New Energy India

Financing Models in RE

The most common structures used to finance projects are Project Financing, Corporate Financing, and Lease Financing.

- Project financing refers to financing structures wherein the lender has recourse only or primarily to the assets of the project and depends on the cash flows of the project for repayment. It can be “limited recourse” financing when besides the project cash flows’ the lender has some recourse to the balance sheet of the promoter by way of issuance of corporate guarantees. ‘Non-recourse finance’ is used when there is no recourse to the balance sheet of the promoter and therefore the lender takes a higher financing risk and therefore may charge higher interests and/or put stricter norms in place.

- Corporate financing involves the use of internal company capital to finance a project directly, or the use of internal company assets as collateral to obtain a loan from a bank or other lender.

- Lease financing involves the supplier of an asset financing the use and possibly also the eventual purchase of the asset, on behalf of the project sponsor. Assets which are typically leased include land, buildings, and specialized equipment. A lease may be combined with a contract for operation and maintenance of the asset.

Sources of Finance

- Equity financing refers to the use of retained earnings otherwise paid to stockholders, and the issuance of stock. Both forms of equity financing use funds invested by the current or new owners of the company. The equity financiers’ returns are usually paid in dividend payments and depend on the growth and profitability of the business.

- Debt Financing includes both short-term borrowing from financial institutions and the sale of long-term bonds, wherein money is borrowed from investors for a fixed period. Lenders have right to interest and principal payment or to be repaid at a particular date.

Innovative Financing Mechanisms

- Clean Development Mechanism (CDM) is one of the flexible mechanisms following the Kyoto Protocol, which offers industrialized countries the possibility to engage in economically and environmentally competitive emission reduction projects in developing countries. The income stream from selling the creditable emission reductions from emission reduction projects have beneficial effect on the project’s financial structure. See CDM section for details.

- Dealer-Credit Model involves an arrangement wherein the dealer is provided support through access to business financing and sells the RE system to the end user, which can be some times on credit.

- In a Consumer Credit Model local finance institutions provide loans to users to buy the RE system. The RE enterprise in this case transacts on commercial basis with the users.

- Supplier Credit Model is similar to equipment lease financing, insofar as it involves financing provided by suppliers of goods and services to the project.

- In an Energy Service Company Model (or Fee-for-Service model) the customers pay for the energy service that is provided to them by an energy service company (ESCO). It makes the energy affordable and minimizes the long-term risks for the customers as the ownership and maintenance of the equipment lies with the energy service company.

- A Revolving Fund is reserve money or fund, often used in developing countries, to lend to one or more borrowers. The idea for the revolving fund can be used both for an organization or an individual. The borrower on the other hand is expected to repay the original sum that restocks the fund over the given period of time. Usually, an additional sum is charged (interest) to the borrower that acts as a fee for providing the service (administrative costs) and helps to protect the fund from being depleted.

Contribute Content on RE Finance

Renewable Energy (RE) Finance Overview

Concerns about energy security and climate change notwithstanding, investments in renewable energy projects are rising globally. Investors are funding both the installed renewable capacities as well as manufacturing capacities for renewable equipments. India is also part of this exciting action.

So far much of India’s renewable growth has been financed domestically and conservatively. Majority of financing has been asset financing in the area of wind where captive power generators have been investing to expand wind-manufacturing capacity.

For a long time, domestic banks were shy to lend to renewable sector. There were perceived technological risks as well as risks associated with lack of fuel supply arrangement in the case of biomass and municipal waste. But thanks to growing awareness, government’s changing priorities and the inevitability of renewables to supplement India’s energy mix, the banks and increasingly funding these projects.

Especially in the wind sector, the shift in the attitude of financiers is reflected in elongated maturities and tenors of loans and lower borrowing costs. Also, besides wind, which now enjoys a structured plain vanilla commoditized based financing, financiers are broadening their exposure to other renewable sectors and energy efficiency projects.

Venture capital and private equity firms are also viewing renewables as an exciting opportunity. Besides, the RE companies are testing the IPO route and M&A activity is on an upsurge.

On top of the financing spectrum is IREDA, the Indian Renewable Energy Development Agency, an apex nodal agency for renewable energy development in India and a funding arm of the Ministry of New and Renewable Energy. The other government agencies that actively fund renewable energy projects are Power Finance Corporation and Rural Electrification Corporation.

