TAMIL NADU

SOLAR POLICY
targeted installed capacity

3,000 MW 304 MW 15 MW

of solar power by 2015

solar renewable purchase obligation by 2015

installed capacity of solar power in 2012

The Tamil Nadu Solar Policy

INDIA SOLAR POLICY BRIEF

1,900-2,100 kWh/m2 8.9 m MWh/year (10.5%) 2,247 MW (17.5%) 2-12 hours

power outages per day

solar irradiation per year

A detailed analytical outlook on the opportunities and risks under the Tamil Nadu State Solar Policy

-` 80.9 billion

income of DISCOMs in 2011

BRIDGE TO INDIA 2012

LCOE of diesel power

` 8-20/kWh

LCOE of solar power

` 7/kWh
APPC

` 2.54 ` 7.00 ` 5.50 ` 5.75

70

COMMERCIAL INDUSTRIAL RESIDENTIAL

current electricity prices /kWh

BRIDGE TO INDIA, 2012 1

DISCLAIMER

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BRIDGE TO INDIA, 2012

CONTENTS

1. 2.

Overview Utility scale projects - 1,500 MW

High Tension (HT) customers through Solar Purchase Obligation - 500 MW Distribution companies (DISCOMS) through competitive bidding 1,000 MW

01 03 03 04 07

3. 4. 5. 6. 7.

Rooftop solar systems - 350 MW REC off take - 1,150 MW Policy summary Glossary of terms About the authors

10 12 13

BRIDGE TO INDIA, 2012

TAMIL NADU SOLAR POLICY

3,000 MW
UTILITY SCALE PROJECTS
1,500 MW

RENEWABLE ENERGY CERTIFICATE (REC) PROJECTS

1,150 MW

ROOFTOP PROJECTS
350 MW

SOLAR PURCHASE OBLIGATION (SPO) PROJECTS

500 MW

COMPETITIVE BIDDING PROJECTS

1,000 MW

PRIVATE ROOFTOP PROJECTS

50 MW

GOVERNMENT ROOFTOP PROJECTS

300 MW

OFF TAKERS

High Tension DISCOM (TANGEDCO) consumers (33 kV+) / SPO obligated entities

Open-Access consumers DISCOM DISCOMs (TANGEDCO) RPO obligated entities SPO obligated entities

DISCOM (TANGEDCO)

SPO of 3%/6% FiT with state High returns under the Frequent power Project sizes REC mechanism expected at 5-50 No size restriction of outages projects MW High cost of Pro-active and diesel responsive management by state authorities

OPPORTUNITY

Net metering Net metering Generation Rising power Based Incentive costs (GBI) available Rising power costs

Source: BRIDGE TO INDIA

OUR VIEW

MEDIUM TO HIGH likelihood of realisation

MEDIUM likelihood of realisation

LOW likelihood of realisation

HIGH likelihood of realisation

HIGH likelihood of realisation

BRIDGE TO INDIA, 2012

BRIDGE TO INDIA, 2012

No penalty structure to enforce SPOs Not all SPOs will be bankable PPA signatories

PPA bankability Enforcement of RPOs Little clarity on (demand for RECs) process as yet FiT auction Technical Medium-term pricing of process RECs (bankability) challenges unpredictable Overall supply/demand of (power evacuation) RECs in India

Little clarity on process as yet Technical challenges (power evacuation)

RISKS

1. OVERVIEW

Tamil Nadu already has significant experience with the generation and transmission of renewable energy as it has the highest installed capacity for wind power in India.

The Tamil Nadu Solar Energy Policy 2012 was announced in October 2012, making Tamil Nadu the seventh Indian state out of 28 to announce a solar policy. The operative period of the policy is from 2012 to 2015, during which it targets to add 3 GW of solar power. No breakup between photovoltaic (PV) and concentrated solar power (CSP) projects has been given.

Tamil Nadu already has significant experience with the generation and transmission of renewable energy as it has the highest installed capacity for wind power in India (over 40% of total installed capacity; a total of 6,613MW in December 2011)3. At the same time, the state has a significant energy deficit. The total

Break-up of policy targets

Category Utility Scale Off takers High Tension (HT) consumers [through Solar Purchase Obligation (SPO)] TANGEDCO (DISCOM) (through competitive bidding) Rooftop REC
Source: BRIDGE TO INDIA

Capacity addition (MW) 5001

BRIDGE TO INDIA, 2012 1

1,0001 50 300 1,150

Private buildings Government buildings RPO obligated entities/third party consumers

The total annual electrical energy deficit in the financial year 2011-12 was 8.9m MWh with a peak monthly deficit in March.

