Renewable Energy Assets in India

Shantanu Srivastava, Energy Finance Analyst 1
Ankur Saboo, Project Finance Specialist

June 2022
Renewable Energy Assets in India:

A Project Finance Perspective
Analysing the Feasibility of Renewable Energy
Projects in Light of Current Sectoral Headwinds
Executive Summary
The growth of India’s renewable energy sector is among the most successful energy
transition efforts globally. In the early years of the renewable energy sector’s
evolution, stakeholders perceived almost all business risks to be high. The equity
returns for the initial projects were at a higher threshold – and >18% return on
equity (ROE) expectations were commonplace. As business risks eased over the last
decade, renewable energy technologies emerged as India’s lowest cost energy
source.
Figure 1: Global Levelised Cost of Energy Benchmarks for Bulk Power,

2014-2021 (US$/MWh)
Figure Source: BNEF
Falling tariffs have resulted in renewable energy capacity in India increasing by

nearly 10-fold in the last decade from ~12 gigawatts (GW) in 2010 to around
110GW in March 2022.1 Over the years, alongside tariffs, ROE expectations have also
fallen. From a must have 18% threshold, the ROE expected now hovers around the
12% mark.
1 CEA. All India Installed Capacity. March 2022.

Renewable Energy Infrastructure in India:
A Project Finance Perspective 2
However, fresh challenges have emerged for the sector. Global supply chains have
been in tatters lately due to the disruption caused by the pandemic and, more
recently, the Russia-Ukraine war. Both wind turbine generator producers and solar
module manufacturers have been hiking prices as materials, freight, labour needs
coming out of the pandemic, and geopolitical risk weigh down on critical raw
material prices. Fresh trade barriers have emerged with the imposition of a basic
customs duty (BCD) on the import of solar modules and cells in India.2 To top it all,
the sharp, seemingly uncontrollable inflation is making global central banks suck
out the system’s liquidity, leading to a steep increase in interest rates.
In this context, a natural question is whether India will be able to continue its
renewable energy capacity addition trajectory as witnessed in the past? We believe
it will because current challenges will ease in the short-to-medium term, and the
industry has enough cushion to absorb these downside risks. Interest in renewable
auctions from the large sector players should not wither, even in these
unprecedented times.
Module Price Hike – An Aberration in the Long-Term

Deflationary Trend
Landed costs of solar modules in the country halted their downward trajectory,
rising for the first time (on a sustained basis) in more than a decade. Module costs
form ~65% of initial capital expenditure for a typical solar project, hinging project
viability on their trajectory.
Industry belief is that these are aberrations

due to the Ukraine war and COVID-19
related supply chain disruptions, especially
in China. It would be fair to assume that
long term average prices should revert to
sub US$0.20 level (before taxes).
It would be fair to assume
In the short-to-medium term, the presence
of non-BCD stock of imported modules, that long term average
importing cells that attract lower BCD (25% prices should revert to
versus 40% on modules) and assembling sub US$0.20 level
locally, framework agreements with
domestic suppliers, and backward linkages (before taxes).
into module manufacturing will provide a
good grip on capital costs. Further, even as
BCD kicks in, domestic manufacturing
capacities buoyed by policy initiatives such
as PLI schemes will grow multifold,
softening domestic prices.
2Mercom. Basic Customs Duty of 25% on Solar Cells and 40% on Modules to Take Effect from
April 2022. March 2022.
Multiple Levers Remain with Renewable Energy Players to

Enhance Returns and Provide Cushioning Against Any
Downside Risks
While the “nameplate” return expectations for renewable energy infrastructure
assets remain in the ~12% ROE range, several developers have in the past jacked up
equity returns through prudent financing improvements (or financial engineering)
and capital management practices.
Besides the obvious gains to equity returns through procuring modules at lower
rates (through any of the avenues listed above), several other returns enhancing
practices cushion against downside risks.
Figure 2: Equity Return Kickers for a Model Wind-Solar Hybrid Project
20% Increase in Equity IRR (Cumulative) 17%

14%
15%
10%
10%
4%
5% 2%
0%
Refinancing at lower No loan Self EPC margins on Selling to InvIT or Revenues from
rate amortisation period wind and solar strategic investors carbon credit
trading
Source: IEEFA Analysis
Bond market refinancing: Refinancing of project debt post commissioning is

