity consumption and income generation. In some models, third-party developers lease rooftops from building owners, which provides long-term rental income. 1.7.3 Low Space Requirement Large projects face significant hurdles and delays due to land acquisition as well as clearances and approvals from various authorities. In India, for example, several authorities across village and State levels need to be consulted for land-related approvals. In comparison, rooftop solar PV projects require relatively few clearances; projects are usually permitted through automatic standard provisions in most countries. Site selection and related clearances under building by-laws can also be standard rather than project specific. Clearly, rooftop solar projects are easier to permit and simpler to develop.
  24. 24. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 24 | P a g e B y : S o m o b r a t a B a l l a b h 1.8 Primary Survey and Market Research Six different states (Gujarat, Tamil Nadu, Karnataka, Delhi, Andhra Pradesh, Haryana ) were selected for primary survey and market research on the basis of city characteristics, state preparedness for solar implementation, regional representation etc. Market research conducted to assess the characteristics for power supply, power outages and propensity for adoption of rooftop SPV in the residential, commercial and industrial sectors revealed that:  Power outage for about 1 to 2 hours and voltage fluctuation are experienced by all consumer categories in all cites except Gandhinagar.  Commercial and industrial consumers use generator set and residential consumers use inverter-battery set for power backup.  Power cut problem is predominant in residential and institutional segments. Inverters are used as back up. This results in wastage of grid electricity due to inefficient invertors and batteries, and losses in storage and conversion. It also reduces the available electricity for productive use.  Consumers intuitively expect rooftop solar PV systems to reduce expenses on electricity and to assure reliable power supply even in case grid power outage. This however, is not being addressed in the current schemes. 1.9 Market Players in Indian Solar Rooftop Market The companies that are into EPC and installation of solar projects in Indian market are Lanco, Welspun, CEL, Juwi etc. Apart from only solar plant installation these companies are also engaged in multiple business verticals. Furthermore below figure will illustrate the major players in Indian Solar Rooftop market that are extensively following the solar RESCO and CAPEX model for the deployment of solar rooftop system.
  25. 25. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 25 | P a g e B y : S o m o b r a t a B a l l a b h List of Companies: Tata Power Solar System Ltd.  Vikram Solar Pvt. Ltd.  Moser Baer Solar Group  Emvee Group  First Solar  Adani Solar Power In the recent years companies like these built numerous rooftop solar projects across India and across different sectors and that actually helps to boost the solar rooftop capacity addition plan taken up and promoted by the government. Below fig 10 illustrates the sector wise sanctioned and commissioned solar rooftop projects till year 2015. These projects are segregated into brad categories like projects assisted by states and SECI (Solar Energy Council of India). 0 5 10 15 20 25 30 MW Sector Wise Commissioned Capacity Fig: 11 Sector Wise Sanctioned and Commissioned Small Scale Solar Projects Installed by States (MW) Installed by SECI (MW) Source: Bridge to India Analysis
  26. 26. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 26 | P a g e B y : S o m o b r a t a B a l l a b h 1.10 State Wise Comparison Gujarat It has been decided through competitive bidding The net-metering system is expected to make solar rooftop projects more attractive to individual households, especially in the new towns and cities in Gujarat where the project is yet to pick up. As per the Census 2011, there are about 16,000 households in Gujarat that use solar energy as a primary source to illuminate their homes. Type: Grid-Connected Metering Policy: Gross Metering Tariff Rate: 4.98 INR/Unit* * As the tariff rate is less than 5.55 INR/Unit we escalated the GBI for Gujarat @ 3% on Y-o-Y basis. Furthermore to reach at a standard tariff rate we took the average of tariff rate maintained by three DISCOMs in the state. Incentive: Incentives linked to rooftop solar power Generation Incentive for the Developers. Generation based incentive will be payable to the utilities equivalent to CERC tariff less Rs. 5.50 per kwh (Base Rate) with 3% annual escalation. Fig: 12 Yearly Solar Irradiation Rate (Avg. 5.32 w/m2 /Day)_Gujarat Karnataka KERC has proposed that any distribution licensee or other consumers failing to meet the RPO for any year within the time specified, shall purchase RECs to the extent of 110% of quantum of shortfall in meeting RPO, by 30th June of the immediately following year, failing which action under Section 142 of Electricity Act, 2003 shall be initiated. The increase in RPO targets is important but at the same time targets without proper enforcement would not yield great result which needs focus as many states are still being lenient over the RPO compliance by state utilities. Type: Grid-Connected Metering Policy: Net Metering Tariff Rate: 6.4 INR/Unit Fig: 13 Yearly Solar Irradiation Rate (Avg. 5.3 w/m2 /Day)_Karnataka
  27. 27. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 27 | P a g e B y : S o m o b r a t a B a l l a b h Tamil Nadu Solar power projects would be developed through competitive bidding. Investments through joint ventures by state undertakings will also encouraged through competitive bidding. Type: Grid-Connected Metering Policy: Net Metering Tariff Rate: 6.6 INR/Unit Delhi Type: Grid-Connected Metering Policy: Net Metering Tariff Rate: 8.75 INR/ Unit DISCOM: Tata Power Delhi Distribution Ltd. Incentive: All solar panels, inverters, energy meters, and other devices purchased for the installation of solar plants in Delhi shall be exempted from VAT and entry tax during the Operative Period. Incentive: According to the Tamil Nadu Government Solar Policy, domestic consumers are eligible for a GBI of INR 2.00/kWh for first two years, INR 1.00/kWh for next two years, INR 0.50/kWh for the subsequent two years. It is not clear if both incentives will be simultaneously applicable or not. Nevertheless, the proposition seems attractive enough to incentivize residential consumers to set up their own power plants. Fig: 14 Yearly Solar Irradiation Rate (Avg. 5.23w/m2 /Day)_Tamil Nadu Fig: 15 Yearly Solar Irradiation Rate (Avg. 5.05 w/m2 /Day)_Delhi