The policy is targeting 1,500 MW of capacity addition through utility scale installations. Of this, 1,000 MW will be allocated through competitive bidding for sale to Tamil Nadu Generation and Distribution Company Limited (TANGEDCO). The remaining 500 MW will be driven by private power purchase agreements (PPAs) with power consumers who need to fulfill solar purchase obligations (SPOs). A further 350 MW capacity addition is being targeted from rooftop solar installations. Of this, 300 MW is expected from the rooftops of government owned buildings, while 50 MW is expected from privately owned or domestic rooftops. For both, net metering is allowed. The remaining 1,150 MW of the total target is to be added through Renewable Energy Certificate (REC) projects2.

annual electrical energy deficit in the financial year 2011-12 was 8.9m MWh with a peak monthly deficit in March. The peak power deficit during that year stood at 2,247 MW or 17.5%. The Central Electricity Authority (CEA) estimates that the annual electrical energy deficit will significantly rise to 27.4m MWh (29.6%) in the financial year 2012-13 with an anticipated peak power deficit of 4,123 MW (30.7%)4. Power generation in Tamil Nadu comes mostly from wind, coal and hydro power plants. The states main industries are textiles and automotive. Solar power could help reduce the deficit and the use of expensive diesel for back-up gen-sets. The generation potential in Tamil Nadu is high. Taking

--------------------1 The original policy document envisaged 1,000 MW from HT consumers and 500 MW from sales through the TANGEDCO. The TANGEDCO portion had subsequently been increased to 1,000 MW. We are assuming that this will lead to an equivalent reduction of the HT customer share (leaving the overall target intact). TANGEDCO will also sell the procured power to the SPO obligated entities. 2 To download the policy follow the link given in the Policy Details table at the end of this document 3 Ministry of New and Renewable Energy (MNRE) annual report financial year 2011-2012 4 Load Generation Balance Report 2012-13; CEA. The annual peak power deficit is calculated by subtracting the highest availability at any point in time from the highest demand at any point in time during that year.
BRIDGE TO INDIA, 2012

The Tamil Nadu Solar Policy attempts to shift part of the financial burden from the DISCOMs to large power consumers.

the average of various cities in Tamil Nadu, based on 2011 data from the Central Electricity Regulatory Commission (CERC)5, we arrive at the following data points: Average irradiation: 5.36-5.67 kWh/m2/day6 Average ambient temperature: 28.8 degree celsius Expected plant output: 1,560 MWh/ year/MW Capacity Utilization Factor (CUF) for a year: 17.81% The Tamil Nadu distribution company (DISCOM) is a high loss making entity that can currently hardly afford to purchase expensive solar power over a long period of time through, for instance, long term Feed-in-Tariffs (FiT). The policy reflects this concern to some extent by shifting part of the financial burden from the DISCOMs to large power consumers.

in Indias north-west. Since then, the market has been very slow, waiting for the second phase of the NSM and new state policies such as the Tamil Nadu Solar Policy to be announced. So far, the policy has attracted great initial enthusiasm from a number of new entrants: project developers from south India as well as large power consumers (obligated entities). However, the policy is still a work-in-progress and a number of essential aspects such as implementation of SPOs and other aspects or a payment security theme that ensure a realization of the targets are under discussion or need to be tackled.

The strongest part of the policy so far is the SPO, which nudges industrial and commercial customers that are already plagued by high and rising power costs and low supply security towards adopting solar power quickly. The The timing of the policy is good: The most interesting aspect of the policy is first wave of installations under the the net metering for 350 MW of roofNational Solar Mission (NSM) Phase I top projects as it has the potential to and the Gujarat Solar Policy has crestructurally change the solar market ated a spurt of growth from almost in Tamil Nadu and India as a whole nothing to 1,000 MW between early (if implemented successfully). Most 2011 and mid 2012 with grid-connected doubts come around the proposed power plants being built mostly in targets for REC-based projects. the states of Gujarat and Rajasthan

--------------------5 Performance of solar power plants in India; CERC 6 Solar irradiance data in Tamil Nadu; TEDA
BRIDGE TO INDIA, 2012 2

2. UTILITY SCALE PROJECTS HT CUSTOMERS 1,500 MW (THROUGH SOLAR

PURCHASE OBLIGATION) 500 MW
Solar projects set up under the SPO mechanism will not receive financial assistance from the government in the form of FiT, GBI, VGF or capital subsidies.