The multilateral agencies such as the World Bank, World bank’s private sector arm International Finance Corporation, KfW and the Asian Development Bank have also stepped up their assistance to this sector in the last few years.

Prominent domestic banks that fund renewable projects are IDBI, ICICI, IFCI, SBI, and PNB among others. Foreign banks such as Standard Chartered, ABN Amro and Rabobank are also focused on renewable financing. There are also regional localized banks such as that also provide micro credit facilities for stand-alone units.

General Eligibility Criteria for Renewable Energy Loans

Who Can Apply?

- Public, Private Ltd companies, NBFCs and registered Societies

- Individuals, Proprietary and Partnership firms (with applicable conditions)

- State Electricity Boards which are restructured or in the process of restructuring and eligible to borrow

loan from REC/PFC

Eligibility

- Profit making companies with no accumulated losses.

- Debt Equity Ratio not more than 3:1 (typically 5:1 in case of NBFCs)

- No default to any government agency (IREDA/PFC/REC) and other FIs / Banks

- No erosion of paid-up capital.

Typically, applicants who are loss making/ not meeting the criteria relating to accumulated losses/ debt equity ratio shall be eligible for financing if Bank Guarantee / FDR is provided as security for the entire loan.

Generic Eligibility Criteria and Conditions for Loans for Specific RE Technologies

Wind Energy

Eligible Projects

- Projects demonstrating techno commercial viability

- Grid connected wind farm projects in identified windy sites appearing in the MNRE / CWET list of

potential sites for wind farm projects in the country

- Projects incorporating wind electric generators appearing in the C-WET approved manufacturers list

- Project sites having mean annual wind power density of over 200 Watts/Sq.m. at 50m above ground

level (agl)

- Project incorporating new Wind Electric Generators with the capacity 225 kW and above

Financing Norms (IREDA)

- 10.25% interest rate with a 10 year maximum repayment period

- 30% minimum promoter contribution, and loan available up to 70% of the project cost

- Front end fee of 0.5% to 1.25% of the loans amount

- Registration fee between Rs 10,000 to Rs 60,000 depending on the loan amount

Small Hydro Power

Eligible Projects

- Projects demonstrating techno commercial viability

- Small Hydro – electric projects being developed at the existing irrigation canals as Canal Based

schemes, as Dam-Toe schemes & as Run-of-River schemes with maximum station capacity 25 MW

- Projects above 25 MW capacity may be considered under co-financing / consortium financing

arrangements

- Refinancing of projects which are not commissioned earlier than 1 year from the date of application to

IREDA

Financing Norms (IREDA)

- 10.75% interest rate with a 10 year maximum repayment period

- 30% minimum promoter contribution, and loan available up to 70% of the project cost

- Front end fee of 0.5% to 1.25% of the loans amount

- Registration fee of between 10,000 to 60,000 depending on the loan amount

Biomass Power and Cogeneration

Eligible Projects

- Public, Private Ltd. companies, NBFCs and registered Societies

- Individuals, Proprietary and partnership firms (with applicable Projects) demonstrating techno

commercial viability

- Projects with PPA signed with SEB’s or State Utilities or third parties

- Projects setup for captive consumption

- Projects based on boiler pressure of 63 kg/cm2 and above

- Sugar plant of minimum size of 2500 TCD for Bagasse based Cogeneration projects

- Project incorporating new equipments

Financing Norms (IREDA)

- Biomass cogeneration and industrial cogeneration: 11.25% interest rate with a 10 year maximum

repayment period

- Biomass power generation: 10.75% interest rate with a 10 year maximum repayment period

- 30% minimum promoter contribution, and loan available up to 70% of the project cost

- Front end fee of 0.5% to 1.25% of the loans amount

- Registration fee of between 10,000 to 60,000 depending on the loan amount

Waste-to-Energy/Biofuels

Eligible Projects

- Projects demonstrating techno commercial viability

- Municipal Solid Waste Projects of capacity up to 6MW

- Projects incorporating new equipment

Financing Norms (IREDA)

- Recovery of energy from industrial, municipal, and urban waste: 12% interest rate with a 10 year

maximum repayment period

- Ethanol/Bio-diesel production: Biomass power generation: 11.75% interest rate with a 8 year

maximum repayment period (2 year moratorium)

- 30% minimum promoter contribution, and loan available up to 70% of the project cost

