Report and Recommendation of the President to the Board of Directors

Project Number: 44941 April 2011

Proposed Guarantee Facility Solar Power Generation (India)

In accordance with ADB's public communications policy (PCP, 2005) this abbreviated version of the RRP excludes confidential information and ADB's assessment of project or transaction risk as well as other information referred to in paragraph 126 of the PCP.

CURRENCY EQUIVALENTS (as of 1 February 2011)

Currency Unit Indian rupee/s (Re/Rs)

Rs1.00 = $0.022

$1.00 = Rs45.91

ABBREVIATIONS ADB Asian Development Bank ASEI Asia Solar Energy Initiative CERC Central Electricity Regulatory Commission CO2 carbon dioxide DMC developing member country ESMS environmental and social management system GUVNL Gujarat Urja Vikas Nigam Limited MNRE Ministry of New and Renewable Energy NSM National Solar Mission NTPC National Thermal Power Corporation NVVN NTPC Vidyut Vyapar Nigam PCG partial credit guarantee PPA power purchase agreement REC renewable energy certificate RPO renewable purchase obligation SEB state electricity board SERC state electricity regulatory commissions SPV special purpose vehicle TA technical assistance

WEIGHTS AND MEASURES kWh kilowatt-hour m2 square meter MW megawatt MWh megawatt-hour

GLOSSARY

Insolation Insolation or irradiance is a 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.

NOTES

(i) The fiscal year (FY) of Indian banks and companies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 31 March 2000.

(ii) In this report, $ refers to US dollars.

Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Director General P. Erquiaga, Private Sector Operations Department (PSOD) Director M. Barrow, Infrastructure Finance Division 1, PSOD Team leader D. Purka, Senior Investment Specialist, PSOD Team members C. Gin, Senior Counsel, Office of the General Counsel S. Gupta, Principal Investment Specialist and Unit Head, Private Sector

Operations, India Resident Mission, PSOD V. Medina, Safeguards Officer, PSOD J. Munsayac, Social Development Specialist, PSOD A. Patil, Investment Specialist, PSOD A. Porras, Safeguards Officer, PSOD B. Raemaekers, Senior Financing Partnership Specialist (Guarantees

and Syndications), Office of Cofinancing Operations 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

FACILITY SUMMARY

I. THE PROPOSAL 1II. BACKGROUND AND RATIONALE 1

A. Project Identification and Selection 1B. Sector Background 2C. Alignment with ADB Strategy and Operations 4

III. THE FACILITY 5A. Facility Description 5B. Development Impact 6C. Environment and Social Dimensions 7D. Program Financing Plan 8E. Implementation Arrangements 9F. Projected Operational and Financial Performance 10G. Guarantee Pricing 11

IV. THE PROPOSED ADB ASSISTANCE 11A. The Assistance 11B. Justification for ADB Assistance 12C. Risks and Mitigation Measures 13D. Assurances 15

V. RECOMMENDATION 15

APPENDIXES 1. Design and Monitoring Framework 17 2. Indias National Solar Mission 19 3. Pipeline of Solar Power Generation Projects 26 4. Summary Poverty Reduction and Social Strategy 29 5. Summary Environmental and Social Management System 32 6. Partner Bank Due Diligence List 37 7. Summary Guarantee Term Sheet and Project Eligibility Criteria 38

SUPPLEMENTARY APPENDIXES (available on request) A. Economic and Financial Analysis of Representative Solar Power Project B. Credit Analysis of NTPC Vidyut Vyapar Nigam C. Credit Analysis of Gujarat Urja Vikas Nigam Limited D. Due Diligence Report of Norddeutsche Landesbank Girozentrale (Nord/LB)

FACILITY SUMMARY Facility Description A facility whereby the Asian Development Bank (ADB) will issue partial

credit guarantees (PCGs) in an aggregate amount of up to $150 million of principal (or its equivalent in Indian rupees or other foreign currency acceptable to ADB), in favor of foreign and local commercial banks lending to solar power generation projects in India. The facility will support multiple projects up to a maximum size of 25 megawatts (MW) under a solar power program with the central or state government. Under the facility, ADB will issue PCGs to guarantee scheduled payments of principal and interest under loans to be provided by foreign or local commercial banks. The PCGs will be provided without government counter-guarantee.

Classification

Targeting classification: General intervention Sector (subsector): Energy (Renewable energy) Themes (subthemes): Environmental sustainability (eco-efficiency);

economic growth (promoting economic efficiency and enabling business environment); capacity development (institutional development); private sector development (private sector investment)

Location impact: National (high), regional (medium), rural (medium) Partnership: Foreign and local commercial banks, development partners

Environmental and Social Safeguards Classification

Environment: FI Involuntary Resettlement: FI Indigenous Peoples: FI

Impact, Outcome, and Benefits

The outcome will be the demonstration of the profitable and sustainable solar power generation plants under the National Solar Mission (NSM) and state power schemes, which will contribute to the growth of Indias power generation supply through low carbon resources. The impact will be successful implementation of phase I of the NSM, increased foreign direct investment by the private sector in the solar power industry and long-term cost reduction for solar power in India.

Project Borrowers and Sponsors

Projects will be implemented by special purpose vehicle companies, incorporated in India, which will develop, construct, commission, and operate solar power generation projects. Project sponsors will include local and foreign investors with at least 50% of their shares held by private sector entities.

Guaranteed Lenders

Select local and foreign commercial banks operating in the project finance market in India. ADB will conduct due diligence and seek the Investment Committees approval of each partner commercial bank to be eligible under the facility. ADB will not issue PCGs to any single lender that in aggregate would exceed 40% of the facility.

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Proposed ADB Assistance

A guarantee facility of $150 million backed by the ordinary capital resources of ADB. Project loans under the facility will have a term of up to 15 years (18 years in some exceptional cases) including a grace period of up to 1 year, and other terms and conditions as approved by ADBs Investment Committee. The guarantees will partially cover nonpayment by the borrower. The net present value of the guaranteed outstanding principal and accrued interest will not exceed 50% of the loan amount for the project.

Implementation Arrangements

Projects will be initially screened by partner commercial banks and assessed as to whether they are in line with ADBs eligibility criteria for the facility. Banks will conduct due diligence in accordance with ADBs requirements and in line with ADB policies on anticorruption, safeguards, integrity, and procurement. ADB will conduct due diligence on partner commercial banks and submit this to the Investment Committee prior to any guarantees being issued. PCGs will be materially in line with the agreed terms for the facility. Appropriate facility limits and other sub-limits on sponsors, partner banks, and projects will be maintained, unless otherwise approved by the Investment Committee.

Risks and Mitigating Measures

Key risks examined and mitigated during due diligence include (i) technology risk and equipment manufacturer risk; (ii) sponsor risk; (iii) off-taker risk; (iv) regulatory risk, (v) risk sharing with partner banks, (vi) lack of technical expertise of partner banks in the evaluation of solar energy projects, and (vii) selection of partner banks. These risks will be mitigated by: (i) establishment of well defined eligibility criteria for equipment manufacturers and sponsors, (ii) appropriate structuring of the facility, (iii) the strong commitment of the government to support solar power projects, (iv) continuous involvement of ADB in the selection process of each of the partner banks, (v) parallel technical assistance provided by international solar experts, and (iv) detailed evaluation of potential local commercial banks.

Justification / ADB Value-Added

ADB assistance (through the facility and parallel technical assistance) will help solar projects close affordable long-term financing, which is a necessary condition for the viability of a solar power project. ADBs assistance will mobilize the participation of local and foreign commercial banks with little or no experience in solar energy in India. The assistance will demonstrate the commercial viability of utility-scale, grid-connected solar photovoltaic technology in India.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed guarantee facility for solar power generation projects in India. The design and monitoring framework is in Appendix 1.

