Making Small Beautiful

Key learnings from the success of rooftop solar tenders in Madhya Pradesh

Manu Srivastava, Principal Secretary, Government of Madhya Pradesh

While India has justifiably earned acclaim for its ground-mounted solar programme for which the installed capacity has reached more than 32 GW, its solar rooftop installations are still below

5 GW. The rooftop solar segment has yet to gain traction and continues to lag the success achieved by the ground-mounted solar segment. Looking at the scenario, Ernst Friedrich Schumacher, German-British economist and statistician and a proponent of decentralised technologies, would have frowned and muttered, “Don’t they know that small is beautiful?”

Although the capital cost of rooftop solar projects has come down sharply in the past few years, beneficiary organisations still face limitations in marshalling resources. In view of the same, the Madhya Pradesh government implemented an innovative rooftop solar programme under the renewable energy service company (RESCO) mode in 2018. In this mode, beneficiary organisations do not have to make any capital investment whatsoever and the project is set up by a private entity that recovers its investment by solar power sale to the beneficiary organisation over a 25-year period.

The project was implemented in partnership with the World Bank, and the International Solar Alliance (ISA) gave full support to it. The RESCO tenders attracted 40 international and domestic bidders, who oversubscribed the tender capacity by 630 per cent. This included Singapore-based Cleantech Solar, Malaysian company Amplus Solar and Canadian firm Amp Solar. While the lowest rate in the RESCO-I  tender was for Power Grid Corporation of India Limited’s buildings at Rs 1.58 per unit, the RESCO-II tender went even lower at Rs 1.38 per unit for a project commissioned at the Central Academy of Police Training, Bhopal. This is a fraction of what is being currently paid to distribution companies (discoms) for electricity supply. The savings by government organisations on account of the RESCO project amounts to Rs 260 million for the first year and Rs 2,620 million over the project life in net present value terms.

The tender was largely focused on public sector buildings, which enjoy a capital subsidy of 43 per cent from the central and state governments (net of administrative charges). In the absence of such a subsidy, investment from the bidder would have increased and tariff would have come to Rs 2.66 per unit, other things remaining the same. This is an extremely attractive rate and comparing with the present discom cost, any consumer would quickly decide to move to a rooftop solar project. However, “other things remaining the same” is an important rider. Such rates can be achieved only if rooftop solar projects are well conceptualised, structured and implemented.

Favourable policy environment

The Madhya Pradesh government’s Decentralised Renewable Energy Policy, 2016 supports decentralised projects based on any single renewable energy technology or a combination of them that can be installed in consumers’ premises. The policy does not specify any restrictions on the rooftop system size, based on the contract demand of the beneficiary. Beneficiaries can install a rooftop system much larger than their contract demand, if the rooftop size and distribution transformer capacity permit it. They can even be energy self-dependent. This makes sense since the load factor of any premises is usually much higher than the capacity utilisation factor of a rooftop solar system. Further, rooftop systems actually help reduce the loading of discoms’ transformers. This helps in reducing congestion and losses, and defers augmentation investments to a future period.

Best practices

The success of rooftop solar projects underscored the point that rooftop solar projects – though requiring far lesser capital than ground-mounted solar projects – need careful project structuring and robust project preparation. The projects were consciously aimed at risk mitigation and appropriate risk allocation between the developer, procurer and the state nodal agency. Hence, the transaction structure and project documents developed under the RESCO project addressed the challenges and uncertainties faced by rooftop solar developers.

Usually, in RESCO tenders, the marketing exercise is left to developers. For these tenders, various government departments and private organisations was convinced about the projects, and even pre-clearance on the power purchase agreement (PPA) terms were obtained. So, the project consisted of 663 pre-identified project sites, including government colleges, police establishments, universities, urban local bodies, state and central governments, and private institutions. This saved bidders from the marketing exercise of identifying and convincing procurers and then struggling with each of them clause by clause through the PPA.