commonplace as construction risks subside and the project operationalises. Further,
a non-amortising period of 3-5 years often accompanies a bond market refinancing,
especially in offshore market issuances.
EPC margins: Most of India’s large renewable energy companies currently have
their engineering, procurement and construction (EPC) divisions. Even when
competitively considered, EPC margins of 10% (on non-module costs for solar) are a
fair assumption in renewable energy projects today.
Stake sale in operational projects: Just as the cost of debt reduces for operational
and de-risked projects, the cost of equity also reduces. India has been witnessing
this churn with stake sales in operational projects to strategic and financial
investors for a long time now. With the recent success of InvITs, much larger pools
of such lower cost equity are accessible to developers today.
Carbon credit trading: Several players have started considering the revenues they
earn from selling carbon credits as an important source of income. The carbon
prices in India have ranged from US$1-10/tonne in the recent past.3 Currently,
about 98% of the carbon credits generated in India go to developed economies. The
government is trying to create a domestic marketplace.4 Carbon credits trading is
one of the only enhancements that generate additional revenue for the project and
improves equity IRR as well as project IRR, thereby making it more viable.
To be fair, these “return enhancements” might be available with only the top rung
being able to push returns to higher levels. Still, the reality is that a large proportion
of India’s renewable energy capacity will be added by the largest players already
operating in the industry, given the capital-intensive nature of the business and
competition the sector.
3 Saur Energy. EKI Energy Services Races To Make The Most Of Its Headstart In Carbon Credits.
December 2021.
4 BNEF. Indian IPO Darling Sees National Carbon Market in Three Years. January 2021.
Table of Contents
Executive Summary ............................................................................................................... 1
Module Price Hike – An Aberration in the Long-Term
Deflationary Trend ......................................................................................................... 2
Multiple Levers Remain with Renewable Energy Players to
Enhance Returns and Provide Cushioning Against Any Downside Risks 3
Retrospective View of the Renewable Energy Sector .............................................. 7
Falling Tariffs and Increasing Bid Sizes Underscored the
Sector Transformation .................................................................................................. 8
Technology Played a Key Role in Making Renewables Competitive .......... 8
Policy Support Provided Backbone for the Thriving Sector .......................... 9
Investing and Financing Scenario Altered as the Sector Grew ..................... 9
Capital Recycling Led to Better Utilisation of Resources ..............................10
The Finance – Refinance Story ................................................................................10
Economies of Scale at Play ........................................................................................11
Feasibility Analysis of Plain Vanilla Solar Project ...................................................11
Project Returns ..............................................................................................................15
Solar Project Scenario Building ...............................................................................15
Other Upside Triggers for Solar Project Returns .............................................17
Feasibility Analysis of Solar-Wind Hybrid Project..................................................19
Assumptions for a Plain Vanilla Wind Project...................................................19
Total Project Cost for Hybrid Project ....................................................................22
Project Returns – Hybrid Project ............................................................................22
Hybrid Project Scenario building ...........................................................................22
Other Upside Triggers for Hybrid Project Returns .........................................24
About the Authors ................................................................................................................25
Table of Figures
Figure 1: Global Levelised Cost of Energy Benchmarks for Bulk Power,
2014-2021 (US$/MWh) ....................................................................................................... 1
Figure 2: Equity Return Kickers for a Model Wind-Solar Hybrid Project........ 3
Figure 3: Major Impediments to Renewable Energy Sector’s Initial Growth. 7
Figure 4: Current Levelised Cost of Energy Range (US$/MWh, nominal) in
India ............................................................................................................................................. 9
Figure 5: Renewable Energy Financing Landscape ................................................10
Figure 6: Solar Project Related Assumptions ............................................................12
Figure 7: Solar Total Project Cost (75MW AC) .........................................................12
Figure 8: Simplifying the Rule of Thumb Around BCD on Solar Projects ......13
Figure 9: Operating Assumptions ..................................................................................14
Figure 10: Financing Assumptions ................................................................................14
Figure 11: Base Case Return Metrics ............................................................................15
Figure 12: Capital Management Cycle of Adani Green Energy Limited ..........16
Figure 13: Solar Project Scenarios .................................................................................17
Figure 14: Value of Solar Cells (Assembled or Unassembled) Imported in
India (US$bn) .........................................................................................................................18
Figure 15: A Word of Caution on Key Global/Macro Risks .................................18
Figure 16: Wind Project Related Assumptions (100MW)....................................19
Figure 17: Wind Total Project Cost (100MW) ..........................................................20
Figure 18: Operating Assumptions ...............................................................................20
Figure 19: Full-Service Initial Contract Prices for Onshore Wind Turbines
Over 1MW by Signing Year ...............................................................................................21
Figure 20: Financing Assumptions ................................................................................21
Figure 21: Base Case Return Metrics ............................................................................22
Figure 22: Hybrid Project Scenarios .............................................................................23
Figure 23: Hybrid Equity IRR Range.............................................................................23
Figure 24: Government of India 10 Year G-Sec Yield .............................................24
Retrospective View of the Renewable Energy Sector

The growth of India’s renewable energy sector is among the most successful energy
transition efforts globally. India is one of the few countries on track to achieve its
climate goals and nationally determined contributions (NDCs) defined under the
Paris Agreement.5 Over the years, investors and business owners from varied fields
have entered the sector, attracted by the improving return profile of renewable
energy assets.
Stakeholders perceived business risks to be high in the initial years of the renewable
energy sector’s evolution. As a result, equity returns for the initial projects were at a
higher threshold. Expectations of return on equity (ROE) being more than 18%
were commonplace.
However, the risks have panned out over the past decade or so. Evolution of
technology, plummeting module prices, simplicity of designs, timely commissioning
of projects, accommodative regulatory stance and offtaker risks/working capital
issues have helped stabilise project behaviour.
Lower risks also resulted in intense competition. Today, the Indian renewable
sector has investments from the biggest investors globally. A combination of these
parameters has led to a sharp decline in return expectations. From a must have
18%, the returns expected now hover around the 12% mark.6
Figure 3: Major Impediments to Renewable Energy Sector’s Initial

Growth
5 Hindustan Times. India only G20 nation to meet climate goals. August 2021.
6 IEEFA Analysis; Industry insights.
Falling Tariffs and Increasing Bid Sizes Underscored the

Sector Transformation
The first open bids for solar power projects of megawatt (MW) scale, between 2010
and 2012, attracted tariffs ranging from Rs12/Kilowatt-hour (kWh) to Rs18/kWh7
(US$0.16/kWh to US$0.24/kWh). The majority of bids were for a capacity of less
than 5MW. Projects of 20MW were rare and sought by large players with deep
pockets and high-risk taking appetites. The tide has turned completely, and the
lowest bids for solar projects came at Rs1.99/kWh (~US$0.03/kWh).8 Even if we
consider Rs1.99 per unit as an aberration, a steady state tariff of Rs2.2-2.5/kWh
(~US$0.03/kWh) has become a reality for most solar projects.
The wind sector has evolved differently. The market started on a return on equity
(ROE) guarantee model whereby large Wind Turbine Generator (WTG)
manufacturers executed a lump sum turnkey project – from site identification to
project completion. Under the FiT (feed in tariff) regime, WTG manufacturers often
back calculated the project cost to provide a 15-18% return on equity to the wind
developers/investors. Over time, as the FiT regime made way for open bids, the
sector started innovating both technologically and financially. Negotiations
deepened, margins shrunk and indigenisation picked pace. Wind power developers
often split the contract between them and WTG manufacturers into equipment and
balance of plant (BOP) works. As developers competed for increased market share
in the open bid regime, record low tariffs of Rs2.54 to Rs2.59/kWh
(~US$0.03/kWh)9 won the Solar Energy Corporation of India (SECI) III and SECI IV
bids. The tariffs seem very aggressive, and factoring for increased risks of wind
compared to solar, the SECI III and SECI IV projects’ viability is questionable. The
sector is facing interim challenges, but even so, sub-Rs3/kWh tariffs seem to have
become the norm.
Technology Played a Key Role in Making Renewables

