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1 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management December 2011 Warm Wishes For ew Year 2012 Ronnect emerges as the single largest Rs supplier during December Trade ession. nalysis of Draft R order of ndhra radesh Draft R ndhra radesh published its draft R regulations this month. This is significantly delayed ( was the only major state remaining to publish R; Delhi has a draft order, and West Bengal is essentially a non-participant), and was much awaited. Highlights of the draft regulation are: Total R is fixed at 5% (4.75% on- olar and 0.25% olar). However, there are several points that stand-out, and are a matter of concern. The obligation does not start until , and remains constant till This is important due to several reasons it is a deviation from the practice of other states where R% progressively increases, and also from the target (according to which the national R should reach 14% by , if the 15% target by 2020 needs to be met) Till the earlier order on R remains in force (of 2009). The earlier order places the obligation on Discom s only. Further, it did not recognize Rs, or allowed purchase of R power from outside the state. R Tariff rder R Trade Report R roject tatistics Green ews bout Ronnect ne question this raises is that can Discom s in use Rs to meet their current obligation? The answer appears to be no. The current draft order places the obligation on aptive and pen ccess users. However, it appears that the obligation will not apply immediately to these categories of consumers. The 2009 order does not specify the penalty in case of non-compliance. The practical implication of this is that there is no effective penalty mechanism till nother implication of the current regulation will be that eligible renewable energy generators in are likely to be al lowed to register in the R mechanism. This will lead to a situation where R generators can participate in the national R market, while consumers in face no obligation. There are also other generic issues like lack of clarity on the definition of verage ooled urchased ost (). While this is also the case in regulations of other states, it appears has had no benefit of coming last! ublic hearing to discuss this regulation is set for January 12, From Management s Desk Dear Readers, December was a momentous month for us. We were the largest trader in the R market. We want to thank all our clients and well-wishers who helped us achieve this. It is a great confidence booster for the entire team, and a validation of our core belief that Knowledge is ower. ndhra radesh finally came out with the draft R regulation it was the only major state remaining to do so. ur lead article this month focuses on an in-depth analysis of the regulation. verall, the regulation falls far short of any meaningful R at present, as captive and open access users face no obligation till , and there is no penalty provision till them. Details are in the article below. We have also presented an analysis of the new R Tariff rinciples published by R. These are important as they form the basis of tariff determination at the state level. R has made some fundamental changes, which have important implications, and also left some parts untouched (which we think should have changed). rices seemed to have hit a peak in Rs Trading, at least for now. learing price on IX was Rs 2,950 (vs. Rs 2,900 last month). Total volume traded increased marginally from 105,000 last month to approximately 112,000. ee details in the trading review. -Team Ronnect Month: December 11 ontents of this newsletter are for informational purposes only age 1

2 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management nalysis of Renewable nergy Tariff Determination rder by R Draft R R Tariff rder R Trade Report R roject tatistics Green ews bout Ronnect The entral lectricity Regulatory ommission (R) recently published draft Renewable nergy Tariff Determination rder. The hearing was held in ew Delhi on Dec 22, 2011, which we attended. The below is a summary of the important changes proposed in the order. The R tariff determination regulation is important because the principles set by R act as guidelines for actual tariff determination by state Rs. R has made some bold structural changes in tariff determination: ontrol period The control period has increased from 3 years to 5 years. This is an important change as a smaller control period resulted in frequent changes in the regulations. The five year term will provide longer visibility for the investors. This is also a natural step as most of the R technologies (except solar) have reached a level of maturity and critical mass of installation in the country, and therefore do not see significant changes in technology or costs. Wind Density ondition removed - ccording to MR circular dated , there will be no restriction on the wind power density while installing new machines as there is a continuous improvement in the technology and the lower wind density regime can be explored. This will increase investments in the wind sector and also more sites will be available for the generation. By removing the barrier of wind density the renewable potential of each state will be utilized to its maximum. ther important points: The return on equity (R) has been taken at 20% for the first 10 years. This is based on the tax holiday enjoyed under section 80-I of the Income Tax ct, according to which income from R generation is tax -free. The current calculation assumes a 16% posttax R, grossed up to 20% factoring in Minimum lternate Tax requirements (MT). R may have to review this sooner if the proposed Direct Tax code no longer provides the this benefit to R generators. Receivables are assumed to be 2 months. This implies that payment from sale of power to Discoms is realized in 2 months. necdotal evidence suggests this is very optimistic (in some states payment takes close to 10 months). haring of DM benefits at present, sharing of DM benefit is envisaged with 100% retained by the R generator in the first year, 10% in the next year, progressively increasing by 10% every year till it reaches 50%. This worked while carbon credit (R) prices were high. However, with the recent collapse of R prices, this clause will act as a disincentive for projects to go for DM registration (as the high upfront costs have to borne by the generator - these are not shared and are often not covered by the first year R revenues alone). ll these points need to be factored in to determine a tariff that will be attractive to investors. -nd of rticle- We are pleased to present the nline R calculator. Its a first of its kind tool in India. It will help you plan and manage your R liability in a easy and effective manner. You can access the R calculator using the link below: ontents of this newsletter are for informational purposes only age 2

