Financing of Renewable

Energy in India:
I li ti
Implications fforr P
Policy
li
A CPI-ISB Energy and Environment Program Publication
Authors:
Gireesh Shrimali, David Nelson, Shobhit Goel, Charith Konda, Raj Kumar

BRAZIL Indian School of Business,

CHINA Gachibowli, Hyderabad, India
EUROPE Isb.edu
INDIA climatepolicyinitiative.org
INDONESIA
UNITED STATES

1
Group introduction:

Climate Policy Initiative (CPI) is a team of analysts and

advisors that works to improve the most important energy and
land use policies around the world
world, with a particular focus on
finance.

CPI works in places that provide the most potential for policy
impact – Brazil, China, Europe, India, Indonesia and the US.

In India, CPI partners with the Indian School of Business (ISB)

and works with some of key stakeholders in the government
government,
industry, and banking community.

2
Motivation:
• India has ambitious renewable energy goals
– Solar Mission: 20GW of solar by 2022
– Wind Target: 31GW of wind by 2017

• It has done reasonably well so far

– Under phase 1 of Solar Mission, 1GW of solar by 2012, compared to
<50MW in 2010
– 16GW of wind by 2011, with CAGR of ~20% during the 11th 5-year
plan (2007-2011)
• However, the task is daunting
– Solar Mission in total would require an investment of ~USD
USD 26 billion:
phase 2 funding is already an issue
– India faces a USD 300 billion gap (30% of total) in infrastructure
funding in the 12th plan
• Renewable energy requires subsidies: need to look for cost-effective
solutions
• Our study explores how policies influence indirect (i.e., financing) costs of
renewables
bl

3
How did we assess the impact of policy?
• Use of levelized cost of electricity (LCOE) metric
– LCOE: Minimum price per kWh to meet investment criteria (e.g., hurdle
rates at P50,, DSCR at P90,, etc.)

• Assumption: Projects would maximize leverage, within limits (typically less

than 80%)

• Project-level cash-flow models: Use of actual project-level data

– Mostly gathered from interviews
– Supplemented by secondary research

• Essentially sensitivity analysis!

4
What data did we use?

5
Govt. policies helped renewable energy
development in India
Policy assistance as a % of total project cost
Policy Wind Solar
Feed-in/ Preferential 35% 61%
tariff
Accelerated - 21%
depreciation
Generation-based 11% -
incentive
Clean development 6% 2%
mechanism

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But, higher financing costs increase Indian
renewable energy costs by 22-28%

* LCOE – Levelized  Cost of Electricity 7
Equity returns are similar to US/Europe but debt
cost is much higher
R
Range off required
i d returns on equity
i anddddebt
b ffor renewable
bl energy
India versus US and Europe

8
Debt cost and terms are the main driver of higher
finance costs, contributing 24-32%
Comparison of US and Indian Financing costs for renewables

9
In the US and Europe, policy can have a large
impact on financing costs

10
In India the high base rate of debt overwhelms
other policies

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An interest-rate subsidy can reduce subsidy
burden significantly

Interest rate Wind Solar

concession
Reduction in Reduction in Reduction in Reduction in
LCOE NPV of LCOE NPV of
subsidy subsidy
3% 7.9% 12.6% 7.5% 8.8%
5% 13 8%
13.8% 21 8%
21.8% 13 1%
13.1% 15 5%
15.5%
7% 20.1% 31.8% 19.3% 22.8%

Source: CPI Analysis

Note: Reduction in total subsidy relative to no interest rate concession.

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Conclusions
• Cost (and terms) of debt is the most pressing issue: adds 24-32% to the
cost;
– Cost of debt adds about 12-19% to the cost.
– Loan terms – debt tenor and variable rate debt – add about 13-14%
13 14% to the
cost.

• High cost of debt overwhelms other policy impacts. Finer policy

instruments are not as effective, given that they can affect the cost by 3-
11%.
– Duration of revenue support: 7-11%
– Revenue certainty: 3-8%
– Risk
Ri k reduction:
d i 3
3-8%
8%
– Completion certainty: 4-8%

• Policy should focus on improving debt-terms before using finer

instruments
• An interest rate subsidy can actually reduce the overall subsidy burden by
up to 30% in case of Wind and around 22% for Solar PV
ԟ Can increase effectiveness of other policy instruments

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BRAZIL Indian School of Business,
CHINA Gachibowli,
G hib li HHyderabad,
d b d
EUROPE India
INDIA
INDONESIA Climatepolicyinitiative.org
UNITED STATES Isb.edu
Backup

15
The high cost of debt is the biggest issue facing
renewables in India
Issues with cost and availability of debt and equity for renewable projects in India

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U.S. Cases & Modeling Assumptions

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European Cases & Modeling Assumptions

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India Cases & Modeling Assumptions
Acciona Reliance Dahanu Lanco Chinnu CSP
Tuppadahalli Wind Solar PV Project Project
Project
Project Size (MW) 56.1 40 100
PLF (%) 28 21 35
Project Cost 6.05 14.02 18.0
(Cr/MW)
PPA Price 3.39 14.95 10.50
(Rs./kWh)
PPA Length 20 25 25
(years)
Debt/Equity 60:40 75:25 70:30
Debt Interest Rate 11.8 12.0 11.0
(%)
ROE (%) 16.0 16.0 16.0

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BRAZIL Indian School of Business,
CHINA Gachibowli,
G hib li HHyderabad,
d b d
EUROPE India
INDIA
INDONESIA Climatepolicyinitiative.org
UNITED STATES Isb.edu