Tamil Nadu is preempting that buying solar power instead of conventional power will be a viable option for HT consumers by 2015 and is not making any long-term financial commitments.

Tamil Nadu has introduced a new SPO mechanism. Under this, certain power consumers have to purchase a set quota of solar power. The SPO has been fixed at 3% till December 31st 2013 and 6% from January 1st 2014 onwards. The obligated entities to which the SPO applies are different from those specified by the national Renewable Purchase Obligation (RPO). SPO obligated entities include HT consumers, who receive power from the grid at a constantly maintained high voltage level, of more than 11kV, transmitted though high tension lines. These include special economic zones (SEZs), railway traction, registered factories7, textile factories, tea estates, government educational institutions, government hospitals, places of worship, consumers paying commercial electricity tariffs, cinemas and theaters, lift irrigation8 cooperative societies, industries guaranteed with 24/7 power supply, IT parks, telecom towers, all colleges and residential schools and all buildings with a built up space of 20,000 square meters or above. To fulfill their SPOs, obligated entities can produce their own solar power, purchase power from a solar plant, purchase RECs on any of the national power exchanges or purchase power from TANGEDCO at the prevalent solar tariff. The solar projects set up under the

SPO mechanism will not receive financial assistance from the government in the form of FiTs, Generation Based Incentives (GBI), Viability Gap Funding (VGF), or capital subsidies. However, there is a possibility that these projects will be allowed to get RECs as SPO requirements are supposedly not conflicting with the RPO mechanism. If allowed, this can have a significant upside to such projects. More clarity is needed on the subject. Also, accelerated depreciation (AD) benefits will apply. The market tariff for solar power in India has already fallen to ` 79( 0.11)10/kWh , which is approximately the same as the tariff paid by commercial consumers in the state. If, as we expect, the cost of solar power falls by a further 40% till 201511, power could be generated at ` 4.2 ( 0.06)/kWh. This implies that the power tariff paid in the state, which is between ` 4.5 ( 0.07)/kWh and ` 9.5 ( 0.15)/kWh for the obligated entities (who comprise of primarily commercial and industrial tariff customers), will reach parity with solar tariffs by 2015. Thus, Tamil Nadu is preempting that buying solar power instead of conventional power will be a viable option for HT consumers by 2015 and is not making any long-term financial commitments, as it would have done under a FiT scheme such as that of phase one of the NSM.

The opportunity
The Tamil Nadu government has estimated that through the implementation of the SPO mechanism 500 MW of solar power will be installed for direct use of or third party sale to SPO obligated entities. This provides an oppor-

--------------------7 Factories registered under the Factories Act (1984) 8 Lift irrigation is a method by which water for irrigation is lifted with the help of pumps or other such means which use electricity 9 Conversion rate used in this document is 1 =65 ` 10 ` 7/kWh was the lowest winning tariff bid for a solar project during allocations by the state of Odisha for 25 MW to Alex Green Power in February 2012. While the tariff was ambitious then, we believe that due to a recent fall in polysilicon prices and the continuing oversupply in the market is its feasible now. CERC estimates the current cost per kWh is at INR 7.48. 11 BTI estimate based on the falling CAPEX for a solar plant
BRIDGE TO INDIA, 2012 3

Many commercial consumers will not have the infrastructure, space or technical knowledge to set up large solar power plants themselves, and will often choose to buy power from private power producers.

tunity for project developers to enter into private PPAs for the sale of solar power to those obligated entities that do not regard solar power as part of their core business or that do not have the financial liquidity to set up a solar power plant to fulfill their SPO. For example, many commercial consumers will not be equipped with the infrastructure, space or technical knowledge to set up large solar power plants themselves and on site. Therefore, they will often choose to buy power from private power producers by signing a PPA with them. Industrial consumers, while having a lower power tariff, are typically larger single off-takers and might have space locally available to build solar power plants. Obligated entities can either have solar plants set up on site (under a captive model) or off site (under an open access model). Project developers could supply power to one customer or to many.

be stringent. For this the state has to levy penalties, which are higher than the prevalent REC prices for entities, who default on their SPOs. The policy document as it stands today does not outline a penalty structure. For plants that are located off site and supply solar power through the grid, there are risks related to charges (transmission charges, transmission losses, wheeling charges, wheeling losses, crosssubsidy charges) and related to the stability of the grid as such. As of now, the policy just specifies that wheeling charges will be as normal and tax concessions as per the states industrial policy. Further information will likely be provided in the Request for Selection (RfS) at a later point.