In most RESCO tenders in the country all buildings in a state are offered as one tender, unmindful of the average capacity of each project, geographical spread of projects and procurers’ creditworthiness. In Madhya Pradesh, project grouping was done based on the profile of the ultimate paying entity, namely, central and state government departments, and the nature of end use, thereby ensuring that each group had similar projects. For example, all government colleges spread across the state with an individual capacity ranging from 8 kW to 80 kW constituted one group. Similarly, all medical colleges of the state with an individual capacity ranging from

1 MW-1.5 MW formed another group. All the project sites were grouped into 29 groups. Bidding was separately undertaken for each group, making the RESCO tender a veritable bouquet of 29 tenders. The winner for each group was to implement all the projects in that group. It enabled better risk profiling, good economies of scale, efficient material procurement, better project execution planning, efficient financing and more dependable programme implementation with the panel of vendors.

As it was not possible for bidders to visit all the 663 sites coming under the RESCO tender, a unique data room was created and made accessible to bidders, so as to address information asymmetry. The data room was developed with technical assistance from the World Bank. It had details regarding each building, with information about available shadow-free rooftop space and with basic engineering design, so that bidders had complete information about each site. The data room included information such as Google coordinates of the buildings, an indicative solar PV array layout superimposed on the Google image and electricity consumption history. The pre-engineering design was detailed enough to include a number of panels and inverters, and even the cable length needed to implement each project in every category. The data room significantly reduced the risk profile of projects and enabled more informed bid participation, thus leading to low bid rates.

In addition, projects opted for escalating tariff, rather than the more prevalent flat tariff. The bidding parameter was the first-year tariff, escalating at 3 per cent annually. On the other hand, discom tariffs usually increase by around 4-5 per cent per annum. Since the RESCO mode has to be accepted by consumers as being preferable to the established discom supply, it is appropriate that the RESCO tariff has a similar yearly profile to that of the discom tariff. With the RESCO tariff escalating at a lower per cent value per annum, its attractiveness will only increase, going forward. For the developer too, the inflationary costs of maintaining systems would be commensurate with increasing tariffs, which would retain its interest for a long tenor. This structure is a win-win situation for consumers, developers and the government. The tariff of Rs 1.38 would increase to Rs 2.81 in the 25th year of the project, which would still be less than half of what government organisations are paying today.

The relationship between the RESCO developer and the consumer is not governed by the regulator, and issues need to be settled between the procurer and the developer. The same can be seen as a challenge or as an opportunity to provide contractual clarity in the documents. In view of the same, the tender clearly articulated the incidents, which can be categorised as change in law and the impact on tariff once such an incident occurs.

The project documents have clarity on several contractual innovations, with respect to impact on bid tariff due to change of law, imposition of safeguard duty (SGD), payment security, facilitative cash flow, early monetisation, definition of operational year, deemed generation, payment certainty even in disputed invoices, penalty on generation shortfall and compensation on early termination. The provisions in the documents have an appropriate risk allocation between building owners, RESCO developers and Madhya Pradesh Urja Vikas Nigam Limited. Moreover, the PPA forbids premature termination for the initial five years. If the project is terminated subsequently, the procurer would have to make an age-linked termination payment. The payment is differently quantified in three scenarios. In each scenario, the compensation takes care of the debt liability of the project and encourages contractual performance by both parties.

Under the RESCO mode, the developer recovers the upfront investment by charging electricity bills. This provides a natural hedge to protect productivity of rooftop systems, hence the requirement for submitting operational performance bank guarantee has been waived. It helps developers in reducing their transaction cost and the working capital requirement.

Solar insolation is different across months. Therefore, a seasonally indexed test of generation was provided to assess project completion. It ensured installation quality, productivity of the roof space rendered, and also the optimal use of the government’s subsidies.

A provision of “tied loan” was made under the project, subject to due diligence. A concessional line of credit for commercial and industrial customers was made available from the World Bank and the Asian Development Bank through the State Bank of India and Punjab National Bank respectively. Further, credit for other customer categories was available from the Indian Renewable Energy Development Agency. The project documents were shared with these organisations, which made suggestions for enhancing the bankability of project contracts. This made the entire project more bankable, immensely helping bidders.

