F. No. 53/15/2016 -WE Ministry of New & Renewable Energy. Evaluation of Generation Based Incentives Scheme for Wind Power Projects

F. No. 53/15/2016 -WE Ministry of New & Renewable Energy Evaluation of Generation Based Incentives Scheme for Wind Power Projects The GBI scheme was initially introduced in 11th Plan on 17.12.2009 with the approval of the Cabinet for taking up 4,000 MW in 11th Plan. Under that scheme a GBI of Rs. 0.50 per kwh with a ceiling of Rs. 0.62 crore per MW was provided to wind power project. The incentive was to be availed in not less than 4 years and in maximum of 10 years with an annual ceiling of Rs. 15.5 lakh per MW in first 4 years. IREDA was designated as the implementing agency for the Scheme. The scheme was further extended for the 12 th Plan period with increased ceiling of Rs. 1.0 crore per MW. Under GBI scheme over 7000 MW capacity has already been registered. 2. IREDA has undertaken an evaluation of the GBI Scheme through CRISIL. CRISIL has submitted its final report on evaluation of the GBI scheme. The report has been placed on the website of the Ministry for comments/suggestions/views of the stakeholders. 3. The comments/suggestions/views on the GBI evaluation report may please be sent through email (preferably in word format) by 15 December 2016 to: Shri J. K. Jethani Scientist-D Ministry of New & Renewable Energy Blcok-14, CGO Complex, Lodhi Road New Delhi-110003 Tel/Fax- 24362728 Email: jethani.jk@nic.in

INDIAN RENEWABLE ENERGY DEVELOPMENT AGENCY Evaluation of Generation Based Incentive scheme for wind power projects Final report October 2016

Table of content 1. Executive summary... 5 2. Introduction... 11 2.1 Background... 11 2.2 Objective of study... 11 2.3 Scope of work... 11 3. Approach and methodology... 13 3.1 Scope of work... 13 3.2 Our approach... 14 4. Key considerations... 15 4.1 Renewable energy in India... 15 4.2 Wind energy in India... 15 4.3 Incentive schemes for wind sector... 16 5. Assessment of GBI scheme... 19 5.1 Progress and performance of GBI scheme... 19 5.1.1 Achievement of objectives... 20 5.1.2 Achievement of targets... 22 5.1.3 Key constraints... 22 6. Determination of appropriate GBI benefit... 23 6.1 Option 1-GBI to wind investors... 23 6.1.1 Based on Revenue Neutrality... 25 6.1.2 Based on NPV equal to zero... 26 6.1.3 Based on Target Equity IRR... 26 6.2 Option 2-GBI benefit to discom... 27 6.2.1 Eligibility for availing PBI incentive... 28 6.2.2 Control period of PBI scheme... 28 6.2.3 Impact on exchequer... 28 6.2.4 Sale of wind power under competitive bidding (both intra and inter-state sale to discom)... 28 6.3 Methodology for determination of GBI incentive for alternate offtake options... 29 6.3.1 Sale of wind power under repowering scheme... 29 6.3.2 Sale of wind power under wind solar hybrids... 31 6.3.3 Captive Consumption... 32 6.3.4 Third Party Sale... 33 2

6.4 Recommendation on Incentive Level and Cap... 33 7. Assessment of implementation procedure... 35 8. Other key aspects... 37 8.1 Impact of GST and DTC... 37 9. Conclusion and recommendations... 38 3

Table of figures Figure 1: Capacity additions and projects registered (MW) under GBI Phase II... 6 Figure 2: Three methodologies used for determination of appropriate level of GBI... 7 Figure 3: Proposed approach... 14 Figure 4: Incentive schemes in wind energy... 16 Figure 5: Wind installed capacity trend in India... 19 Figure 6: Objectives of GBI scheme... 20 Figure 7: Capacity additions and projects registered under GBI... 21 Figure 8: Share of states in projects availing GBI... 21 Figure 9: Three methodologies for determination of required GBI... 23 Figure 10: Repowering potential in India... 29 List of tables Table 1: Treatment of GBI benefits... 6 Table 2: Proposed PBI incentive... 8 Table 3: Estimated financial impact on exchequer from PBI scheme under FIT and bidding route... 10 Table 4: Estimated financial impact on exchequer from GBI scheme-repowering & wind-solar hybrid projects... 10 Table 5: Installed power capacity, as on July 30, 2016... 15 Table 6: State-wise installed wind power capacity... 15 Table 7: Weighted average SERC parameters... 24 Table 8: Various parameters used during the calculation... 24 Table 9: Appropriate level of GBI based on Revenue Neutrality... 25 Table 10: Appropriate level of GBI based on NPV equal to Zero... 26 Table 11: Appropriate level of GBI based on target Equity IRR... 26 Table 12: Proposed PBI incentive under FIT and competitive bidding route... 27 Table 13: Estimated financial impact on exchequer... 28 Table 14: Assumptions for computation of GBI incentive for repowering projects... 30 Table 15: Assumptions for computation of GBI incentive for wind-solar hybrid projects... 31 Table 16: Proposed PBI incentive... 38 4

