Kishore Kumar by pengtt

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									        Financing Non-conventional Energy

                            15th February, 2010

                               Presentation by
                             N. S. Kishore Kumar
              Country Head (Investment Banking), HDFC Bank Ltd.



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Introduction

• India has potential to harness a variety of non-conventional sources
   – Main sources are wind, hydro, solar and biomass
                      Source                    Estimated Potential
                      Wind                        over 45,000 MW
                      Biomass power                  16,000 MW
                      Bagasse cogeneration            3,500 MW
                      Small Hydro Power (SHP)        15,000 MW
                                                             Source: MNRE


• Government level commitment to Non-conventional energy
   – 1992: Establishment of the Department of Non-Conventional
     Energy Sources
   – 1992: Subsequently upgraded to a full fledged Ministry of Non-
     Conventional Energy Sources (MNES)
   – 2006: MNES re-christened as Ministry of New and Renewable
     Energy

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Current Status and 11th Plan Target

• Wind accounts for a lion’s share of total installed capacity currently
                                                   4.9%
                                            7.2%             0.4%




                                  16.8%




                                                                          70.7%




                              Wind energy   S HP   Bagasse     Biomass   Waste to energy




• Current performance and 11th Plan target
 Source               By end of 9th Plan       10th Plan addition          11th Plan Target   By end of 11th Plan
 Wind                       1,667                     5,415                     10,500              17,582
 Small Hydro Power          1,438                      520                       1,400               3,358
 Biomass power               368                       750                       2,100               3,218
 Solar Power                  2                         1                         50                  53
 Total                     3,475                     6,686                      14,050             24,211
                                                                                              Source: Planning Commission

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                Types of Renewable Energy




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Wind Energy

• Uses energy of the wind to turn blades of a windmill, which spins the
  turbine to generate electricity
• Current installed capacity of 10,242 MW, contributing 71% of total
  installed capacity in March 2009
• Capital cost typically around Rs. 4-5 crores per MW
• Plant Load Factor normally is in range of 20%-30%
• India has potential of over 45,000MW of wind power capacity across
  9 states (acc. to wind resource assessment program by C-WET)
• Several incentives provided by Central and State Governments
   – Ten year tax holiday
   – 80% accelerated depreciation for first year
   – Buy-back by various State Governments



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Wind Energy - Potential

 State                Gross Potential (MW)   Installed capacity
 Karnataka                          11,531               1,327
 Gujarat                            10,645               1,567
 Andhra Pradesh                      8,968                 123
 Tamil Nadu                          5,530               4,305
 Rajasthan                           4,858                 738
 Maharashtra                         4,584               1,939
 Kerala                              1,171                  27
 Madhya Pradesh                      1,019                 213
 Orissa                               255                    3
 West Bengal                          -                      1
 Total                              48561               10,242


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Hydro Power Energy

• Electricity generated by water falling from a height which runs a
  turbine, coupled with the electric generator
   – Water is stored in a reservoir created by building a dam
   – Power generated could vary depending on rainfall and water
      level in the reservoir
• Run-of-river hydro plants, which use natural gradient of the river
  are being preferred to avoid large construction costs
   – However, possible only in hilly areas
• Hydro projects with capacity upto 25 MW qualify as SHP
   – Capacity addition in SHP almost on target except last few years
   – Nearly 23 states have announced policies for setting up
      commercial SHP with private sector participation
• Total hydro potential: ~148,700 MW; SHP potential: 15,000 MW

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Hydro Power Energy
• Plant Load Factor (PLF) of Hydro Power Plants: around 40-50%
• Capital cost typically around Rs. 5-8 crores per MW; can also increase
  based on terrain
• Advantages of hydro power projects
   – Long useful life
   – Best suited to meet peak demand
   – Low Operation & Maintenance expenses
   – Storage based Hydro projects provide benefits of irrigation, flood
      control, drinking water supply, navigation, tourism etc.
• Issues for development
   – Have a long gestation period
   – Issue of rehabilitation and resettlement
   – Require a number of clearances / approvals
   – Indirect impact on environment due to deforestation, flooding etc.
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Solar Energy

• India lies in a sunny region with 250-300 sunny days in a year
• Solar Energy can be harnessed through 2 routes
   – Photovoltaic: Converting sunlight into electricity
   – Thermal: Using the solar heat for commercial applications
• Currently accounts for a miniscule portion of total installed capacity
• Advantages (of SPV systems)
   – Abundant and free availability of solar radiation
   – Modular, hence can be expanded as desired
   – Quick installation
   – Long life and require minimal maintenance
• Capital cost typically around Rs. 16 - Rs.20 crores per MW
• National Solar Mission targets 20 GW through solar power by 2020


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Biomass & Bagasse based co-generation