  28. 28. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 28 | P a g e B y : S o m o b r a t a B a l l a b h Andhra Pradesh AP State government is keen to tap the immense solar potential and promote this clean source of energy to meet the rising energy requirements of the State. The following factors make Andhra Pradesh an ideal location for setting up Solar Power Projects:  The state has the best performing power distributing companies in India (APEPDCL and APSPDCL)  An efficient and strong evacuation infrastructure that can facilitate distributed generation Haryana Initiatives Planned: The rooftop space available in the Government institutions can be provided on lease/rent for setting solar projects Development of solar parks through Saur Urja Nigam Haryana Ltd. (SUN Haryana). Type: Grid Connected Metering Policy: Net Metering Tariff Rate: 6.75 INR/unit Mandate: Mandated installation of solar power plant of 3% to 5% of connected load for residential buildings above 500 Square Yards size, all private and government institutions Rooftop having connected load of 30 kW and industrial establishments above 50 kW load. Fig: 16 Yearly Solar Irradiation Rate (Avg. 5.02 w/m2 /Day) Type: Grid Connected, Metering Policy: Net Metering Tariff Rate: 8.8 INR/Unit Incentives: The will promote and develop solar parks and solar rooftop projects on a gross and met metering basis. A maximum of 1Mwp will be allowed at a single location. Power producers will be encouraged to set up SPP's for captive use within the state or third party sale within and outside the state of Andhra Pradesh. Fig: 17 Yearly Solar Irradiation Rate (Avg. 5.01 w/m2 /Day)
  29. 29. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 29 | P a g e B y : S o m o b r a t a B a l l a b h 1.11 Financials Cost Analysis of a 5KWp Rooftop Solar PV Module* (*Here in the report we illustrated the model for Delhi only. Calculation for other states is done on the basis of same model and assumptions) 1.11.1 Assumptions Table:1 Assumption Amount Unit Rooftop Space Available 60 Sq. Mt. Estimated Annual Energy Consumption 15000 Kwh O&M Cost 10000 INR Capacity Based on the maximum system capacity on the basis of shade free top Formula: Capacity=shade-free rooftop area divided by 12 5 - Based on the system capacity on annual energy consumption Formula: Capacity=90% of annual energy consumption (in Kwh) divided by 1500 9 - For 350Kwp we need 400 rooftop SPV, so for 5 Kwp we need approx. 6 rooftop SPV - - We are assuming that whatever is the generation it will be utilized - - For States having tariff rate below 5.5 INR/ Unit the annual GBI incentive is 3% on a y-o-y basis 3% - 1.11.2 Calculations of Total Unit Generation Table:2 Operational and Technical Details Capacity 5 KW Gross PLF 16% For Rooftop Solar Generation Formula=(Capacity*Gross PLF*365*24) 7008 Per Unit Auxiliary Consumption @ 2% 6867.84 VC Escalation Rate 2% Plant Load Factor Plant Load Factor (PLF) is the ratio between the actual energy generated by the plant to the maximum possible energy that can be generated with the plant working at its rated power for the duration.
  30. 30. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 30 | P a g e B y : S o m o b r a t a B a l l a b h 1.11.3 Cost Components Table:3 5 Mw Rooftop Solar Panel Deployment Cost Cost Calculation (Solar Panel Without Battery) Maximum Solar Capacity 5 Particulars Qty Amount (INR) 1. SPV Cost with subsidy - - Cost of 1 Kwp roof top SPV 1 100000 Cost of 5 Kwp roof top SPV 6 600000 Subsidy @ 30% 0.3 180000 Net Cost After Subsidy - 420000 Accelerated Depreciation @80% 0.8 84000 Tax Rate @35% 0.35 54600 2. Cost of 3 Phase Inverters (Rs/Watt) - 25 Size of Inverter - 200 Total Cost for 3 Phase Inverter - 5000 3. Cost of 3 Phase Transformer (Rs/Watt) 20 Size of Transformer 200 Total Cost for 3 Phase Transformer 4000 Cost of System without line battery Net Cost After Subsidy (SPV-PANELS) - 420000 Total Cost for 3 Phase Inverter - 5000 Total Cost for 3 Phase Transformer - 4000 Net Cost for Whole Set Up 429000 Fixed Cost Component 429000 O&M Cost 10000 Insurance as a percentage of O&M @ 2% 0.02 200 Variable Cost Component 10200
  31. 31. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 31 | P a g e B y : S o m o b r a t a B a l l a b h 1.11.4 Project IRR Analysis for States Taken Under Considerations 1.11.4.1 Internal Rate of Return Before going into Internal Rate of Return of a solar rooftop project, we need to understand the concept of Net Present Value (NPV). NPV negates the problem of having to compare cash flows in different time periods. The value of a rupee now wouldn‘t be the same five years down the lane. NPV brings the future cash flow to its value today (present value) by estimating how much value money loses over time. Internal Rate of Return (IRR) also considers the time-value of money and is aptly called time-adjusted rate of return. The IRR is defined as the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows in a capital budgeting analysis. Effectively it is the factor that makes the NPV of cash flows as zero. It is always expressed in percentage. Naturally, a higher IRR is better than a lower one. 1.11.4.2 Debt-Equity MW scale solar plants in India are financed through a mixture of debt and equity. Debt is the money that is borrowed and has to be repaid with interest periodically. For example, using a credit card or getting a home loan is a form of debt financing. Equity involves the presence of investors, which means, having a share in the business you are trying to invest in. 1.11.4.3 Equity IRR and Project IRR When a project is financed by means of equity as well as debt, we have to take into consideration equity IRR as well as project IRR. Calculation of the internal rate of return considering only the project cash flows (excluding the financing cash flows) gives us the project IRR whereas calculation of the internal rate of return considering the cash flows net of financing gives us the equity IRR. Equity IRR represents the degree of returns of a project to the providers of equity capital. For profitable investments, equity IRR is always higher than project IRR. Equity IRR will reduce if equity portion is increased as leverage provided by debt reduces. If there is no debt, then equity IRR is same as project IRR. 1.11.4.4 Factors Affecting IRR Tariff Rates, Accelerated Depreciation, Capacity Utilization Factor, Escalation of O&M Cost.