1. Executive summary Wind energy is the fastest growing renewable energy source in India. With an installed capacity of close to 28 GW, it constitutes about 61% of the country s installed renewable power capacity. Commercial wind power projects in India are promoted through fiscal and promotional incentives. The main driving force for initial development of the wind sector has been the provision of 80% accelerated depreciation (AD). Later, to broaden the investment base through entry of large independent power producers (IPPs) and attract foreign direct investment (FDI), the Ministry of New and Renewable Energy (MNRE) introduced the Generation Based Incentive (GBI) scheme in December 2009. The objective of the scheme was to provide level playing field to IPPs and also promote increased generation and efficiency in installations. The GBI scheme, which was withdrawn on March 31, 2012, was reintroduced on September 4, 2013 retrospectively, with the following terms and conditions: Under phase II of the scheme, GBI is being provided to wind electricity producers @ Rs 0.50 per unit of electricity fed into the grid for a period of not less than four years and a maximum period of 10 years, with a cap of Rs 10 million per MW The total disbursement in a year cannot exceed one-fourth of the maximum limit of the incentive, i.e. Rs 2.5 million per MW per annum during the first four years The scheme will be applicable for the entire Twelfth Five-Year Plan period, i.e. up to March 2017 With the GBI scheme nearing its deadline of March 31, 2017, the Indian Renewable Energy Development Agency (IREDA) and MNRE have facilitated this study to evaluate the performance of the GBI scheme, in terms of meeting its objectives and targets, its impact on the wind power sector, and identifying and addressing any relevant issues. To conduct this assessment, financial model was prepared for a typical IPP in various states that includes the impact of variation in FIT in states on financial viability of the wind power project. Beside, a consultative approach has been used, which comprises discussions with stakeholders, including MNRE, IREDA, developers of wind power projects, turbine manufacturers and wind associations. Concern of DISCOMs on account of relatively higher cost of wind power, compliance of RPO, as well as impact on retail tariffs were also factored in. The key findings from this study are: Performance of GBI scheme: Although the performance of GBI phase II, in terms of capacity addition, has been modest, with a total addition of 5,762 1 MW as against the target of 15,000 MW, the GBI scheme has had a positive impact on the wind power sector, and has been appreciated by wind power developers/ investors and other stakeholders. It remains one of the key incentive that has driven investments in the sector especially from number of IPPs who are not availing AD benefit but doing project finance. 1 Source: IREDA; as on March 31, 2016 5

Figure 1: Capacity additions and projects registered (MW) under GBI Phase II 2098 290 376 986 1410 1702 1325 1325 2012-13 2013-14 2014-15 2015-2016 Registered under GBI Other projects not registered under GBI In terms of approach, it has rightly set a transition from investment- or capital-linked incentive to outcome- or generation-linked objective. The scheme has been successful in improving wind capacity utilization factor (CUF) levels in the country. The same can be observed from increase in normative CUF levels considered by Regulatory Commissions over the last 5 years such as Maharashtra (CUF increased from 20% to 22%), Gujarat (CUF increased from 23% to 24.5%) and Karnataka (CUF increased from 24.5% to 26%) It has lead on improved technology advancement with better hub-height that has eventually lead to higher generation or performance. It has also helped in financial closure by providing comfort to lenders of assured cash flow from the central government. In fact, investors have cited positive impact the GBI scheme has had, in terms of availing financial closure for wind projects during times when there have been payment delays by utilities. Factors affecting GBI offtake: Projects registered under the GBI scheme, as a percentage of total wind projects commissioned, reduced to less than 40% in 2015-16 from a high of 83% in 2012-13. In Tamil Nadu and Karnataka, investors preferred alternative offtake options, such as group captive /captive/ third-party models, which offer better returns and financial viability of the project. This lowered the percentage of projects registered under GBI-sale to distribution companies (discoms). Also impacting GBI offtake is reluctance by discoms in signing fresh power purchase agreements (PPAs) in key wind states, such as Rajasthan and Maharashtra. This lowered the share of projects under GBI in 2015-16. TREATMENT OF GBI BENEFITS- Considering the ultimate objective of GBI scheme is to benefit the end consumers and also promote investments in wind sector, there are two approaches for treatment of GBI benefit Table 1: Treatment of GBI benefits Options GBI Beneficiary Rationale 1 Investor 1) Provide level playing field with AD benefit 2) Compensate for lesser FIT vis-à-vis submitted cost of generation as well as to overcome impact on retail tariffs 6