3 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management Review of R Trading-December 2011 Draft R R Tariff rder R Trade Report R roject tatistics Green ews bout Ronnect R markets continue to grow, albeit more slowly than in the earlier months. Total traded volume increased to approximately 120,000 (an increase of 14%), while price increased marginally to Rs 2,950/ R (vs. Rs 2,900 last month; IX prices). rices at XIL increased to Rs 2,950 from Rs 2,800 last month. Total demand volume grew marginally from 278,000 to 285,000 (an increase of 2.5%), while Rs bid for sale decreased by 3% to 180,000. This was on the back of significantly lower level of issuance this month only 87,000 Rs were issued, as compared to 136,000 last month (a decrease of 36%). This is due to low generation (this is a seasonal phenomenon) in wind and small hydro generation. Issuance volumes are expected to grow from next month, once Rs are issued to sugar mills (the crushing season started in early ovember). eller participation remained high at 82% of the total Rs available for sale. Flat demand is a likely indicator that early buyers have met a significant portion of their R requirement and are price sensitive (a barrier seems to exist at Rs 3,000/ R price point). hort of strong enforcement signals, we can expect demand to only spurt in February and March now, when a lot of fence sitters today get into the market for purchases before the end of the compliance period. High seller participation in the previous month and this, flat demand and expectation of higher issuances next month are pointers that demand has peaked for the meantime. o olar Rs were traded this month. ress coverage: Hindu Businessline quoted Vishal andya below: The price hike has been very marginal, which reflects that the prices are very near to their maturity, says Mr Vishal andya, Director, Ronnect nergy olutions, a consultancy that specialises in facilitating R trading. The future market movement will depend heavily upon how the new demand shapes up as next month onwards we can expect additional supply of Rs coming into the market, Mr andya told Business Line today. ontents of this newsletter are for informational purposes only age 3

4 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management tatus of projects in R Mechanism Draft R ccredited apacity : MW R Tariff rder R Trade Report R roject tatistics Green ews bout Ronnect Month: December 11 ontents of this newsletter are for informational purposes only age 4

5 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management tatus of projects in R Mechanism Draft R Registered apacity : MW R Tariff rder R Trade Report R roject tatistics Green ews bout Ronnect Month: December 11 ontents of this newsletter are for informational purposes only age 5

6 Green ews Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management Draft R R Tariff rder R Trade Report R roject tatistics Green ews bout Ronnect olar Tariffs have fallen ignificantly in current round of bidding under ational olar Mission India has advanced the target date for selling solar power at the same rate as conventional electricity by five years to 2017 as tariffs have fallen significantly in the latest projects on offer and the trend is likely to continue, government officials said. The average tariff offered in the current round of bidding under the ational olar Mission was 8.78 per unit. The lowest bid was 7.49 per unit. articleshow/ cms Green nergy: R proposes alignment of financial norms with market rates The entral lectricity Regulatory ommission (R) has proposed assured long-term tariff visibility and alignment of financial norms with the prevailing market conditions. In its draft tariff regulations, 2012, it has proposed the return on equity (Ro) to be revised keeping in view the increase in the Minimum lternate Tax (MT). nforcement of R regulations is critical to R market growth The key question facing the R market is the enforcement of R regulations. While states have done a very good job in creating the regulations, their enforcement remains a key question. Without strong enforcement, where defaulters are penalised, adequate demand for Rs will not materialize. Green energy turns lucrative Rs has brought a windfall to the green energy makers, which are reaping twin benefits of selling power as well as Rs. The prices of tradable Rs have shot up from Rs1.5 per unit to Rs2.9 per unit within the last one month, indicating a huge premium commanded by these companies. issues draft regulations for renewable purchase obligation' Mr. Vishal andya of Ronnect, a consultancy, note that the draft regulations are out of sync with the national vision of bringing in a green power purchase obligation of 15 per cent on the obligated entities. ven the Forum of Regulators, of which R is a member, has resolved to target an R of 10 per cent by ontents of this newsletter are for informational purposes only age 6