• Biomass – Utilization of energy stored in organic material
• According to estimates, about 540 mn tonnes of agricultural and
  agro-industrial residue generated in India every year
• Of this at least 130-160 mn tonnes do not find productive use
• Studies suggest potential of 21,800 MW (including bagasse based)
• Current installed capacity of 1,928 MW (including bagasse based)
   – 345 MW capacity addition in 2008-09 against plan of 300 MW
• Capital costs of Rs. 3-4 crores per MW
• Co-generation: a form of biomass power generation, using a single
  fuel to produce more than one form of energy
   – In typical electricity generation plants, up to 70% of heat in
      steam is rejected to the atmosphere
   – In co-gen mode, this heat is used to meet heating requirement
   – Overall efficiency in fuel utilization increases
   – Prevalent in sugar mills – bagasse based co-generation
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                Funding of Renewable Energy




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Funding of Non – Conventional Energy Projects

• Traditionally, government and multilateral agencies took a lead role
    – Soft loans and financial subsidies
    – Dedicated agency like IREDA created for financing projects


• Initiatives undertaken to promote growth of the sector
    – Policy measures in the form of fiscal incentives & reforms
    – Attracting private sector investments by way of PPPs
    – Scheme like takeout financing being introduced to address
      lenders ALM mismatch




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General Financing Features

• High Debt: Equity ratio
• Additional revenue stream from sale of carbon credits
• Increasing incidence of projects being financed on a non-recourse/
  limited recourse basis
• Long project implementation period more so in case of Hydro power
  projects
• Longer repayment period – Door-to-door maturity typically about 10-
  15 years
• Cash losses in initial years- necessitates moratorium period of 1-2
  years post construction
• Cash Flow based structured repayments


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Lender’s Key Considerations

• Credit strength and experience of project sponsors
• Sponsors capability to bear market risk and cost overruns
• Statutory and Regulatory approvals esp. w.r.t. land acquisition and
  environmental clearances
• Creation and enforceability of security
• Project company: Governance structures, information reporting and
  transparency
• Project technology and experience/capability of EPC contractor
• Identification of key project risks and mitigants
• Provision of DSRA
• Product marketing arrangements and credit strength of off-taker




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Key Challenges for Financing Projects

• Non- availability of long term loans with stable interest rates
• Long tenor lending leads to banks facing mismatch in ALM
• Insurance Companies/ Pension Funds not active
• Shallow and illiquid bond market
• Securitisation market not yet evolved in India
• Constraints in ECBs
    – Inability of companies to use ECBs to refinance Rupee Term
      Loans
    – Absence of longer tenors (>5-7 Years) in the case of ECBs
    – Currency and Interest rate risk if not hedged




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Financing Trends

         Existing Approach                      Evolving Trend



                                     Financing from new class of investors
 Conventional lending through debt   with varying risk profile such as
 and Promoter’s Equity               NBFCs, PE funds & Insurance
                                     companies & Multi lateral Agencies




                                     New      Avenues     and    increasing
 Debt: Rupee Term Loan               mobilisation through Subordinated
                                     debt, Convertible structures, ECB’s &
                                     ECA’s, etc


                                     Being addressed through recently
 Limited Exit Options for Lenders    announced Takeout Financing Scheme
                                     & provision for “Step in” right in
                                     concession agreement


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Debt Funding Options – Instruments & Features

  Instrument /             RTL             ECB                 ECA
    Feature
     Availability        Normal      High credit rating   Country specific
                                           cos.
   Tenor (years)          10-14             5-7                8-12

 Interest rate basis    Banks PLR         LIBOR               LIBOR

   Hedging cost           None             High                High

 Commitment fee          Nominal           High                High

    Flexibility in        High             Low                 Low
     drawdown
     Covenants           General           Tight               Tight

Typical Tie - up time   3-4 Months      3-6 Months         6-12 Months

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Risk & Mitigants
             Type of Risk                                  Mitigation


Construction & Operating Risk    Experienced Sponsor
                                 Experienced EPC & O&M Contractor
Land Availability/Acquisition    Government assistance by way of notification
                                 Contractual arrangement with land owners
Time Overrun                     Fixed Time, Fixed Price Contract with EPC

Cost Overrun                     Sponsor Undertaking

Funding                          Equity contribution from Sponsor
                                 Timely Debt tie up
Evacuation                       Arrangement with Government and suitable undertaking


Off take                         Suitable arrangement under PPA

Technology Risk                  Continuing support & Suitable Guarantee, Warranty from EPC
                                 contractor
Interest rate, Inflation & Fx.   Suitable Hedging by the project company
Fluctuations
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Suggestions for Reforms

• Single window clearance – currently approval from multiple
  departments required
• Uniform policies across states
• Introduction of Renewable Energy Certificates trading
• Enabling policy for promoting New Technology Renewable Energy
  Projects from waves and geothermal




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                     Thank You



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