FINANCING RENEWABLE ENERGY Issues & challenges

1. FINANCING RENEWABLE ENERGYIssues & challenges R-ENERGY 2012, Chennai March 12-13, 2012

2. About REC • REC is one of the two apex NBFCs under the Ministry of Power to finance power infrastructure in the country • REC finances projects related to Village Electrification, Power Generation including, Transmission and Distribution, Decentralized Distributed Generation (DDG) and Renewable Energy across the entire country • REC was incorporated in 1969 and registered as NBFC in 1998 • Became a Navratna company 0n 5th May 2008 • REC is a listed company with 66.8% Govt. Holding

3. Loans Sanctioned by REC (Rs Cr)

4. Loans Disbursed by REC (Rs Cr)

5. RE Projects financed by REC

6. Renewable Energy Potential & Targets • Renewables constitute about 12% of current grid installed capacity (186.7 GW) and contribute about 6% to the energy mix • *Estimated cost of capacity addition in 12th plan is 1,36,600 Crore

7. RE-Potential - Opportunities • As per rough estimates total fund requirement for the 12th plan would be more than 1 lakh Crore which presents a huge business opportunity for Banks and Financial Institutions. • However, it is a general perception among promoters that arranging finance for renewable energy projects, is one of the most difficult and crucial areas • More often than not, financiers are considered ‘villain-of-the-piece’ when it comes to RE projects

8. Food for thought (…Issues) With such a great business opportunity… • Why are the financiers shying away ? • Why are the banks / FIs reluctant ? • What are the issues ? • What is a financier looking for ? • What are the concerns ?

9. Concerns – Project Related • Are the technologies proven and have track record ? • Are the resource assessments done properly ? • Is the required infrastructure available ? • Are the required Statutory / Non-Statutory clearances in place ? • Is the power evacuation arrangement available ? • Concerned for his money back in time.

10. Concerns – Project Related (2) • Where is the project located ? Every State has a different policy and feed in tariff . • Is the project cost realistically estimated ? • Who is the EPC Contractor/ other Contractors ? • What is the Power Purchase Agreement (PPA) ? • Whether Borrowers have in-house capability for O&M ? • Is the Cost and Tariff of the project competitive ? • Will the cost lead to acceptable financial parameters ?

11. Concerns – Borrower / Entity Related • Due to small size of Renewable Energy projects many individual borrowers are interested but are all of them serious ? • Capability to bring in equity ? • Will the promoter be able to bring in equity at appropriate time? • What will happen if any equity partner backs out during the project construction ? • Is the borrower capable enough to manage the project. ? • The RE projects are perceived as risky. Is the Borrower capable to offer additional security as collateral ?

12. Addressing the Concerns • REC conducts detailed due diligence during appraisal which includes : • Technical due diligence • Sizing and layout of the plant • Technology Review / Design Review • Environment Impact • Resource Assessment • Contract Assessment EPC/O&M • Off-take arrangement etc • Track record of suppliers • Financial due diligence including Borrower’s appraisal • Financial model assumptions and its appropriateness • Project IRR / DSCR / • Legal due diligence RENWABLE ENERGY – LENDERS’ PERSPECTIVE

13. General Issues / Observations • Projects under SPV route not amenable to balance sheet financing • Recourse / collateral securities are not available • Bankability Issue - Steep decline in tariff of solar PV. • Urgent need for guarantee funds or such mechanism to offer comfort to lenders • Availability of transmission infrastructure for open access. • Financers need comfort that the Solar / Wind Power generated, can be transferred to RPO obligated states • Capex on upgradation of transmission infrastructure is required by the states

14. Suggestions – for mitigation • Need for a fixed rate finance / refinance window for all renewable energy projects in the country • A central fund at the country level may be created to refinance projects at a fixed rate spread to all banks and financial institutions, provided the ultimate borrower receives loans at a particular fixed rate • Urgent need of Guarantee Funds or some such mechanism • Assignment of GBI incentive to banks/financial institutions. Currently being channelized though the DISCOM

15. Suggestions – for mitigation (2) • Developers should insist EPC Contractor to compensate them for 100% of the energy loss attributable to the drop in Performance Ratio (PR) below the minimum guaranteed PR at the prevailing PPA feed in tariff by way of Bank Guarantee • Supply additional panels (in case of solar) to meet shortfall to meet assured generation • Promoters should enter into O&M contracts for at least 5 years duration • Enforcement of RPOs and trading policies for RECs requires to be strengthened

16. Financing of RE projects by REC • In order to facilitate financing of Renewable energy projects and to make the process faster and transparent the following actions have been taken • Detailed guidelines for appraisal of RE projects have been formulated consisting of • Guidelines for borrower • Guidelines for project appraisal- including grading of borrowers • Guidelines for documentation • Financing norms • REC is also in touch with bilateral agencies for funding of RE projects at cheaper rates RENWABLE ENERGY – LENDERS’ PERSPECTIVE

17. Guidelines for financing of RE Projects in REC • Summary of financing norms • Extent of Funding • Rate of Interest • Moratorium period • Security • Application processing fees • We at REC hope that these guidelines would facilitate financing of renewable energy project in a fast ,uniform and transparent manner and help in financial closure of large number of project in the coming years to meet the requirements of development of renewable energy sector. RENWABLE ENERGY – LENDERS’ PERSPECTIVE

18. Financing Norms

19. Financing Norms

20. Financing Norms

21. SECURITY • Security comprises of the following : • Bank Guarantee/State Govt Guarantee • Mortgage of Immovable Property • Hypothecation of movable assets • Personal Guarantee of the promoters / promoters directors backed by assets • Corporate guarantee /any other collateral guarantee acceptable to REC RENWABLE ENERGY –

22. CONCLUSION • The policy framework has enabled bankability of the renewable energy projects however, in the long run, the cost of production from renewables must come down and be more competitive with those based on conventional fuels. There are indications that this is already beginning to happen. We at REC are prepared to support in the above challenge by providing long term debt in a systematic and transparent manner. RENWABLE ENERGY – LENDERS’ PERSPECTIVE

23. Thank You

24. CONCLUSION • The policy framework in the renewable sector, after an initial evolution period, is now maturing • Regulatory provisions including multi-year feed-in Tariffs, Renewable Purchase Obligations (RPOs), Renewable Energy Certificates (RECs), and other incentives like GBI, CFA etc and other subsidies have led this sector to a promising position. • The policy framework has enabled bankability of the renewable energy projects however, in the long run, the cost of production from renewables must come down and be more competitive with those based on conventional fuels. There are indications that this is already beginning to happen. RENWABLE ENERGY – LENDERS’ PERSPECTIVE