II. BACKGROUND AND RATIONALE

A. Identification and Selection

2. Asian Development Bank (ADB) technical assistance (TA) supports the Ministry of New and Renewable Energy (MNRE) in the formulation and implementation of Indias National Solar Mission (NSM), announced by the Government of India in January 2010. 1 The NSM intends to commission 20,000 megawatts (MW) in grid-connected solar power generation by 2022 to help fill persistent energy shortages with diversified low-carbon power generation, secure its energy independence using indigenous resources, and become a manufacturing hub for the solar energy industry in Asia. 3. During TA implementation, ADB staff engaged the MNRE in various discussions on how to encourage private sector investment in and financing of solar projects under the NSM program. This included specific assistance on drafting a bankable power purchase agreement (and a subsequent power sales agreement with the states), transparent eligibility guidelines and selection criteria, and an enhanced regulatory framework for green energy. All parties stressed the importance of long-term financing and the impact of its cost on the levelized cost2 of solar electricity. Given the high up-front but low operating cost profile of solar power generation, the profile, tenor, and cost of debt play a significant part in optimizing costs and viability; and have been the main focus of ADBs efforts in this area. 4. As the MNRE defined the details of the NSM program, it became clear to the project team that the first phase projects would be relatively small (2 MW25 MW), mostly solar photovoltaic projects. Based on current cost estimates (about $3,000$3,300 per kilowatt of installed capacity), the total costs of such projects are likely to be too small for direct ADB lending. The challenge thus became how to support the financing of multiple small solar projects that would demonstrate their viability in the context of Indias operating and climatic environment. ADB discussed various financing structures and support mechanisms with local and foreign commercial banks. Based on the feedback received from these banks, there is an immediate window of opportunity for ADB to make a real impact in this nascent but critically important sector, by mobilizing available commercial funds into solar projects and building capacity within the local banks on the technical and commercial risks of solar power projects. This iterative consultation process led to the design of a multi-project partial credit guarantee (PCG) facility structured to provide long-term financing and share commercial risks between banks and ADB for the first wave of solar projects. Commercial risk mitigation and extension of debt tenors are critical to ensure the bankability and viability of, and to lay the groundwork for, a sustainable solar program.

1 ADB. 2008. Technical Assistance to India for Integrated Renewable Energy Development. Manila (TA 7099-IND).

This ongoing TA will fulfill ADBs participation requirement for nonsovereign guarantee operations. 2 Levelized cost refers to the present value of the total cost of constructing and operating a generating plant over its

economic life converted on an annual basis.

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B. Sector Background

5. As of October 2010, installed power generation capacity in India was 167,278 MW, 64.9% of which is fired from thermal sources (coal and gas), 22.3% from hydropower, 2.7% from nuclear power, and 10.0% from renewable energy. Indias growth rates in energy consumption are much higher than the gross domestic product growth rate, reflecting an increasing share of energy investment. Indias energy sector contributes about 58% of the countrys greenhouse gas emissions.3 6. Solar energy is abundant in India, with high insolation measured at about 300 sunny days on average per year4 and estimated to be 5 billion megawatt-hours (MWh) per year of energy over Indias land area. Most regions receive 47 kilowatt-hours (kWh) per square meter (m2) per day; the national average is 4.5 kWh/m2/day. This rate of insolation is among the highest in the world, comparing favorably with Australia (4.7 kWh/m2/day) and ahead of the Peoples Republic of China (3.4 kWh/m2/day) and Western Europe (2.9 kWh/m2/day).5 Effective unlocking of this huge potential, through photovoltaic or concentrating solar thermal power development, provides the ability to generate power on a distributed basis and enables rapid capacity addition with relatively short lead times (e.g., less than 1 year). 7. From an energy independence and security perspective, solar is the most secure of all sources since it is renewable and abundantly available. Given the large number of poor and unserved people in India, all efforts need to be made to exploit this source of energy. Solar projects can be flexibly sited within high insolation areas to avoid competing for scarce land that may have other productive uses. The acquisition of land has become a major hurdle for infrastructure development projects in India and other developing member countries (DMCs). While domestic coal-based power generation is the cheapest electricity source today, future scenarios suggest that this could change. Under current electricity deficit conditions and looming domestic coal shortages, peak energy prices could reach Rs8.50 per kWh ($0.18 per kWh) as the country begins to partly rely on imported coal to meet its energy demand. Given energy shortages, India is increasing the use of diesel-based electricity, which is both expensive (up to Rs15.00 per kWh) and polluting. 8. The NSM is an initiative of the central and state governments to promote ecologically sustainable energy growth while addressing Indias energy security challenge. It will constitute a major contribution by India to the global effort to meet the challenges of climate change. The NSM helps implement some of Indias objectives under the National Action Plan on Climate Change, which recognizes that solar energybecause of Indias tropical climate and abundant sunshinehas great potential as a future energy source and will enable the decentralized distribution of electricity production. However, solar power generation is the least developed form of renewable energy in India because of technical and financial challenges (Table 1).

3 Agence France-Presse, 2010. 4 Government of India, Ministry of Power, Central Electricity Authority. 2010. Monthly Power Sector Report: April

2010. New Delhi. 5 Conergy. 2009. Deployment Challenges for Large Scale On-Grid Solar PV Implementations. Singapore.

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Table 1: Renewable Energy in India (MW)

Source Potential Installed FY2009 Cumulative Installed Biomass 16,881 131 834 Wind 45,195 683 10,925 Small hydro (up to 25 MW) 15,000 129 2,558 Cogeneration (bagasse) 5,000 253 1,302 Waste-to-energy 2,700 4 65 Solar (under the National Solar Mission) 20,000 3 6

Total 104,776 1,203 15,690 MW = megawatt. Source: Ministry of New and Renewable Energy.

9. Unfortunately, the total costs (capital and operating costs) for solar power generation are currently much higher than for thermal power stations, which are centralized and sized to reap economies of scale (e.g., 2,0004,000 MW). One of the objectives of the NSM is to create conditions (through a rapid scaling up of capacity, technological innovation, and indigenization) that will drive down the capital costs of solar power generation toward grid parity.6 The NSM aims to achieve grid parity (peak energy) by 2022 and parity with coal-fired thermal power by 2030. As more solar capacity is installed globally, production costs for panels and other components will decrease as a result of economies of scale and manufacturers locating production facilities close to demand in Asia. This cost trajectory will depend on the scale and pace of global deployment, technology development, and transfer of knowledge. Once solar power costs approach or reach grid parity, this will facilitate the deployment of smaller and more distributed power generation stations that can serve more remote and nonurban locations where Indias poor are concentrated. 10. The objective of the NSM is to establish India as a global leader in solar energy by creating the policy conditions for rapid diffusion of technology and investment across the country. The NSM will adopt a three-phase approach, spanning the remaining period of the Eleventh Five Year Plan, 200720127 and first year of the 12th plan (1,000-2,000 MW of utility-scale capacity by 2013) as phase 1; the remaining 4 years of the 12th plan as phase 2 (4,00010,000 MW added by 2017); and the 13th plan as phase 3 (20,000 MW by 2022). The NSM will evaluate progress against plan milestones to review capacity and targets for subsequent phases based on emerging cost and technology trends, so as to protect the government from heavy subsidy exposure in case anticipated cost reductions do not materialize as expected. 11. NSM activities are currently embedded within the existing framework of the Electricity Act, 2003, but solar-specific regulatory frameworks and contractual arrangements are being established to facilitate its development. One of the key regulatory drivers for promoting solar power is a renewable purchase obligation (RPO) in which a minimum amount of electricity must be purchased from clean energy sources by power distribution companies (e.g., varies from 1.0% to 15.0% in Indian states at present). As required by the National Electricity Policy (2005), the National Tariff Policy (2006) was amended by the cabinet in January 2011 to mandate that the state electricity regulators specify a minimum amount of electricity generated by solar power that must be purchased by power distribution companies. The solar power purchase obligation for states will start at 0.25% no later than 2013 and increase up to 3.0% by 2022. 6 Grid parity refers to the cost of electricity on an Indian rupee per kilowatt hour basis, which is equivalent to the

current market price for short-term power. 7 Government of India, Planning Commission. 2008. Eleventh Five Year Plan, 200712. Delhi.

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12. The Central Electricity Regulatory Commission (CERC) has issued detailed guidelines for determining feed-in tariffs for solar power, taking into account current cost and technology trends. These will be revised on an annual basis for new projects being commissioned (although presently fixed until the end of March 2012). This will be complemented by a renewable energy certificate (REC) mechanism to allow utilities and solar power generation companies to buy and sell certificates to meet their solar power purchase obligations. In January 2010, CERC announced REC regulations that enable the interstate trading of such certificates to meet the RPOs. This will drive utility-scale renewable power generation, but it is not yet consistently in place across all statesrepresenting a risk for solar project developers. The NSM offtake regime, with its blended tariff structure, is therefore critical in bridging the near-term competitiveness of solar with other renewable technologies. Short-term adoption is critical in achieving cost economies of scale and diffusing the technology in the long term. RPOs of 1%15% of total power purchases have been established by 18 states based on renewable potential in the state. When NTPC Vidyut Vyapar Nigam (NVVN) supplies bundled power to state utilities at the rates determined in accordance with CERC regulations, those state utilities will be entitled to use the solar part of the bundled power for meeting their RPOs under the Electricity Act, 2003. Further information on Indias National Solar Mission, power purchase schemes, and regulatory framework are in Appendix 2. C. Alignment with ADB Strategy and Operations

1. Consistency with Strategy 2020

13. The facility is consistent with Strategy 2020, 8 which emphasizes ADB support for environmentally sustainable development and private sector development. The facility will expand ADBs promotion of, and investment in, sound environmental management while capitalizing on its operational strength, such as infrastructure development and finance. The strategy seeks to meet the regions growing energy demand by helping DMCs to develop environmentally friendly technologies, specifically promoting energy efficiency and the use of clean energy sources. One of the key actions is to mitigate climate change by moving DMCs onto low-carbon growth paths by (i) improving energy efficiency, (ii) expanding the use of clean energy sources, (iii) reducing fugitive greenhouse gas emissions, (iv) modernizing public transport systems, and (v) arresting deforestation. In addition, one of Strategy 2020s goals is that ADBs cofinanced lending will increase at a faster rate than ADBs stand-alone financing operations, with a long-term objective of total annual direct cofinancing exceeding the value of ADBs stand-alone financing. The facility would be consistent with this cofinancing goal.