Competitive
Solar and wind rank as the lowest priced sources of electricity generation in the
country today, a trend seen globally. The trajectory of input price deflation in key
solar and wind technologies and government impetus to grow the country’s
renewable energy sector have led to a nearly 10-fold increase in installed capacity
over the last 12 years. From ~12 gigawatt (GW) (of which 11.8GW was wind and
15MW was solar) in 2010,10 capacity rose to nearly 110GW in March 2022. 11
7 Bloomberg New Energy Finance (BNEF). Global Auction and Tender Results and Calendar.
Extracted on 29 April 2022.
8 Financial Express. Solar auction tariff hits new low of Rs 1.99 per unit. December 2020.
9 Bloomberg New Energy Finance (BNEF). Global Auction and Tender Results and Calendar.
Extracted on 29 April 2022.

10 NREL. Indian Renewable Energy Status Report. October 2010.
11 CEA. All India Installed Capacity. March 2022.
Figure 4: Current Levelised Cost of Energy Range (US$/MWh, nominal) in

India
Source: Bloomberg
Policy Support Provided Backbone for the Thriving Sector

The Ministry of New and Renewable Energy (MNRE), Government of India and
several state governments have been at the forefront of providing the necessary
policy support and a facilitative regulatory system for the fast and orderly growth of
the renewable energy sector. During the early days, when technology was still at a
nascent stage, government support for wind and solar in the form of fiscal and
financial incentives helped channel private capital and gave confidence to financiers.
Some of the regulatory steps that helped remove revenue risks for projects included
providing a “must run” status to the projects. Further, generation-based incentives
(GBI) ensured sovereign risk for a part of the revenue while waiving Inter-State
Transmission system (ISTS) charges made the sector more cost competitive than
other energy sources. Finally, accelerated depreciation provided a tax cushion in the
initial years. Such steps lowered return expectations from these projects.
Investing and Financing Scenario Altered as the Sector Grew

As the renewable energy sector grew, so did the sources of financing. What started
with just private Non-Banking Financial Companies (NBFCs), when capital from
other conventional sources such as banks, private or public, found it best to avoid
exposure to a nascent and evolving technology, soon expanded into various sources.
Figure 5: Renewable Energy Financing Landscape
2019-2021
Domination by
2015-2019 Private Banks &
NBFC, Select Pvt Global Bonds, entry
2013-2015 Banks, Global of ECB Lenders,
Bonds, Domestic Shrinkage of NBFCs
Private NBFCs,
2010-2013 Infra Debt Funds, Bonds with
Global Bonds make opportunistic
Dominated by structured deals
Private NBFCs & early entry
IREDA
On the equity side, sizeable investments came from sovereign entities, global private
equity players, oil and gas majors and national conglomerates like the Adani Group,
Tata Group and most recently, Reliance Industries.
Capital Recycling Led to Better Utilisation of Resources

The evolution of financial structures led to further aggression in ROE expectations
for renewable energy projects. For instance, with infrastructure investment trust
(InvIT), the profit at InvIT level is tax exempt.12 This boosts the returns of projects
by up to 30%. Therefore, issuing an InvIT or selling operating assets to an existing
InvIT provides an attractive exit to a renewable energy developer.
For a renewable energy developer with limited capital to deploy, this also provides a
reliable way to exit older investments at a profit and grow further in new
investments. A developer with limited capital and high execution skills will use a
churn model. Under such a model, a developer creates an asset base, pools it and
then sells/dilutes it to an InvIT or other such instruments. The developer can
redeploy the capital to another asset.
The Finance – Refinance Story

Lenders funded the first solar public-private partnership (PPP) projects in Gujarat
at 12-14% interest rates owing to their limited track record and unproven
technology. The lenders also kept sufficient cushions in debt service coverage ratios
(DSCRs), with transaction closures happening at DSCRs of 1.3x to 1.4x on
conservative assumptions. Hence, the debt-to-equity split was often near the 50-50
or 60-40 mark.
Over time, this has changed substantially. Today, renewable energy projects,
specifically solar projects, get some of the most competitive structures in long-term
12 PGInvIT. Frequently Asked Questions on Taxation – PGInvIT.

financing. Financing costs have come down

by ~50-60% from the highs of ~13%
interest rate. A majority of the changes
came post COVID-19, as central banks
across the globe followed an easy money
policy. Financing for under construction
projects often have 20-year tenors, while The advent of
the DSCRs are close to 1.2x. This structuring international bond
superiority leads to a significant
enhancement of ROE. issuance has further
enhanced equity
The advent of international bond issuance
has further enhanced equity returns. Bonds
returns.
are often structured with nearly no debt
amortisation for 3-5 years, allowing further
capital deployment (equity contribution) of
the free cash flow. This, in turn, has a
cascading positive effect on ROE.
Economies of Scale at Play

Economies of scale play out perfectly when it comes to operating expenses for
renewable energy projects. In the case of solar projects, a majority of operating
expenses are for the cleaning of solar panels. With larger projects (100-1000MW
DC), labour utilisation is much more efficient. Automation is also possible as the
operations are simple. Robotic arms are now doing automatic clean-up. As a result,
pure play operating expenses have come down from ~Rs0.4-0.5mn/MW DC (~US$
6,000/MW DC) to ~Rs0.15-0.2mn/MW (~US$ 2,300/MW), a substantial saving for
grid scale projects.13
The proportion spent on spares and inventory also plays out perfectly with
increased project sizes. This advantage is available for both wind and solar projects.
For a wind project, for instance, the number of spare nacelle parts, spare wings, or
inverters is now a small percentage of overall project cost, resulting in substantial
savings.
Feasibility Analysis of Plain Vanilla Solar Project

Solar photovoltaic (PV) technology has dominated renewable energy capacity
additions in India recently. While during the start of the sector’s journey, wind
energy ruled the market, solar PV’s phenomenal cost deflation over the last decade,
coupled with the country’s vast solar energy potential, quickly brought it to the
forefront of India’s energy transition efforts. Consequently, India has some of the
lowest tariffs for solar projects worldwide.
13 IEEFA Analysis; industry insights.

