With a reduction in solar prices, it is widely acknowledged that solar energy today is more viable than conventional electricity in project life cycle terms. This is equally true of rooftop solar projects. However, most organisations and governments lack the resources or the willingness to set up rooftop solar projects. India has set a target of 100 GW of solar by 2022. While India has achieved significant progress in ground-mounted solar, with the installation of 40 GW of capacity as against a target of 60 GW, the progress in rooftop solar has been much more modest, with only 6 GW being set up against a target of 40 GW.
To address the situation, renewable energy service company (RESCO) model projects could be set up, where the investment would be made by solar developers who would recover it with the sale of power to the beneficiary over the next 25 years. This model has been tried in government buildings by numerous organisations in India, but has faced substantial challenges.
Background: Madhya Pradesh model
The RESCO model has been successfully attempted in Madhya Pradesh and over hundred rooftop projects are functioning, all set up without any investment by the beneficiary and enabling saving to beneficiaries from day one. This includes central government organisations, IIM-Indore and the Central Academy of Police Training and Powergrid substations, as also numerous state government organisations, such as colleges, police stations, medical colleges, universities, etc.
The rate achieved in Madhya Pradesh is by far the lowest in India – Re 1.38 per unit (with 3 per cent annual escalation). This is with the then available subsidy of 25 per cent from the Ministry of New and Renewable Energy (MNRE) and 18 per cent from the Madhya Pradesh government. If there were no subsidy, as it is now, the rate is estimated at Rs 2.21 – almost equal to the rate of ground-mounted solar projects in October 2018 – when the project was bid. The discovered tariff is a fraction of what is being currently paid to the distribution companies (discoms) by government institutions in most states – around Rs 7-Rs 8 per unit.
The rate achieved in Madhya Pradesh is by far the lowest in India – Re 1.38 per unit (with 3 per cent annual escalation). This is with the then available subsidy of 25 per cent from the Ministry of New and Renewable Energy (MNRE) and 18 per cent from the Madhya Pradesh government
Key innovations in Madhya Pradesh
The participation of developers in these projects and tariff attractiveness have been achieved by mitigating the risks and uncertainties for developers. This has been accomplished through numerous innovations, robust project preparation, an efficient transaction structure, balanced risk allocation and careful contractual terms.
Usually, in RESCO tenders, the marketing exercise is left to developers. In Madhya Pradesh, various government departments were convinced about the RESCO project and pre-clearance was obtained on power purchase agreement (PPA) documents. This saved bidders from spending their resources on identifying procurers and reduced project uncertainty.
Subsequently, project grouping was done based on the profile of consumers, viz., central/state government and nature of end-use, thereby ensuring that each group has similar projects. For example, government colleges spread all over the state with individual capacity in the range of 8kW to 80 kW constitute one group, while medical colleges with individual capacity of 1 MW to 1.5 MW form another group. Bidding was separately undertaken for each group and the winner implemented all the projects in that group. It has enabled better risk profiling as also economies of scale.
It is not possible for bidders to visit all sites for due diligence. Hence, for the first time in India, a data room was created to address information asymmetry. This included information such as Google coordinates of buildings, indicative solar photovoltaic array layout superimposed on Google image and electricity consumption history. The bidders even knew the number of panels and inverters, and the length of cable needed to implement the project. The data room was developed with technical assistance from the World Bank. The development of the data room greatly reduced the risk profile of the projects and enabled more informed bid participation, leading to low bid rates.
Tied loan was provided under the project through the State of India (SBI) under the World Bank’s line of credit, the Punjab National Bank (PNB) under the Asian Development Bank’s (ADB) line of credit and the Indian Renewable Energy Development Agency (IREDA), subject to due diligence. The developer had the option to take the loans offered. The World Bank, SBI, ADB, PNB and IREDA had pre-cleared the PPA.
