Report and Recommendation of the President to the Board of Directors

Project Number: 45915 October 2011

Proposed Loan Dahanu Solar Power Private Limited Dahanu Solar Power Project (India)

This RRP contains information that is subject to disclosure restrictions agreed between ADB and the relevant sponsor or recipient of funds from ADB. Recipients should therefore not disclose its content to third parties, except in connection with the performance of their official duties. Upon Board approval, ADB will make publicly available an abbreviated version of this RRP which will exclude confidential information and ADBs assessment of project or transaction risk.

CURRENCY EQUIVALENTS (as of 6 September 2011) Currency Unit Re1.00 $1.00 = = Indian rupee/s (Re/Rs) $0.022 Rs46.096

ABBREVIATIONS ADB CERC COD CPS DMC DSPPL EPC Ex-Im Bank O&M R-Infra RPL RVPNL Asian Development Bank Central Electricity Regulatory Commission commercial operations date country partnership strategy developing member country Dahanu Solar Power Private Limited engineering, procurement, and construction ExportImport Bank of the United States operation and maintenance Reliance Infrastructure Limited Reliance Power Limited Rajasthan Vidyut Prasaran Nigam Limited

WEIGHTS AND MEASURES km kV kWh MW MWh kilometer kilovolt kilowatt-hour megawatt megawatt-hour

NOTES (i) The fiscal year (FY) of Dahanu Solar Power Private Limited ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2010 ends on 31 March 2010. In this report, $ refers to US dollars.

(ii)

Vice-President Director General Director Team leader Team members

L. Venkatachalam, Private Sector and Cofinancing Operations P. Erquiaga, Private Sector Operations Department (PSOD) M. Barrow, Infrastructure Finance Division 1, PSOD A. Patil, Investment Specialist, PSOD P. Bailet, Counsel, Office of the General Counsel S. Gupta, Principal Investment Specialist, PSOD V. Medina, Safeguards Officer, PSOD J. Munsayac, Safeguards Specialist, PSOD M. Pascua, Senior Safeguards Officer, PSOD D. Purka, Principal Investment Specialist, PSOD M. Tsuji, Principal Safeguards Specialist, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page PROJECT AT A GLANCE I. II. THE PROPOSAL THE PROJECT A. Project Identification and Description B.Development Impact, Outcome, and Outputs C.Alignment with ADB Strategy and Operations D.Project Cost and Financing Plan E.Implementation Arrangements F.Projected Financial and Economic Performance III. THE PROPOSED ADB ASSISTANCE A.The Assistance B.Value Added by ADB Assistance C.Risks IV. POLICY COMPLIANCE A.Safeguards and Social Dimensions B.Anticorruption Policy C.Investment Limitations D.Assurances V. RECOMMENDATION 1 1 1 2 3 4 4 5 5 5 5 5 6 6 7 7 7 8

APPENDIXES 1. Design and Monitoring Framework 9

I.

THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan of up to $48 million to Dahanu Solar Power Private Limited (DSPPL) for the Dahanu Solar Power Project in India. II. A. THE PROJECT

Project Identification and Description 1. Project Identification

2. Reliance Power Limited (RPL) is one of the largest private power developers in India with market capitalization of Rs221 billion.1 However, 86% of its portfolio is fossil-fuel based (predominantly coal and gas). RPL is looking to reduce its dependency on fossil fuel resources and develop a renewable energy portfolio of wind and solar power assets. Solar energy is one of the focus areas for RPL as recent regulatory initiatives (such as mandatory renewable purchase obligations and revised tariff guidelines) have improved the viability of solar power projects in India. The Dahanu Solar Power Project will be the first solar power project to be developed by RPL and will be the largest solar photovoltaic plant in India. 3. The Asian Development Bank (ADB) was approached by RPL in July 2011 to help finance the project. From initial discussions, ADB viewed that the project possessed sound fundamentals in various aspects including the financial strength of the sponsor, high-quality project preparatory work, and attractive offtake tariff. In addition, with its direct purchase of renewable energy by a private utility company to satisfy its renewable purchase obligations, the project promotes a sustainable market platform for the development of renewable energy in India and endorses the recent regulatory reform in solar energy. The project will strongly complement ADBs ongoing initiatives in solar energy in India. 2. Project Design