Options GBI Beneficiary Rationale 3) To promote quality investments through adoption of superior technology as well as higher generation in the wind sector 4) Unfulfilled target of 15000 MW 2 Discom 1) To incentivize discoms to assure that they execute PPA and move towards non-solar RPO compliance, thereby helping in increased capacity addition in the wind sector 2) To compensate discoms for comparatively higher cost of wind power over APPC cost, thereby also helping timely payment to the investors 3) To help in reducing impact on the retail consumer tariffs. DETERMINATION OF APPROPRIATE LEVEL OF GBI: The appropriate level of GBI is arrived at considering both the options-a) GBI offered to investor b) GBI offered to Discom. a) Option 1- GBI offered to investor The analysis of appropriate level of GBI has been done through 3 methodologies as shown below. Figure 2: Three methodologies used for determination of appropriate level of GBI Based on Revenue Neutrality to AD Determination of required GBI level Based on NPV equal to zero Based on target Equity IRR Revenue neutrality to AD: Revenue neutral GBI has been calculated considering the levelised value of the total equity cash flow (post tax), thus taking cognizance of the tax benefit of AD for each year. According to revenue neutrality, the required GBI level is coming to be in the range of Rs 0.51 per unit. Based on NPV equal to zero: In this second methodology, the required GBI has been calculated based upon keeping Net Present Value of equity cash flows (post tax) equal to zero. As per this methodology, the required GBI level is coming to be Rs 0.48 per unit. Based on target equity IRR: In this third methodology, the required GBI level has been calculated keeping equity IRR (post tax) is in the range of 14%-16%. As per this methodology, the required GBI level is coming to be Rs 1.08/kWh, Rs 1.28/kWh and Rs 1.48/kWh for equity IRR of 14%, 15% and 16% respectively. Repowering Projects: It is suggested to offer GBI benefit for repowered wind projects. Appropriate GBI has been calculated considering the difference between levellised cost of generation from repowered project and the weighted average offtake tariff. Accordingly, GBI benefit to investor is coming to be Rs 0.66 per unit. 7

Wind-Solar hybrid projects: It is suggested to offer GBI benefit for wind solar hybrid projects. Appropriate GBI has been calculated considering the difference between levellised cost of generation from wind-solar hybrid project and weighted average offtake tariff. Accordingly, GBI benefit to investor is coming to be Rs 0.61 per unit. Incentive Cap: It is suggested that there should not be any further annual or overall cap. This has been explained in the points below. In case any cap is imposed to the scheme then it will reduce the availability of GBI for the 10 years period as assumed in the calculation. This, in turn, would lead an increase in overall GBI requirement. The removal of cap is also supported from one of the objective of the scheme- to incentivize higher generation efficiency. Annual or overall cap to the scheme would restrict the efficiency by limiting the amount of generation that would be eligible for GBI. This would be in conflict to the scheme objective itself. b) Option 2- GBI offered to discom One of the key challenge faced by the wind sector is lack of non-solar RPO compliance (including in states with no wind potential) as well as recently observed reluctance of discoms to procure wind power due to their weak financial health or due to its potential impact on the retail level tariffs for consumers. Therefore, suitable mechanisms need to be developed to use GBI to encourage discoms to procure wind power, make timely payments and also prevent forced backing down of wind power. This procurement incentive may be provided to the DISCOM till such time utilities payout for wind power is greater than the marginal cost of conventional power or average power purchase cost as well as its likely impact on the retail tariffs & its financial health 2. Further, the GBI scheme was launched with an objective to promote generation efficiency in the wind sector when the sector was struggling with poor efficiency levels, which the GBI scheme has been successful in addressing and also promoting investment that are through project finance 3. Therefore, there is a need to shift from generation based incentive to a procurement based incentive by incentivizing utilities to comply with RPO targets including states with lack of RE resources, Accordingly, a suitable procurementbased incentive (PBI) is structured to help reduce the purchase cost of wind power for states. Such a change will enhance transparency, facilitate timely payment to generators and ease out the administration of the incentive with the central government would only need to deal with the discoms than with investors. It is suggested that apart from wind repowering and wind solar hybrid power projects, which are still in nascent stage of promotion, conventional wind power sale to utilities (under both FIT as well as competitive route) should be covered under the PBI scheme i.e. incentive should be offered to utilities rather that wind investors. Determination of appropriate level of PBI: With the objective to incentivize utilities to meet RPO targets and ensure timely payments to investors, the appropriate level of achievement-linked PBI is arrived by computing the difference between lowest cost of wind generation (lowest wind feed-in-tariff (FIT) of Rs 4.16/kWh) and national average power procurement cost (Rs 3.40/kWh 4 ). Therefore, an achievement-linked PBI is proposed to be offered to utilities, based on the following achievement levels: Table 2: Proposed PBI incentive S. no. Achievement vis-à-vis state wind targets (MW) specified by MNRE Procurement-based incentive 1 85% and above (till 2017-18) 75 paisa/kwh 2 Below 85% and up to 60% (till 2017-18) 50 paisa/kwh 3 Below 60% (till 2017-18) 25 paisa/kwh 2 Financial health is likely to improve by 2019-20 post implementation of UDAY scheme and its operational targets and benefits 3 The same can be observed from increase in normative CUF levels considered by Regulatory Commissions over the last 5 years such as Maharashtra (CUF increased from 20% to 22%), Gujarat (CUF increased from 23% to 24.5%), and Karnataka (CUF increased from 24.5% to 26%) 4 http://www.cercind.gov.in/2015/orders/so15.pdf 8