The PPA had unambiguous provisions regarding change in law. Usually, electricity regulators take decisions regarding the impact on tariff in case there is a change in law. However, direct power sale between a developer and a consumer is not within the purview of the electricity regulator. In view of this, the PPA clarified through a clear formula, the impact on tariff and of change in taxation, both during commissioning and the operational phase. This was tested soon enough. The Government of India imposed safeguard duty on solar panels and cells a few weeks before the bid was to be closed. With only a few days left for the bid closing, the implementation of the order was stayed by the Odisha High Court. In such a situation, there was a lack of clarity on whether the expected imposition of safeguard duty after the bid date would be covered as a “change in law” event. If the safeguard duty comes into effect after the bid submission date, it shall be provided as a pass-through and the impact on tariff was delineated. It was clarified that the expected imposition of 25 per cent safeguard duty would lead to an increase in tariff by 5.2 per cent, based on the calculation: 25 per cent (safeguard duty) x 26 per cent (share of solar cells in the total capital cost) x 80 per cent (proportionate adjustment to tariff on account of variation in capital cost). This simplified the situation and bidders did not consider it necessary to build in the impact of the expected imposition of safeguard duty on their bid price. This also insulated the bid authorities from the challenge of deciding a contentious issue after the bid closing and replaced that with a transparent non-discriminatory decision prior to the bid closing. By the time PPAs were to be signed, the safeguard duty was already in place and PPAs were signed at the tariff modified on account of the safeguard duty, not the bid tariff.
Payment security is crucial to the developer and even more so for the debtor of the project. It was provided that the procurer or procurer’s administrative department shall provide payment security through a letter of credit, bank guarantee, fixed deposit or government guarantee/assurance.
Project documents had detailed and well-thought-out contractual provisions on many other issues such as payment security, facilitative cash flow, early monetisation, deemed generation, payment certainty even in disputed invoice, penalty on shortfall of generation, etc. These aimed at an appropriate risk allocation between consumers and developers, with the underlying principle that the stakeholder best placed to handle a particular risk should bear the same.
As the PPA provides for 3 per cent annual escalation, it leads to a substantially lower first-year tariff, making it easier for consumers to opt for the rooftop option. The annual increase of 3 per cent is less than the usual inflationary impact, as also the average annual increase of around 4-5 per cent in discom tariff. The tariff will only be 2.03 times at the end of 25 years. Thus, the rate of Rs 1.38 in 2018 would increase to Rs 2.80 in the last year of the project, that is, 2043. This rate, 25 years later, would still be less than half of what government organisations are paying today. This helps the developer by keeping the tariff more aligned to the cost of maintaining the rooftop system, even until the last year of the project life.
The PPA forbids premature termination for the initial five years. Subsequently, if the termination is triggered by an event of default by the developer, or procurer, or without any such default, the procurer wishes to terminate early, then in all three scenarios, the procurer has to pay ageing-linked termination payment, differently quantified. Such compensation takes care of the debt liability of the project and encourages contractual performance by both parties.
Multiple pre-bid meetings were conducted, where extensive pre-bid consultations were held with prospective bidders. The pre-bid meeting in Delhi was organised with full support by the World Bank and the International Solar Alliance (ISA) and was webcast live by the ISA to its then 121 member countries. Bidders’ queries were examined in detail and an official reply, comprising 67 queries, was uploaded for the bidders. Many suggestions from the bidders were accepted and the necessary modifications were made in the project documents by issuing a corrigendum, leading to substantial value addition in the project documents.
After the bid opening of the first round of tenders, PPAs were expeditiously signed. Within a month of the bid opening, on one single day, at a programme organised in Bhopal, 427 PPAs (291 government colleges, 124 engineering colleges and 12 universities) were signed between respective institutions and selected developers. In the second round of tender, the work order was issued to selected bidders on the spot after bids were opened in a public ceremony held on the sidelines of “RE-Invest 2018” in the presence of the secretary, MNRE, and the World Bank director.
NITI Aayog launches SuBaH
NITI Aayog has decided to replicate Madhya Pradesh’s rooftop projects under its initiative titled “Sun’s Blessings and Health (SuBaH)” for setting up rooftop solar projects for health institutions. SuBaH would provide inexpensive and green power to government health institutions and play a big role in reducing their overall expenditure. Our government health institutions face a resource constraint with electricity bills being a drain on their limited resources. The situation is compounded since they are considered commercial customers and thus are in the highest tariff category. Savings enabled by SuBaH could be used for the purchase of medicines and other necessary expenditure, as also for strengthening the health infrastructure.
During the second wave of Covid-19, a lot of attention has been focused on the issue of oxygen availability. On account of the apprehension of a third wave of Covid-19, a large number of health institutions are making arrangements for setting up their own oxygen plants. Electricity consumption in these oxygen plants is approximately 1 kW per NM3 of oxygen. Excluding depreciation, electricity cost would be 70-80 per cent of the running cost of these oxygen plants. Government health institutions in the country find it a challenge to meet their regular expenditure even otherwise; their burden would become all the more onerous with the setting up of these oxygen plants.
