2. Partnership to Advance Clean Energy - Deployment (PACE-D) TA Program Accelerating Deployment of Solar Rooftop through Gross Metering for Karnataka 11th September, 2015 Presented at the Stakeholder Consultation for RE Hybrids and Gross Metering Bangalore, India Presented by The USAID PACE-D TA Program

3. Introduction to the Global and Indian Solar Rooftop Market Solar Rooftop Business Models – the relationship with incentive structures Consumer Analysis of Karnataka Objective of Study Benefits of Gross Metering Business Case for Gross Metering Determination of FIT for Gross Metering Contents

4. Mainstreaming EE in Corporate Loans Solar - fastest-growing generation technology globally - key contributor has been solar rooftop. Large markets like U.S. and Germany - added more capacity through rooftop A number of drivers have been pushing the development of solar rooftop projects across the globe CountrySolar PV Installed Capacity (GW)Share of Rooftop PV (%) Germany~38~60% US~20~40% Japan~24~35% Australia~4~80% Solar Deployment areas/ benefits Supply gap reduction Energy security T&D loss reduction Stimulate investments Optimal utilization of infrastructure Large ground mounted solar projects √√√ Large commercial solar rooftop projects √√√√√ Small household based rooftops projects √√√√√

5. 4 SectorInstalled by SECI (MW)Installed by States (MW)Total installed (MW) Commercial10.917.228.9 Government3.04.97.3 Hospital1.60.52.1 Institutional (Schools, Collages)2.25.18.3 Religious institution0.67.57.6 Residential0.00.3 Total18.3535.53254.187 India’s solar rooftop market potential ~124 GW India has set an ambitious target of 40 GW by 2022 13 States have notified Solar Policy’s supporting grid connected rooftop systems 19 states/ UTs have notified regulations for net metering/feed-in-tariff mechanisms India’s solar rooftop journey has just started and the sector has the potential for rapid scale up – however right now the sector is still in infancy with close to 300 MW of installed

6. While significant potential exists in India, the sector is still in infancy with development of the requisite eco-system is still falling into place Policy and regulation Multiple incentive structures Utility’s participation Simple Procedures and Processes Distribution Utility Preparedness Standardized interconnectio n processes Awareness of rooftop solar Capacity of Utility personnel Financing Financing products and guidelines/ norms Risks and associated mitigation strategies Evaluation Tools and capacity of FI’s Market and Awareness Standards & certifications B2B business models Contracting structures & their sanctity

7. 6 Solar Rooftop Development Business Models

8. Incentive Terms used in the Presentation Gross Metering – a framework where all the energy generated is exported to the grid with no internal consumption at the rooftop owners facility Net Metering – a framework wherein the energy generated by the rooftop system is first used internally (by the rooftop owners facility) and the excess is exported to the grid only to be netted against imports at later times FIT – A feed in tariff used to denote the price paid by a utility for power under the gross metered regime Solar Tariff - this is the tariff paid for excess power exported to the grid by the Net Metered consumer under the present Net Metering Regulations in Karnataka today Gross Metering and FIT have been used interchangeably in the presentation and stand for power exported to the grid under gross metering at a price determined by the Regulatory Commission

9. Solar PV implementation across the globe has followed two routes – large scale centralized generation or smaller scale distributed generation Solar Rooftop

10. Solar rooftop (aka Consumer-end Driven) Space has seen a number of models emerge – basically based on ownership, metering and types of rooftops which have been defined by the policy and regulatory regime, taxation structures and market structures

11. 10 CountryQuantityPricingFiscal MeasuresInstalled Capacity GermanyFiT Linked capacity cap (MW)- introduced recently FiTCapital Subsidy (way back) Low interest loans Around 38 GW ItalyFiT Linked capacity cap (MW)- introduced recently FiTNone FranceFiT linked capacity cap FiTTax Abatement on Equipments SpainAnnual Capacity Cap (MW) FiTInvestment Subsidies (prior to 2004) USEnergy Purchase (RPS) Net MeteringTax Abatement on Equipments Capital Subsidy Tax rebates Around 20 GW JapanEnergy Purchase (RPO) Now Moved to FiT Capital SubsidyAround 24 GW As pointed out - globally Policy and Regulatory Instruments have played a critical role in the development of the solar industry – the same is the case with rooftop solar

12. On 10 th October, 2013 KERC, under the solar tariff order, determined the tariff for grid interactive rooftops and small solar PV power plants (Rs. 9.56/kWh) Under the same tariff order, KERC suggested that the concept of net metering can be adopted for grid tied solar rooftop systems In pursuance this, BESCOM along with other distribution utilities launched the Net metering based Solar rooftop program in October 2014 Despite a supporting policy and regulatory environment and a clear and simplified process for interconnecting systems, the scheme has not be able to achieve the desired results Rooftop capacity around 2.14 MW has been commissioned under the program so far Challenges faced by the program are (based on PACE-Ds analysis) –Difficulties in encouraging consumers with lower retail tariff –Marketing by developers and equipment suppliers yet to take off –participation from 3 rd party investor still limited due to contracting and payment security issues 11 Although the state of Karnataka has taken a number of proactive steps in terms of policy and regulation, the development of Solar rooftop sector in Karnataka has not achieved the expected results