The following sections elaborate on the assumptions and financial feasibility

analysis of a modelled plain vanilla solar project.
Figure 6: Solar Project Related Assumptions

Parameter Value
Project PPA Tenor (years) 25
Construction Period (months) 12
AC Capacity 50
Loading Factor 1.5
DC Capacity 75
Year 1 P90 PLF (%) 18.7%
The above table lists the project related assumptions for a solar project of 50MW AC
capacity bid out in Rajasthan. The P90, P75 and P50 levels have been derived 14 after
considering several factors, including irradiation, variability levels, and solar
module technology. The levels represent the probability that the plant’s
performance will be higher than or equal to this number 90%, 75% and 50% of the
time. P-90 would hence be less than P-75, which in turn will be lower than P-50.
Figure 7: Solar Total Project Cost (75MW AC)

Rs Total Cost Total Cost % of
Cost Items (Cr/ MWp) (Rs Cr) (US$ Mn) Total
Land Costs 0.05 3.8 0.5 1%
Evacuation Costs 0.3 18.8 2.4 7%
Modules 2.3 173.7 22.6 64%
EPC Price 0.8 60.0 7.8 22%
Hard Cost 3.4 256.2 33.3 94%
Soft Cost 0.2 15.8 2.1 6%
Total Cost 3.6 272.0 35.3 100%
14 Industry insights.
Figure 8: Simplifying the Rule of Thumb Around BCD on Solar Projects

Modules contribute ~60% of gross project cost for a typical project. India has levied basic
customs duty (BCD) on the import of solar modules, whereby ~44% additional duty/tax is
charged along with an additional 12% GST. Changes in tax laws are mostly considered a
pass-through cost for executed power purchase agreements (PPAs).
A rough calculation shows that for a project bid at a tariff of Rs2.00 per unit, 44% duty
(including cess) on 60% cost heads would roughly lead to a ~17.4% or Rs0.35 per unit increase
in base tariff (also adjusting for previous duty).
SECl’s auction of 1,785MW solar in Rajasthan got one of the lowest tariffs in recent auctions
at Rs2.17/kWh.15 This was before the imposition of BCD, and adjusting for it, the landed tariff
comes to ~Rs2.8/kWh. We have considered a Rs3.00/kWh tariff in the base case.
For projects bid out after the BCD/GST announcement, the base scenarios have changed.
BCD on cell import is ~25% viz a viz 44% for module import. Cells constitute ~50% of the total
module cost. Hence, if the developer can assemble the modules at the same price as
imported modules, the effective landed tax impact of BCD comes to ~12.5% - i.e., 50% of 25%.
Module Versus Cell Import Cell Module

Comparison (US$ cents) (US$ cents)
Non-Cell/Assembly Cost (per Wp) 12.0 0.0
Cell Cost (per Wp) 12.0 21.0
BCD (%) (inc cess @ 10% of BCD) 27.5% 44%
GST (%) 12% 12%
Landed Cost (per Wp) 30.6 33.9
The above table gives an illustrative example of the import of solar cells versus modules. For
cells, the total cost, including the price of imported cells, assembly and associated BCD and
taxes, is almost 10% lower than importing modules directly. Currently, domestic facilities for
the assembly of cells to modules are limited. A competitive back-end integration to materials
in the domestic market is a critical lookout for the sector in the years to come. And with
industry stalwarts like ReNew Power, Reliance Industries, Azure Power and Adani Group
preparing to manufacture solar modules and cells, further efficiencies are bound to come in
the sector soon.
For the base case, the total landed cost is Rs36mn/ MW (US$ 0.47mn/MW). Most
large solar projects use leased land. Therefore, land accounts for 1.5%-2% of total
project costs (TPC). Considering cell imports and assembly in India (through tie up
with key players), we assume developers will buy solar cells at US$0.12/Wp (before
duty and taxes) and US$0.31/Wp (after BCD & GST), including non-cell assembly
15 Mercom. SECI’s 1,785 MW Solar Auction Gets Lowest Tariff of ₹2.17/kWh. December 2021.
cost at US$0.12/Wp. At a total landed cost of Rs23mn/MW (US$ 0.30mn/MW), 64%

of TPC (refer to figure 9 below), solar cells are the biggest project cost item. While
the raw module price may appear aggressive considering prevailing prices, industry
belief is that these are aberrations owing to the Ukraine war and COVID-19 related
supply chain disruptions, especially in China. Therefore, it would be fair to assume
that long-term average prices should revert to the sub-US$0.12 level (before taxes)
for cells and ~US$0.20-US$0.22 for assembled modules.
Figure 9: Operating Assumptions

Rs Crores US$ Thousand
Item
(If applicable) (If applicable)
Tariff (per unit) Rs 3.0 3.9 cents
O&M Cost – 3rd Party & Internal (per MW) 0.04 4.6
Advance received revenue (in months) 3 months 3 months
Operating expenses for solar assets are very low as the majority of the costs are the
frontloaded initial capital expenditure. Operating and maintenance (O&M) costs
typically entail module cleaning, monitoring and security costs. The typical year’s
EBITDA margin for such projects is 85-90%.
Figure 10: Financing Assumptions