The health sector should rightly be one of the first claimants to the benefits flowing from the solar revolution. The fall in electricity costs from solar can be attributed to improved panel technologies, economies of scale, increasingly competitive supply chains, growing developer experience and the rising comfort of financiers. This has been made possible by favourable policy and regulations framed by the Government of India, in addition to the vigour and initiative of the private sector. At the same time, project structuring has played a large role and can further go a long way in reducing solar prices. Even the success achieved by Madhya Pradesh has been attributed to project structuring. At this moment, the calling is to set up viable projects where risks are mitigated and long-term returns are assured. SuBaH aims to do the same.
Some states have implemented solar rooftop projects in health facilities under the capital expenditure (capex) route, but limited budget allocation has severely limited its scale. Further, such capex projects are faced with challenges regarding operations and maintenance and even simple cleaning of solar panels. The SuBaH initiative does not require government investment and it is in developers’ interest to maintain and even keep the panels clean to preserve their revenue flow.
SuBaH: engaging with stakeholders
The primary stakeholder in any solar rooftop project is the owner of the building. Most buildings in the health sector are owned by the state governments. This makes it crucial that the state governments do not merely support the initiative, rather they own it. On account of the above, SuBaH in each state would be managed separately with full support and ownership by the state.
The World Bank is offering technical assistance for SuBaH and will function as the project implementation agency (PIA) for its roll-out in all states.
A national workshop on SuBaH was held on September 30, 2021. It was chaired by Amitabh Kant, chief executive officer, NITI Aayog. Junaid Ahmad, the World Bank’s country director in India, addressed the same and called the SuBaH initiative “the big message for COP26 from India”. The workshop witnessed engagement with over 150 senior officials of state governments.
NITI Aayog and the World Bank would eschew the easier and “procrustean” path of having a common central agency handling all states via one common tender and one common project, since states find it difficult to have any ownership for such tenders and projects. Rather, NITI Aayog and the World Bank would work independently with each states to implement SuBaH in the respective state. Each state would have its own tender and its own project, entirely owned by the state and NITI Aayog and the World Bank would independently support each such project.
NITI Aayog would develop the transaction structure and model documents. For the same, it has constituted a Project Consultative Group as an institution responsible for the development of model frameworks and contracting documents, and for monitoring the progress of the implementation of projects. The World Bank would provide transaction advisory support. The documents developed thus would be issued by the state. The state would also provide all information necessary for the development of the data room. As of now, the programme would be limited to institutions at the state level, divisional level and district headquarters level, on account of a stable grid supply availability.
NITI Aayog and the World Bank would not limit themselves to merely issuing a common tender document. To facilitate the states, there would be continuous handholding and to and fro of ideas and suggestions between the state, NITI Aayog and the PIA at each stage – refinement of project documents, incorporating inputs received during pre-bid meetings, signing of PPA, providing access to selected developers to rooftops, installation and commissioning of rooftop solar projects and till eventual grid synchronisation. Thus, SuBaH would not just initiate the process, but rather work step by step independently with each state till the last stage of the project.
SuBaH: key benefits
SuBaH aims to set up PPP/RESCO projects that are well structured, with appropriate risk mitigation and risk allocation among various stakeholders. Setting up such viable PPP projects has multifold advantages. First, they attract serious private developers, including international players, to state projects that are otherwise perceived as too risky and do not attract investor attention.
SuBaH aims to set up PPP/RESCO projects that are well structured, with appropriate risk mitigation and risk allocation among various stakeholders
Second, they encourage sovereign, pension and trust funds to invest in PPP projects of the states; these groups of investors are more keen for assured returns than windfall profits and they have expectation of moderate return on investment as long as the project is derisked. And third, the low risk profile would allow debt structuring at lower rates. The golden mix of low expectation of return on capital and of cost of debt, along with increased bidder participation, would enable low tariffs from SuBaH projects. This would lead our hospitals and medical colleges to make savings without any investment and without any responsibility of maintaining the solar project.
The bigger message of SuBaH would be that renewable energy has arrived at a beautiful confluence of economic viability and environmental considerations and this would facilitate the shift to a green future that does not require regulatory directions or government subsidy. Further, the country can reap the best returns on PPP projects only if risks in these projects are mitigated. Achieving these objectives through SuBaH would indeed be a new dawn for the nation.