2. Consistency with the Country Strategy

14. Approved by ADBs Board of Directors in June 2009, the India country partnership strategy, 20092012 emphasizes continued and sustained infrastructure development (e.g., transport, energy, urban and water resource management).9 ADBs energy program in India aims to enhance the impact of the governments initiatives for demand- and supply-related programs. The planned activities include (i) developing renewable and alternative energy sources, and clean generation technology; (ii) reducing technical and commercial losses in transmission and distribution networks and facilities; (iii) strengthening interregional transmission capacity; (iv) bringing demand-side management and energy conservation into the

8 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 20082020.

Manila. 9 ADB. 2009. Country Partnership Strategy: India, 20092012. Manila.

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mainstream; and (v) promoting private sector participation, while ensuring environmental sustainability, and supporting institutional strengthening to implement the reforms required by the Electricity Act, 2003. Key thematic concerns include environmental sustainability, private sector development, private sector operations, governance, and partnerships. 15. The facility complements the current lending and TA program by ADBs South Asia Department in support of solar power projects in India. There has been close cooperation between ADBs Private Sector Operations Department and South Asia Department on the TA program with the MNRE. In addition, ADB is preparing a $100 million loan in support of a 500 MW solar park being developed in the state of Gujarat. Additional TA is proposed for a similar solar park in the state of Rajasthan for developing solar engineering centers of excellence in local universities, funding of smart grid transmission management systems, and vocational educational programs in support of the solar industry in India.

3. Consistency with the Sector Strategy

16. Under ADBs Energy Policy, ADBs investments will focus on energy efficiency and renewable energy projects, as well as the expansion of energy access. Starting in 2013, ADB will increase its target of clean energy investments to $2 billion a year from $1 billion, in a bid to accelerate low-carbon growth and reduce greenhouse gas emissions in the region. 10 As part of the policy implementation, ADB is emphasizing private sector participation as a tool to enhance energy sector efficiency as a result of introducing increased competition and increased investable resources. The objective is to create a framework that makes investing in the energy sector a commercially viable proposition and ADB is committed to facilitate direct private sector participation. 17. The facility is also directly aligned with ADBs Asia Solar Energy Initiative (ASEI) 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 DMCs by May 2013; and (iii) pilot test innovative financing mechanisms and risk mitigation measures specifically for solar power. The ASEI 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 service 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. ADBs solar initiatives in India have been extensively coordinated with the energy community of practice.

III. THE FACILITY

A. Facility Description

1. Facility Rationale and Design

18. Commercial banks in India typically lend against fixed asset collateral or, if insufficient, against corporate guarantees as opposed to the cash flow and debt service capacity of the project (i.e., project financing). Banks rely heavily on relationships with existing borrowers to grow their lending business. This practice makes it difficult for new companies or borrowers to obtain financing on reasonable terms or without high collateralization. With solar projects being

10 ADB. 2009. Energy Policy. Manila.

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relatively small and having some technical risks that cannot be easily mitigated at the present time, banks remain wary of lending to solar projects and/or lending beyond their existing corporate relationships. 19. The facility will help close these gaps by sharing credit risks with commercial lenders. Supported by parallel capacity development TA (para. 37), the facility has the twin objective of (i) making limited recourse debt financing available on reasonable terms and conditions, and (ii) extending the tenor of loans to solar projects to recoup the current high capital costs. ADB would issue PCGs to international and local lenders to cover up to 50%11 of any nonpayment by the borrowers. The PCGs would cover any default of scheduled repayments of principal and accrued interest. This is not a first loss guarantee, which would be paid prior to any loss sharing by the commercial banks; banks will incur losses alongside any ADB claims paid.

2. Project Borrowers and Sponsors

20. The projects to be supported under the facility are likely to be financed through special purpose vehicle companies (SPVs), established by project sponsors to build, own, and operate the assets as a stand-alone independent power producer incorporated in India. Based on the indicative pipeline of projects (Appendix 3), the SPVs are sponsored by a mix of local and foreign investors with either experience as power sector operators in India or joint venture consortia of financial investors and companies with solar power experience outside of India. The facility will only be eligible for lenders to those SPVs in which 50% or more of the shares are owned by private sector companies and sponsored by investors with acceptable experience and credit quality.

3. Outcome and Outputs

21. The outcome will be the demonstration of profitable and sustainable solar power generation plants under the National Solar Mission and/or state solar power policies. These projects will diversify the countrys energy mix, increase energy security, reduce reliance on fossil fuels, lower imports and exposure to international energy prices and exchange rate fluctuations, and decrease the emission of greenhouse gases as well as local pollutants. The amount of carbon dioxide emissions reduced is one of the indicators for the outcome, in addition to financial and operation indicators. 22. The facility will support the development of utility-scale, grid-connected solar power projects in India through long-term commercial financing. The facility will mobilize lending and develop the capacity of commercial and partner banks to undertake technical due diligence on solar projects and provide affordable longer-tenor loans, which are critical to their viability, sustainability, and replicability. The design and monitoring framework is in Appendix 1. B. Development Impact

23. Solar power is most appropriate for off-grid and distributed electricity generation because of its modular scalability to meet small loads, ease of installation, and minimal

11 Sharing of the risks between ADB and the commercial bank ensures an equitable balance and prevents against

moral hazard. This level of risk sharing is calculated on a present value basis over the life of the loan, which provides flexibility for guarantees to be structured in different ways (either a constant guarantee scheme or a back-ended scheme in which coverage is higher in the latter years of the loan) depending on the banks preference. The net present value of the guaranteed outstanding principal and accrued interest shall not exceed 50% of the total principal of the guaranteed loan.

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operating and maintenance costs. As the cost of solar power equipment drops as a result of economies of scale from indigenous production and development of local capacity, solar energy will become more affordable, reliable, and accessible in the remote and underdeveloped areas of India. In essence, demand from utility-scale grid-connected solar projects in the first phase will lead to long-term cost reductions for solar power across India, including for off-grid consumers who are often bypassed in terms of sharing the benefits of development. 24. Significant capacity beyond a pilot scale needs to be developed and operated on a commercial basis in the DMCs for solar power technology to scale up. It is expected that the facility will directly leverage private sector investment for about 130 MW of projects, which would result in 205 gigawatt-hours of electricity from solar energy added to the grid in India and 1.76 million tons of carbon dioxide abated during the first 10 years of operations. The facility improves the financial viability of solar projects by extending the tenor of the loans without a commensurate increase in lending margins. This will alleviate some pressure on project cash flows to service debt and as a result, improves the returns on the private sector investors equity to an acceptable level. This effect will generate more investment in this nascent sector. Higher returns on equity on the first projects would, in turn, allow electricity regulators to lower the feed-in tariff levels required in the future. 25. In the medium term, commercial banks that finance projects alongside ADB will become more comfortable with solar power and have direct access to performance and operational data to understand the risks better. This will transform market risk perceptions and induce other banks to lend to the sector without ADB support or (limited) recourse to the sponsor. This hypothesis can be compared with the evolution of the wind power sector in India since 2000. Banks initially had similar concerns on wind power resources and the unproven performance of wind energy turbines in India. Now with over 14,000 MW of wind power installed in India, local commercial banks are more comfortable with the risks, understand technical parameters better, and offer long-term debt financing without recourse to parent companies. The same results can be expected (e.g., longer tenors, lower margins) once there is a track record of solar operations. The target of 4,000 MW of solar power in the second phase of the NSM (20132015) cannot be met without similar developments in the project finance market. Performance indicators for the medium-term impacts include the cumulative solar capacity in the country by 2015, the percentage of solar projects financed on a non-recourse basis, and the project margins charged as compared with other renewable energy projects. 26. In line with the ASEI, one of the long-term objectives is to reduce the capital costs for solar power in DMCs. This can be accomplished in India once the manufacturing of solar power components is indigenized and reaches economies of scale. Significant demand from projects for capital equipment, solar panels and modules, and experienced contractors is a prerequisite to generate investment in local manufacturing. Based on a much lower cost of labor but strong engineering and technology base, there is significant scope for manufacturing cost reductions in India. Local manufacturing will reduce the price of solar components and increase the competitiveness of solar power with other sources of energy production. Establishing a large commercial market in DMCs will stimulate global competition in the sector, further lowering prices and the cost of electricity production. C. Environment and Social Dimensions

27. The facility is classified under category FI for environment, involuntary resettlement, and indigenous peoples under ADBs Safeguard Policy Statement (2009). The partner banks will be required to establish and adopt an appropriate environmental and social management system

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(ESMS). Implementation of the ESMS will ensure that the projects meet ADBs safeguard requirements on environment, involuntary resettlement, and indigenous peoples. The partner banks will appoint suitably qualified officers to oversee environmental and social aspects of the operations and the day-to-day implementation of the ESMS. 28. For this type, size, and nature of project, no significant environmental impacts are expected. The solar power developers are required to implement mitigating measures and good construction management practice. The occupational health and safety performance of the contractors and their workers will be closely monitored during construction. ADB will coordinate with the partner banks to ensure that an ESMS satisfactory to ADB has been adopted prior to ADB issuing a guarantee for the first project.