Outlook
We believe that under the current policy structure around half of the 500 MW of SPO installations will be constructed. We reach this figure after discounting for those obligated entities (48%)16 whose current power tariff has not yet reached parity with solar tariffs and who will default on fulfilling their SPO as long as there is no credible penalization. The realized capacity addition would increase significantly, if the state imposes a strict penalty on the defaulters.

In order to ensure the SPO target is fully realized, the enforcement of the mechanism by the state has to be stringent.

Another factor making solar a viable option for the obligated entities is the frequent power outages and high diesel prices for diesel-based gen-sets in the state. Tamil Nadu has been facing frequent bouts of load shedding which stretch up to 10 hours in the suburbs and over 2 hours in the cities, such as Chennai12. Diesel is already more expensive than solar power, with a levelized cost of energy (LCOE) between ` 8 ( 0.12)/kWh and ` 20 ( 0.31)/kWh13 while solar has an LCOE of ` 7 ( 0.11)/ kWh to ` 9 ( 0.14)/kWh14. Thus, in a state with an energy deficit of 18%15 in its monthly energy requirement, buying solar power already makes financial The Tamil Nadu Electricity Developsense for some commercial and indusment Authority (TEDA) as the nodal trial consumers. agency will be directly allocating 1,000 MW by 2015. The solar power produced The risk from these projects will be sold to the state DISCOM, TANGEDCO, at a preferIn order to ensure that the SPO tarential FiT. get is fully realized, the enforcement of the mechanism by the state has to

DISCOMS (THROUGH COMPETITIVE BIDDING) 1,000 MW

--------------------12 Outrage in Chennai over frequent outages; The Hindu 13 BRIDGE TO INDIA analysis 14 BRIDGE TO INDIA analysis 15 NLDC monthly report September 2012 16 A study on power scenario in Tamil Nadu; P. Jayabalan
BRIDGE TO INDIA, 2012 4

The opportunity
Following the spurt of growth in the Indian solar industry, driven by the Gujarat Solar Policy and the NSM there has been a marked lull in the market since the middle of 2012, since when there have been no PV project allocations in India. Even for 2013 and beyond, so far only projects amounting to 750 MW from phase two batch one of the NSM (to be announced shortly) and 40 MW from the Karnataka Solar Policy are expected. As of now, Tamil Nadu and more recently still Rajasthan, are the only states with current project announcements that have announced that they would be paying a FiT to projects. The other currently available policies (Karnataka, Madhya Pradesh, Andhra Pradesh and Chhattisgarh) have so far not made any specifications. A consultation meeting was held by the TEDA in Chennai on November 23rd 2012 to discuss the details of this policy. These are the main points: Bidders need to show a net worth (roughly equivalent to the balance sheet) of ` 10m ( 150,000) per MW. Minimum capacity is 1 MW there is no limit on the maximum capacity, but single project sizes will likely not exceed 50 MW. This is due to the evacuation constraints of the grid17. Also, at the TEDA meeting, Mr. K Gnanadesikan, Chairman of TANGEDCO, declared that everybody will get a piece of the cake18, suggesting that there will be a large number of project developers rather than a few large ones. The validity of the PPA will be 20 years Project developers need to have their land tied-up before they take part in the bidding. The tariff will be determined by a

Mr. K Gnanadesikan, Chairman of TANGEDCO, declared that everybody will get a piece of the cake.

The tariff will be determined by a slightly convoluted reverse bidding process, in which all bidders will be asked to match the lowest bid. There will be a 5% annual escalation of the tariff for 10 years.

reverse bidding process called the open tender-two part system in which all bidders have to submit two separate bids in two separate sealed envelopes. Of this, the first is a techno-commercial bid with the commercial terms and conditions and the financial statements of the bidder and the second, a financial or price bid. The last date for submission of the bid is January 4th 2013 at 14:00 hours. BRIDGE TO INDIA, as per its financial model, expects the tariff at an internal rate of return (IRR) of 12.8% to be approximately ` 6.2 ( 0.09) /kWh. As per TANGEDCO, there will be a 5% annual escalation of the tariff for 10 years. The timeline for project developers starts with the issuing of the tender and not with the signing of the PPA (as in previous policies in India). Signing of the PPA is expected 120 days after the publication of the tender. The project is to be commissioned 360 days after of the publication of the tender. The tender was published on December 5th 2012 by the TANGEDCO. Project development investments specified so far, are: an earnest money deposit of ` 700,000 ( 10,800) per MW for taking part in the bidding process and a security deposit of ` 3,000,000 ( 46,000) per MW once the PPA is signed.