Item Value
Debt (%) 80%
Equity (%) 20%
Interest Rate Post COD Term Loan (%) 8.5%
Debt Tenor (years) 20
DSRA (quarters) 2
Interest costs are one of the most significant cost heads for a solar project. Even at a
cost of ~7-8%, it eats into ~45% of the total topline. However, it has also been the
most prominent value earner for solar projects as lending costs have trended
downwards over the last couple of years. A cost of 8.5% is often a comfortable base
case number adjusting for suppliers’ credits – a lower cost of debt results in a
double benefit for a project. Lower rates result in lower pricing, making the project
much more stable and capable of handling more debt.
Another base case assumption is the equity investment in the form of Compulsorily
Convertible Debentures/ Non-Convertible Debentures (CCD/ NCD) by the sponsor
(considered at 75% of total equity contribution and carrying a 12% coupon rate).
The coupons of such CCDs/NCDs are useful to provide a tax shield to a project.
Project Returns
Under these base assumptions, the project gives a project internal rate of return
(IRR) of 7.7% and an equity IRR of 9.6%. As initially discussed, the competitive
scenario for solar projects has intensified as the sector has gradually de-risked on
the construction, technology, revenue, receivables and, above all, offtake risks (for
central offtakers). As a result, the returns form a steady threshold for any investor in
the sector.
Figure 11: Base Case Return Metrics

Return Metrics Value
Project IRR 7.7%
Equity IRR 9.6%
Why, then, are the bids oversubscribed at these tariffs? And that too by the most
prominent local and global developers and investors. The following scenario
building exercise aims to answer this question.
Solar Project Scenario Building

We have run six scenarios on the current model incrementally. Each scenario is
superimposed on the previous one and provides a kicker to the equity IRR. The
reason for this is fairly simple – many developers are already implementing most of
the financing improvements (or financial engineering), and the scenarios take our
base model to a more current or contemporary state.
1. Imported cells at 10% lower cost (@ US$0.108): The record low solar bid of
Rs1.99/kWh discovered in India, in December 202016 came close on the heels
of record low module prices of ~US$0.19/Wp. The trend line for solar module
pricing has been relatively linear historically, steadily declining from the
US$0.40 mark, even reaching US$0.16-US$0.17 for a fair amount of time. The
solar cell price could be ~US$0.10 itself in the steady state – adjusting for the
current aberrations.
2. Refinance of debt at 7.5%: Last year India issued its first AAA rated renewable
energy green bonds on a non-recourse basis.17 The issue was unprecedented
because of the rating and the pricing at 6.49%. Other similar issues have
happened in the 6.6%-6.9% range.18 As the sector evolves further, the demand
for such papers will increase. The equity IRR takes a further upward flight,
adjusting for this refinance cost.
16 Mercom. Gujarat’s 500 MW Auction Sets A New Record Low Solar Tariff of ₹1.99/kWh.
December 2020.
17 Business Standard. Vector Green's subsidiaries to raise Rs 1,237 crore in green bonds. June
2021.
18 Moneycontrol. Avaada Energy's Rs 1,440 crore green bond issue oversubscribed. March 2022.
3. Foreign bonds with no amortisation for five years: The international bond
market has been more proactive in the renewable energy sector than the
domestic one. While the cost of debt was initially higher as a sum of coupons,
hedge and fee, they were “non-amortising” for 3-5 years. For a non-amortising
bond, the promoter does not repay the principal debt initially, and the cash after
interest servicing is available for further equity infusion. From a project balance
sheet point of view, this is simply preponement of equity and provides the most
significant bump up to equity returns. Most players have followed up a refinance
of projects with foreign bond issuance, and hence, they avail of both these
upsides sequentially.
Figure 12: Capital Management Cycle of Adani Green Energy Limited
Source: Adani Green Energy Limited Equity Presentation May 2020
4. Accounting for engineering procurement and construction (EPC) margins

and management fee: Most of India’s large renewable energy companies
currently have EPC divisions. Therefore, even when competitively considered,
EPC margins of 10% (on non-module costs) are a fair assumption in renewable
energy projects. Logically speaking, loading this margin of EPC on the project
means that the actual equity invested in the project is lower by this amount. For
a non-module cost of Rs 1bn (US$13mn), this would mean lower equity by Rs
100mn (US$1.3mn), or ~20% of base case equity. The IRR would, hence, bump
up further.
5. Purchase of assets by InvITs/investors with a lower cost of capital

(equity): Just as developers replace high-cost debt with low-cost debt once
projects become operational and de-risked, it is easy to assume that the cost of
equity for operating projects would be lower than that for under construction
projects. India has been witnessing this churn for a long time now with more
and more consolidation in the sector. With the success of InvITs, much larger
pools of such lower cost equity are accessible to the developers.
6. Revival of carbon market: Carbon credit, a legally tradable certificate that

permits the right to emit one tonne of carbon or carbon dioxide equivalent.
Carbon credits trading can help companies worldwide meet their goals to
reduce greenhouse gas emissions and achieve their net-zero commitments.
Several renewable energy companies from India, such as Azure Power, Acme
Solar, ReNew Power, and Adani Green Energy, have started considering the
revenues they earn from selling carbon credits as an important source of
income. The carbon price considered in our model is US$1/tonne, though prices
in India have ranged from US$1-10/tonne in the recent past.19 Currently, about
98% of the carbon credits generated in India go to developed economies,20 but
government efforts are on the way to create a domestic marketplace too.
Amongst all the value enhancers, carbon credits are one of the only
enhancements that derive additional revenue for the projects – and hence, lead
to improvement not just in equity IRR but make the project more viable by also
improving the project IRRs.
Figure 13: Solar Project Scenarios

Project Equity IRR
Parameter Changed
IRR (%) (%)
Cell Price @ US$0.11/Wp (Module cost US$0.30
8.1% 10.8%
including non-cell cost and taxes)
Loan refinance @ 7.5% rate 8.2% 12.6%
Refinance through Bonds @7.5% with no repayment for
8.2% 16.7%
first 5 years
Self EPC Margins @10% of non-module cost/ Optimising
8.2% 20.6%
BoP Cost
Valuation Benefit through selling to an InvIT that
8.2% 25.4%
derives tax benefits
Revenue from sale of carbon credits 8.6% 28.2%
Considering all the above scenarios pan out perfectly, the current solar projects are
viable and attractive and could see much lower tariffs.
It is important to note that we have assumed the returns considering the import of
cells and not modules. While this is desirable, there is a clear shortage of module
assembly plants in India. Solar power developers will be running a race against time
and supply to tie up with reputed module assembly players for the outstanding bids.
By virtue of scale and bargaining power, the GW scale players are likely to take the
lion’s share of these assembly units’ capacities, leading to a higher landed cost for
the players/projects who will import modules from China.
Other Upside Triggers for Solar Project Returns