In order to capture inflation cost under national level average power procurement cost, PBI incentive will be computed on an annual basis. A multiplier (APPC n-1/appc n) will be computed, based on Central Electricity Regulatory Commission (CERC) computation of national level average power procurement cost each year. For e.g., in case CERC determines average cost of power procurement as Rs 3.60/kWh, the multiplier will be 0.94, i.e. 3.40/3.60. Accordingly, the PBI incentive will be 0.71 for 2018-19 (0.94 multiplied by 0.75 under the first performance category. Eligibility criteria: The PBI incentive should be offered under both procurement modes, i.e. procurement under FIT route, and procurement through competitive bidding route. Further, all new wind projects, including standalone wind projects, wind-solar hybrids and repowering projects, should be eligible under the scheme. The payment of PBI incentive to utilities will be built in, with following pre-conditions: Utilities should clear pending invoices for wind power projects to be eligible Utilities should submit documentary evidence for timely payment to wind generators, along with the PBI claim application, monthly Moreover it is clarified that the PBI incentive should not be monetized by utilities and banks for financing purpose Control period for PBI scheme: It is suggested that the PBI scheme will be applicable for a period of 3 years i.e. till 2019-20, with an incremental wind capacity target of 15 GW. Further, such PBI incentive will be paid for a period of 5 years for the contracted capacity. It is expected that the utilities financial and operational health will significantly improve within the next 3 year period with the help various government initiatives including implementation of UDAY scheme. The scheme will be reviewed after a period of 3 years and re-evaluated depending on RPO targets met, utilities financial situation etc. Inclusion of competitive bidding route (both intra and inter-state sale) under the PBI/GBI scheme: With Ministry notifying guidelines for introduction of competitive bidding for procurement of 1000 MW wind projects by nonwindy states, it is important to evaluate the need for GBI under competitive bidding route. Considering the fact that under competitive mode, the distribution company is the end procurement party, it is suggested that GBI/PBI scheme should be applicable under competitive bidding mode also. Therefore, along with offering PBI incentive to utilities under FIT regime, similar PBI incentive should be offered to procuring utility under competitive bidding route. Captive consumption and Third party sale: It is suggested to continue third party sale as ineligible for GBI scheme as the generators would be selling this power at higher/ appropriate tariffs, and thus making considerable/ reasonable profits. Summary of Treatment of GBI/PBI scheme Under FIT and competitive bidding route-pbi incentive to be offered to procuring discoms based on table 2 above (both under FIT as well as competitive bidding route). Under repowering and wind solar hybrid power projects-gbi payment to be given to wind investor o o For repowering projects-gbi incentive is worked out at Rs 0.66 per unit For wind-solar hybrid projects- GBI incentive is worked out at Rs 0.61 per unit Captive and third party sale-continue to remain ineligible under GBI/PBI scheme Impact on exchequer: The financial impact of the PBI scheme on the exchequer will depend on actual performance of utilities, in terms of compliance with wind targets. Under base case of 100% compliance, the cumulative financial impact is estimated at Rs 10276 crore. 9

Table 3: Estimated financial impact on exchequer from PBI scheme under FIT and bidding route 2017-18 2018-19 2019-20 Proposed wind capacity targets under PBI scheme (MW) 4000 5000 6000 Expected generation per year (MU)*-(A) 7709 9636 11563 cumulative generation (MU) 7709 17345 28908 PBI incentive (Rs/kWh)**-(B) 0.75 0.71 0.68 Estimated PBI (Rs crore) for a 5 year period (A x B x 5/10) 2891 3445 3940 Cumulative PBI (Rs crore) 10276 (*assuming 22% CUF level and ** considering 100% compliance with estimated increase in APPC cost at 4.91% (based on historical CAGR for WPI from 2004-05 to 2015-16I)-actual PBI incentive will depend on actual compliance and actual APPC cost for particular year)) In addition to the above, the financial impact of offering GBI incentive to wind repowering and wind-solar hybrid projects with a target of 3000 MW (1500 MW each under both wind repowering and wind-solar hybrids) over the next 3 years under both categories and for a period of 10 years is estimated at Rs 3670 crore Table 4: Estimated financial impact on exchequer from GBI scheme-repowering & wind-solar hybrid projects 2017-18 2018-19 2019-20 Proposed wind capacity targets under GBI scheme (MW) 1000 1000 1000 Expected generation (MU) per year*-(a) 1927 1927 1927 GBI incentive (Rs/kWh)**-B 0.635 0.635 0.635 Estimated GBI (Rs crore) for a 10 year period (A x B x 10/10) 1224 1224 1224 Cumulative PBI (Rs crore) 3670 (*assuming 22% CUF level and ** considering average GBI benefit of Rs 0.635 for wind repowering and wind-solar hybrid projects) Implementation procedures: Separate payment pool for PBI-While IREDA allows monthly claim of GBI benefit, there have been instances of delay in release of GBI claims to developers, mostly due to non-availability of funds from MNRE. In order to prevent delay in disbursal of PBI, it is suggested that MNRE should create a separate pool of amount equivalent to targeted annual PBI payments, and the amount should be monitored and budgeted annually. Execution of PPA as a pre-condition for availing GBI payments- The GBI scheme currently makes it mandatory for wind power projects to register with IREDA within 6 months of commissioning, to be eligible to avail GBI. To register on GBI web portal, it is desirable that signed PPA is available with the applicant. However, the applicant will be allowed to register on GBI web portal pending signing of PPA subject to condition that they shall be eligible to claim GBI only after signing of PPA. Considering the fact there have been issues related to delays in execution of PPA even after project commissioning in state like Maharashtra, such projects are not eligible under the present guidelines. It is suggested that such projects where the project is commissioned but PPA with state utility for sale of power under preferential tariff has not been signed due to any unforeseen reasons should be allowed to avail GBI benefit from the commissioning date and not PPA execution date. Implementation procedure for PBI payments to utilities-it is suggested that existing procedure followed under the existing GBI scheme for small solar and solar rooftops systems (RPSSGP) should be followed under the PBI scheme for wind projects as well subject to eligibility criteria discussed above. 10