The risk
The state utility has a record of delaying its payments to wind project developers in the state since July 2011. It now owes approximately ` 35 billion ( 538m) to 400 members of the Indian Wind Turbine Manufacturing Association (IWTMA)19. The delay in payments can primarily be attributed to the fact that it has the second highest loss making state utility in

--------------------17 For a full list of the evacuation capacity of districts, please refer to the recent TEDA document 18 Piece of cake for everyone: TANGEDCO chief; The Hindu Business Line 19 Up in the air; Business World 20 Ibid.
BRIDGE TO INDIA, 2012 5

The only guarantee of payment is a standard one year, revolving letter of credit, which wind park operators also hold but do not redeem in order not to jeopardize their longer term payments.

the country with a net internal loss of ` 80.9 billion ( 1.25 billion) in 2011, which has gone up to ` 500 billion ( 7.7 billion) by March 2012 (estimated)20. Due to TANGEDCOs poor financial condition and past record for delayed payments, the strength of its PPA is being questioned by investors and banks. There is currently no provision for a payment security scheme except for a Letter of Credit (LoC) to cover the payment of tariffs to the 1000 MW of solar projects that is to be allocated through bidding. Thus, project developers might find it difficult to obtain financing for their projects in the state. In countering critical questions from prospective bidders at the TEDA consultation meeting of November 23rd 2012, Mr. K Gnanadesikan of TANGEDCO said that you can tell your bankers that there is absolutely no problem in getting the payment. So far, however, the only guarantee of payment is a standard one year, revolving letter of credit, which wind park operators also hold but do not redeem in order not to jeopardize their longer term payments. An additional risk inherent in the policy as it currently stands is the bidding process. By this, all bidders will be asked to match the lowest bid (although irradiation varies between 5.36 and 5.67 kWh/m2/day across the states districts). This provision, and the per-district limitations on project sizes, will make it difficult for bidders to estimate what could be a winning bid and how the state would handle over-subscription. We expect that there will be significantly more discussion and detailing of the process. BRIDGE TO INDIA can help developers to participate in the

process by providing them with key planning related insights that will help them to get an allocation. Also, we can offer our project development services for a professional and timely execution of plants.

Outlook
We estimate that under current conditions, only a small amount of projects will be realized. At the moment, TANGEDCO would receive a high (solar) tariff from those obligated SPO entities that decide to act upon their SPO but do not buy solar power under direct PPAs with project developers, develop own solar projects or buy RECs. In theory, this could cover the costs of a solar FiT that TANGEDCO pays to project developers selling power to it directly. However, there is no direct connection between the FiT and the solar tariff paid by the obligated entity. The extra solar tariff income would be absorbed by the overall financials of TANGEDCO, where it would make little difference. Thus, payment uncertainties remain. Some project developers might choose to build plants (probably initially financed purely on equity) under a PPA and, in case of default, see the REC mechanism as a fallback option. They would be betting on a strengthening of either the TANGEDCO PPA or the REC mechanism in the future to allow them to refinance the project after commissioning. Any credible payment guarantee scheme or a direct link between the solar tariff paid by an obligated entity and the solar power producer would significantly strengthen this project option.

The per-district limitations on project sizes will make it difficult for bidders to estimate what could be a winning bid and how the state would handle over-subscription.

BRIDGE TO INDIA, 2012

3. ROOFTOP SOLAR SYSTEMS350 MW

Tamil Nadu is the pioneer in allowing net metering in India on a MW scale.

The Tamil Nadu policy is targeting a capacity addition of 300 MW from rooftops of government owned buildings and 50 MW from rooftops of privately owned buildings. In order to encourage installations in the rooftop space the policy allows net metering at 240V, 415V and 11KV. This is significant, as the state is the pioneer in allowing net metering in India on a MW scale. Under the mechanism, two meters are set up along with a rooftop solar system: one which calculates the units of conventional power that is consumed by the owner of the rooftop system and another which calculates the amount of solar power the rooftop solar system feeds back into the grid. The owner of the rooftop system ultimately pays for the net difference of the power consumed, as calculated by the meter. (This mechanism is also often called gross metering). For net metering to function efficiently, the local grid has to be responsive and stable, which is not the case everywhere in the state. In addition to allowing net metering the private rooftops with solar systems installed before March 31st 2014 are also eligible to receive a GBI. The GBI starts off with ` 2 ( 0.03)/kWh for the first two years from the date of installation (independent of the year of installation), ` 1 ( 0.02)/kWh for the next two years and ` 0.50 ( 0.01)/kWh for the last two years. However, 50 MW serves as both a targeted capacity addition from domestic rooftops and also as a cap for the GBI for this category.

