Policy Recommendation For Solar Energy Development in AP & TELANGANA

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gopal somani

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Lessons of Solar Policy 2012, Feedback and Experience in Solar Energy Development by Developers in AP

1. The greatest blunder carried by the state authorities is that all the developers though they were L 1 in respective S/S wise competitive bidding, were offered L1 of  L1 bid price i.e. Rs. 6.49 / kwh and asked to confirm acceptance.
2. This move along with $ acceleration has forced the developers to relook at project economics and bankability for funding and sign the PPA at Rs. 6.49 / KWh. The project economics and returns were not sufficient for debt servicing at the L 1 tariff of Rs. 6.49 / kWh.
3. Financing and bankability of solar projects at L1 tariff of Rs. 6.49 / kWh for 20 years and PPA terms emerged to be a major concern.
4. Poor and worsening financial situation of the State DISCOMS increases the credit risks for the lenders. Given that payment default by State DISCOMS is common, lenders do not find the PPAs entirely credible and bankable. Thus, despite apparently an excellent solar policy 2012 in place, solar power development remained risky for SPD’s and lenders.
5. DISCOMS though would honour purchase obligations of solar power at Rs. 6.49 / kWh under the PPA for 20 years, this costs cannot become affordable unless it is brought down further through VGF or designated funds.
6. Solar project sites are mostly located in remote areas and wastelands, which are often not well connected and lacking in adequate infrastructure, however, under the policy developer is required to put in place the required infrastructure themselves, feasibility approvals for interconnection, right of way, acquire land and permits for
land use, secure water connection, get all statutory clearances and put in place the evacuation infrastructure. This is not only costly and challenging for any developer,but also extremely time consuming, and adds to the risks of timely completion of projects.
7. The delays in obtaining permits and approval following long procedures involved in getting feasibility sanctions has been highlighted by SPD’s when M/s KCP Limited presented facts and shared his bitter experience about the hindrances and obstacles during developers meet on 16th August and pre bid held on 22nd August, 2014. The treatment SPD’s are given by all permitting agencies had been strongly felt unfavourable for the investment. The ES has made a strong note on this and assured SPD’s for creation of single window for fast track operations in project clearances and statutory permit grants.
8. Notwithstanding aggressive policy was introduced, bids decided, open offers asked, LOI’s issued and few PPAs got signed, several projects actually delayed because of obvious reasons.
9. One of the fact that the lenders still consider some of the risks much higher than the returns at tariff of Rs. 6.49 in a high financing cost regime including $ escalation will delay in financial closure and force SPD’s to postpone project execution. The main concern of developers and FI’s with all the states is the financial weakness of the DISCOMS having high losses and surviving on subsidy from State Governments.
10. The approach of KPMG as consultants has not been favourable to SDP’s and investment as they lack experience in dealing with strong and investment friendly policy structuring. Their performance and attitude had been unfavourable to SPD’s and they failed to address concerns and issues raised by developers at various forums and meets held in the state.

Energy Demand Supply Gap

Andhra Pradesh has been facing severe energy deficits and the situation is likely to continue in the coming years. The current Deficit is + 15.2%. The deficit has rising trend and likely to continue due to:
a) Domestic coal shortages
b) Drastic drop in domestic gas availability from KG – D6
c) Higher dependency on Hydro Projects

State’s Aggressive Solar Energy Development Plan (Proposed)