- Front end fee of 0.5% to 1.25% of the loans amount

- Registration fee of between 10,000 to 60,000 depending on the loan amount

Energy Efficiency

Eligible Projects

- Projects demonstrating techno commercial viability

- Projects undertaken through ESCO modes/end users for implementation of energy

efficiency/conservation project

- Projects involving purchase and installation of energy efficiency and / or load management

devices/systems

- Projects for production of energy efficiency equipment

- Projects involving end-user’s participation in SEB and other utility sponsored Demand Side

Management (DSM) programs

Financing Norms (IREDA)

- Energy conservation / Efficiency projects (including DSM) and projects implemented in ESCO model:

11.25% interest rate with a 10 year maximum repayment period; and 10.25% interest rate with a 8

year maximum repayment period

- Energy conservation / Efficiency improvement equipment: 11.75% interest rate with a 8 year maximum

repayment period

- 30% minimum promoter contribution, and loan available up to 70% of the project cost

- Front end fee of 0.5% to 1.25% of the loans amount

- Registration fee of between 10,000 to 60,000 depending on the loan amount

Latest Trends in RE Financing

According to Global Trends in Sustainable Energy Investments 2007 report by UNEP, in 2006, roughly half of the VC/PE total ($100 million) was private equity investment for expanding wind manufacturing capacity. Asset financing ($2 billion) was focused on wind, although the majority of investment is by captive power generators. Public market activity was negligible, with no Indian companies going public in 2006. There was only one M&A deal involving an Indian target during the year, and this was very small: Solar-Fabrik AG’s $3.8 million acquisition of an 80% stake in OJAS Energy, an Indian PV wafer manufacturer.

In the other direction, however, Indian companies aggressively sought opportunities beyond their borders. Suzlon acquired Belgian gearbox manufacturer Hansen for $565 million; telecoms and beverages group Sterling Infotech entered the renewables market by paying $28.2 million for a 40% stake in Finnish turbine manufacturer WinWind; solar group Moser Baer made two investments, one in the US and one in Slovenia; and bioethanol producer Praj Industries acquired US engineering firm CJ Schneider.

Useful Research Resources

Global Trends in Sustainable Energy Investment 2007

This report presents the dollar view of the current status of sustainable energy development, including both the renewable energy (RE) and energy efficiency (EE) sectors. The information is intended to provide financiers and policy makers with an overview of the status and drivers of the sustainable energy market development.

Financing Mechanisms for Renewable Energy

The e-learning module highlights various financing mechanisms and models in renewable energy finance.

Guide to Financing CDM Projects

This Guidebook, commissioned by the UNEP Risoe Centre as part of the activities of the Capacity Development for CDM (CD4CDM) project, has a two-fold purpose -- to guide project developers on obtaining financing for the implementation of activities eligible under the CDM; and to demonstrate to developing country financial institutions typical approaches and methods for appraising the viability of CDM projects and for optimally integrating carbon revenue into overall project financing.

Barriers to Financing RE Projects

This presentation lists and explains key barriers to renewable energy financing in India. These include technical, political, social, environmental, cultural, and legal barriers.

CDM and Role of Financial Institutions

This presentation deck explains the concept of CDM and highlights key aspects that enterprises should consider while evaluating and structuring CDM projects.

Financing Structures for CDM Projects in India and Capacity Building Options for EU-Indo Collaboration

This discussion paper describes the current status of the CDM stakeholders in India, assesses risk perspectives of CDM projects, and provides suggestions for approaches these stakeholders may adopt in order that projects from Indian promoters are able to capture a sizeable share of emerging competitive CDM market. It also defines options for capacity building support from EU.

Wind Energy Finance: Mobilizing European Investment in Indian Wind Sector

This presentation lists means for Indian projects to access European capital, and evaluates strengths and weaknesses of the Indian RE market (mainly wind sector).

Major Financial Institutions in RE Sector

Gujarat Industrial Investment Corp. Ltd.

Indian Renewable Energy Development Agency Limited

IDFC

IFCI

Infrastructure Leasing and Finance Services Ltd.

National Bank for Agriculture and Rural Development (NABARD)

Power Finance Corporation

Rural Electrification Corporation

Pradeshiya Industrial & Investment

Small Industries Development Bank of India

Tamil Nadu Power Finance and Infrastructure Development Corp. Ltd.