4. The project entails the construction of a 40-megawatt (MW) solar photovoltaic power generation plant near the village of Dhursar in Jaisalmer district of Rajasthan state. The project site is 180 kilometers (km) west of the city of Jodhpur and 10 km from the JodhpurJaisalmer national highway (NH-114). The annual global horizontal irradiance 2 at the project site is estimated to be 2,064 kilowatt-hours (kWh) per square meter, one of the highest in the country. 5. The project will use fixed-tilt cadmium telluride thin film solar photovoltaic modules. Cadmium telluride technology is suited to warm and dry environment such as Rajasthan where ambient air temperatures can exceed 40C in summer, which can reduce the net energy yield of the modules. The solar photovoltaic modules have a projected degradation of 1.0% per year for the first 10 years of operation and 0.6% per year for the next 15 years of operations. 6. The electricity generated from the project will be evacuated from the project site to the existing 220-kilovolt (kV) Dechu substation of Rajasthan Vidyut Prasaran Nigam Limited (RVPNL) through a 30 km long, 220 kV double-circuit transmission line to be built by DSPPL.
1 2

National Stock Exchange, 14 September 2011. Measure of intensity and availability of sunlight in a given location, which can be converted to electricity either through photovoltaic solar panels or concentrating solar thermal power technology.

The transmission line has been sized to evacuate additional phases of DSPPLs solar photovoltaic project. 3. The Borrower and Sponsor

7. The borrower, DSPPL, is a special purpose vehicle set up by RPL exclusively to develop the project. DSPPL is a 100% subsidiary of RPL. RPL is a listed group company of the Reliance Anil Dhirubhai Ambani Group (Reliance ADA Group), established to develop, construct, and operate power projects in India and abroad. The Reliance ADA Group is one of Indias largest conglomerates with a strong presence in telecommunications, media and entertainment, financial services, infrastructure, and energy. 8. RPL has a portfolio of 33,440 MW of power generation capacity in various stages of development. The operational portfolio is 600 MW while 15,060 MW is under construction and 17,780 MW is under development. Coal-fired power plants (including the three ultra-mega power projectsSasan, Tilaya, and Krishnapatnam) account for 61% of the total portfolio, gasfired plants comprise 25%, and hydropower plants represent 14%. The proposed project is its first solar energy project. RPLs renewable energy pipeline for the next 5 years is in Table 1. Table 1: Renewable Energy Projects Being Developed by Reliance Power Limited
Project Dahanu Solar Power Project (Phase I) Rajasthan Concentrating Solar Power Project Vashpet Wind Power Project Dahanu Solar Power Project (Phase II) Urthing Sobla Hydroelectric Project Source: Reliance Power Limited annual reports. Fuel Solar Solar Wind Solar Hydro Capacity (megawatt) 40 100 200 60 400 Location Rajasthan Rajasthan Maharashtra Rajasthan Uttarakhand Year of Commissioning 2012 2013 2013 2014 2016

9. During FY2011, RPL generated revenues of Rs105,478 million and a net profit after tax of Rs7,604 million on a consolidated basis. As of 31 March 2011, RPL had a net worth of Rs168,333 million.3 10. RPL is owned 45% by Reliance Infrastructure Limited (R-Infra) and 40% by AAA Project Ventures Private Limitedboth of which are part of the Reliance ADA Group. The remaining 15% free float is two-thirds held by retail investors and one-third by institutional investors. RPL is listed on the Bombay Stock Exchange and the National Stock Exchange. B. Development Impact, Outcome, and Outputs 1. Impact

11. The project is designed to promote sustainable economic growth by diversifying Indias energy mix through the addition of renewable energy capacity. The development impact of the project also includes environmental benefits through more efficient use of indigenous renewable energy resources with almost no emission of pollutants or greenhouse gases. In addition, the building of the project will help prove the feasibility of utility-scale solar power projects in India and the operational performance in a location (Rajasthan) where substantial development in solar power is planned during 20122017.

RPL. 2011. Audited Financial Results for the Year Ended March 31, 2011. Mumbai.

2.