1. To address severe peak deficit in meeting growing energy demand, AP has an ambitious plan to tap the solar potential in the state in coming years, issued Solar Policy 2013 and called a tender for procurement of 500 MW of solar power and posted RFS on 16th August 2014.
2. State has the vision and intends to announce a new solar policy with objective of achieving installation of 5000MW Solar Power Projects in the next five years.
a) In the first phase capacity installation of 800 MW is envisaged within first year.The phased development plan year by year for capacity development shall accordingly be defined clearly.
b) Both NVVN and SECI will lead to develop 1000 MW each and the state has already identified 12500 acres of revenue land.
c) State will further identify land parcels for 500 MW capacity solar farms in each solar potential district and facilitate transmission and power evacuation facility with financial assistance.
d) AP state is going to have soon a 50 MW CSP Plant in operation (MEGA) and therefore appropriate provision for development of 500 MW (proposed) CSP technology will be made. The guide lines for tariff, time frame, land requirement and incentives etc. will accordingly be framed in line with NSM phase II CSP program. The addition of Solar Thermal Storage and 15% gas back up will be mandatory for the successful implementation.
e) The policy will also have provision for hybrid options Solar, Biomass, Wind etc. at pilot scale to promote the concept.
f) The PPA, tariff, enabling facility for transmission system to handle the development for assured power evacuation and match with development will also be prescribed for the confidence of developers.
g) The appetite for AP Government to absorb solar power within the affordability of  utilities for long term PPA i.e. 25 years shall be mentioned for bankability of project proposal under various options i.e. PPA with DISCOMS, REC Mechanism and RPO compliance, Open access third party sale, captive consumption, Rooftop and stand alone PV plants for distributed applications.
h) The solar power over and above the appetite of AP government will be allowed to wheel out for other states to absorb within RPO targets and tariff affordable to these states.
i) The current policy and regulations i.e. waiver off wheeling and transmission charges will continue for the next 10 years to support this ambitious development plan of achieving 5000 MW target.
j) The solar power produced will be allowed and kept out of merit order dispatch instructions and all 33 KV and 11 KV feeders carrying solar power will be deemed be must charged. The policy will take care of deemed generation benefit under grid outages.
k) The Government of AP under its Solar Policy 2012 has provided excellent incentives listed here under to the solar power generators in the state for encouraging solar power generation.SOLAR POLICY MERITS AND INCENTIVES WILL CONTINUE IN THE NEW POLICY.

3. Way Forward For A Progressive Solar Policy

a) MERITS as listed in AP Solar Policy 2012 to continue:
i. No wheeling & transmission charges, Net Metering facility allowed to encourage consumers to set up solar PV plants at unutilized places on rooftops, waste lands, industries, offices, institutions, etc,
ii. 100% banking facility
iii. No cross subsidy surcharge
iv. PPA for 25 years and payment security for bankable proposals
v. Electricity Duty exemption
vi. VAT refund for all the inputs required
vii. Refund of Stamp Duty & Registration charges
viii. REC eligibility – To be regularised by APSERC.
b) Energy Department and APTRANSCO are now aware about various issues and concerns expressed in meeting Chaired by ES that perspective developers and entrepreneurs are hesitant to take investment decision in the state partly because of concerns related to the state’s political split and partly due to projects no longer being viable in the wake of increased component costs (driven by the rupee’s devaluation).
c) After deliberate discussions, the ES has appreciated these concerns on inappropriate delays in getting approvals and permits referred at item 7 above and assured for setting up a single window clearance facility. NREDCAP will be
the nodal agency for getting all permits and project approvals in limited time frame. The nodal agency will also facilitate land allocation its deemed land use conversion and feasibility of transmission interconnection etc. The project implementation activities after the approvals and permits will be monitored by a
committee to be nominated by ED.
d) The success story of solar energy development under NSM Phase I and Phase II Batch I projects could be learning lesson for these two new states to follow for capacity allotment to SPD’s for its timely achievement of ambitious Solar Energy Development Plan .
e) The concept of L 1 tariff being offered to all the SPD’s need to be done away and instead FIT discovered through a transparent competitive bidding process acceptable to SPD’s be offered.
f) It may please be noted that the procurement undertaken by AP Transco on behalf of the DISCOMs in 2013 through competitive bidding was not complying provisions of Section 63 of Electricity Act and further same went against the
tender conditions for allotting the projects to L1 bidder in each location. This was a missed opportunity where instead of developing 1000MW of solar power, as planned in the policy, not even 10% capacity was commissioned.
g) It may kindly be noted that for the RFS issued, the determination tariff through competitive process for district wise S/S and selection of SPD’s as explained in the pre bid meet on 22nd August, 2014 appears to be complex and may again fail attract the SPD’s to take investment decision in development of solar energy projects in the state.
h) A special incentive of 70 paisa / kWh in L 1 tariff i.e. Rs. 6.49 / kwh or alternately incremental tariff could be offered to all SPD’s who are not eligible for AD benefits will result in economic viability of the solar projects allotted under the existing policy, attract these developers to sign the PPA and deliver the projects in time.
i) The State Government is well aware that present financial health of distribution leniencies and utilities in most Indian states do not allow them to support high cost solar energy in its energy basket. The local FI’s therefore consumes lot of time for financial appraisal and project approval for funding even the SPD’s signs the PPA with the assigned DISCOMS. In view of this the solar energy development will still need strong policy support in the form of FIT, Capital Subsidy, VGF or concessional treatment in land allocation and transmission by way of waiving wheeling charges and T&D losses.
j) Several issues and concerns surfaced during developers meet on 16th August, 2014 had been major hurdles for solar power developers and lenders in past.[/ezcol_1half]