  32. 32. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 32 | P a g e B y : S o m o b r a t a B a l l a b h Based on various regulatory policies and incentives we have considered Accelerated Depreciation (AD) as 80% on the subsidized capital cost. In this report we have taken under considerations 10 states namely Delhi, Tamil Nadu, Gujarat, Karnataka, Andhra Pradesh, Madhya Pradesh, Rajasthan, Maharashtra, Haryana, Uttarakhand to find out the immediate and longer term viability of solar roof top business model. Under our assumptions we have considered Escalation of O&M Cost as 2%. Furthermore as far as small scale solar rooftop unit is concerned we can ignore the auxiliary consumption because the amount of efficiency loss due to generation and other cause is highly negligible. Below is the diagram where we can see the relation between tariff rate charged by the various DISCOMs and the IRR of the investment they may make in near term across the states that are mentioned earlier. Therefore it can be concluded from the above figure that places having higher tariff rate is likely to have higher IRR rate. Therefore states having higher IRR will definitely attract the market players in solar rooftop market to utilize the opportunity and take up the maximum out of this. Furthermore it is also seen from the analysis that states having higher solar irradiation rate and higher PLF is likely to carry out higher IRR for the investors. Refer the below figure 8.756.284.986.408.805.706.409.5011.806.754.00 15.70% 4.16% 17.00% 4.73% 15.94% 1.40% 4.73% 19.33% 31.57% 6.37% 10.13% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 IRRRate(in%) DISCOMTariffRate INR/Unit States or Cities Fig: 18 State Wise Various DISCOM's Tariff Rate and Their Calculated IRR Tariff Rate IRR *Tariff rates for the states have been taken from policy guidelines of distribution companies across states and rates are considered for the highest level of consumption
  33. 33. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 33 | P a g e B y : S o m o b r a t a B a l l a b h where we can find out this illustration. Despite the higher tariff rates‘ alluring the investors to move towards the states where they will find the higher opportunity cost of capital it will also has some drawbacks as well. States where the tariff rates of conventional energy is at lower end will make the consumers rethink before installing the solar roof top panel. However in the recent years as the conventional grid tariff achieves the parity of solar energy tariff it is highly likely that domestic consumers and small & medium scale commercial consumers will choose the solar roof top system thinking about the long term benefit of energy savings and other incentives provided by Government. In such a scenario states having solar tariff rates closer to the conventional grid tariff rates will offer the best possible opportunity to the solar panel manufacturer and DISCOMs to enter and tap in the market potential. 19.00% 18.00% 20.00% 19.00% 19.00% 15.70% 17.00% 15.94% 19.33% 10.13% 0% 5% 10% 15% 20% 25% Delhi Gujarat Andhra Pradesh Maharashtra Uttarakhand M e a s u r e s States or Cities Fig:19 Statewise Analysis of CUF and IRR CUF IRR 9 8.7 8.2 7.8 7.5 7 6.7 6.4 5.5 5.7 5.9 6.2 6.4 6.7 7 7.2 0 1 2 3 4 5 6 7 8 9 10 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Rates in INR/Unit Years Fig:20 Solar Tariff Rate Towards Grid Parity Solar Rooftop Power Tariff Grid Tariff Source: KPMG’s Rising Sun Report 2015
  34. 34. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 34 | P a g e B y : S o m o b r a t a B a l l a b h Hence from the combined analysis it seems that Delhi, Gujarat, Andhra Pradesh, Tamil Nadu, Kerala, Maharashtra, Punjab are the states which hold the huge potential for the solar roof top business in the near term. 1.11.5 Status of Policy/Regulations in Various States Delhi Karnataka Tamil Nadu Kerala Madhya Pradesh Surplus Generation to be accounted as if it has occurred during off-peak time block Solar Rooftop PV systems connected to LT grid of a distribution company, the concept of net metering shall be adopted and the net energy pumped into the grid shall be billed Net Metering Mechanism has been extended to LT (as recommended in policy) and HT Consumers The quantum of electricity banked shall be settled first in the corresponding normal period and the balance in the peak period and in the off peak period in succession in subsequent billing period. Excess electricity generated by the solar energy system installed in one premises and to use such excess electricity in other premises owned by the consumer is permitted within the area of supply of the licensee. Net Metering Regulations & Policy at public consultation stage
  35. 35. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 35 | P a g e B y : S o m o b r a t a B a l l a b h 1.11.6 Risk Analysis Table:4 Risk Analysis For Investors or Financers Consumer Type Risk Perception Risk Category High Level (H)/ Medium Level (M)/ Low Level (L) Likelihood of Ocurance (H/M/L) Risk Mitigation Strategy Residential Loan Default H L Linking Solar Loan with Property Loan Electricity Generation Revenue is lower than expected M L Quality control and design standardization Sale of Capacity H M Linking solar system with the property. The owner of the property also owns the system Commercial/Industrial Loan Default H L Linking solar loan with existing loan of comercial /industrial entity Electricity generation revenue lower than expected M L Quality control and design standardization Sale of commercial/ industrial establishments H M Linking solar system with the Commercial / industrial establishment. The owner of the commercial/ industrial establishment also owns the system
  36. 36. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 36 | P a g e B y : S o m o b r a t a B a l l a b h Table:5 Risk Analysis for Utility Client Type Risk Perception Risk Category High Level (H)/ Medium Level (M)/ Low Level (L) Likelihood of Ocurance (H/M/L) Risk Mitigation Strategy Residential/ Commercial/Industrial Revenue loss due to generation by consumer M M Utility may enter into the business in third party ownership mode Loss for power surplus utilities M L Sale of electricity to power deficit regions and industries Payment for surplus electricity fed to the grid L L Cap on system size for individuals Choose energy settlement mode instead of paying for surplus Table:6 Risk Analysis for Consumers Client Type Risk Perception Risk Category High Level (H)/ Medium Level (M)/ Low Level (L) Likelihood of Ocurance (H/M/L) Risk Mitigation Strategy Residential/ Commercial/ Industrial/ Institutional Lower generation from solar than expected M L Quality control and design standardization Grid unavailability M to H M Sale of electricity to power deficit regions and industries
  37. 37. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 37 | P a g e B y : S o m o b r a t a B a l l a b h 1.12 Recommendations 1.12.1 Commoditization of Solar Rooftop Market For large scale deployment of rooftop solar PV, even after having various central and state government schemes, many challenges still exist on the policy, technology, and consumer awareness fronts. These include regulations for metering arrangements, technical standards/rules for grid interconnection, tariff determination and accounting, monitoring, control and verification, and financing schemes. The deployment of rooftop SPV can be accelerated further if: 1) Solar technology solutions are easily available and accessible as a complete product or as a package in the market. 2) Easy finance schemes are available for procurement of SPV systems through banks. 3) Consumers are fully aware of the service levels and actual economic benefits. 4) Well established solar service networks exist just like those for other high-end commodities. 5) Thus, a need was felt to evaluate market preparedness and policy status in India for commoditizing solar energy based power solutions for various categories of consumers. Given this context, The Energy and Resources Institute (TERI) carried out a detailed market research to identify drivers and barriers for commoditization of roof top SPV systems. 1.12.2 Encourage to Use Renewable Energy Devices/System Solar Water Heater A domestic solar water heater, with a capacity of 100 liters per day, is sufficient for a family of four or five members. It can easily replace a 2- Kw electric geyser and can save up to 1500 units of electricity per year. It pays back the cost in three to five years depending on the electricity tariff and hot water use in a year. After this the hot water is available almost free of cost during the remaining lifespan of the system, which is about 15-20 years.