Outcome

12. The project will demonstrate the profitability and sustainability of utility-scale private solar power generation in India by generating 56,160 megawatt-hours (MWh)4 of clean energy per annum while delivering adequate returns for the private sponsor. 3. Outputs

13. Successful implementation of the project will result in the construction and operation of Indias first utility-scale solar photovoltaic power plant and increase solar power generation capacity in the country by 40 MW. C. Alignment with ADB Strategy and Operations 1. Consistency with Strategy 2020 and Country Strategy

14. The project supports two of the five core operational areas of Strategy 2020 infrastructure and environment. 5 The project is aligned with the India country partnership strategy (CPS), 20092012. One of the four strategy pillars of the CPS is to support inclusive and environmentally sustainable growth through continued focus on infrastructure development and enhanced focus on renewable energy. The project is consistent with one key outcome indicator of the CPS, which targets an addition of at least 70 MW of solar power generation through ADB assistance by 2012.6 2. Consistency with the Energy Policy and the Asia Solar Energy Initiative

15. Under ADBs Energy Policy, ADBs investments will focus on energy efficiency and renewable energy projects, as well as expansion of energy access. The policy states that support for renewable energy projects will be prioritized and broadened, with an objective to create a framework that makes investing in renewable energy commercially viable. The policy envisages that in the process of facilitating private investments in renewable energy, ADB will assume greater (but thoroughly assessed) risks and act as a catalyst for investments that the private sector might not otherwise be willing to make.7 16. The project is also directly aligned with ADBs Asia Solar Energy Initiative, which aims to (i) facilitate knowledge sharing and transfer for solar power; (ii) help develop, finance, and commission 3,000 MW of solar power generation capacity in developing member countries (DMCs) by May 2013; and (iii) pilot test innovative financing mechanisms and risk mitigation measures specifically for solar power. The initiative seeks to stimulate solar power development in DMCs with the goal of (i) increasing economies of scale to reduce costs and improve solar energys competitiveness within the grid; (ii) exploiting select DMCs solar radiation resources to serve their fast-growing electricity demand and utilize their greater availability of land compared with most developed countries; and (iii) promoting DMCs potential to become global and regional manufacturing hubs for solar technology goods and equipment.

4 5

6 7

Average energy production per annum over the life of the project. ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 20082020. Manila. ADB. 2009. Country Partnership Strategy: India, 20092012. Manila. ADB. 2009. Energy Policy. Manila.

3.

Consistency with ADB Operations

17. The project strongly complements ADBs current initiatives in solar energy in India. In April 2011, the ADB Board of Directors approved the Solar Power Generation Guarantee Facility, which will issue partial credit guarantees in an aggregate principal amount of up to $150 million (or its equivalent in Indian rupees or other foreign currency acceptable to ADB), in favor of foreign and local commercial financial institutions (partner commercial banks) lending to solar power generation projects in India. The facility will support multiple solar generation projects up to a maximum capacity of 25 MW under a solar power program with the central or state governments. This facility will catalyze commercial lending and private investment for the smaller solar generation projects, while the proposed project aims to catalyze private investment in larger solar generation projects with a capacity greater than 25 MW. This highlights ADBs multiproduct approach to promote private investment in solar energy and its ability to customize based on market needs and associated risks. D. 18. Project Cost and Financing Plan The project is estimated to cost $147.5 million.

CONFIDENTIAL INFORMATION DELETED

E. 19.

Implementation Arrangements Table 4 summarizes the implementation arrangements.8 Table 4: Summary of Implementation Arrangements

Aspects Regulatory framework

Arrangements The Maharashtra Electricity Regulatory Commission has specified that all distribution licensees in Maharashtra state will have to purchase 0.25% of their total electricity requirements from solar energy sources from FY2011 to FY2013. This renewable purchase obligation increases to 0.50% beginning FY2014. The construction period is from September 2011 to March 2012. The term of the energy purchase agreement is 25 years from COD. On the basis of international competitive bidding, DSPPL has entered into a fixed price turnkey EPC contract with R-Infra for (i) procurement and supply of foreign and domestic equipment; and (ii) erection, construction, and services for the project. Under the EPC contract, R-Infra will source the cadmium telluride solar photovoltaic modules from First Solar (USA). DSPPL has entered into an energy purchase agreement with R-Infra to sell 100% of the output of the project for a period of 25 years at a fixed tariff as specified by the CERC RE Tariff guidelines 2009. R-Infra distributes electricity to 2.8 million retail, commercial, and industrial consumers in Mumbai. The electricity purchased from the project will be used by R-Infra to offset its renewable purchase obligations stipulated by the Maharashtra Electricity Regulatory Commission.

Implementation period Construction arrangements Engineering, procurement, and construction

Equipment supplier Operations arrangements Revenue structure

Operation and maintenance

8

Details of Implementation Arrangements (accessible from the list of linked documents in Appendix 2).

Aspects Performance monitoring

Arrangements DSPPL will enter into a suitable agreement for O&M of the plant. Key performance indicators will be reported by DSPPL and monitored by ADB and the ExportImport Bank of the United States. In addition, during the construction phase, ADB will appoint an independent lenders technical advisor to monitor progress, attend performance testing, and certify COD.