plant. This would cost approximately ` 300,000 ( 4,700), including the solar meter. Assuming that all power would be fed into the grid, that power tariffs escalate by 5% per annum (as they have done on average for the last years), and assuming that such a system would be fully funded by equity, we do not arrive at a positive return. For a 100 KW system (with 70% debt finance at 12% interest), the project IRR would be at only around 5%. Installations on government owned buildings can also use net metering but are not eligible for a GBI. This space is ideal for project developers to build rooftop systems by signing a PPA with the government, as the rooftop space available in these buildings is often large and the policy implementation will likely be stringent. There might be a specific tender coming out for government rooftops (as has been the case in Gujarat).

The risk
This is the first attempt at large scale net metering in India and hence a pioneering effort. There are always certain risks associated with being a first mover. In specific, TANGEDCO might find it difficult to monitor the erratic supply of solar power from multiple rooftops while simultaneously maintaining the stability of the local grid, which is already facing difficulty in handling the supply from various wind farms. However, if handled well and if spread evenly throughout the grid, this new tail-end generation might even have a (mild) stabilizing effect on the distribution grid. See the recently published report by Prayas on Solar Rooftop PV in India for more details21.

Net metering, if handled well and spread evenly throughout the grid, might even have a (mild) stabilizing effect on the distribution grid.

The opportunity
The highest tariff of residential customers in Tamil Nadu is currently ` 5.75/kWh (above 500 kWh/month). A residential customer with around 25 m2 of rooftop space could set up a 2 kW

--------------------21 Ashwin Gambhir, Shantanu Dixit, Vishal Toro, Vijaypal Singh (Prayas): Solar Rooftop PV in India, November 2012

BRIDGE TO INDIA, 2012

Outlook
We believe that the 350 MW will be constructed in Tamil Nadu. The government can directly control the construction of 300 MW on public buildings. We believe that despite the currently low IRR, the 50 MW of private rooftops will also be built by solar enthusiasts. The size of the batch is also good to allow TANGEDCO to experiment and gain experience with net metering. If net metering works, we see this as a potential game changer in the Indian solar market and believe that the capacity additions in Tamil Nadu can significantly exceed the current target. On the market side, the main driver for this will be the rising cost of power

Given the off-take security that net metering provides, solar will increasingly start to replace diesel back-up power generation.

both of grid power as well as back-up (diesel) power. The central government, suffering from a significant budget deficit itself, has set aside funds to bail out DISCOMS only under the condition that they take the politically unpopular step of increasing power prices. Given the size of TANGEDCOs deficit, this could lead to a significant rise in tariffs in Tamil Nadu. In addition, given the off-take security that net metering provides, solar will increasingly start to replace diesel back-up power generation (even without storage). If the REC mechanism works and if it is adapted to become more suitable (registration costs and processes, sales mechanism) to small generators, this would add a significant incentive to the installation of these rooftop systems.

BRIDGE TO INDIA, 2012

4. REC OFF TAKE 1,150 MW

The state does not offer any additional benefits for REC projects in the form of land acquisition benefits, exemption on wheeling and transmission charges or tax rebates.

The policy aims to add 1,150 MW of solar through REC projects. Under this route, the solar power plant owners enter into a PPA with either a DISCOM at average pooled purchase cost (APPC) or a private consumer at a mutually greed tariff and additionally generate RECs to be traded on either the Indian Energy Exchange (IEX) or the Power Exchange of India Ltd. (PXIL). Such projects could be of any size but would typically be of 10 MW or above, feeding power into the grid.

lack of price visibility for RECs beyond 2017. This makes it difficult for project developers to raise debt from banks and other financial institutions for REC projects. The risks involved with the REC mechanism in the state are the same as the risks involved in the mechanism all over the country. The REC mechanism has so far experienced only limited success in the Indian market, primarily because of the difficulty in obtaining financing for projects. Also, most states do not have a penalty structure in place for non-compliance of RPO. If RPOs were to be stringently enforced, the demand for RECs would increase, encouraging more active trading of RECs on the exchanges and more REC projects.

The opportunity
The REC mechanism allows a project developer to have a dual income stream: the income from the sale of power produced and the income from selling REC certificates (1 REC = 1 MWh). Until 2017, the project owner will receiving at least the floor price of ` 9,300 ( 143)/REC.