  38. 38. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 38 | P a g e B y : S o m o b r a t a B a l l a b h Solar Cooker A solar cooker is a device that uses heat energy from the sun to cook food. Two types of solar cookers are available in the market box type and dish type. A box solar cooker, suitable for a family of four or five, can cook food in two to three hours. The cooker has to be kept outside in the sun and can cook up to four items at once. It is available with electrical backup, so it can be used even in non-sunshine hours. It costs Rs 1500–2500 depending on its features, and can save up to four LPG cylinders a year. Food cannot be fried in the box solar cooker. A subsidy of 30% is available on these cookers through State Nodal Agencies. Currently there are about 35 manufacturers/ supplier of solar cookers. Solar Lantern It is a portable device for lighting. It is available with a 10 W SPV (solar photovoltaic) module, 7W CFL, maintenance-free lead acid battery, and electronics. The lantern can provide light for a minimum of three hours daily and covers a range of 360°. Solar lanterns that follow MNRE specifications cost Rs 2500–3000. 1.12.3 Provide Transparent Support for Grid-Connectivity of Rooftop Solar Owners of rooftop PV systems will want to feed power into the grid during those times when their captive power consumption is low (e.g. on public holidays and weekends). Feeding power into the grid would allow for a more generous system sizing and would significantly reduce the per kWh cost of solar as no power is wasted – thus making it viable more quickly. The government would need to facilitate metering (either gross or net). 1.12.4 Conduct Stakeholder Meetings and More Detailed Analysis Government should bring together the affected stakeholders of such a power shift to solar in regular stakeholder meetings. These would include the various regulatory bodies (e.g. DERC, CEA, etc.), the Delhi utilities, the utilities of the adjoining states Haryana and UP (who will be affected, too), civil society representatives (e.g. Greenpeace, academic and research institutes, Resident Welfare Associations, other customer groups), solution providing
  39. 39. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 39 | P a g e B y : S o m o b r a t a B a l l a b h companies and financiers. In addition and perhaps steered by the stakeholder meetings, the government should commission a detailed analysis of the technical challenges and solutions of interconnecting large amounts of PV with Delhi‘s grid. This would prepare Delhi for the later stages of PV development (2016 onwards), but such a study should not be a pretext for slowing-down or stopping initial PV growth. 1.12.5 Strengthen Load Forecasting by DISCOMS As per the roadmap for solar adoption in this report, 2 GW of solar by 2020 will be within the limits of the grid. However, the impact of Solar Rooftop PV on the grid in India is not entirely understood. There is a need for government policy to prepare DISCOMS for the expected ramp-up of PV capacity. Government policy needs to ensure that rooftop PV‘s contribution is included in the power planning process of the DISCOMS. DISCOMS need to include solar into the city‘s energy growth forecasts. The government can support DISCOMs in developing more sophisticated weather forecasting, which would enable DISCOMs to better manage solar power scheduling. 1.12.6 Emphasize on R&D to Support the Managing of Solar Power Intermittency Despite having over or average 5 w/m2 /day solar irradiation rate across India throughout the year, India suffers from the low level solar power generation because of other environmental factors like low solar insolation rate during monsoon and winter etc. Therefore in order to bridge this gap, utility companies should mix their product portfolio with advanced hi-tech inverter as a part of solar PV module. In a way of achieving that they should focus more on the Research and Development activities. 1.12.7 Increase Public Awareness It is important for the government to communicate the potential, the viability and the opportunities of rooftop solar to all the stakeholders in the city: to consumers, DISCOMS and government administrators. The government could articulate an official Solar 2020 vision document with a roadmap for each state and major city to become a leading solar generation hub globally.
  40. 40. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 40 | P a g e B y : S o m o b r a t a B a l l a b h Solar is still widely perceived to be an expensive source of power and there is too little knowledge about the amount of power a PV system can provide and where it can be procured. There is a need to demystify solar costs and prove to the stakeholders that it is viable. Consumer‘s electricity bills are a good platform to relate electricity prices with solar costs to show their viability. The government could mandate all the state DISCOMS to include viability analyses on consumers‘ power bills to raise awareness about solar. 1.13 Conclusions and Outlook Globally, major PV installations have been on rooftops in countries like Germany, Japan and USA. Given the global trend, high solar irradiation, growing energy demand & power deficit issue and abundance of rooftops for SPV systems installation, SPV rooftop system seems a logical alternative choice to meet India‘s energy requirements. Solar power has already achieved parity with commercial power tariffs for industrial and commercial segment in many states in India. However, SPV rooftop installations are at very nascent stage in India as against targeted SPV rooftop installations of 40 GW by 2022 and hence, capital subsidy alone may not be the solution to achieve targeted installations but comprehensive solar solutions is the need of the hour. Implementation of SPV rooftop systems can be accelerated if solar solutions are easily available and accessible as a complete package; easy financial assistance is available and there is increasing awareness amongst consumers about its economic/environmental benefits. Promoting SPV rooftop for self-consumption could be the most important step towards popularizing SPV rooftop. Large participation across the consumer segment may be achieved through creating awareness about benefits supported by synchronization between stakeholders i.e. Government nodal agencies, consumers and system integrators. Furthermore, government policies should also put emphasis on encouraging power generation through decentralized SPV rooftop systems at the point of consumption rather than only providing capital subsidy. One of the ways could be through providing generation based incentives for end-users including the house hold segment which can drive growth of SPV rooftop systems without putting any additional burden on distribution and transmission infrastructure while at the same time achieving targets for renewable energy installations.