ADB = Asian Development Bank, COD = commercial operations date, DSPPL = Dahanu Solar Power Private Limited, EPC = engineering, procurement, and construction, FY = fiscal year, km = kilometer, kV = kilovolt, kWh = kilowatthour, O&M = operation and maintenance, R-Infra = Reliance Infrastructure Limited, USA = United States of America. Source: Dahanu Solar Power Private Limited.

F.

Projected Financial and Economic Performance

20. The project is financially viable and is economically sustainable as the economic internal rate of return is higher than the social discount rate. CONFIDENTIAL INFORMATION DELETED

III. A. The Assistance

THE PROPOSED ADB ASSISTANCE

21. The proposed ADB loan of up to $48 million to DSPPL to finance the construction of the Dahanu Solar Power Project will be provided from ADBs ordinary capital resources without government guarantee. The ADB loan will have a tenor of up to 17.5 years, including a grace period of up to 12 months and will be repaid semiannually. The ADB loan will carry an interest rate as well as other fees as approved by ADBs investment committee. B. 22. Value Added by ADB Assistance The proposed transaction merits ADBs assistance for the following reasons: (i) The project will promote the efficient use of a relatively untapped, indigenous energy resource resulting in low-cost, carbon-efficient electricity generation. Once commissioned, the project will be the largest solar photovoltaic project in India. (ii) The proposed ADB assistance will provide long-term, limited recourse financing, which is not readily available for large solar power generation projects in India. (iii) ADB participation in the project will help promote global standards for project development and due diligence in a nascent sector, thus enabling long-term commercial financing for future solar power generation projects in India. Risks

C.

23. Tariff reset risk. The tariff is established in the energy purchase agreement in accordance with the Central Electricity Regulatory Commission (CERC) renewable energy tariff regulations of 2009, which are in effect until 31 March 2012. In case COD is delayed beyond 31 March 2012, the tariff will be determined by the new order passed by the CERC to extend the tariff regulations beyond 31 March 2012. A lower tariff will reduce cash flows from the project. CONFIDENTIAL INFORMATION DELETED

24. Technology risk. Cadmium telluride is a proven technology that has been in commercial operation globally since 2002. However, its long term reliability has not yet been proven and the data evidencing long term degradation in performance is limited. Unique local conditions such as high ambient air temperatures and high levels of dust and soiling could impair module performance. The performance warranties provided by First Solar and conservative forecast of energy yields mitigate this risk. The financial analysis has factored in the loss in performance caused by high temperatures, soiling, and other factors. CONFIDENTIAL INFORMATION DELETED 25. Foreign exchange risk. The ADB loan will be denominated in US dollars, but the project revenues will be in Indian rupees. The loan documentation will specify hedging strategies to mitigate this risk. CONFIDENTIAL INFORMATION DELETED 26. Interconnection risk. DSPPL is responsible for constructing the 30 km, 220 kV doublecircuit transmission line from the project site to the Dechu substation of RVPNL. DSPPL is in the process of signing a grid connectivity agreement with RVPNL. A delay in construction of the transmission lines will result in loss of revenue for the project. ADB will closely monitor the transmission line construction progress during the implementation period. CONFIDENTIAL INFORMATION DELETED 27. Operation and maintenance risk. O&M for a solar photovoltaic plant is primarily limited to ensuring adequate cleaning of the panels and replacement of inverter components after 10 years. Therefore, the O&M risk is not considered to be significant. After 5 years, the O&M activities will be undertaken in-house by DSPPL. CONFIDENTIAL INFORMATION DELETED IV. A. POLICY COMPLIANCE

Safeguards and Social Dimensions

28. The project is classified under category B for environment, category B for involuntary resettlement, and category C for indigenous people under ADBs Safeguard Policy Statement 2009. The potential environmental and social impacts and risks of the project have been identified and effective measures to avoid, minimize, mitigate, and compensate for the adverse impacts and to ensure compliance with ADBs Social Protection Strategy 2001 are incorporated in the safeguard reports and plans. The institutional capacity and commitment of DSPPL to manage the projects social and environmental risks are deemed adequate. Information disclosure and consultations with affected people are conducted in accordance with ADB requirements.9 DSPPL will ensure that the project is in compliance with applicable national laws and regulations and will establish and maintain appropriate environmental and social safeguards arrangements to manage impacts and risks, all in accordance with ADBs Safeguard Policy Statement 2009 and Social Protection Strategy 2001.
9

Summary Poverty Reduction and Social Strategy; Safeguards and Social Dimensions Summary (accessible from the list of linked documents in Appendix 2).