29. Most solar projects are being sited on barren or unproductive government land in a coordinated effort by state governments. Each 5 MW solar power plant will require about 12 hectares of land. No physical displacement is expected since lands can be flexibly acquired to avoid impacts on existing villages and communities. The solar power plants will typically utilize the existing distribution substations and will be connected to the state electricity grid. If extensions of transmission lines are required, these are expected to be established along existing public road rights-of-way. Potential impacts on indigenous peoples and/or scheduled tribes will only be ascertained once specific sites for each solar power plant are identified. However, since barren and unproductive lands will be used, the impacts on scheduled tribes, if any, are unlikely to be significant. 30. Other social dimensions (e.g., gender, labor issues) of each solar power project will be analyzed as part of the environmental and social assessment to be undertaken by each SPV in accordance with the Safeguard Policy Statement and the ESMS of partner banks. The summary poverty reduction and social strategy is in Appendix 4 and a summary ESMS is in Appendix 5. D. Financing Plan

31. With over 700 MW awarded to project sponsors in December 2010 through the National Solar Mission and an additional 965 MW allocated by the state government of Gujarat (Appendix 3), total investment costs over the next 3 years in the sector are about $4.5 billion equivalent. Assuming a debtequity ratio of 70:30 as prescribed by the CERC tariff guidelines, $3.2 billion equivalent of debt financing will be required. Even if only half those projects materialize ($1.6 billion in debt), significant demand for financing from ADB and the facility is likely. The facility has been conservatively sized at $150 million to support 1215 projects between 2011 and 2014, which would represent a reasonable sample of first projects to be financed. Should there be additional demand for guarantees prior to the end of the 3-year availability period, ADB can propose extending the facility through additional financing. 32. The estimated investment cost for projects to be supported under the facility is $429 million equivalent and assumes (i) a project debtequity ratio of no greater than 70:30; and (ii) a guaranteed percentage of 50% on the total debt of the projects. ADB PCGs would, therefore, cover up to $300 million equivalent of commercial loans to projects from domestic and international commercial bank lenders. The remainder of funding will come from equity and subordinated debt (or like instruments).

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E. Implementation Arrangements

33. The facility can issue PCGs over a 3-year period following Board approval. PCGs will be limited to a maximum tenor of 15 years (18 years may be considered only in exceptional cases, as determined by ADB in its sole discretion). Additional sub-facility limits on partner banks, sponsors, and projects are specified below. Any exceptions or changes to these implementation arrangements will require the prior approval of the Investment Committee.

1. Selection and Approval of Partner Commercial Banks

34. Local and/or foreign partner banks will be selected at ADBs sole discretion. Initially, no more than five partner banks will be selected. Any additions to the number of proposed partner banks will be submitted to the Investment Committee for endorsement (It is proposed that the board of directors delegate approval authority for partner banks to the Investment Committee). ADB will require that each prospective lender submit all documentation and information as outlined in the due diligence checklist (Appendix 6). Prospective partner banks will be screened and due diligence results presented to the Investment Committee for approval based on the following factors: (i) credit standing (at least BBB equivalent credit rating by an international rating agency or AA equivalent credit rating by a local rating agency);12 (ii) experience and capabilities in limited recourse lending in India and/or Asia; (iii) existing portfolio in the power sector; (iv) willingness and ability to make financial commitments in renewable energy required under the facility; (v) senior management commitment; (vi) staffing, management, and technical capability to implement the facility; and (vii) operating policies, guidelines, and systems in loan origination, credit assessment, and loan administration and enforcement. No more than 40% of the entire facility can be consumed by PCGs issued to the same partner bank.

2. Selection and Approval of Projects

35. Projects will be identified and selected by partner banks based on customary due diligence on project preparation, financial and commercial viability, adequate sponsor credentials and creditworthiness, and overall project risk mitigation. Projects will then be screened against eligibility criteria (Appendix 7), and banks will need to submit a due diligence report to ADB that meets all the requirements, including the projects compliance with ADBs policies on anticorruption, safeguards, integrity, and procurement. Projects must have signed a long-term power purchase agreement either with the NVVN (under the National Solar Mission framework) or in compliance with an approved state solar power policy. Individual state policies will be reviewed on a case-by-case basis before PCGs are issued.13 The net present value of the outstanding guaranteed principal and accrued guaranteed interest shall not exceed 50% of the total principal of the guaranteed loan. Guarantees with the same sponsor or parent company of the SPVs shall be limited to no more than five projects or an aggregate of 30 MW, whichever limit is reached first. These limits will ensure a diversified portfolio across partner banks, sponsors, and projects.

12 International credit ratings to be from Standard & Poors (S&P), Moodys, or Fitch Ratings; local credit ratings to be

from CRISIL (an S&P company), Investment Information and Credit Rating Agency (ICRA), or Credit Analysis and Research Limited (CARE).

13 The project team has conducted due diligence on the solar power policy in Gujarat, the regulatory norms, the credit standing of the offtaker, and the template form of power purchase agreement.

10

3. Reporting and Monitoring

36. Partner banks will be required to notify ADB promptly of any loan default. Banks will be required to continuously monitor the performance of the project loans and submit annual reports to ADB that include information on disbursements and repayments, construction progress, project operating performance (as against baseline conditions), and quarterly and annual financial statements, the latter having been audited in compliance with Indian national standards. ADB will monitor the use of the PCG, portfolio quality, and compliance with ADB eligibility requirements. ADB will regularly monitor the credit quality of partner banks (through existing credit rating reports), and will conduct a review for any partner banks that are placed on negative credit watch by major credit rating agencies or have their credit rating downgraded. ADB will carry out an annual performance review of the facility to assess the average risk rating of the portfolio and monitor the performance of the facility against indicators in the design and monitoring framework (Appendix 1).

4. Technical Assistance

37. ADB is preparing separate parallel TA that will build capacity and provide technical support to the partner banks during the due diligence of private sector solar power projects. ADB will engage international engineering consultants to provide expertise and hands-on support to partner banks as they conduct due diligence on individual projects. The consultants will advise the partner banks in the areas of solar technology, insolation and irradiance studies, solar panel manufacturers, and performance warranties. Consultants will also be engaged to conduct periodic training for commercial banks and other stakeholders in several locations across India during the implementation period of the facility. ADB is coordinating the first set of training sessions with the National Renewable Energy Laboratory, part of the US Department of Energy.

5. Anticorruption Policy

38. The partner banks will be advised of ADBs Anticorruption Policy (1998, as amended to date) and Policy on Combating Money Laundering and the Financing of Terrorism (2003). Consistent with ADBs commitment to good governance, accountability, and transparency, the guarantee and/or loan documentation will require the project borrowers to institute, maintain, and comply with internal procedures and controls following international best practice standards for the purpose of preventing corruption or money laundering activities or the financing of terrorism, and covenant with ADB to refrain from engaging in such activities. The legal documentation will further allow ADB to investigate any violation or potential violation of these undertakings. F. Projected Operational and Financial Performance

39. While partner banks will be primarily responsible for carrying out due diligence on the projects, ADB has carried out financial and economic analysis of a representative project to assess its viability and sustainability under different funding and operating scenarios. These results were used to structure the type and tenor of the guarantee. The financial internal rate of return of projects under CERC tariffs would be 13.2% and the weighted average cost of capital is projected to be 7.8%. The economic internal rate of return would be 20.5%, which is above ADBs standard discount rate. The economic and financial analysis is in Supplementary Appendix A.