Outlook

The risks involved with the REC mechanism in the state are the same as the risks involved in the mechanism all over the country.

Considering the current conditions of the REC mechanism in India, unless The Tamil Nadu Solar Policy sets a there are additional benefits for project high target of 1,150 MW for REC projdevelopers (such as e.g. provision of ects (by comparison: the states own a fallback revenue option), we do not total RPO and SPO requirements by expect that the states target for REC 2015 amount to 1.304 MW, but not all RPOs will be met through the purchase projects will be met. However, as per an official at TEDA, the REC target of of RECs). The state does not offer any additional benefits for REC projects in the policy is still being discussed and might undergo a change. the form of land acquisition benefits, exemption on wheeling and transmisIf RPOs were to be enforced stringently sion charges or tax rebates. Thus, the and the CERC were to stabilize REC opportunity in the state for REC projprices over a longer period of time, ects is the same as the opportunities 22 then REC projects would become more in the country as a whole . attractive to pursue in the whole of India, including in Tamil Nadu.

The risk

So far, only 18 MW of REC projects have been registered nationally with the National Load Dispatch Center (NLDC) or the State Load Dispatch Centers (SLDC). The low number of REC projects can be attributed to the

This policy brief has been published on December 7th 2012, and will be updated as regulations change.

--------------------22 Please refer to our report BRIDGE TO INDIA; INDIA SOLAR DECISION BRIEF: The REC mechanism, Sept 2012 for more information
BRIDGE TO INDIA, 2012 9

POLICY SUMMARY
Period of operation Target Allocation Timeline
Utility Scale (MW) Rooftop (MW) Renewable Energy Certificate (REC) (MW) Total (MW) 2012-2015 3,000 MW 2013 750 100 150 1,000 2014 550 125 325 1,000 2015 200 125 675 1,000 Total 1,500 350 1,150 3,000

Off takers

Tamil Nadu Generation and Distribution Company Limited (TANGEDCO) Obligated entities under the Renewable Purchase obligation (RPO) Obligated entities under the Solar Purchase obligation (SPO) Open Access (OA) consumers

Obligated entity

High Transmission (HT) consumers as defined by the Solar Purchase Obligation (SPO)

3% till December 31st 2013 6% from January 1st 2014

Financial incentives

Feed-in-tariff (FiT) for projects allocated through competitive bidding Generation Based Incentive (GBI) for rooftop installations for domestic consumers installed before March 31st 2014 from the date of installation For SPO obligated entities No financial incentives. Tax and duty rebates as per the states Industrial Policy 2007 Till the 2nd year ` 2 ( 0.03)/unit Till the 4th year Till the 6th year ` 1 ( 0.02)/unit ` 0.50 ( 0.01)/unit

Single window clearance Domestic Content Requirement PV/CSP break up Exemption on wheeling/open access/ transmission charges Electricity duty Net metering Commissioning period Banking of power CDM benefits Nodal agency State DISCOM Links

Tamil Nadu Energy Development Agency (TEDA) None None given None

Up to 100% exemption for 5 years Allowed For (voltage) Size Not specified Eligible to apply 240 V <15 kWp 415 V 10 kWp to <100 kWp 11 kV > 100 kWp

360 days from the date of release of the tender

TEDA TANGEDCO Tamil Nadu Solar Energy Policy - 2012 Tamil Nadu Industrial Policy 2007 TEDA TANGEDCO Minutes of the TEDA meeting, November 23rd 2012 Evacuation capacity per district Irradiation data per district http://www.teda.in/pdf/tamilnadu_solar_energy_policy_2012.pdf http://www.tidco.com/images/industrialpolicy_e_2007.pdf http://www.teda.in/ www.tangedco.gov.in http://www.teda.in/pdf/pdf1.pdf http://www.teda.in/pdf/pdf3.pdf http://www.teda.in/pdf/pdf2.pdf
BRIDGE TO INDIA, 2012 10

Contact

Thiru Sudeep Jain, IAS, Chairman & Managing Director, Tamil Nadu Energy Development Agency, E.V.K.Sampath Maaligai, 5th Floor, College Road, Chennai 600 006. 044-28222973 | cmd@teda.in

Source: BRIDGE TO INDIA

BRIDGE TO INDIA, 2012

HOW BRIDGE TO INDIA CAN SUPPORT YOU

BRIDGE TO INDIA provides services along the project development value chain. Our approach to project development is to make projects profitable and bankable.