[ezcol_1half_end]4. Concept of Solar Farm development:

a) For the large scale development ahead, the DISCOMS and APTRANSCO in the state shall identify large stretches of revenue land in Solar potential identified  zones and take development of Solar Farms of minimum 500 MW capacity in all solar potential districts. APTRANSCO will accordingly take care of grid interface and power evacuation through financial assistance. The land reform laws should facilitate automatic transfer of lease with land use conversion (deemed conversion) for solar farms and large scale implementation of solar power plant / industry and investment by SPD’s. NCF funds could be availed and used to strengthen state grid infrastructure to provide enabling power evacuation arrangement upfront to match with objectives, vision and targets.
b) The New Solar Policy for large scale development is prepared with following guidelines.
i. The solar farms duly completed with transmission facility and assured power evacuation may be offered to SPD’s at preferential FIT (to be discovered through a transparent system with CERC / State Regulators announced tariff as bench mark). The SPD’s may be asked to deposit / share such development cost per MW.
ii. Alternately the DISCOM may ask for minimum sweat equity or appropriate energy share in yearly generation yield in lieu of such created assets by State / DISCOMS / APTRANSCO
iii. The project proposal with assured power evacuation arrangements and PPA with affordable long term tariff will have no issues in getting financial approvals of FI’s.
iv. It will also facilitate the obligated agencies of non solar potential states to meet their RPO targets by putting their own solar farms in association with AP Government. The power produced in such solar farms could be wheeled and carried to their respective states with specific Regulatory frame work for wheeling and transmission in place.
v. Solar farms so developed could also be offered to developers (open access, REC, third party sale, captive etc.) at competitive price and assured development plan.

5. Utility Grid Power Projects for sale through RE (Solar) Certificate Mechanism:

a) The solar communities in India including MNRE, State Governments and Regulators are well aware about failures of REC Mechanism and RPO compliance
b) The enforcement of RPO compliance has been ineffective.
c) The penal actions are not strong enough for obligated agencies to fulfil mandatory RPO targets and its compliance
d) The long term floor and ceiling prices are not provided by Regulators
e) The trading of RPO has been limited and investors are losing interest
f) The RPO Mechanism is not bankable for large scale deployment.
g) The wheeling and transmission losses are not uniform in all the states.
h) The achievement of capacity installation under RPO and REC mechanism in the entire country must be seen. This could be an eye opener for MNRE and all state government before fixing an ambitious target under this category. A powerful study need to be commissioned for future success of such plans.

6. ROLE – Central and State Government
a) The state and central government must act and drive the targets of solar mission and RPO, vision and objective of large scale solar energy development plan where the power produced by SPD’s be offered and sold to DISCOMS within their affordability. The arrangement will be bankable.
b) A strong political will and gap financing arrangement (FIT, VGF, LOW COST DEBT FUNDS, CAPITAL SUBSIDY, incremental FIT for initial ten years and constant for remaining period etc.) for DISCOMS and Transmission utilities through designated funds will produce results in shortest time. NGF funds needs to make available for transmission infrastructure and bridging the gaps in tariff through VGF.
c) This arrangement will realize the grid parity solar energy on fast track.
d) The system so designed will have warm response from entire solar communities.
Finally, excessive emphasis on MW size projects may not be appropriate for faster and greater penetration of solar technology in the state. Priorities therefore must shift to eradicate energy poverty and provide energy access to all. Given the spread of solar resource availability across the state in various districts, it would be more useful to promote smaller size off-grid, stand alone PV plants, and rooftop projects for schools, govt. buildings, urban households etc, energising agriculture pumps and service to irrigation schemes. This does not in any way imply that MW size projects should not be promoted, but the focus should shift more towards service to rural society and population . This would not only unleash a large untapped demand and huge potential for SPV technology.
The German model where higher FIT is offered to smaller projects compared to larger projects could be looked into for its applicability in India and states. Such focus on smaller sized projects would also help channel subsidy better, release subsidies due to migration from diesel based captive generation and mitigate large off-taker risks prevailing.
As the grid gets extended many of these smaller installations would be able to also provide energy to the grid, and with well planned caps on infirm capacity addition the problem of congestion and excessive financial liability could also be addressed.
It is therefore clear that the gaps in the prevailing policy are few but quite critical for effectively unleashing immense solar potential in the state. The solutions are widely recognized and need to be prioritized.