11

G. Guarantee Pricing

40. The cost of financing14 is critical to the financial viability of solar power projects (and the underlying feed-in tariff). Approximately 85% of the total costs (capital and operations) over the projects economic life are financed up front. This is unlike financing for a thermal power project, where only 30% of the total costs are financed up front (the remainder are fuel and recurrent costs, which are financed annually through cash flow generated by operations). Without the lending experience or installed capacity to prove performance, banks will assign high risk ratings to these projects and commensurate lending margins. The PCGs effectively replace a portion of the project risk, as assessed by the lender, with ADBs AAA credit rating. This risk mitigation will help reduce loan margins required by the partner commercial banks. The PCGs can incentivize banks to reduce the cost of debt, provided that the PCG fees do not consume the savings created by the guarantees risk sharing structure. Guarantee pricing has been set in line with market benchmarks, and will vary within a set band based on exposure size and tenor.

IV. THE PROPOSED ADB ASSISTANCE

A. The Assistance

1. Instrument and Amount

41. The facility will provide for ADB to issue PCGs in an aggregate amount of up to $150 million of principal (or its equivalent in Indian rupees or other foreign currency acceptable to ADB15) in favor of foreign and local commercial banks lending to solar power generation projects in India that meet the minimum eligibility criteria (Appendix 7). Under the facility, ADB will issue PCGs to guarantee scheduled payments of principal and interest under loans to be provided by foreign or local commercial banks. The PCGs will be provided without government counter-guarantee. The facility will partially cover payment default risk on loans made by approved partner banks to private sector borrowers in India implementing solar power generation projects as awarded under the National Solar Mission or an approved state government solar power policy.

2. Terms and Conditions

42. A guarantee term sheet template has been presented to prospective partner banks and a summary term sheet template is in Appendix 7. The guarantee agreement to be entered into with respective partner banks will ensure that the net present value of the outstanding guaranteed principal and accrued guaranteed interest shall not exceed 50% of the total principal of the guaranteed loan. The facility will be available for 3 years from Board approval, with project loans having a maximum tenor of up to 15 years (exceptional consideration of tenors of up to 18 years subject to agreement by ADB). A guaranteed loan may be made in Indian rupees or any foreign currency that is acceptable to the lender and ADB. The Investment Committee determines up-front fees, standby fees, and guarantee fees.

3. Compliance with Investment Limitations

43. The proposed facility will be within the country, industry, group, and single project exposure limits for nonsovereign investments. 14 Inclusive of up-front arrangement fees, commitment fees, margins over the cost of funds, and any guarantee fees. 15 Guarantees issued in currencies other than U.S. dollars will be adjusted on a quarterly basis to ensure the

proposed ceiling amount for the Facility limit shall not be breached.

12

B. Justification for ADB Assistance

44. While solar power technologies have been commercially proven in developed markets such as Germany, Spain, and the United States, there was only 11 MW of installed capacity in India as of December 2010 (mostly installed in 2010). 16 Lenders remain concerned about the risks of solar technology performance, unproven indigenization of the technology to Indias climatic conditions, and the nascent stage of regulatory development with respect to renewable and specifically solar energy. ADBs participation as a guarantor will help mitigate risks and leverage commercial funds into a new subsector in India. The facility leverages commercial bank loans and builds capacity at the appropriate institutions that can apply such knowledge and lessons to future lending in India. 45. ADBs support for the facility is justified based on the following:

(i) ADB assistance will play a crucial role in helping solar projects close affordable long-term financing, which is a necessary condition for the viability of a solar project. As a result of the recent banking crisis, liquidity remains limited, and local banks can rarely provide clean (or uncovered) loans for more than 810 years without recourse to project sponsors. Tenors required for solar power generation projects are typically longer than other energy projects.17 ADBs PCG will share project risks with banks (to reduce the cost of financing) and extend commercial bank tenors to fund power generation plants that have high up-front investment costs, but no recurrent fuel cost. Without the cover provided by ADBs PCG, projects may obtain finance but they will do so with the inevitable condition of having to seek refinancing after commissioning when operational performance has been proven. This is a cost-inefficient process that can be mitigated more appropriately through up-front risk-sharing arrangements.

(ii) Sponsors or developers of solar power projects expect that ADBs participation in

the financing will trigger local and/or international bank participation, additional equity investment, and further interest in the financing of solar projects. ADBs PCG in particular encourages the commitment of local commercial banks, which have little experience in solar energy.

(iii) The facility will play a pioneering role in demonstrating the commercial viability of

grid-connected solar photovoltaic technology in India. The projects will be among the first grid-connected power generation projects with a commercial component under the NSM or state schemes. Once solar power performance under Indian climatic conditions is proven, this will catalyze the deployment of larger-scale solar projects (important to generate sufficient demand for local manufacturing and economies of scale) and increase foreign private sector investment.

(iv) The facility directly achieves the strategies outlined by ADBs energy community of

practice in the ASEI for mainstreaming solar projects through (i) supporting the

16 This figure incorporates recently commissioned solar projects according to project developers and investors. 17 In 2010, the ADB Board of Directors approved long-term loans for two solar power generation projects in Thailand.

ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Grant for the Solar Power Project in Thailand. Manila (loan tenor of 18 years); ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loans and Technical Assistance for the Bangchak Solar Power Project in Thailand. Manila (loan tenor of 15 years).

13

design of appropriate policy frameworks and institutional capacity development for rapid diffusion of solar energy technology for power generation; (ii) creating innovative financing mechanisms and risk mitigation measures to encourage solar power generation; and (iii) facilitating the development of large capacity solar projects that drive down solar generation costs toward grid parity.

(v) Direct ADB lending to solar projects may not always be practical, given the small

size and short development and implementation timetable. The central or state government issues a solar power tariff order within the CERC guidelines and invites investors to tender for allocations based on qualifications, ability to acquire land and close financing. Investors must then deposit funds (scaled based on project capacity) into a government account to secure their performance. They are given a limited timeline (90180 days) to acquire land, sign the power purchase agreement (PPA), and close financing. The investors performance funds would be forfeited if the deadlines are breached. It has proven difficult on other projects for ADB to complete its appraisal and process the transaction within this time frame. The facility is designed to work with partner commercial banks on a streamlined basis to meet financial close within the time lines.

C. Risks and Mitigation Measures

46. The facility involves risks with respect to partner commercial banks and, as the guarantees will be project-specific, to the projects themselves. While not an exhaustive list of risks, the following key issues have been examined and mitigated as appropriate:

(i) Technology risk. Photovoltaic solar panel technologies are still in the innovation stage and are rapidly changing, and often owned by companies with limited track record and weaker credit quality. Moreover, solar panel technologies have varying track record in terms of efficiency and degradation rates. This risk is mitigated to some extent by the eligibility criteria established for the selection of equipment manufacturers based on their operating track record and installed capacity. ADB consultants under the parallel TA will help validate these risks. In addition, more stringent performance and cash flow stress scenarios will be applied to the base case projections to ascertain debt servicing ability.

(ii) Sponsor risk. The projects key risks, i.e., technology, limited track record of

equipment manufacturers, the nascent solar power sector in India, substantial long-term exposures, and relatively high leverage (i.e., up to 70% of the project costs), will be partially mitigated by the sponsors guarantee for completion of the project. Given the critical role of the sponsors, certain eligibility criteria related to the sponsors experience in the sector, the sponsors equity investment in the project, and solvency and liquidity ratios have been included in the program.

(iii) Offtaker risk. Projects will be exposed to nonpayment and/or non-dispatch risk

from the SEBs or defaults from NVVN. Through existing TA support, ADB has been advising MNRE on drafting of the NVVN PPA, and based on continued dialogue with banks and developers, the bankability of the PPA has been improved as a result, including the security provisions and step-in rights for the lenders. There is divergence in the credit profiles of the solar power offtakers for the projects being considered under the proposed facility. The NSM projects benefit from much lower offtaker risks as NVVN, has a reasonably strong credit

14

profile. On the other hand, state government supported solar power projects may face higher offtaker risks given the weak credit profile of the state electricity boards. The PPAs signed with GUVNL have a slightly different tariff structure, which somewhat reduces the payment burden on distribution utilities and is expected to reduce the risk of PPA renegotiation. In addition, the PPA includes compensation payments equivalent to 3 years of revenue in the event of default or termination, which may act as a deterrent but may not essentially mitigate the underlying credit risks. In addition, the program aims to diversify exposures across various offtakers by including exposure limits.