7 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management onsolidated tatus of Rs across various states in India - s on December 28, 2011 tate tatus of Regulation R bligation* R on? R on Users? enalty? ndhra radesh Draft 4.75 % %** o o ot pecified ssam Final 2.70 % % Yes Yes Yes (Rmax) Bihar Final 2 % % Yes Yes Yes (Rmax) hhattisgarh Final 5.00 % % Yes Yes Yes (Rmax) Delhi Draft 1.90 % % Yes Yes Yes (Rmax) Gujarat Final 5.50 % % Yet to be notified Yes Yes (Rmax) Haryana Final 1.25 % % Yes Yes Yes (Rmax) Himachal radesh Final 10 % % Yes Yes Yes (Rmax) J&K Final 2.9 %+0.10 % Yes Yes Yes (Rmax) Jharkhand Final 2.5 % % Yes (>5MW) Yes Yes (Rmax) Karnataka Final 10 % % (BM,MM,H M), 7 % % for others Yes (>5MW) 5% R Yes (>5MW) 5% R Yes (Rmax) Kerala Final 3.05 %+0.25 % Yes Yes Yes (Rmax) Madhya radesh Final 2.10 % % Yes Yes Yes (Rmax) Maharashtra Final 6.75 % % Yes Yes Yes (R max ) Meghalaya Final 0.45 % % Yes Yes Yes (R max ) rissa Final 4.90 % % Yes(>5MW) Yes Yes (R max ) unjab Final 2.4 %+0.03 % Yes Yes Yes (R max ) Rajasthan Final 6 % + JM Yes Yes Yes (R max ) Tamil adu Final 8.95 % % Yes Yes Yes (R max ) Tripura Final 0.90 % % Yes (>5MW) Yes Yes (R max ) Uttrakhand Final 4.5 % % Yes Yes Yes (R max ) Uttar radesh Final 4.50 % % Yes Yes Yes (R max ) West Bengal Final 3 % + R not recognized JR for Goa and UTs Final 1.70 % % Yes Yes Yes (R max ) JR for Manipur and Mizoram Final 2.75 % % (Man) 5.75% % (Miz) Yes Yes Yes (R max ) agaland Final 6.75 % % Yes Yes Yes (R max ) ** R only applies to Discom's at present. lso, refer to article nalysis of Draft R order of ndhra radesh in this newsletter ontent of this newsletter is for informational purposes only age 7

8 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management ast ewsletters Dear Readers, ur previous newsletters are available at our website and can be downloaded from : The summary of our previous newsletters we have published is available below. Volume V: December 2010 & January 2011 Impact nalysis of R Volume VI: February 2011 Demand and upply nalysis of R Mechanism Volume VII: March 2011 India Witnesses First ver Trade of R Volume VIII: pril 2011 olar Rs: Investor s perspective and feasibility study Volume IX: May 2011 R Market: nother round of Regulatory ush Required Volume X: June 2011 nalysis on proposed Floor & Forbearance rices for control period Volume XI: July 2011 pplicability of R/R on o-generation ower lants Volume XII: ugust 2011 R & R: The Dilemma of Double ccounting of Green Tags Volume XIII: eptember 2011 Metering Issues in s and o-gen: From R erspective Volume XIV: ctober 2011 Introduction to Renewable Regulatory Fund Volume XV: ovember 2011 Renewable urchase bligation Demand - upply nalysis Feedback: We wholeheartedly thank you for providing your valuable feed-back on our last newsletter. Your feedback on the newsletter keeps us motivated and would certainly help us to improve the quality of it. Kindly keep writing to us. We are eager hear your views. Best Regards, Team - Ronnect ontents of this newsletter are for informational purposes only age 8

9 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management ervices rovided by Ronnect Draft R R Tariff rder R Trade Report R roject tatistics Green ews bout Ronnect Detailed ervices in R pace ervices for R Generators ervices for bligated ntities (Distribution ompanies / pen ccess onsumers / aptive onsumers) ontents of this newsletter are for informational purposes only age 9

10 Ronnect nergy olutions R, nergy fficiency, lectricity ortfolio Management bout Ronnect Draft R R Tariff rder R Trade Report R roject tatistics Green ews bout Ronnect Ronnect is a venture focused on the Renewable nergy ertificates, nergy fficiency and lectricity ortfolio Management. Ronnect s team has extensive experience in the environmental markets both in India and internationally: Worked in the international carbon markets for several years and has expertise in the consulting and trading of emissions reductions xtensive knowledge about various Renewable nergy ertificate and ontact Ronnect ew Delhi Vibhav uwal vibhav.nuwal@reconnectenergy.com Bangalore Vishal andya vishal.pandya@reconnectenergy.com nergy fficiency ertificate markets in U, urope and ustralia etc. Worked with Indian nergy xchange (IX), India s leading power exchange, and have extensive knowledge and experience of power markets lumnus of olumbia University, an Ivy League University in U, and IIT Bombay Highly experienced core team worked with organizations like J Morgan, Indian nergy xchange, sia arbon and Gensol. uresh Kumar (for R) suresh.kumar@reconnectenergy.com Mumbai Ramkumar K ramkumar@reconnectenergy.com ontents of this newsletter are for informational purposes only age 10