Globally, there has been a gradual shift towards the higher yielding bifacial modules,
which produce power from both sides of the module, increasing total energy
generation. While its uptake has been slow in India, these panels are becoming
19 Saur Energy. EKI Energy Services Races To Make The Most Of Its Headstart In Carbon Credits.
December 2021.
20 BNEF. Indian IPO Darling Sees National Carbon Market in Three Years. January 2021.
increasingly popular. Bifacial modules with a single axis tracker could lead to almost
4-5% improvement in overall utilisation factors and be a key value driver soon.21
Another emerging trend is the automation of O&M through the implementation of

robotic arms for larger projects, leading to a significant lowering of already small
operating costs. Additionally, this would lead to better cleaning, lower major
maintenance capex, longer project life and higher power generation.
Competition breeds creativity and innovation. The Government of India does realise
this, and it has implemented BCD under two slabs – a higher 40% for module import
and a much lower 25% for cell import.
Figure 14: Value of Solar Cells (Assembled or Unassembled) Imported in

India (US$bn)
4.0
2.0
0.0
2018-19 2019-20 2020-21 2021-22
Source: India Lok Sabha
Lastly, as India moves from being a developing economy to a developed one, the
thresholds for debt and equity returns will lower further. It is quite likely that the
Indian entrepreneur is waiting to unlock value from that progress in times to come.
Figure 15: A Word of Caution on Key Global/Macro Risks

Global supply chains have been in tatters lately due to the disruption caused by the pandemic
and, more recently, the Russia-Ukraine war. China continues to be the single largest supplier
of materials for solar (modules) and wind (steel), and the Chinese economy, even with limited
public information, is under deep stress. Both WTG producers and solar module
manufacturers have been hiking prices as materials, freight, labour needs coming out of the
pandemic, and geopolitical risk weigh down critical raw material prices. Developers do not
budget for simple delays in the supply chains that the Indian regulator often absorbs to
ensure that the industry survives and thrives. However, the developers should be cautious
about pricing volatility and project implementation timelines and de-risk themselves from the
material price volatility as much as possible. It will ensure that the growth in the sector is
sustainable and not marred by one single large uncontrollable event like the pandemic.
Secondly, rising inflation across the globe has kept central banks on their toes. Inflation has a
two-fold impact on the projects at hand. It increases the cost of materials that can directly
impact the project returns and make the thin margin projects unviable. Further, the sharp,
21 IEEFA. Solar tariffs projected to increase by one-fifth over the next year. May 2022.
seemingly uncontrollable inflation is making the central banks tighten monetary policy,
leading to a steep increase in interest rates. Lower interest rates play the most significant role
in making projects more attractive today. Conversely, rising rates will have the most severe
impact on the short-to-medium-term sustenance of the projects. It will be necessary for
developers to hedge themselves from this risk in the current scenarios.
Feasibility Analysis of Solar-Wind Hybrid Project

The biggest challenge with a solar or wind project is its intermittency. Solar power
is generated during the day while wind (in addition to seasonality) is more during
the evening and night hours. India’s electricity load profile indicates that peak load
is generally during morning and evening. However, the evening peaks are higher
than the morning peaks. Moreover, all India peak load is typically in
September/October.22 With increasing project sizes, renewable projects can cause
grid stability issues, with a surplus during the day and a shortage at night. To
achieve the global goal of reducing (and eventually eliminating) the use of fossil
fuels, bundling these projects will make them more reliable round the clock. India
can achieve this by using pumped hydro storage (PHS), battery storage, or the more
nascent option of storing generated renewable energy as green hydrogen.
Given the above, SECI and other central offtakers have started sponsoring bids for
hybrid and storage projects over the last two years. A wind and solar project
combination results in a more streamlined power supply and is more grid friendly.
Hybrid projects set a minimum threshold of a mix of two technologies to align with
grid stability and steady power throughout the day. The lower threshold was 25%
for earlier bids, which has increased to 33%.
A hybrid solar-wind project is practically just a sum of parts of independent solar

and wind projects.
The below section will establish the project capital expenditure and operating
assumptions for a wind project of 100MW capacity.
Assumptions for a Plain Vanilla Wind Project

Figure 16: Wind Project Related Assumptions (100MW)
Parameter Value
Project PPA Tenor (years) 25
Construction Period (months) 18
Wind Capacity (MW) 100
Year 1 P90 PLF (%)-Wind 34%
22 CERC. Report on Optimal Generation Capacity Mix for 2029-30. January 2020.
Typically, a wind project commissioning period (owing to multiple land parcels and
greater evacuation complexity) is ~18 months vs 12 months for a solar project. The
biggest positive in current times is that with greater engineering efficiencies and
height of turbines, the PLFs of 34-43% are achievable at P-90 assumptions for good
wind sites, up from ~18-20% last decade. WTGs unsurprisingly constitute the
highest cost component for a wind project. There has been a remarkable amount of
engineering and innovation for wind turbines like in solar. Today, the designed
capacity of new turbines is 2.5MW - 3.5MW. Larger turbines are suitable for
deployment even in medium or slightly lower wind zones, and with high wind zone
sites getting over, higher capacity turbines are the way to go. The PLF considered in
this model is on the lower side at 34% at P90 levels.
Figure 17: Wind Total Project Cost (100MW)

Rs Total Cost Total Cost % of
Cost Items
(Cr/ MW) (Rs Cr) (US$ Mn) Total
Total development costs 0.3 29.9 3.9 4.1%
EPC Price 5.2 520 67.5 72.0%
BoP Costs 1.4 140 18.2 19.4%
Total construction cost 6.6 664.4 86.3 92.0%
Total financing costs 0.3 27.7 3.6 3.8%
Total Cost 7.2 722.0 93.8 100%
The cost of a wind project per MW today is in the range of Rs70mn/MW (US$0.9mn)
to Rs75mn/MW (US$1mn). Today’s higher costs are justified much more due to
much more engineering and much bigger machines, movement costs, land and other
evacuation matters.
Figure 18: Operating Assumptions