  41. 41. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 41 | P a g e B y : S o m o b r a t a B a l l a b h 2.1 Understanding of Credit Rating Credit Rating is the measure of evaluating one‘s stability of financial position and it specifically measures the likelihood becoming defaulter of one borrower. Ratings are relative measures of risk. . Credit ratings, as opinions on relative ranking of vulnerability to default, do not imply or convey a specific statistical probability of default, notwithstanding the agencies‘ published default histories that may be measured against ratings at the time of default. Credit ratings are opinions on relative credit quality and not a predictive measure of specific default probability. In issuing and maintaining its ratings, companies rely on factual information it receive from issuers and underwriters and from other sources that companies believe to be credible. Rating agencies conduct a reasonable investigation of the factual information relied upon by it in accordance with its rating methodology, and obtains reasonable verification of that information from several independent sources; to the extent such sources are available for a given security or in a given jurisdiction. 2.1.1 Rating Assessment Service Credit Rating Assessment Service (CRAS) is nothing but regular monitoring of one entities performance and assessment of its‘ performance in short term or long term basis. Rating Assessment Service includes revision of previous rating activity i.e. rating upgrade, rating downgrade, rating outlook assignment, rating watch assignment. 2.1.2 Rating Categories and Credit Rating Analysis Rating agencies provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. The agency‘s credit ratings cover the global spectrum of corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by receivables or other financial assets. The terms ―investment grade‖ and ―speculative grade‖ have established themselves over time as shorthand to describe the categories ‗AAA‘ to ‗BBB‘ (investment grade) and ‗BB‘ to ‗D‘ (speculative grade). The terms ―investment grade‖ and ―speculative grade‖ are market conventions, and do not imply any recommendation or endorsement of a specific security for
  42. 42. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 42 | P a g e B y : S o m o b r a t a B a l l a b h investment purposes. ―Investment grade‖ categories indicate relatively low to moderate credit risk, while ratings in the ―speculative‖ categories either signal a higher level of credit risk or that a default has already occurred. Common Group of Rating Scales Referred by Rating Agencies: Table:7 Rating Scale Classification Long Term Issuer Financial Strength Rating Short Term Issuer Financial Strength Rating Rating Scales Significance Rating Scales Significance AAA Exceptionally Strong F1 Exceptionally Strong AA Very Strong F2 Good A Strong F3 Adequately Strong BBB Good B Weak BB Moderately Weak C Very Weak B Weak CCC Very Weak CC Extremely Weak C Distressed Notes: “+” or “-” may be appended to a rating to indicate the relative position of a credit within the rating category. Such suffixes are not added to ratings in the ‘AAA’ category or to ratings below the ‘B’ category. Source: India Ratings and Research-Fitch Group Company Website 2.1.3 General Limitations of Credit Rating Specific limitations relevant to the issuer credit rating scale include: edict a specific percentage of default likelihood over any given time period. likelihood that this value may change. the issuer‘s securities or stock. financial profile other than the agency‘s opinion on its relative vulnerability to default.
  43. 43. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 43 | P a g e B y : S o m o b r a t a B a l l a b h 2.2 Project Objective The basic purpose of Credit Rating Provision or Credit Rating Assessment of any project is to identify and let the investors know whether the cash flow on debt instruments is stable enough for the borrowers to meet its‘ short term or long term debt obligation. Additionally, the assets and operation of the project should be within a project vehicle or it should achieve an equivalent project entity to ensure strong project cash flows such as a separate fund within a governmental entity-in either case referred to as a Single Purpose Project (SPP). 2.3 Project Overview The solar thermal project* that we assessed has a particular project vehicle structure under which they have the holding company, ultimate project sponsor and the developer of the project. The Government of Gujarat had selected the company* to set up a 15 MW solar photovoltaic power project under the Gujarat Solar Policy with an off taker entity for entire power generated from the project. The project was implemented in two phases i.e. 9 MW and 6 MW. The 6 MW phase was commissioned on 8 November 2011 (commercial operation date (COD)) and the balance was commissioned on 21 November 2011 (COD). The project has been executed through a turnkey engineering procurement construction (EPC) contract with Conergy Renewable Energy Singapore Pte Ltd. Solar panels and inverters have been sourced from First Solar and SMA Solar Technology, respectively. O&M is being carried out in-house. The total project cost is INR 2,261.5 m, funded through INR 1,696.1 m buyer‘s credit facility and INR 565.4 m sponsor‘s equity. Equipment supply has been financed through a buyer‘s credit from foreign banks secured by letter of credit and letter of undertaking of USD 33.06 m and inland letters of credit of INR134.8 m. The project company availed a loan of INR 1,700 m in March, 2014. The proceeds were used to pay-off maturing buyers. *Note: In respect to the company’s non-disclosure agreement policy the name of the project and the project company is not disclosed.