To make these tenders successful, extensive pre-bid consultations were held with prospective bidders. In fact, the pre-bid conference was webcast live by the ISA to its 121 member countries. Many suggestions from bidders were accepted and the necessary modifications were made, leading to substantial improvement in the project documents. Also, the data room kept on evolving till the last day of bidding to improve the quality and coverage of the information.

SGD on solar panels and cells was imposed by the Ministry of Commerce and Industry, Government of India, in July 2018. With only a few days left for the last date of bid submission, the implementation of the order was stayed by the Odisha High Court. In such a situation, there is no clarity if the change of law had already happened before the bid date with just the implementation deferred, or the change had not yet happened, making the bidder eligible for change of law relief. We promptly came up with a clarification within a day addressing this ambiguity. The corrigendum delineated a clear formula-driven example to provide clarity to bidders. This also insulated the bid authorities from the challenge of deciding a contentious issue after closing of the bid and replaced that with a transparent non-discriminatory formulation decided prior to the bid closing.

To increase participation in the tender, the request for proposal and PPA documents could be viewed freely by interested bidders without any payment requirement. Once the interest was generated among bidders, they had to pay the tender fee to access the data room.

A focused marketing campaign was carried out to reach out to prospective bidders and potential consumers. All forms of media, including print, digital and social media, were used to reach out to the targeted audience. Industry associations such as CII, FICCI, ASSOCHAM and PHDCCI cooperated by communicating information to their members who were interested in participating as bidders. Even complicated issues such as the impact of SGD under change of law, were explained on Twitter, so as to convey the message to a large number of bidders.

The path ahead

The Madhya Pradesh government has now come up with the RESCO-III programme for an industrial estate in Mandideep, close to Bhopal. The project is largely focused on small and medium industries in the industrial estate, which are usually not covered individually by RESCO developers on account of the associated risk. This programme has introduced reverse auctions in India’s solar rooftop market.

One of the biggest challenges facing seamless implementation of rooftop projects in the country has been the non-cooperation of discoms, which are fearful that their contracted power purchase portfolio would remain underutilised with higher adoption of solar rooftops. On the other hand, a large number of ISA member countries face power shortage. There cannot be a more propitious environment to implement solar rooftop projects in these countries. This is a huge opportunity for the ISA to use the learnings from India to promote rooftop solar projects in such countries. This can help member countries achieve their green energy targets without any capital investment. We are assisting in this opportunity. As a part of the delegation of the ISA, team members from Madhya Pradesh visited Ghana and Guinea during 2018 and 2019 for joint efforts to roll out rooftop solar projects in these countries.

Solar rooftops under net metering provide for renewable purchase obligation compliance without any additional cost, which makes the outlook for the RESCO model quite positive. However, the selection of consumers for RESCO projects is critical. The model is workable only for consumers from whom a diligent investor could be confident of getting tariff payment for the next 25 years. Government organisations definitely fit the bill, as do established private companies. However, micro, small and medium enterprises and residential consumers are yet to witness traction in this model.

There is ready availability of finance for RESCO projects, if the projects are well structured. There are a large number of pension funds and sovereign funds that are keen to finance risk-free and low-risk projects. Further, finance from such sources is available at exceptionally low interest rates.

Usually, most government contracts are structured such that the government bears the minimum risk and all uncertainties are left to suppliers or developers, who, in turn, increase the cost of this risk. We have to break out of this mindset and consciously attempt risk mitigation and appropriate risk allocation. This can be achieved by robust project design and innovative de-risking and contract structuring. Transaction advisory support – of the kind that Madhya Pradesh got from PwC – could also help in the process.

The government can play a crucial role by issuing standard bidding guidelines for solar rooftop projects under Section 63 of the Electricity Act, as has been done in 2017 for ground-mounted solar projects. This would enable RESCO developers to get cheaper sources of debt and funds with lower expectation of return on investment, ultimately resulting in significantly lower prices for consumers. This would encourage consumers to increasingly adopt renewable energy, while making zero investment and actually saving on their electricity bills. As showcased by the success of the rooftop solar tenders in Madhya Pradesh, one can confidently say that small is indeed beautiful.

By Manu Srivastava, Principal Secretary, Government of Madhya Pradesh

 

 

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