2. Introduction Wind energy is one of the fastest growing segments in the renewable energy space. The growth and development in wind energy has been possible because of the support of the central and state governments, in the form of promotional and fiscal incentives. Generation Based Incentive (GBI) is one such scheme launched in late 2009 by the Centre to encourage the participation of IPPs and foreign investors in the wind energy sector. The term for phase II of the GBI scheme, which was reintroduced in September 2013, will end on March 31, 2017, and a decision is to be taken on whether it should be continued and any modifications or changes be brought into it. For this purpose, CRISIL Risk and Infrastructure Solutions Ltd has been appointed to evaluate the GBI scheme for wind power projects. 2.1 Background Energy is the basic requirement of an economy. For a developing country like India, energy assumes significance as it is required not just for economic development but also for social development. Since the past few decades, the country has witnessed rapid industrialization, urbanization, growth in per capita consumption and increased access to energy, which has increased the demand and consumption of energy. Currently, India s energy requirement is largely met through fossil fuels, such as coal, oil and natural gas. But, considering the issues associated with the use of fossil fuels, such as fuel shortages, rising prices and environmental impact, the question is being raised as to whether the use of fossil fuels for meeting energy requirements is sustainable in the long run. For energy security and long term sustainability it is essential to promote renewable energy sources, such as wind, solar, biomass and industrial/urban waste. 2.2 Objective of study The response of phase II of the GBI scheme has been modest. About 5,700 MW has been registered with the IREDA under the scheme, which is considerably below the target of 15,000 MW set in the Twelfth Five-Year Plan. The major issues that have been raised by stakeholders with respect to limited offtake under the scheme are: Need to promote alternate business models: There is a need to promote alternate power sale options, including repowering, wind-solar hybrid and inter-state sale power Need to include competitive bidding: With MNRE launching competitive bidding for 1,000 MW wind projects, it is suggested to also include wind procurement under competitive bidding under the scheme GBI as a tool to encourage discoms to procure wind power: The biggest challenge facing the sector is the reluctance of discoms to procure wind power due to their weak financials. Therefore, a suitable mechanism needs to be put in place to use GBI as a tool encourage discoms to procure wind power and make timely payments 2.3 Scope of work Assess the performance of the GBI scheme and its impact on the sector Interact with stakeholders, including MNRE/IREDA, state nodal agencies/utilities, developers, manufacturers of wind turbines and their associations, CERC/ state electricity regulatory commissions (SERCs), government departments and any other organisation, in consultation with MNRE/IREDA, and take feedback/suggestions on the scheme Assess implementing procedures of the scheme and guidelines followed, and suggest modifications to the process 11

Evaluate whether to continue with the scheme or recommend alternatives beyond the Twelfth Five-Year Plan, taking into consideration factors such as technology development for higher CUF, cost of financing, cash flow, other fiscal and financial incentives provided by central/state governments, as well as impact of the likely introduction of goods and services tax (GST) and direct tax code (DTC) Suggest modalities to continue the scheme beyond the Twelfth Five-Year Plan, considering the different types of projects, including captive, open access, repowering, hybrid, inter-state sale, projects selling power at FIT and projects selected through the bidding process 12

3. Approach and methodology The objective of this study is to assess the performance of the projects registered under GBI, issues pertaining to implementation of the scheme, and recommend modifications/changes to the scheme.. 3.1 Scope of work The objective of the study is to comprehensively evaluate the performance of projects registered under the GBI scheme, identify issues with regards to its implementation, recommend any modifications/changes, and study the impact of the scheme on the wind energy sector. Therefore, our understanding of each of the components of the scope of work is: Assess performance of the GBI scheme and recommend whether it should be continued Assess impact of GBI scheme on wind energy during Twelfth Five-Year Plan Interact and discuss with MNRE, project developers and associations on the importance of the GBI scheme for the wind sector, going forward Assess implementation procedure and guidelines of the scheme and suggest modifications/ changes Assess barriers and constraints in implementation of the scheme and suggest remedial measures IREDA is the implementing authority for the GBI scheme. We will hold discussions with IREDA officials as well as wind developers to understand issues or constraints faced in implementation of the scheme during the Twelfth Plan We would also review guidelines/ procedures of the scheme, and based on our understanding from discussions with IREDA officials as well as beneficiaries of the scheme (wind power developers), we would suggest necessary modifications/ changes to effectively implement the scheme Assess adequacy or inadequacy of benefits under scheme The scheme was introduced as mutually exclusive to the accelerated depreciation (AD) provision. Therefore, it is essential that the incentive provided under the scheme is equivalent to that under the AD provision o We would, therefore, compare fiscal benefits available under GBI scheme vis-à-vis AD scheme using a scenario analysis to arrive at adequacy or inadequacy of the GBI scheme Evaluate the scheme, with respect to new business models such as group captive/ third party/ repowering/competitive bidding/inter-state sale The scenario analysis would be further distilled to determine whether: o o Current incentive of Rs 0.50 per unit needs to be increased Cap of Rs 10 million per MW needs to be raised or removed Impact assessment of introduction of DTC and GST on wind power sector, and on GBI scheme and its continuation We will undertake impact assessment of introduction of GST and DTC on the financials of a typical wind power project Findings of the impact assessment will be put forward along with recommendations, in form of an interim report to stakeholders for comments and/or suggestions 13