  44. 44. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 44 | P a g e B y : S o m o b r a t a B a l l a b h Project Summary Particulars Details Project Type 15 MW solar power plant based on the thin film technology Project Location (State) Gujarat Status Operational, achieved COD in November 2011 Revenue Basis Volume or Amount of Generation Applicable Regulation The Central Electricity Act, 2003 MNRE, Gujarat Solar Power Policy 2009 Contractor Conergy Renewable Energy Singapore– Turnkey EPC contractor Operator In-House Equity Sponsors The Holding Company through its 100% owned subsidiaries Equipment Suppliers Thin Film Modules : First Solar Inverters: SMA Thin Film Modules : First Solar Inverters: SMA Solar 2.4 Ownership and Sponsor Structure  Promoters (85%)  Other Enterprise Partner (15%) Structure of Holding Company Third Party Client Clean Energy Developer Solar Capacity Added through Solar Plant Establishment
  45. 45. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 45 | P a g e B y : S o m o b r a t a B a l l a b h 2.5 Rating Evaluation Framework Evaluate Cash Flow Stability India Ratings‘ analysis addresses the project‘s ability to generate a stable cash flow. This requires an evaluation of the fundamental characteristics of the underlying asset, considering its legal framework and fundamental economics, together with any industry specific, political or macroeconomic risks. Analyst will evaluate the sponsor and legal structure, completion risk, operating risk, revenue risk, industry risk and macro risks. Evaluate Financial Structure The agency next considers the financial structure to form an opinion on the capacity of those cash flows to service the rated debt instruments in accordance with their terms. The financial analysis evaluates the debt structure, including priorities, amortization, maturity, interest risk and associated hedging, liquidity, reserves, financial covenants and triggers in the context of the project‘s operating environment. Counterparty risk (off-takers, concession grantors, warranty providers, etc.) is assessed for its impact on the rated debt. Evaluate Stress Scenarios Stress scenarios are used to test the cash flow sensitivity in a range of possible outcomes for key rating drivers. Ultimately, rating cases are established to assess the level of financial flexibility a project can sustain as it encounters stress that can be reasonably expected to occur over the relevant forecast period. The ability of the SPP to make timely payments takes into account its full resources and capacity as captured in metrics measuring its liquidity profile, such as a debt service coverage ratio, as well as metrics measuring its overall financial and operational flexibility, such as a project life coverage ratio or other measures of overall leverage. Important characteristics and metrics of the project financial profile are compared, where possible, with peer transactions to ensure consistency across transactions. Typical Attributes and Peer Comparison Investment-grade ratings are typically associated with projects, structures, and instruments displaying predominantly stronger or midrange attributes described in this report combined with metrics consistent with ratings at that level. Where information on appropriate peer projects for which a rating has been assigned is available to India Ratings (usually for the same sector, and structure), this will be used for comparative analysis of individual risk factors (both qualitative and quantitative) or in establishing the rating, with respect to the peer
  46. 46. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 46 | P a g e B y : S o m o b r a t a B a l l a b h group. Relevant sector criteria suggest indicative metrics for investment grade debt. Where no specific sector criteria apply completely, appropriate metrics will be determined on a basis that seeks consistency and comparability with assets having similar risk profiles. For example, an LNG facility would be evaluated under the Master Criteria and closely follow the analytical approach adopted in criteria for thermal power projects. Even if a project meets the financial metrics requirements for investment grade, other factors may constrain it to a lower rating category. Factors such as weak sponsors, excessive technical risk, partial merchant exposure, sub-investment-grade counterparties or other key risk factor assessments may support a lower rating. Conversely, factors may be present that support a higher rating, such as exceptionally strong contractual protections, a benign industry environment, or market dynamics that reduce potential price or cost volatility. Projects otherwise meeting investment-grade requirements, but exhibiting DSCR coverage profiles lower than indicated for investment grade, are assessed based on the facts and circumstances particular to the project. 2.6 Financials Credit Analysis Base Case Assumption Project Data and Assumption (All units in INRm) / Base Case Term Loan/Total Debt Amount (in INRm) (75%) 1696.10 Loan Tenor (Years) 15 Total Equity Amount (in INRm) (25%) 565.40 O&M Cost including insurance (INRm/MW/Year) 1.1 Total Cost of Capital/Project Cost (in INRm) 2261.50 O&M Annual Escalation 5% Total Capacity (MW) 15 Loan Outstanding (in INRm) 1600 PLF 20% Auxiliary Consumption 1% Total Generation (mn KWh) 26.280 Interest Rate 12% PLF Degradation Factor 0.50% Depreciation 7% Tariff Rate (INR/Unit) for 1st 12 Year 15 Tax Rate 30% Tariff Rate (INR/Unit) for 2nd 13 Year 5 Analysis Summary DSCR (CFADS/Debt Service) 1.18 Net Present Value of CFADS 2086.41 PLCR (Project Life Coverage Ratio) 1.30 Average DSCR (SUM of All CFADS/SUM of Debt Service) 1.39 LLCR (NPV of CFADS till the Loan Tenor) /Outstanding Debt) 1.30 EBITDA-Interest Coverage Ratio (EBITDA/Interest Payment) 2.12 Project IRR 10.07% Equity IRR 11.04%
  47. 47. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 47 | P a g e B y : S o m o b r a t a B a l l a b h Measures under Consideration Plant Load Factor (PLF) or Capacity Utilization Factor (CUF) The PLF or the CUF is a measure of ‗how well a plant is utilized‘. This is important because a PV plant is an asset with a limited life and the investor would like to extract as much value from the plant as possible. It actually depicts the net capacity factor of a power plant that is the ratio of its actual output over a period of time, to its potential output if it were possible for it to operate at full nameplate capacity indefinitely. To calculate the capacity factor, take the total amount of energy the plant produced during a period of time and divide by the amount of energy the plant would have produced at full capacity. Here in our project we calculated the total energy generation as below considering the PLF measure as 20%: ( Total Capacity (in MWh) x PLF X 365 x 24 x 1000 ) 1 million DSCR (Debt Service Coverage Ratio) The Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal. A DSCR greater than 1 means the entity – whether a person, company or government – has sufficient income to pay its current debt obligations. A DSCR less than 1 means it does not. Here in this project we have calculated DSCR as: By this we have calculated the DSCR count for next twelve years and measured the count as more than 1 approximately for all the years and that signifies a strong cash flow standard of the project. Below Fig: 14 will illustrate that trend. mn KWh