13. India has set an aspiring target of achieving 40 GW though Solar rooftops by 2022, wherein the target for Karnataka is 2300 MW To achieve this target, Net Metering alone may not be sufficient. The Objective of this study is to analyse and if found suitable propose a mechanism which can facilitate the development of the solar rooftop sector in the state The focus of the study is to evaluate whether solar rooftops developed under a gross metering regime using Feed in Tariffs would accelerate the deployment of solar rooftop in the state 12 Objective of the Study – propose a mechanism which can facilitate development of the solar rooftop sector in Karnataka FY 2016FY 2017FY 2018FY 2019FY 2020FY 2021FY 2022Total India2004,8005,0006,0007,0008,0009,00040,000 Karnataka102752901344034605182,300

14. Solar Rooftop Development – The case of Karnataka

15. 14 Hypothesis – the gross metering framework using Feed in Tariff offers tangible benefits and has the potential to scale up rooftop deployment in the state Gross metering - solar financially viable for investor/ consumer but at lower cost limiting utility losses Simple to design and deploy – experience of utilities in deploying the instrument Allows wide scale participation from a number of consumers and investors Limited revenue loss for the utility and long range optimization of public finances Positive long term impact on tariffs for all consumer categories Capacity Addition: Consistent and stable curve leading to a well developed industry value chain Long term regulatory consistency for solar market development

16. 15 StakeholderParameterTerm Short (5 years)Medium (5- 10 Years) Long (10 to 20 years) ConsumersImpact on TariffIncreased burden – due to differential between FiT & APPC/ MCPP Still higher burden due to still existing differential Negative impact due to lower procurement cost Viability for consumers – ability to invest rooftops All consumer categories Project Size OptimizationHigh – project sizing can be based on space UtilitySale of power to consumersNo Impact on Sales of the Utility Impact on Utility Cash flowMedium – due to higher FIT requirement Marginal – The FIT is expected to reduce in medium term Low – FIT requirement would be lesser than APPC Impact on Average Power Procurement Cost HighMarginalLow Developers / 3 rd Party Investors Contract SanctityHigh – as DISCOM has signed PPA Payment Security IssuesLow The gross metering framework provides more options for consumers but does burden them in the short term

17. 16 The Gross Metering Framework allows all consumer categories to participate in the solar rooftop program The DISCOMs serve approximately 20 million retail consumers in Karnataka In terms of energy sale, Agriculture is the biggest (36%) consumer followed by Domestic (21%). Subsidised categories constitute 57% of the total units sold in Karnataka Average cost of supply for BESCOM is Rs. 5.50/kWh & for BESCOM, the average retail tariff is Rs. 4.59/kWh Distribution losses (AT&C) for BESCOM are 13.4% of which technical losses at LT level are 12.28%. KERC Supply tariff order, 2015-16 With NEM, Rooftops are not viable for subsidised consumers, Which constitutes to 86% of total Consumers

18. Procurement from Solar Rooftop projects using the gross metering framework will become cost completive in the long run and will reduce considerable loss to revenue from utility The figure projects average power procurement cost vis-à-vis procurement cost from solar rooftop projects installed in FY2016 Increase in electricity demand & fuel prices, utility’s power procurement costs will rise, driving up retail tariffs and APPC, reducing the gap to FIT - solar FIT remains constant throughout life of the project cycle However in the same time the cost of commercial power rises substantially leading to loss in considerable revenues to the utility Short Terms Medium Tem Long Term Procurement from solar will become cost competitive for distribution utilities in long run

19. Solar rooftop FITs will become increasingly competitive with conventional power generation and considerably lower than the commercial consumer tariffs The figure depicts the solar rooftop FITs installed over the years vis a vis changes in retail supply tariff & APPC As per our models, the Solar rooftop FIT will be lower than the average cost of power purchase of utilities Utilities stand to lose considerable revenues from commercial and industrial consumers in case of net metering – gross metering stems that loss Solar FIT Req. will be lower than APPC Short Terms Medium Tem Long Term Technology Innovations and Improvement in Operational efficiency will help in reducing Solar FIT requirement continuously

20. Utilities will suffer from higher losses due to revenue reduction than they would through higher pay-out if gross metering framework was adopted Net Metering mechanism will replace the grid energy with energy from solar rooftop thus it would impact utility sales negatively Graph projects the loss to utility under the net metering mechanism from implementation of solar rooftops vis a vs higher pay-out for FIT under gross metering However under gross metering, utility power procurement cost will increase but at a reducing rate due to a reducing FIT Cost to utility under NM ~ Rs. 1600 Crore Cost to utility under GM ~ Rs. 733 Crore The impact of reduced sales due to Net Metering would be much higher than incremental cost of power procurement under gross metering