3.2 Our approach Adopt a consultative process Long term techno-economic viability and reliability of the study to ensure sustainability Build up scenarios to assess GBI scheme vis-à-vis other fiscal benefits Suitably incorporate stakeholders feedback to provide the most optimal solutions Figure 3: Proposed approach Stakeholder interaction Review of GBI implementing procedures How effective has been GBI scheme? Treatment of GBI scheme GBI vis-à-vis required tariff Likely impact of DTC & GST Evaluation of GBI scheme Treatment for repowering/hybrid/captive/ third-party/inter-state and competitive bidding projects Whether GBI scheme needs to be continued? If yes, for what period? What should be adequate level of GBI? Whether captive consumption should be included? GBI framework for new business models like hybrid/repowering/ competitive bidding, etc What should be 14

4. Key considerations Wind energy is one of the fastest growing segments in the renewable energy space, comprising almost 61% share in the space. This section captures growth of the renewable energy sector and wind energy in particular; and the facilitators. 4.1 Renewable energy in India India has huge potential for generating electricity from renewable sources. Development of renewable energy can become an important catalyst for regional economic development. Also, many states that have rich renewable energy potential lag in economic development. Developing renewable energy in these states can provide secure power supply, thereby fostering industrial development, attracting investment and creating employment opportunities. As per a Central Electricity Authority (CEA) report, as on July 2016, of a total installed power capacity of 304 GW, the share of grid-connected renewable power capacity was 44 GW, which translates into approximately 14% of total installed capacity. Table 5: Installed power capacity, as on July 30, 2016 Sr. no Fuel Capacity (GW) % of total 1. Coal 186.29 61% 2. Gas 24.64 8% 3. Diesel 0.91 0.30% 4. Hydro 42.88 14% 5. Nuclear 5.78 2% 6 Renewable 44.23 15% Source: CEA Total 304.76 100% Further, as per a recent study on renewable energy potential in India, it has emerged that there exists a huge opportunity to further develop grid interactive renewable energy sources. The wind potential itself is estimated at 302 GW at 100m hub height. India has projected an ambitious renewable capacity addition target of 175 GW by 2021-22, out of which 60 GW is from wind power. This translates to annual wind capacity targets of 5 GW. Considering that the highest wind capacity that has been added in a year is 3.4 GW, the 60 GW target is ambitious. Meeting the target would require considerable government support, in terms of policies/regulations and fiscal incentives. 4.2 Wind energy in India Wind energy is an important source of renewable energy. As on September 30, 2016, the installed wind power capacity was about 28 GW, accounting for approximately 61% of the installed renewable energy capacity. Globally, India ranks fourth in terms of the installed wind power capacity, behind China, the US and Germany. Table 6: State-wise installed wind power capacity Sr. no State Gross estimated potential (MW) Installed capacity (MW) Potential utilised 1. Andhra Pradesh 44229 1431 3.24% 2. Gujarat 84431 3948 4.68% 3. Karnataka 55857 2869 5.14% 4. Kerala 1700 43 2.53% 15

Sr. no State Gross estimated potential (MW) Installed capacity (MW) Potential utilised 5. Madhya Pradesh 10484 2141 20.42% 6. Maharashtra 45394 4653 10.25% 7. Rajasthan 18770 3993 21.27% 8. Tamil Nadu 33800 7613 22.52% 9. Telangana 4244 77 1.81% 10. Others 3342 4 0.12% Total 302251 26777 8.86% Source: MNRE as on March 31, 2016 However, as shown in the above table, all states are yet to realise even half of the estimated wind potential. Tamil Nadu, Rajasthan, Madhya Pradesh and Maharashtra are the only states that have realised over 10% of their estimated wind potential. 4.3 Incentive schemes for wind sector Wind energy dominates the renewable energy sector because of continued support of incentive schemes of state governments, and regulatory support from CERC and SERCs. Figure 4: Incentive schemes in wind energy Central government schemes Regulatory interventions State government schemes Accelerated depreciation CERC and SERC tariff policy Sales tax benefit and capital subsidy Income tax holiday Renewable purchase obligations Other statespecific benefits Concessional customs duty Renewable energy certificates Generation based incentive 16