  48. 48. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 48 | P a g e B y : S o m o b r a t a B a l l a b h Cash Flow Available for Debt Service (CFADS) It is a measures the amount of cash a company has on hand as compared to its debt service obligations. Debt service obligations include all current interest payments due, as well as all current principal repayments due. Investors generally prefer a company to have a high CADS ratio; the higher the ratio, the more of a cash cushion the company has to fund its upcoming debt service payments. In other words, the higher a company's CADS ratio, the less likely the company will be to default on its debts, making owning its shares much safer for shareholders. The undertaken project‘s CFADS profile looks promising and it has maintained a consistent rate across the forecasted years as per the financial model. The average CFADS measure for the next 15 years maintains a consistent measure in the range of 300-350 INR m which is significantly higher that the project‘s y-o-y debt service amount. EBITDA to Interest Coverage Ratio The EBITDA-to-interest coverage ratio is a ratio that is used to assess a company's financial durability by examining whether it is at least profitably enough to pay off its interest expenses. A ratio greater than 1 indicates that the company has more than enough interest coverage to pay off its interest expenses. 1.18 1.21 1.25 1.30 1.35 1.41 1.47 1.55 1.63 1.73 1.85 1.98 2.12 2.29 2.49 2.73 3.02 3.37 3.82 4.40 5.20 6.36 8.18 11.44 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 Year 26 Fig 21: Forcasted Analysis of Financial Trend DSCR EBITDA-Interest Coverage Ratio
  49. 49. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 49 | P a g e B y : S o m o b r a t a B a l l a b h For this project this ratio also signifies a strong profile as the ratio reflects a consistent EBITDA to Interest Coverage Ratio two above for the next fifteen years. That is also illustrated in Fig: 14. Amortization Schedule An amortization schedule is a blend of loan payments, showing the amount of principal and the amount of interest that comprise each payment so that the loan will be paid off at the end of its term. While each periodic payment is the same, early in the schedule, the majority of each periodic payment is interest. The percentage of each payment that goes toward interest diminishes a bit with each payment, and the percentage that goes toward principal increases. Later in the schedule, the majority of each periodic payment is put toward the principal. The last line of the schedule shows the borrower‘s total interest and principal payments for the entire loan term. In below Fig: 15 we have illustrated the loan repayment structure of the undertaken project. As per the prepared financial model the entire loan amount is getting repaid by end of FY 28 i.e. 12 years down the line. -200.00 0.00 200.00 400.00 600.00 800.00 1000.00 1200.00 1400.00 1600.00 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29INRm Fig:22 Debt Repayment Schedule Trend Closing Debt Interest Payment Amount Debt Service (Interest+Principal)
  50. 50. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 50 | P a g e B y : S o m o b r a t a B a l l a b h 2.7 Scenario Analysis Table: 8 Scenario Analysis Average DSCR (SUM of All CFADS/S UM of Debt Service) EBITDA- Interest Coverage Ratio (EBITDA/Inter est Payment) Equity IRR Project IRR Base Scenario Scenar io 1 PLF 20% 1.39 5.76 11.04% 10.07% Tariff Rate (INR/Unit) for 1st 12 Year 15 Tariff Rate (INR/Unit) for 2nd 13 Year 5 Positive Scenario Scenar io 2 PLF 21% 1.55 7.09 17.72% 12.18% Tariff Rate (INR/Unit) for 1st 12 Year 16% Tariff Rate (INR/Unit) for 2nd 13 Year 7 Scenar io 3 PLF 21.5 0% 1.54 6.08 18.84% 12.50% Tariff Rate (INR/Unit) for 1st 12 Year 16 Tariff Rate (INR/Unit) for 2nd 13 Year 4 Negative Scenario Scenar io 4 PLF 19% 1.31 5.12 9.14% 7.94% Tariff Rate (INR/Unit) for 1st 12 Year 15 Tariff Rate (INR/Unit) for 2nd 13 Year 4 Scenar io 5 PLF 18.5 0% 1.07 3.91 8.20% 5.19% Tariff Rate (INR/Unit) for 1st 12 Year 12 Tariff Rate (INR/Unit) for 2nd 13 Year 3 While doing the rating assessment considering various ratios we have performed a scenario analysis for the under taken project, where we divided the scenarios into three basic categories namely Base Case Scenario, Positive Case Scenario and Negative Case Scenario. There we varied the plant load factor (PLF) and yearly slab wise tariff rate in order to see how project DSCR and other factors react to different scenarios which in turn will refer to the cash flow stability of the project and also ensure the return on investment to the lenders. Inference It is also evident from the scenario analysis that under several positive or stress situation the Average DSCR consistently remain more than one. The equity IRR and project IRR
  51. 51. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 51 | P a g e B y : S o m o b r a t a B a l l a b h also has reflected a promising measure under every circumstance. Hence we can opine the project profile as a strong one. And as per the analysis we can state that it will maintain a consistent performance in terms of meeting its obligations. Debt Characteristics and Term Loan The project owner has raised a term loan of INR1700 mn to retire the buyer‘s credits. The door-to-door tenor of the loan is 14.25 years (six-month moratorium) (in our analysis we didn‘t consider the projects moratorium period). Interest cost for the loan is 12% at floating interest rates with an annual reset. Very recently the lender of the project Yes Bank sold down its loan coverage to India Infrastructure Finance Company Limited and Indian Bank through novation. Equity IRR and Project IRR Calculation The project IRR takes as its inflows the full amount(s) of money that are needed in the project. The outflows are the cash generated by the project. The IRR is the internal rate of return of these cash flows. The calculation assumes that no debt is used for the project. Equity IRR assumes that you use debt for the project, so the inflows are the cash flows required minus any debt that was raised for the project. The outflows are cash flows from the project minus any interest and debt repayments. Hence, equity IRR is essentially the ―leveraged‖ version of project IRR. Generally Equity IRR is more than project IRR and the equity IRR will be lower than the project IRR whenever the cost of debt exceeds the project IRR. In case of this project under rating assessment analysis we found the project IRR as 10% and equity IRR as 12% and it signifies a very strong commitment towards the equity investors in terms of their return on investment. 2.8 Risk Factors under Consideration Operation Risk The O&M of the plant is carried out in-house. Attributed cost is INR0.6m/MW per annum, which is much lower than the O&M cost of INR0.9m/MW per annum approved by the Gujarat Electricity Regulatory Commission for solar power plants. Ind-Ra in its base case has assumed an O&M cost (including insurance) of INR1.1m/MW for FY16. Unlike most industry peers, the project does not have a provision of major maintenance overhaul costs. Annual O&M costs of PV projects are lower than those of typical thermal power projects. Costs unique to PV projects include inverter repair or replacement and PV panel replacement due to defect or breakage. Overhaul costs for inverters can range from every five to 10 years. The project does not have long-term water sourcing arrangement in