Roof Top, Standalone small PV plant and Irrigation Pumping

To continue with the momentum created by the JNNSM and the state initiatives and ensure that India emerges as the global destination for investment in solar energy following categories needs a special treatment to support:
1. Large scale application in Rooftop KW range to 1 MW, Remote and Stand Alone PV system is the need for energy security and energy independence.
2. The rooftop, remote and stand alone PV plants do not require extra grid infrastructure, it will reduce the transmission losses, avoid low voltage conditions and provide energy security.
3. Irrigation Agriculture Pumping
a) The large scale application of energizing irrigation pumping sets through dedicated small 20 to 250 KW PV plants will revolutionize the solar energy development in Rural villages.
b) Net metering arrangement need to be made and separate regulation is required for compliance. The banking of surplus Solar energy is required and separate feed in tariff for surplus power fed to the grid is required for large scale
deployment, the CERC bench mark tariff could be a good idea. The service to rural village population is the need of the day and program must be aimed to encourage them to use PV Solar Systems for irrigation pumping. This will require a strong separate policy as publicly advocated by Honourable PM. The small 10 – 250 KW capacity PV plants can be installed at village level which will ensure electricity to remain available during the day and will be independent and can be interfaced with local grid for continuity. The economic models need to be promoted through IPP / DISCOMS. The success of the scheme if implemented at pilot scale in 100 – 200 villages in first instant will revolutionise the development and will generate huge employment.
1. Standalone DC pumps with 3 to 10 KW could also be covered under this scheme.
2. The Central and State subsidy with low cost bank finance for large scale application will boost this program where agriculture connection will be feasible for the farmer. The new solar policy being worked out need a thorough review and open discussion holding a brain storming session to be participated by all the stake holders including authorities
from MNRE, SECI, NVVN, State Regulators, DISCOMS of other states and financial institutions like PFC, REC, SBI, KFW, WB, ADB and IREDA . Apart from KPMG involvement, the expertise of IIT’s / IIM’s, IDFC Policy group be involved a power full Solar Policy to emerge.A thorough review of Tariff structures and bidding RFS being issued under NSM Phase II upcoming batches, existing policies of other states, affordability of DISCOMS and rate payers
need to be evaluated and compared with Policy Provisions of this draft document. It should not happen that the investors opt to be away for selecting other states or NSM Phase II program as their preferred destination for investment and state face yet another failure in its goal.

Additional payment security

Recognizing the importance of concern of lenders on tariff, PPA terms and payment security, the ministry introduced an additional payment security scheme for grid connected solar projects under JNNSM. The Government has approved Payment Security Sc heme to facilitate timely financial closure of projects under Phase I and Phase II of the JNNSM by extending Gross Budgetary Support (GBS) amounting to Rs.486 crore to Ministry in the
event of defaults in payment by the State DISCOMS to NVVN. The core component of the Payment Security Scheme is to create Solar Payment Security Account (SPSA) financed from GBS to Ministry to have availability of adequate funds to address all possible payment related risks in case of defaults by DISCOMS for the solar power. The PPAs have payment security mechanism for recovering the payments through Letter of Credit (LOC), an escrow mechanism, and subsequently sale to third party or even power exchange pending bilateral negotiation with third party. Similar provisions as additional payment security could be considered for incorporation in the PPA for the satisfaction of lenders and timely financial closer.

Gopal Lal Somani

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