Rs Crores US$ Thousands
Item
(If applicable) (If applicable)
Tariff (per unit) Rs 3.1 4.1 cents
O&M Cost – Wind (per MW) 0.07 9.6
O&M Cost – Wind BoP & Spares (per MW) 0.05 6.5
Advance received revenue (in months) 3 Months 3 Months
The operating costs for a wind project consist of normal O&M and spares/other
O&M (combined 80-90% of total operating costs). Owing to fewer machines and
improved designs, the aggregate costs have decreased substantially. O&M costs are
largely a function of the number of turbines rather than capacity, meaning doubling
turbine capacity can slash O&M prices. As per BNEF, there has been a 76% decrease
in onshore wind O&M prices in real terms since 2009. 23
23 BNEF. 2H 2021 Wind Operations and Maintenance Price Index. December 2021.
Figure 19: Full-Service Initial Contract Prices for Onshore Wind Turbines
Over 1MW by Signing Year
Source: BNEF
In terms of cost/unit of power generated, this is even more competitive than past.
The O&M cost triggers from year 4 or year 5 onwards, as the WTG manufacturers
package their machines with 3-4 years of free O&M. Costs still leave healthy
operating expenditure margins for the WTG manufacturers, anywhere between 30-
60%. This is evident from the market valuation that the WTG manufacturers derive
from their maintenance units. Many large (GW scale) players focus on building their
own large O&M and spares setup in-house, to save on the O&M costs even further.
Figure 20: Financing Assumptions

Item Value
Debt (%) 80%
Equity (%) 20%
Interest Rate Post COD Term Loan (%) 8.5%
Debt Tenor (years) 20
DSRA (quarters) 2
Financing costs for wind projects, just like solar, have become more competitive and
are hence, one of the biggest proponents of improvement in the project economies.
Wind projects, by design, have marginally higher risks than solar because the
resource risk (sun vs wind) is different. Further, construction of a wind site is more
challenging with an increase in the number of sites, movement of cranes,
dependence on inclement weather and land/R&R issues. Naturally, with all other
parameters remaining the same, a lender would consider a higher rate (25 to 50
BPs) and higher DSCR cushion (1.25 vs 1.2 to 1.15) for wind compared to solar.
Total Project Cost for Hybrid Project

The total project cost for the project is the sum of costs for the solar and wind
projects. The cost per MW is aligned at ~Rs108mn/MW (US$1.4mn/MW). A project
with more capacity in wind (2/3rd in our case) will have a higher cost per MW than
one with a reverse combination of solar. Commercially though, as both the projects
have IRRs within the same range, economies of scale play out based on a player’s
competence – whether it is higher in wind or solar - or resource availability with the
bidder (in wind vs solar) and evacuation lines.
The current bids permit a player to have separate locations (state wise) for the wind
and solar projects. For instance, the solar project can be in Rajasthan or Gujarat,
while the wind is in Gujarat, Karnataka, Tamil Nadu, Maharashtra or other high
wind zones.
If a developer can find a site suitable for hybrid projects, there can be some
economies of scale for the evacuation setup and other ancillary setups, leading to
greater cost competitiveness and savings. However, such opportunities, currently,
are few and far between.
A hybrid project is, in effect, a portfolio of two projects. With the diversification of
technology, geography and resource, a hybrid project provides a risk mitigated
solution. It is also more aligned with the government’s energy goals, has more grid
balances, and will be in a favourable position with the regulators and offtakers. The
interest cost can be more competitive. The only limitation is that a large hybrid
project would entail a higher overall cost and would leave only a handful of players
that can underwrite the entire exposure.
Project Returns – Hybrid Project

Figure 21: Base Case Return Metrics
Return Metrics
Project IRR 7.4%

Equity IRR 8.7%
The returns for a hybrid project, like a wind and solar project, are a weighted
average of the individual projects. While some economies of scale in staff, admin and
management costs can play out, the same is not considered in the base case as it is
dependent on the location of plants etc. and a tiny part of the overall cost.
Hybrid Project Scenario building

In the previous section, we ran six scenarios to establish that several avenues are
available for project developers to improve their equity return profiles over the
project’s life. The following section will build on the previous scenarios to consider
the changes to the returns in a wind-solar hybrid model.
Figure 22: Hybrid Project Scenarios

Wind-Solar Hybrid
Parameter Changed
Project IRR (%) Equity IRR (%)
Cell Price @ US$ 0.11/Wp (Module cost
7.5% 8.9%
US$0.30 including non-cell cost and taxes)
Loan refinance @ 7.5% rate 7.6% 10.5%
Refinance through Bonds @7.5% with no
7.5% 13.0%
repayment for first 5 years
Self EPC Margins @10% of non-module
7.5% 19.0%
cost including Wind EPC Margin @ 7%
Valuation Benefit through selling to an
7.5% 23.1%
InvIT that derives tax benefits
Revenue from sale of carbon credits 7.9% 26.0%
Considering all the above scenarios pan out perfectly, the current hybrid projects
are viable and attractive. They could even see a tariff of Rs2.8/kWh (including duty
and taxes). The table below provides the equity IRRs for a range of tariffs.
Figure 23: Hybrid Equity IRR Range

Tariff (Rs per unit) Equity IRR (%)
3.13 26.0%
3.00 21.2%
2.80 12.3%
As attractive as the equity IRRs look for a hybrid project (or renewable projects in
general), it is essential to note that the sensitivity towards the tariffs is exceptionally
high. Simply speaking, the margins of error are minuscule. As the financing
structures become more complex and risky, a small error or delay can substantially
wipe out the project returns. Looking at the volatility in India's 10-year benchmark
government security (G-Sec) rates can provide a glimpse into the risk of financing
and refinancing for renewable energy projects.
Several interest rate hikes by the central bank are on the cards, the rising cost of
imports is denting India’s balance of payment position and potentially affecting
country risk premiums, and the relative attractiveness of developed country assets
is increasing. It would be wise for promoters to tread with caution on the leverage
side, which is like the sword of Damocles in project financing.
Figure 24: Government of India 10 Year G-Sec Yield