Central government schemes Accelerated depreciation The major fiscal incentive offered by the Centre has been the provision of accelerated depreciation (AD) on plant and machinery. While wind power projects enjoyed 80% AD of gross block (as tax deductible expenditure) in the first year of installation of a project till 2015, it was reduced to 40% in Union Budget 2015-16. Tax shelter from AD benefit has been one of the major contributors in improving attractiveness of wind projects. This is apparent from the fact that this incentive has resulted in attracting sizeable private investment in the sector, and about 70% of wind energy capacity has been installed through balance sheet financing. Income tax holiday Developers of wind power projects are exempt from paying corporate tax for 10 years under Section 80 IA of the Income Tax Act. However, the income tax holiday has a sunset date of March 31, 2017. Concessional customs duty The government provides duty exemption on certain wind-related equipment parts in the form of concessional rates of duties/taxes, such as customs duty, excise duty, central sales tax and general sales tax. Generation Based Incentive In December 2009, the MNRE announced GBI for wind power producers feeding their power into the grid. Under this scheme, the government earmarked subsidies by way of GBI to the tune of Rs 3.8 billion. During the first phase, GBI was made applicable to projects of up to 4,000 MW and commissioned till March 31, 2012. The GBI scheme was reintroduced on September 4, 2013 retrospectively, with the following terms and conditions: Under phase II of the scheme, GBI is being provided to wind electricity producers @ Rs 0.50 per unit of electricity fed into the grid for a period of not less than four years and a maximum period of 10 years, with a cap of Rs 10 million per MW The total disbursement in a year cannot exceed one-fourth of the maximum limit of the incentive, i.e. Rs 2.5 million per MW per annum during the first four years The scheme will be applicable for the entire Twelfth Five-Year Plan, with a target of 15,000 MW As on April 2016, 5,762 MW were registered under the reinstated GBI-Phase II scheme The scheme is being implemented by IREDA, a financial institution under the administrative control of MNRE The incentives of AD and GBI are mutually exclusive till the end of the Twelfth Five-Year Plan. All wind power producers (whether availing AD or GBI) are required to be registered with the IREDA. Upon registration, the IREDA provides each wind power producer with a unique identification number, which is used to claim GBI and also for monitoring the performance of projects with respect of quantity of electricity fed into the grid The existing system followed by state utilities for data collection of electricity generation for the purpose of disbursal of tariff is being followed as the basis for disbursal of GBI. Investors are required to furnish documentary proof that no AD has been availed by them The overall objectives of the GBI scheme are, therefore: To broaden the investor base and create a level playing field among classes of investors To incentivise higher efficiencies with the help of generation/outcome-based incentives To facilitate entry of large independent power producers and foreign direct investors 17

Regulatory interventions CERC and SERC tariff policy CERC determines the tariff for generating companies owned or controlled by the central government. The SERC determines the tariff for generating companies in the respective states, following a cost plus approach. Preferential tariffs are fixed for renewable energy developers, based on their cost of generation and reasonable investment return requirement. Renewable purchase obligation Renewable purchase obligation (RPO) is set at the state level by the respective SERC. RPO requires that utilities purchase a certain percentage of their overall power purchase from renewable energy sources. Currently, almost all states have specified the RPO, which is 1-11%. Various methodologies have been used by the SERCs to determine the RPO. There is wide divergence in the way the states have specified RPOs. In most states, on-year RPO targets have been specified; whereas in some of the states, technology/ renewable energy source-related targets have been specified. Moreover, there has been limited non-solar RPO compliance by states that have limited wind potential. Renewable energy certificates In January 2010, the CERC issued a notification on Terms and Conditions for Recognition and Issuance of Renewable Energy Certificate for Renewable Energy Generation. Renewable energy certificate (REC) seeks to address the mismatch between availability of renewable sources and requirement of the obligated entities to meet their RPOs. It allows certificate holders to sell renewable energy to states deficient on this front; individual or other trading entities are expected to stimulate competition and create a market for renewable power across states. The National Load Dispatch Centre is the central agency for implementation of RECs. State government schemes Sales tax benefit and capital subsidy Capital subsidy and exemption from payment of sales tax are some of the special incentives introduced by state governments to encourage private investors to set up wind power projects in the states. Developers of wind power projects were able to recoup the entire capital cost owing to exemption from sales tax along with the tax shelter through AD. Therefore, the projects were financially viable (with limited generation) and attractive for investors (especially balance sheet investors). Other state-specific benefits Apart from sales tax benefit and capital subsidy, some specific benefits are also provided by state governments to wind power developers, such as wheeling, open access and electricity duty exemptions. 18

5. Assessment of GBI scheme This section covers assessment of the GBI scheme, in terms of meeting its objectives, targets and impact on the wind power sector in India. 5.1 Progress and performance of GBI scheme The driving force until 2009 for development of the wind sector was the provision of accelerated depreciation (AD), which enabled large profit-making companies, small investor and captive users to participate in the sector. The key objective for introducing the GBI scheme was to attract investments by IPPs and FDIs who cannot avail AD benefits, and to improve generation efficiencies. GBI aims to shift the yardstick of incentives from tax-induced capital investment to productivity-linked revenue enhancement. The pilot GBI in June 2008 received overwhelming response, with over 300 MW of projects applying for the 49 MW scheme. Taking this as a positive sign, the government launched the scheme in December 2009, enlarging the size to 4,000 MW. The target was increased to 15,000 MW when the GBI scheme was re-launched in 2013. This saw wind power installation rising sharply between 2010 and 2012 and then from 2014 to 2016, compared to wind installation in period prior to 2010. Figure 5: Wind installed capacity trend in India Source: MNRE The positive impact of GBI on the wind sector was corroborated during stakeholder consultations, including sample survey of projects/ wind power developers; they unanimously stated that the GBI scheme well achieved its objectives. 19