29. The project will be constructed on vacant and barren public land. The findings of the Social Safeguards Compliance Audit show that there are no permanent or temporary dwellings or cultivation at the site. Initial survey of the 30 km transmission line right of way indicates that it will pass through vacant public and private lands characterized predominantly by sandy dunes, light vegetation and barren land. The route and location of the transmission towers has not been finalized. Hence the project has been conservatively classified under category B for involuntary resettlement and a Resettlement Framework has been prepared in accordance with ADBs requirements. 30. Environmental impacts during construction such as dust and noise from transportation of materials and construction camps are likely to be short term and limited to the project site. Impacts during operations are expected to be minor and limited to soil quality, ecology and occupational health hazards. Impacts during decommissioning due to the dismantling of the solar modules will be addressed by collection and recycling of the solar modules by the equipment supplier. 31. DSPPL and its contractors will enter into covenants in relation to core labor standards and formulate a corporate human resources policy embodying this. Compliance with such covenants will be monitored by DSPPL and included in the regular reporting. DSPPL has conducted consultations with various stakeholders including local villagers, village heads, nongovernment organizations, and state officials. During project construction and the operations phase, DSPPL will continue such consultations and promote womens participation in community development programs, which the project will jointly implement with the community as part of DSPPLs corporate social responsibility initiative. B. Anticorruption Policy

32. DSPPL has been advised of ADBs anticorruption policy and its policy of implementing international best practices relating to the combating of money laundering and the financing of terrorism. ADB will ensure that the loan documentation includes appropriate anticorruption provisions and remedies for ADB in the event of non-compliance. C. Investment Limitations

33. The proposed loan is within the country, industry, group, and single project exposure limits for nonsovereign investments. CONFIDENTIAL INFORMATION DELETED D. Assurances

34. Consistent with the Agreement Establishing the Asian Development Bank, the Government of India will be requested to confirm that it has no objection to the proposed assistance to DSPPL. ADB will enter into suitable finance documentation, in form and substance satisfactory to ADB, following approval of the proposed assistance by the Board of Directors.

V.

RECOMMENDATION

35. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve the loan of up to $48,000,000 to Dahanu Solar Power Private Limited for the Dahanu Solar Power Project in India from ADBs ordinary capital resources, with such terms and conditions as are substantially in accordance with those set forth in this report, and as may be reported to the Board.

Ursula Schaefer-Preuss Vice-President 12 October 2011

Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Impacts Diversified energy mix through the addition of renewable energy capacity Replication of utilityscale (>25 MW) solar power generation projects Performance Targets and/or Indicators 15% of energy to come from renewable sources by 2020 2 GW of solar power generation capacity is installed by 2014 At least five other utilityscale solar photovoltaic power plants are installed by 2014 of which at least three are located in Rajasthan. 56,160 MWh per year of electricity from solar power is delivered to the offtaker during the life of the project Average carbon dioxide emission avoidance of 41,000 tons per annum during the life of the project Project financial internal rate of return (nominal) exceeds 10% Outputs Construction and operation of Indias first utility-scale solar photovoltaic power generation facility Successful commissioning of the 40 MW solar photovoltaic power plant by 2012 Company progress reports ADB annual reviews Lenders technical advisor reports Assumption Project agreements are adhered to as agreed by third parties Risk Delays in project construction Inputs Debt funding by ADB and EXIM Bank Equity funding by RPL Company financial statements Company progress and performance reports ADB annual reviews Operational risks causing disruption in power production Data Sources and/or Reporting Mechanisms Statistics published by the Ministry of New and Renewable Energy Ministry of New and Renewable Energy annual reports Assumptions and Risks Assumptions Continued macroeconomic and political stability at the central and state levels Continued regulatory support for solar power projects Risk Market price of fossil fuels dramatically decreases

Outcome Demonstrated profitability and sustainability of a utility-scale private solar power generation project

Assumption Offtaker complies with energy purchase and payment obligations Risk

Activities with Milestones 1. Financial close by 30 November 2011 2. Full commission to be achieved by 31 March 2012

ADB = Asian Development Bank, GW = gigawatt, MW = megawatt, MWh = megawatt-hour. Source: Asian Development Bank.