(iv) Regulatory risk. The regulatory environment pertaining to solar power in India is

still evolving and may change over the course of the program and adversely affect the viability of the projects. The central and state governments have shown a significant commitment to promote electricity supply from renewable energy sources (for energy supply diversification as well as climate change motivations) by introducing the RPO requirement, the percentage of which increases every year. The National Tariff Policy was amended in January 2011 to enact solar-specific RPOs as well, demonstrating the political will to support the National Solar Mission. Some state regulators introduced solar RPO requirements even before the policy was amended. Purchases from solar power are exempted from market dispatch orders by state regulators (i.e., must run status). That said, it is very likely that comparable solar technology would be more efficient and cheaper in the medium-to-long-term. This would decrease the competitive standing of the present pipeline of projects, which require higher tariffs to recover the higher technology and investment costs. This would thus expose the underlying projects and ADB to regulatory risks as offtakers may seek to renegotiate contracts and tariffs. As the credit profile of most of the state offtakers is already stressed from under-recovery of costs for conventional power, the incentive-based payments required to establish the viability of solar photovoltaic or solar thermal power projects may add to their financial burden and over time, increase the risks of nonpayment under contracted terms. This is mitigated by the strong commitment of the Government of India to solar power projects with the introduction of very robust regulatory framework.

(v) Risk sharing with partner banks. The project borrowers will ultimately be

responsible for loan repayment. However, there is risk that they will be unable to service the guaranteed loans. By carefully selecting each partner bank, ADB will ensure that appropriate credit assessment and due diligence is carried out before any guaranteed loan is advanced. The proposed facility may provide a back-ended guarantee structure, with ADB providing up to 100% cover to the partner banks on the default risk of the underlying projects. For these projects, there are concerns as it may trigger a sense of complacency in the due diligence, project selection and exposure monitoring activities of the partner banks under the comfort that ADB will eventually absorb all the credit losses in the latter years of the loan tenor. This concern is aggravated by the partner banks limited experience in financing solar power in India and the expectations that over time, ADB will reduce its involvement in the project assessment process. To align the interests of the partner banks with that of ADB and incentivize the partner banks to exercise risk discipline in its approval and monitoring process, it was agreed that ADBs 100% cover will be limited to the tail end of the loan and the

15

guarantee fee would be structured such that partner banks have an incentive to consider continued financial support to the projects on a stand-alone basis.

(vi) Lack of technical expertise of partner banks in the evaluation of solar

power projects. The potential partner banks have limited technical expertise in the evaluation of solar power projects. Although the parallel TA would help build their internal capacity, these benefits may only be realized in the medium term, while the build up of exposure under the facility may occur at a more rapid pace. Some foreign banks operating in India may have some experience in the sector; however, they may not have an in-depth knowledge of the sponsors and the regulatory framework in the country. To mitigate this, operating arrangements have been established such that ADB will be actively involved in the selection of projects by each of the banks, and in the initial transactions, this involvement would be more detailed until confidence is established with the partner banks project selection abilities.

(vii) Selection of partner banks. ADB will rely on the partner banks for the

selection, structuring, and monitoring of the projects. Although broad criteria has been established for the selection of partner banks, there is a need for ADB to conduct a more comprehensive assessment of the risk profile of local commercial banks (i.e., those without an international credit rating). Although ADB will not be exposed to any direct credit risk on the partner banks, any distress in their financial condition would divert resources and may reduce their oversight over the projects covered under the facility. This aspect is critical given the long-dated maturity and the proposed back-ended guarantee scheme. This risk will be mitigated by the detailed evaluation of the credit profile of potential local partner commercial banks both at the initial selection stage and on an annual basis.

D. Assurances

47. 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 facility. ADB will enter into suitable guarantee agreements and other required legal documents once the proposed facility is approved by ADBs Board of Directors and the individual partner banks are approved by ADBs Investment Committee. These agreements will be on terms and conditions satisfactory to ADB.

V. RECOMMENDATION

48. I am satisfied that the proposed guarantee facility would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the guarantee facility for ADB to issue partial credit guarantees without government counter-guarantee, in amounts, in aggregate, of up to $150,000,000 (or its equivalent in Indian rupees or other foreign currency acceptable to ADB) from ADBs ordinary capital resources, in favor of eligible foreign and local commercial banks lending to solar power generation projects in India, 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.

Haruhiko Kuroda

16

President 17 March 2011

Appendix 1 17

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets

and/or Indicators Data Sources and/or

Reporting Mechanisms Assumptions

and Risks Impact Successful implementation of phase 1 of the NSM Increased foreign direct investment by the private sector in the solar energy industry Long-term reduction in levelized cost of solar energy in India

1,100 MW of solar capacity commissioned by 2011; 2,000 MW by 2013 8 commercial banks undertaking independent technical due diligence of solar projects by 2015 50% share of private capital in solar industry by 2015 Regulated solar photovoltaic (Rs17.9 per kWh) and concentrating solar power tariffs (Rs15.3 per kWh) decrease at least 20% by 2015 Regulated ceiling for solar photovoltaic capital costs decreases from Rs169 million per MW to Rs135 million per MW by 2015 (20% reduction)

Ministry of New and Renewable Energy statistics Distribution company data and annual reports Solar industrial associations reports Company annual reports Central and state electricity regulatory commission orders and reports

Assumptions Stable and consistent regulatory policies for the renewable energy sector Consistent policy decisions by the government for the National Solar Mission Risks Change of government, which impacts renewable energy policies Supply of solar energy exceeds RPO requirements plus the demand for renewable energy certificates

Outcome Solar power generating facilities under India's National Solar Mission and state power schemes installed and deliver energy to the grid

205,000 MWh of solar power per annum delivered to the state grids by 2015 Generation of at least 1.76 million tons of CO2 emission reduction in total during the first 10 years of operation Loan tenors for facility supported projects are extended from 810 years to

NVVN reports Carbon market reports Central and state electricity regulatory commission reports

Assumptions Plants achieve capacity utilization factors and energy yields within the estimates assumed by financiers and investors Offtakers honor the payment and tariff provisions in the PPAs and there are no defaults by SEBs (either directly or through NVVN) Risks Solar-specific RPO orders are not issued or delayed

18 Appendix 1

Design Summary Performance Targets

and/or Indicators Data Sources and/or

Reporting Mechanisms Assumptions

and Risks 1215 years

by state regulatory commissions Sufficient solar RPO penalty system is not enacted The grid management systems are unable to handle the variability of energy production from renewable sources.

Outputs Supported financing of solar projects Solar project-related technical due diligence and capacity building provided to partner and local commercial banks Mobilization of affordable debt and equity from domestic and international investors for renewable energy power plants

130 MW of solar power generation capacity commissioned by 2015 1015 solar project loans guaranteed by 2015 Technical due diligence for at least 15 solar power projects for partner and local banks by 2015 An ESMS is established by each partner bank. Debt and equity mobilization of $300 million from domestic and international sources

Borrower annual reports Guaranteed lender annual monitoring reports NVVN annual reports Distribution utility disclosures to state electricity regulators Capacity development technical assistance consultants reports ESMS and other relevant safeguard-related document submissions by partner banks Partner bank annual reports on environmental and social safeguards compliance

Assumptions Project agreements are adhered to by third parties. Interest and participation of domestic commercial lenders, international financial institutions Risks ADBs partial credit guarantee may be insufficient to help lenders overcome their risk assessment to provide required long-term financing

Activities with Milestones 1.1. NSM phase 1 new project allocations made (completed) 1.2. NSM phase 1 projects sign PPA (completed) 2. First partner bank approved (March 2011) 3. Two additional partner banks approved (September 2011) Financial close for NSM phase 1 projects and projects under the state solar policies (March 2011December 2011)

Inputs

ADB guarantees

Foreign and local bank loans (70%)

Equity (30%)

ADB = Asian Development Bank, CO2 = carbon dioxide, ESMS = environmental and social management system, KWh = kilowatt hour, MW = megawatt, MWh = megawatt hour, NVVN = NTPC Vidyut Vyapar Nigam, NSM = national solar mission, PPA = power purchase agreement, RPO = renewable purchase obligation, SEB = state electricity board.