8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
25-04-2020 25-04-2021 25-04-2022
Source: Bloomberg
Other Upside Triggers for Hybrid Project Returns

A wind site utilises ~10 acres of land per site, including the approach roads and site
spaces. A large part of the land is often vacant and unutilised, especially as the
geographic conditions are difficult for cultivation. Over time, we expect developers
to place solar cells on vacant land. As the evacuation system is already available, this
can lead to design and generation efficiencies.
On a larger scale, the co-location of the two

projects can lead to excellent efficiencies and On a larger scale,
grid stability.
the co-location of the
As the bids for hybrid projects mature over two projects can lead to
time, we expect projects to utilise the learning excellent efficiencies and
of these combinations and storage to better
prepare for RTC (round the clock) bids. grid stability.
Once RTC projects become commonplace, we
would be able to visualise generators almost as electricity distribution companies
(discoms), providing a bouquet of grid stabilised solutions to the end users.
Investment by the largest renewable players in this line of business looks to be a
well thought through and forward-looking strategy.
The war in Ukraine has exposed the developed world’s dependence on fossil fuels.
Large fossil fuel owners can exert pressure on the largest economies and this has led
to an increased focus on the renewable energy sector, with the valuation of even the
existing plants going up substantially. Climate change by itself is the most critical
issue that the world faces today, and movement towards a greener earth is
happening on a war footing, faster than ever before. Owing to these two global
factors, there is a likelihood of more investments in the sector in the medium term.
About IEEFA
The Institute for Energy Economics and Financial Analysis (IEEFA) examines
issues related to energy markets, trends and policies. The Institute’s mission
is to accelerate the transition to a diverse, sustainable and profitable energy
economy. www.ieefa.org
About the Authors

Shantanu Srivastava, CFA
Shantanu Srivastava works as an energy finance analyst with IEEFA India.
He has experience in corporate finance and strategy consulting, working
with North American and Middle East clients. He has previously worked on
transaction advisory, business valuation and strategy consulting projects. A
CFA charter holder, he has an MBA degree in finance from IMT and an
engineering degree from NMIMS University, Mumbai.
Ankur Saboo
Ankur Saboo, an XLRI alumnus, is an infrastructure and Infrastructure
Finance specialist. After working at a leading infrastructure finance NBFC –
L&T Infra – for nearly 12 years in various leadership roles, he joined as head,
project finance and fund raise at Vector Green Energy Pvt Ltd, a wholly
owned subsidiary of Global Infrastructure Partners and was instrumental in
refinancing their entire loan book within a span of 7 months. He is currently
working in the UAE with a global infrastructure developer – Vision Invest -
in business development role.

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Shantanu Srivastava, Energy Finance Analyst 1

Ankur Saboo, Project Finance Specialist

Renewable Energy Assets in India:

Figure 1: Global Levelised Cost of Energy Benchmarks for Bulk Power,

Figure Source: BNEF

Falling tariffs have resulted in renewable energy capacity in India increasing by

1 CEA. All India Installed Capacity. March 2022.

Module Price Hike – An Aberration in the Long-Term

Industry belief is that these are aberrations

Multiple Levers Remain with Renewable Energy Players to

Figure 2: Equity Return Kickers for a Model Wind-Solar Hybrid Project

20% Increase in Equity IRR (Cumulative) 17%

Source: IEEFA Analysis

Bond market refinancing: Refinancing of project debt post commissioning is

Retrospective View of the Renewable Energy Sector

Figure 3: Major Impediments to Renewable Energy Sector’s Initial

Source: IEEFA Analysis

Falling Tariffs and Increasing Bid Sizes Underscored the

Technology Played a Key Role in Making Renewables

Extracted on 29 April 2022.

Figure 4: Current Levelised Cost of Energy Range (US$/MWh, nominal) in

Policy Support Provided Backbone for the Thriving Sector

Investing and Financing Scenario Altered as the Sector Grew

Figure 5: Renewable Energy Financing Landscape

Source: IEEFA Analysis

Capital Recycling Led to Better Utilisation of Resources

The Finance – Refinance Story

12 PGInvIT. Frequently Asked Questions on Taxation – PGInvIT.

financing. Financing costs have come down

Economies of Scale at Play

Feasibility Analysis of Plain Vanilla Solar Project

13 IEEFA Analysis; industry insights.

The following sections elaborate on the assumptions and financial feasibility

Figure 6: Solar Project Related Assumptions

Figure 7: Solar Total Project Cost (75MW AC)

Figure 8: Simplifying the Rule of Thumb Around BCD on Solar Projects

Module Versus Cell Import Cell Module

Source: IEEFA Analysis

cost at US$0.12/Wp. At a total landed cost of Rs23mn/MW (US$ 0.30mn/MW), 64%

Figure 9: Operating Assumptions

Figure 10: Financing Assumptions

Figure 11: Base Case Return Metrics

Solar Project Scenario Building

Figure 12: Capital Management Cycle of Adani Green Energy Limited

Source: Adani Green Energy Limited Equity Presentation May 2020

4. Accounting for engineering procurement and construction (EPC) margins

5. Purchase of assets by InvITs/investors with a lower cost of capital

6. Revival of carbon market: Carbon credit, a legally tradable certificate that

Figure 13: Solar Project Scenarios

Other Upside Triggers for Solar Project Returns

Another emerging trend is the automation of O&M through the implementation of

Figure 14: Value of Solar Cells (Assembled or Unassembled) Imported in

Source: India Lok Sabha

Figure 15: A Word of Caution on Key Global/Macro Risks

Feasibility Analysis of Solar-Wind Hybrid Project

A hybrid solar-wind project is practically just a sum of parts of independent solar

Assumptions for a Plain Vanilla Wind Project

Figure 17: Wind Total Project Cost (100MW)

Figure 18: Operating Assumptions

Figure 20: Financing Assumptions