Our unique combination of adapting an international quality and localknowledge makes us the right partners for executing your solar projects in Tamil Nadu.

Source: BRIDGE TO INDIA

BRIDGE TO INDIA, 2012

IDENTIFICATION
Site identification & assessment Techno-commercial feasibility studies Detailed Project Report (DPR) preparation

DEVELOPMENT

CONSTRUCTION & OPERATION

Project registration Bid strategy preparation Land securitization Power Purchase Agreement (PPA) facilitation Management of permits and approvals Renewable Energy Certificates (REC) consulting Technology evaluation & selection EPC tendering and selection Project structuring and documentation

Site supervision Quality management Stakeholder management Cost controlling and reporting

If you would like to discuss our project development services, please contact: Mr. Akhilesh Magal Head of Project Development
akhilesh.magal@bridgetoindia.com +91 813 033 0011 + 91 (11) 46 08 15 79

BRIDGE TO INDIA, 2012

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5. ANNEXURE

GLOSSARY OF TERMS
APPC - Average Pooled Purchase Cost AD - Accelerated Depreciation CEA - Central Electricty Authority CERC - Central Electricity Regulatory Commission CSP - Concentrated Solar Power CUF - Capacity Utilization Factor DISCOM - Distribution Company FiT - Feed In Tariff GBI - Generation Based Incentive HT - High Tension IEX - Indian Energy Exchange IWTMA - Indian Wind Turbine Manufacturing Association LCOE - Levelized Cost of Energy LoC - Letter of Credit NSM - Jawaharlal Nehru National Solar Mission NLDC - National Load Dispatch Center PPA - Power Purchase Agreement PV - Photovoltaic PXIL - Power Exchange of India Ltd. REC - Renewable Energy Certificate RfS - Request for Selection RPO - Renewable Purchase Obligation OA - Open Access SEZ - Special Economic Zone SLDC - State Load Dispatch Center SPO - Solar Purchase Obligation TANGEDCO - Tamil Nadu Generation and Distribution Company Limited TEDA - Tamil Nadu Energy Development Authority VGF - Viability Gap Funding

BRIDGE TO INDIA, 2012

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ABOUT THE AUTHORS

As part of Market Intelligence at BRIDGE TO INDIA, we provide our clients with the most comprehensive, analytical and up-to-date research and analyses on the Indian market compiled through the joint expertise of our team of experts. Through our offering of various products, we offer our clients a range of business intelligence solutions that enable them to take strategic decisions that directly impact their success. We are knowledge driven. We seek to understand the larger dynamics of the Indian market, especially in our core fields: renewable energy policies, projects, financing and manufacturing. Further, we are certain that a deep understanding of the underlying social, political and economic trends is crucial for business success in India. Our team combines various expertise, experiences and skill sets from diverse academic backgrounds to provide clients the best analysis in the industry.

Dr. Tobias F. Engelmeier

Managing Director
tobias.engelmeier@bridgetoindia.com
Expertise: Business model development, first mover strategies, long term growth, stakeholder management

Ms. Ratnottama Sengupta

Consultant
ratnottama.sengupta@bridgetoindia.com
Expertise: Policies, market regulations, market demand projections

Tobias founded BRIDGE TO INDIA in 2008. He is deeply concerned with the energy use of Indias rapidly growing economy and believes in finding business-driven and Indiaspecific business models to cope with this. Over the past years, Tobias has advised many investors and businesses on the Indian energy market. Prior to setting up BRIDGE TO INDIA, he has worked for five years in the energy sector for a leading strategy consultancy and written a book on Indian political culture. His PhD is in political science from the South Asia Institute in Heidelberg, Germany.

Ratnottama analyzes the fast developing policy and regulatory framework for solar power in India. She also looks at how the market grows and expands into new segments. She holds a masters degree in Economics from Bangalore, India where her areas of study included macro and developmental economics within the Indian economy. Her prior work experience is as a risk and financial analyst at Goldman Sachs Pvt. Ltd.

BRIDGE TO INDIA, 2012

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BRIDGE TO INDIA is a consulting company with an entrepreneurial approach based in New Delhi, Munich and Hamburg. Founded in 2008, the company focuses on renewable energy technologies in the Indian market. BRIDGE TO INDIA offers market intelligence, strategic consulting and project development services to Indian and international investors, companies and institutions. Through customized solutions for its clients, BRIDGE TO INDIA contributes to a sustainable world by implementing the latest technological and systemic innovations where their impact is the highest.

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