Appendix 2 19

INDIAS NATIONAL SOLAR MISSION A. Background 1. The current power generation capacity in India is insufficient to meet demand. According to the Central Electricity Authority, the energy shortage in 20102011 is expected to be 10.6% (93 terawatt-hours) and the corresponding peak load deficit is expected to be 12.1% (the equivalent energy of 15 gigawatts).1 For annual gross domestic product growth of 8%, it is estimated that India will have to double its current installed capacity to over 300 gigawatts by 2017.2 2. Fossil fuels dominate the power generation mix, with coal accounting for over 50% of the power generation capacity in India. The total installed power generation capacity in India in October 2010 was 167,278 megawatts (MW). Of this, 64.9% was fossil fuel fired power plants (coal, gas, and diesel); 22.3% hydropower; 2.7% nuclear power; and 10% renewable energy.3 Indias energy sector contributes about 58% of the countrys greenhouse gas emissions.4 India is implementing a National Action Plan on Climate Change that suggests that 15% of energy could come from renewable sources by 2020. 3. India has vast solar energy potential. About 5 billion megawatt-hours (MWh) per year of energy exist over Indias land area, with most regions receiving 47 kilowatt-hours per square meter (kWh/per m2) per day, averaging 4.5 kWh/m2/day nationally. This rate of insolation is among the highest in the world, comparing favorably with Australia (4.7 kWh/m2/day) and ahead of the Peoples Republic of China (3.4 kWh/m2/day) and Western Europe (2.9 kWh/m2/day).5 Effective unlocking of this potential will enable rapid capacity addition with relatively short lead times (e.g., less than 1 year) and no additional greenhouse gas emissions. Unfortunately, the total costs (capital and operating costs) for solar power generation are currently significantly higher that thermal power stations, which are centralized and sized (e.g., 2,0004,000 MW) to reap economies of scale. 4. The Jawaharlal Nehru National Solar Mission (NSM), launched in January 2010, is an initiative of the central and state governments to promote ecologically and economically sustainable growth in solar power generation by creating an enabling policy and regulatory framework. The NSM is one of eight national missions outlined in the National Action Plan on Climate Change.6 B. Objectives and Targets 5. The objective of the NSM is to establish India as a global leader in solar energy by creating the policy conditions for its diffusion across the country as quickly as possible. The immediate aim of the mission is to focus on setting up an enabling environment for penetration of solar technology in the country both at centralized (utility-scale, grid-connected) and decentralized (off-grid, rural electricity supply) levels. The mission will adopt a three-phase

1 2011, Load Generation Balance Report 2010-11, Central Electricity Authority, Ministry of Power. 2 2009, Powering India: The Road to 2017, McKinsey & Company. 3 2010, Monthly Power Sector Report: October 2010, Central Electricity Authority, Ministry of Power. 4 2010, Agence France-Presse, Quoting a report from the Ministry of Environment, Government of India. 5 2009, Development Challenges for Large Scale on-grid Solar PV Implementations, Singapore, Conergy

(Referencing International Energy Agency Greenhouse Gas R&D Program, Gloucestershire, UK. 2003) 6 The other seven national missions cover enhanced energy efficiency, sustainable habitat, water, sustaining the

Himalayan ecosystem, green India, sustainable agriculture, and strategic knowledge for climate change.

20 Appendix 2

approach, spanning the remaining period of the Eleventh Five Year Plan, 200720127 and the first year of the 12th plan (up to 2012-13) as phase 1, the remaining 4 years of the 12th plan (20132017) as phase 2, and the 13th plan (20172022) as phase 3. The targets for the deployment across application segments are in Table A2.1.

Table A2.1: National Solar Mission Targets

Application segment Target for Phase 1

(20102013) Target for Phase 2

(20132017) Target for Phase 3

(20172022) Solar collectors 7 million m2 15 million m2 20 million m2

Off-grid solar applications 200 MW 1,000 MW 2,000 MW

Utility grid power (including rooftops) 1,0002,000 MW 4,00010,000 MW 20,000 MW

M2 = square meters, MW = megawatt, Source: Ministry of New and Renewable Energy. Jawaharlal Nehru National Solar Mission: Towards Building Solar India. C. Policy and Regulatory Framework 6. To achieve the NSM objective, it is critical to create a policy and regulatory environment that provides a predictable incentive structure that enables rapid and large-scale capital investment in solar energy applications and encourages technological innovation and lowering of costs. NSM activities are currently embedded within the existing framework of the Electricity Act, 2003; National Electricity Policy, 2005; and the National Tariff Policy, 2006 (and as amended in December 2010). However, in the long run, sector-specific legal and regulatory frameworks will be established for the development of solar power.

1. Electricity Act, 2003 7. The Electricity Act, 2003 has been a major step toward liberalizing the power market in India along the value chain, encouraging competition and attracting private investment. Under the acts part VII section 61(h), the promotion of cogeneration and electricity generation from renewable sources is identified as a consideration in the establishment of tariff regulations, allowing the Central Electricity Regulatory Commission (CERC) to establish a preferential tariff for renewable energy.8 Further, the open access provision allows licensed renewable energy power generators access to transmission lines and distribution systems and only requires that the generators pay a wheeling charge for the use of the transmission lines and a fee to the load dispatch center.

2. National Electricity Policy, 2005 8. The National Electricity Policy, 2005, stipulates the need for increasing the share of electricity from nonconventional sources and allows for the state electricity regulatory commissions (SERCs) to establish a preferential tariff for electricity generated from renewable sources to enable them to be cost-competitive.9 Section 5.12.3 of the policy encourages the development of cogeneration facilities and allows for SERCs to promote arrangements between

7 Government of India, Planning Commission. 2008. Eleventh Five Year Plan, 200712. Delhi. 8 Ministry of Power. 2010. The Electricity Act, 2003.

http://www.powermin.nic.in/acts_notification/electricity_act2003/pdf/The%20Electricity%20Act_2003.pdf 9 Ministry of Power. 2010. The Gazette of India: Extraordinary Part I Section 1.

http://www.powermin.nic.in/whats_new/national_electricity_policy.htm

Appendix 2 21

co-generators and distribution companies interested in purchasing excess electricity through a competitive bidding process.

3. National Tariff Policy, 2006 9. The National Tariff Policy announced in January 2006 mandates each SERC to specify a renewable purchase obligation (RPO) with distribution companies in a time-bound manner. These purchases are to be made through a competitive bidding process. The objective of this policy is to enable renewable energy technologies to compete with conventional sources. Section 6.4 of the National Tariff Policy calls for the relevant commission to establish preferential tariffs with distribution companies for the purchase of electricity from non-conventional technologies.10 The National Tariff Policy mandates that each SERC specify RPOs by distribution companies in a time-bound manner. Given the magnitude and importance of the activities under the NSM, solar-specific amendments have been made to these RPOs. In January 2011, the union cabinet approved the proposal from the Ministry of Power to amend the National Tariff Policy to fix a percentage of energy purchase from solar power under the RPOs. The solar power purchase obligation for the states will start at 0.25% (by 2013) and increase up to 3% by 2022.

4. Renewable Purchase Obligations 10. As of December 2010, 18 states have established RPOs or have draft regulations under consideration (Table A2.2) with RPO requirements ranging from 1% to 15% of total electricity generation. Solar RPOs have also been specified in most cases, and it is expected that the state level tariff orders will be modified to conform to the minimum solar power purchase obligations specified by the Ministry of Power.

Table A2.2: State Renewable Purchase Obligations

State Order date RPO (per annum) Solar RPO (per annum) Andhra Pradesh 6 Jul 10 5% 0.25%

Bihar 2 Aug 10 1.5% (for FY2011, 2.5% for FY2012, 4.0% for FY2013)

0.25% (for FY2011, 0.5% for FY2012, 0.75% for FY2013)

Chhattisgarh 9 Nov 10 5% (for FY2011, 5.25% for FY2012, 5.5% for FY2013)

0.25% (for FY2011-FY2013)

Gujarat 17 Apr 10 5% (for FY2011, 6% for FY2012, 7% for FY2013)

0.25% (0.5% in FY2012; 1% in FY2013)

Haryana 8 Jul 10 1% 0.25% (for FY2011; 3% for FY2022)

Himachal Pradesh

12 Mar 10 10.1% (annual increase of 1% until FY2013)

0.1% (until FY2013)

Karnataka 11 Feb 08 10%

Kerala 23 Nov 10 3% (for FY2010, with annual increase of 0.3% until a maximum RPO of 10%)

0.25%

Madhya Pradesh 7 Nov 08 10%

Maharashtra 3 Mar 10 6% (annual increase of 1% until FY2014; 9% for FY2015 and

0.25% (for FY2011FY2013; 0.5% for FY2014FY2016)

10 Ministry of Power. 2010. Tariff Policy. http://www.powermin.nic.in/whats_new/pdf/Tariff_Policy.pdf.

22 Appendix 2

State Order date RPO (per annum) Solar RPO (per annum) FY2016)

Manipur 26 Apr 10 1% (for FY2011 and FY2012; 2% for FY2013)

0.25%

Mizoram 26 Apr 10 5% (for FY2011; annual increase of 1% until FY2013)

0.25%

Orissa 16 Mar 10 5% (for FY2012; annual increase of 0.5% until FY2016)

0.5% (for FY2012; annual increase of 0.25% until FY2016)

Punjab 24 Nov 06 3% (for FY2011 with a view to achieve 10% by FY2020)

Rajasthan 7 Mar 07 7.45% (for FY2010, 8.5% for FY2011, 9.5% for FY2012)

Tamil Nadu 28 Apr 10 14% (for FY2011)

Tripura 16 Sep 10 1% (for FY2011, 1% for FY2012, 2% for FY2013)

0.1%

Uttar Pradesh Draft 4% (for FY2011, 5% for FY2012, 6% for FY2013)

0.25% (to increase to 1% by FY2013)

Uttarakhand 6 Jul 10 4% (for FY2011, 4.5% for FY2012, 5% for FY2013)

0.025% (for FY2012; 0.05% for FY2013)

West Bengal 10 Aug 10 2% (for FY2011, 3% for FY2012, 4% for FY2013)

FY = fiscal year, RPO = renewable purchase obligation. Source: Indian Renewable Energy Development Agency Limited. Solar Energy: Compendium of Regulations & Tariff Orders of CERC, SERC and Policies of State Governments, http://www.ireda.gov.in/Solar/DATA/ Tariff%20order/Title.pdf; various sources and state information.