21. Gross Metering is a more powerful mechanism for developing rooftops as the FIT can be tuned as per market conditions – the FIT also provides flexibility to promote other solar uses such as solar based pumping Gross Metering allows all consumers to deploy solar rooftops while Net Metering is viable only for high paying consumers With Gross Metering, utilities face no threat of losing customers and business, while they end up procuring cheaper power over the life of solar projects vis a vis net metering In long run, the cost of procurement from solar rooftops would be cheaper than other conventional sources for utilities However Gross Metering based FIT needs frequent revisions and care needs to be taken on the quantum of capacity procured under this mechanism to limit burden on the end consumers 20 Inferences till now

22. 21 Capital Cost vis-à-vis FIT ParametersUnitsGERCRERCHERCKERC* Category of ProjectRooftop (draft)Rooftop Capital Cost(Rs./kWp)8056.568.090.0 Tariff(Rs./kWh)8.426.457.199.56 Tariffs provided by various regulatory commissions for solar rooftops: Based on our analysis, FIT for solar rooftops will be: ParametersUnitsLevellised Tariff for different Capacity System Size(kWp)1-1010-100Above 100 Capital Cost(Rs./kWp)75,00072,50070,000 Feed-In-Tariff(Rs./kWh)7.977.717.44

23. Thank You Key Partners: RE Component Design and development of innovative financing mechanisms Microfinance Partners Capacity to design and implement supportive policies and regulations Implementation of techno-commercially viable pilots

24. In terms of public expenditure per unit capacity addition, Germany and Japan have had the most effective frameworks for promoting solar capacity development over the long term German investments focused more on FiT leaving technology and supply chain development/ cost reduction to the market Japan focused more on R&D, investment subsidies and demonstration projects – however market unable to take off – shifted to FiT in 2010 Deloitte 23 Measures for optimizing public investments in solar development Source: (Avril and Lemare,2012)

25. 24 Distribution Losses (AT&C) of Karnataka Source: FOR, Assessment of AT&C Losses of Karnataka, March-2014 Out of total losses, Technical losses in Karnataka are roughly 11.7% With Solar rooftops, impact of technical losses could easily be minimised and Utility’s power purchase cost can be reduced Rooftops can help utilities in reduction of technical losses both at HT and LT level

26. Global Solar Market has witnessed a steep decline in Solar PV system price in last few decades As per Experts, the system cost will keep on falling due to the following factors –World Demand for panels –Technological Innovations –Learning –Inflation –Exchange Rate Risk To analyse the impact of key drivers on cost of solar power, the PACE-D team used three cases i.e. Optimistic, Base and Pessimistic case How will Solar Costs evolve in the future

27. Impact of Drivers on Cost of Generation from Solar To evaluate the impact of key drivers on Solar Cost of Generation, scenarios have been developed i.e. Optimistic, Base and Pessimistic Assumptions Optimistic – 5% Reduction in Solar COG annually due to fall in price by technology innovation with conducive policy and regulatory environment for investors Base – 3% Reduction in Solar COG annually due to moderate environment for investors Pessimistic – 2% Increase in Solar COG annually due to increase in prices because of low technology innovations and rise in inflation

28. Module Prices and their projections As per IEA- Technology Roadmap Solar PV, The Cost of solar Modules will drop to half in next 20 years The Price range of PV system will narrow and the Avg. cost will be halved by 2040 or before

29. Capital Cost – Comparison of Capex. based bids invited by SECI for solar rooftops and quotations provided by various system installers CUF – Several state commissions (KERC, HERC, GERC, RERC etc.) has considered CUF of 19% for solar rooftops while determining tariff Interest Rates – Rate of interest for raising funds for installation of rooftops has been considered 11.85% (SBI base rate +200 basis points) Return on Equity - Flat ROE of 20% (pre-tax) has been considered for entire life of plant i.e. 25 years considering continuous cash flow for generator Discount Factor – Discount factor has been computed on the basis of WACC O&M Expense - O&M of solar rooftops is very low hence 2% of capital cost has been considered as O&M Expense per year with annual escalation of 5.72% similar to recommendation of KERC Depreciation – for the purpose of computing depreciation benefit, regulatory approach has been adopted (Straight Line Method) 28 Assumptions for determination of Solar FIT

30. Financial Parameters for FIT determination Parameters (Units)GERCHERCRERCKERCProposed Capital Cost/MW (Rs. /lakh)800680565900720 - 675 Debt: Equity (Ratio)70:30 Debt Repayment Tenure (Years)10 1210 Interest on Debt (%)12.70%13.75%13%12.50%11.85% Capacity Utilization Factor (CUF)19% 20%19%18% Return on Equity (Post tax) (%) 14%16%20%(Pre Tax) Discount Factor (%)10.64%14.42%10.89%13.41%11.48% Auxiliary consumption (%)0% O & M expenses (Rs. Lakhs/MW)10111318 16 (2% of Capital Cost) O & M Escalation p.a. (%)5.72% Interest on Working Capital (%)11.85%14%12.50%13%12.85% Depreciation for first 10 yrs6%7%5.83%7% Depreciation for next 15 yrs2%1.33%1.54%1.33%