  52. 52. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 52 | P a g e B y : S o m o b r a t a B a l l a b h place. It has created a large reservoir for water storage and has awarded a module cleaning contract to the locals. Supply Risk –Solar Resource The project has not conducted any independent solar resource estimation study. It has used satellite data from the global meteorological database provider Meteonorm. This contains database of ground station measurements of irradiation and temperature on hourly basis. India has 57 Meteonorm stations and the nearest stations from site are Rajkot (141km), Ahmedabad (262km) and Bhuj-Rudramata (48km). Site resource data is interpolated from these stations and satellite data. We consider the usage of only satellite data for the estimation of solar irradiance as a weak attribute. However, given the abundance of solar resources in Gujarat (project site), the variance in long-term incidence of solar irradiation at different degrees of statistical probabilities is modest (average difference between P-50 and P-90 is 5%-10%). Irradiance and generation potential at the project site have been verified from independent technical consultant, TUV Rheinfield, based on the solar radiation data sourced from Meteonorm. Also, uncertainty concerning the supply risk is mitigated by the 16 months operational data of the project. Technology Risk The rating factors in the limited operating history of cadmium telluride based thin-film PV panels being used in the project compared with over 30 years of operating history of crystalline silicon-based PV panels. According to the independent engineer, thin-film technology is more suitable for high temperature regions as with an increase in temperature, efficiency loss is lower in thin film PV panels than in crystalline silicon based PV panels. However, some uncertainty exists over PV panels segment‘s operating performance (efficiency, degradation) because of absence of long-term performance data from existing installations in India and the segment‘s dependence on favorable climatic conditions. We draw some comfort from the plant‘s 53-months track record of hassle-free operations. PV modules have demonstrated efficiency, performance ratio and annual degradations in line with the technical efficiency specified by the original equipment manufacturers. Tail-Risk The project has an economic life of 25 years (COD: November 2011) and loan amortization schedule of 13.75 years (last principal repayment date: March 2028). Hence, a comfortable tail of around nine years provides the sponsors an incentive to support the project in case of
  53. 53. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 53 | P a g e B y : S o m o b r a t a B a l l a b h stress in cash flow during the initial stabilization period. Revenue Risk Gross Revenue/Off-take The project‘s revenue profile is secured with a 25-year long PPA with a relatively strong counterparty, at a fixed tariff of INR15/unit for first 12 years and INR5/unit for the following years. The PPA has a payment security mechanism in form of a revolving letter of credit equivalent to one month‘s power sales payment. The project‘s tariff of INR15/unit is higher than the applicable tariff for the projects based on the conventional sources of fuel. The agency considers the price risk for the project as moderate due to the state policy support for solar power developers. That said, the project‘s revenue profile is sensitive to regulatory policy risks. Project Counter Party Risk The project‘s PPA counterparty has a better credit profile than other government-owned discoms‘ in the country. Also, Gujarat was one of the few states to fulfill its renewable purchase obligation in 2012-2013. The project‘s equipment supplier for PV panels First Solar and inverter supplier SMA Solar both have a long operating history. Hence, the risk pertaining to warranty servicing is fairly limited. Termination Event Risk Upon the occurrence of any event of default from the project counterparty, the developers may deliver a default notice specifying the reasons and calling upon the project off taker to solve the same. At the expiry of 30 days from the delivery of this default notice, unless the parties have agreed otherwise or the event of default has been sorted and in that case the off taker may serve a suspension notice to project counterparty for a duration not exceeding one year. Following events will considered as a default by the counterparty: 1. Failure or refusal by counterparty to pay any portion the monthly bill for 90 days after the due date 2. Start-up of bankruptcy or insolvency proceedings 3. Repudiation of this PPA In case that counterparty fails to cure the default even after the end of suspension period, project off taker may terminate this agreement by delivering a termination notice to the counter party.
  54. 54. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 54 | P a g e B y : S o m o b r a t a B a l l a b h 2.9 Key Rating Drivers and Rating Assignment Project Operations in Line with Projections As per the analysis I affirmed senior project terms loans taken by the project owner. The affirmation reflects stable plant load factor (PLF) of 19.49% in 2014, in line with the agency‘s base case expectations and the project receiving the scheduled payment from the power purchase agreement (PPA) counterparty. Favorable Off-take Arrangement The rating reflects the project‘s strong revenue profile through a 25-year PPA with a reasonably strong counterparty, at a fixed tariff of INR15/unit for the first 12 years of operations and INR5/unit for the remaining 13 years. The PPA counterparty is purchasing power from project builder at the contracted tariff and paying within 30 days from the date of invoice. However, the project‘s revenue profile is highly sensitive to possible regulatory/policy actions. Payment Security Mechanism Payments under the PPA are supported by a security mechanism, wherein PPA counterparty has established a revolving letter of credit equivalent to one month‘s average billing. The project‘s economic interest is partially protected i.e. if the counterparty defaults on its purchase obligation, the PPA contract will be terminated. The off-taker is liable to pay Project Developer and Sponsors an amount equivalent to three years‘ billing based on the first-year tariff considered on a normative PLF of 20%. Moderate Technology Risk The rating factors in the limited operating history of cadmium telluride based thin-film PV panels being used in the project compared with over 30 years of operating history of crystalline silicon-based PV panels. According to the independent engineer, thin-film technology is more suitable for high temperature regions as with an increase in temperature, efficiency loss is lower in thin film PV panels than in crystalline silicon based PV panels. However, uncertainty still looms over the plant‘s operating performance (efficiency, panel degradation) because of lack of long term performance data from the existing installations in India and performance dependence on favorable climatic conditions.
  55. 55. Summer Project Report-2016 India Ratings and Research A Fitch Group Company 55 | P a g e B y : S o m o b r a t a B a l l a b h Strong Equipment Supplier Solar PV panels and inverters have been sourced from First Solar Inc. Malaysia and SMA Solar Technology AG, Germany, respectively, which have extended a defect liability period of five years for the products. The original equipment manufacturers have proven technology and a long operating track record. Sponsor’s Satisfactory Track Record The rating is supported by the sponsor‘s satisfactory experience in operating solar power plants. The sponsor is the largest owner and operator of solar power projects in India with an installed capacity of 364MW as on date. Operations and maintenance (O&M) is being carried out in-house. Rating Affirmation Bank Loan Sanctioned Outstanding Rating/Outlook India Infrastructure Finance Company 670 624.8 IND A-/Stable Indian Bank 500 466.3 IND A-/Stable Yes Bank 530 494.2 IND A-/Stable Total 1700 1585.3

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