5. Tradable Renewable Energy Credits 11. The availability of renewable energy sources differs across states. In some states (such as Delhi), the potential for harnessing renewable energy compared with the demand for energy is very small. In other states such as Tamil Nadu (wind), Rajasthan (solar) or Himachal Pradesh (hydro), it is very high. This variability offers opportunities for interstate trading in the form of renewable energy credits (RECs). 12. In January 2010, CERC announced the terms and conditions for a tradable REC program. Under this program, the renewable energy generators will have two options: (i) sell the renewable energy at a preferential tariff fixed by the concerned Electricity Regulatory Commission, or (ii) sell the electricity generated and the environmental attributes associated with the generation, separately.11 On choosing the second option, the environmental attributes can be exchanged in the form of a REC. The price of the electricity component would be equivalent to the weighted average purchase cost to the distribution company, including short-term power purchase but excluding renewable power purchase cost. CERC will issue the RECs and the value of one REC will be equivalent to 1 MWh of electricity delivered to the grid from renewable energy sources.

13. The RECs can be traded only on power exchanges approved by CERC within the band of a floor price and a ceiling price to be determined by CERC. The floor price is determined by

11 CERC. 2010. CERC Announces Renewable Energy Certificate (REC) RegulationA Step Forward for Green

Energy Promotion. Press Release (18 January).

Appendix 2 23

keeping in view the minimum requirements for ensuring the viability of the renewable energy projects set up to meet the RPO targets. This viability requirement covers loan repayment and interest charges, operation and maintenance expenses, and fuel expenses in the case of biomass and cogeneration projects. The ceiling price is derived based on the highest difference between the cost of generation for the renewable energy technologies and/or renewable energy tariff and the average power purchase cost for the respective states. Based on the above principles, CERC has specified the following floor and ceiling prices for the RECs (Table A2.3). These prices shall remain valid up to FY2012.

Table A2.3: Floor and Forbearance Prices for Renewable Energy Certificates

(Rs/MWh) Applicable Renewable Energy Certificate Floor Price Ceiling Price Solar 12,000 17,000 Non-solar 1,500 3,900 MWh = megawatt-hour, Rs = Indian rupees. Source: Central Electricity Regulatory Commission. 2010. Determination of Forbearance and Floor Price for the REC Framework. Petition No. 99/2010 (Suo Motu). New Delhi (1 June).

6. Power Purchase Agreements 14. The NSM promotes a more affordable tariff through a power purchase agreement (PPA) framework that bundles solar power with unallocated thermal power produced by the National Thermal Power Corporation (NTPC).12 NTPC will then sell the power to the state electricity boards (SEBs) through NTPC Vidyut Vyapar Nigam (NVVN)NTPCs power trading subsidiary (Figure A2.1). In February 2010, CERC announced a feed-in tariff for FY2011 of Rs17.9 per kWh for photovoltaic and Rs15.3 per kWh for concentrated solar power, and declared that the PPAs would have a validity of 25 years. When NVVN supplies bundled power to state utilities at the rates determined in accordance with CERC regulations, those state utilities will be entitled to use the solar part of the bundled power for meeting their RPOs under the Electricity Act, 2003.

12 NTPC is a regulated central power utility, majority owned by the Government of India. While 85% of the capacity of

its power plants is contracted through long-term PPAs, 15% is reserved by the Ministry of Power to be allocated and sold by the NTPC to energy-deficient states on an annual basis. This is considered NTPCs unallocated power.

24 Appendix 2

Figure A2.1: Power Sales and Power Purchase Agreement Architecture

NTPC = National Thermal Power Corporation, NVVN = NTPC Vidyut Vyapar Nigam, PPA = power purchase agreement, RPO = renewable purchase obligation, SEB = state electricity board, SERC = state electricity regulatory commission, SPV = special purpose vehicle. Source: MNRE. 15. In addition to NVVN, certain states such as Gujarat have developed a regulatory framework for solar power. In Gujarat, the Gujarat Electricity Regulatory Commission devised a solar power procurement tariff regime. Under this regime, Gujarat Urja Vikas Nigam Limited (GUVNL) will enter into 25-year power purchase agreements with private developers for offtake of solar power. The tariff will be fixed at Rs15 per kWh for the first 12 years and Rs5 per kWh for the remaining 13 years. The GUVNL PPA includes several notable aspects, including termination payments under certain events of default. D. Institutional Arrangements for Implementing the National Solar Mission 16. It is envisaged that the NSM will be implemented by an autonomous Solar Energy Authority embedded within the existing structure of the Ministry of New and Renewable Energy. The authority secretariat will monitor technology developments, review and adjust incentives, manage funding requirements, and execute pilot projects. The authority will report to the Prime Ministers Council on Climate Change on the status of its program. 17. The broad contours of the autonomous and enabled authority would comprise the following:

(i) A steering group, chaired by the minister for new and renewable energy and composed of representatives from all relevant ministries and other stakeholders, will be set up to oversee the overall implementation of the NSM.

NVVN

NTPC

Solar

SPVs

SEBs

Lenders

Payment Security

Mechanism

RPO Obligation 1,000 MW Thermal +

1,000 MW Solar

Debt

1,000 MW Solar (e.g., multiple projects)

Multiple PPAs

1,000 MW Thermal

Single PPA

Investors

Equity

SERCs

Appendix 2 25

(ii) An executive committee, chaired by the secretary of the Ministry of New and Renewable Energy, will periodically review the progress of implementation of the projects approved by the Mission Steering Group.

(iii) An empowered Solar Research Council headed by an eminent scientist will advise the mission on all research and development, technology, and capacity building related matters.

(iv) A director, with the rank of an additional secretary, will head the authority secretariat and be responsible for day-to-day functioning as well as achieving the goals laid out in a time-bound manner.

26 Appendix 3

PIPELINE OF SOLAR POWER GENERATION PROJECTS

Name of Project Company

Size of Project (MW) Project Type

Project Site Location

Aatash Power Private Limited 5 Photovoltaic Gujarat Abellon Clean Energy Limited 3 Photovoltaic Gujarat AES Solar Energy Private Limited 5 Photovoltaic Rajasthan AES Solar Energy Private Limited (US) 15 Photovoltaic Gujarat Alex Astral Power Private Limited 25 Photovoltaic Gujarat Alex Solar Private Limited 5 Photovoltaic Orissa Alex Spectrum Radiation Private Limited 5 Photovoltaic Rajasthan Alpha Green 1 Photovoltaic Gujarat Ambit Advisory Services Private Limited 5 Photovoltaic Gujarat Amrit Animation Private Limited 5 Photovoltaic Rajasthan APCA Power 5 Photovoltaic Gujarat Aravali Infrapower Limited 5 Photovoltaic Gujarat Asahi Energy Pvt. Limited 5 Photovoltaic Gujarat Aston Field Solar (Rajasthan) Private Limited 5 Photovoltaic Rajasthan Astonfield Solar (Gujarat), US 25 Photovoltaic Gujarat Avatar Solar Private Limited 5 Photovoltaic Gujarat Azure Power (Punjab) Private Limited 2 Photovoltaic Punjab Azure Power (Rajasthan) Private Limited 5 Photovoltaic Rajasthan Azure Power Limited (US) 15 Photovoltaic Gujarat Backbone Enterprises Limited 5 Photovoltaic Gujarat Bhaskar Green Power Private Limited 5 Photovoltaic Rajasthan Camelot Enterprises Private Limited 5 Photovoltaic Maharashtra CCCL Infrastructure Limited 5 Photovoltaic Tamil Nadu Claris Lifesciences Limited 2 Photovoltaic Gujarat Clover Solar Private Limited 2 Photovoltaic Maharashtra Coastal Projects Limited 5 Photovoltaic Karnataka Coastal Projects Private Limited 25 Photovoltaic Gujarat Comet Power Private Limited 5 Photovoltaic Rajasthan Commonwealth Business Technologies (UK) 10 Photovoltaic Gujarat Corner Stone Energy Private Limited 5 Photovolt