5.1.1 Achievement of objectives Figure 6: Objectives of GBI scheme Broaden investor base Incentivise actual generation with help of generation/outcome-based incentive Facilitate entry of large IPP and FDI to wind sector The main objective of the GBI scheme is to provide a framework for transition from an investment-based incentive to outcome-based incentive, and accordingly to broaden the investor base by facilitating the entry of large IPPs and attracting FDI; to provide a level playing field among various classes of investors and to incentivise higher efficiencies. The overall objective behind the GBI scheme, i.e. providing incentive equivalent to that of AD and thus to provide a level playing field between various classes of investors, has been appreciated. This gets reflected in the fact that the GBI scheme has been helpful in securing investments from IPPs and FDIs to the tune of 7,993 MW 5 out of total new installed capacity addition of 14,939 MW 6, i.e. close to 54%. This has resulted in increasing the share of GBI-based projects to about 30% 7 of total wind installed capacity in India. This is a positive indicator, and accordingly further investment can be expected from this class of investors. It is a welcome sign and a precursor to transit from tax-induced capital investment to the productivity-linked revenue enhancement. 5 Source: IREDA; as on March 31, 2016 6 Source: IREDA and MNRE 7 Source: CRIS analysis (7993 MW out to 26883 MW) March 31, 2016 20

Figure 7: Capacity additions and projects registered under GBI 4000 100% 3000 83% 82% 75% 2000 57% 57% 50% 39% 1000 19% 25% 0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 0% Registered under GBI (MW) Percentage of projects under GBI (%) Other projects not registered under GBI (MW) Source: IREDA This further gets substantiated by the fact that projects under the GBI scheme are well dispersed among states. Figure 8: Share of states in projects availing GBI 2% 28% 14% 12% 27% 10% 6% AP Gujarat Karnataka MP Maharashtra Rajasthan Tamil Nadu Source: IREDA Various wind power developers/ investors, though, have highlighted that the GBI level of Rs 0.50 per unit is insufficient to promote wind capacity addition in Tamil Nadu, Gujarat and Karnataka due to unviability of FIT plus GBI model. Further, with the GBI scheme being limited to sale to discoms and reluctance shown by discoms such as Rajasthan and Maharashtra (comprise close to 55% of total GBI registration from 2012 to 2016) offtake, investors are concerned regarding lack of viable business opportunity under FIT plus GBI model post March 2017. 21

5.1.2 Achievement of targets MNRE had set a target of maximum 15,000 MW capacity of wind projects to be registered under GBI by the end of the Twelfth Five-Year Plan; but so far, only 5,762 MW have been registered under the scheme. Thus, the GBI scheme is significantly behind meeting the target. As per wind power developers/ investors, the key reason for the shortfall is the inadequate GBI level of Rs 0.50 per unit, which is not attractive to investors looking to set up projects based on the project finance route in Gujarat, Karnataka, Madhya Pradesh and Tamil Nadu (post March 2017). However, it is to be highlighted that, in spite of projects availing GBI being well behind the target, its share in overall wind capacity addition has risen sharply. The percentage of GBI-based projects in overall wind project installed has increased from 3% in 2010-11 to 30% at end-2015-16. This indicates that the GBI scheme has gained traction with investors, and it is expected that this number (capacities availing GBI) would increase substantially in the coming years, subject to continuation of the scheme. 5.1.3 Key constraints Based on a sample survey of wind power developers/ investors, the key constraints pertaining to the GBI scheme are: Need to promote alternate business models: There is a need to promote alternate power sale options, including repowering, wind solar hybrid and inter-state sale power under GBI scheme Need to include competitive bidding route under GBI mechanism: With the Ministry launching competitive bidding for 1,000 MW wind projects, it is suggested to also include wind procurement under competitive bidding under GBI scheme Promoting non-solar RPO compliance: With wind potential limited to 7-8 states in India, there has been limited non-solar RPO compliance and wind procurement by states having limited wind potential. Therefore, a suitable mechanism is required to promote inter-state sale of wind power and enable non-solar RPO compliance GBI as a tool to encourage discoms to procure wind power: The biggest challenge facing the sector is reluctance on the part of discoms to procure wind power due to their weak financial health. Therefore, suitable mechanisms need to be developed to use GBI to encourage discoms to procure wind power and make timely payments These constraints/ issues, along with those pertaining to implementation procedures of the GBI scheme, have been analysed in the subsequent chapters. 22

6. Determination of appropriate GBI benefit This chapter covers the determination of appropriate level of GBI incentive considering the prevailing project parameters of wind power plants under various options for treatment of GBI incentive. Further it details out GBI benefit across new business areas such as repowering, sale under competitive bidding route, wind-solar hybrids etc. The appropriate level of GBI incentive is computed considering both the options of either offering GBI benefit to investors or to Discoms. 6.1 Option 1-GBI to wind investors In order to determine appropriate amount of GBI that is required to incentivize investors, three different methodologies have been adopted as mentioned below. Figure 9: Three methodologies for determination of required GBI Based on Revenue Neutrality to AD Determination of required GBI Based on NPV equal to zero Based on target Equity IRR Further, in each of the methodology mentioned above, the calculations have been done taking 2 sets of assumptions, CERC Zones and weighted average SERC norms. These are detailed hereunder. CERC Zones: In this case, the calculations have been done for each of the five zones specified by CERC on the basis of annual mean wind power density (W/m 2 ). The calculation has been based upon all parameters, including capital cost, as per CERC norms used for tariff determination for wind power plants (CERC Tariff Order dated 30 th March 2016 regarding determination of tariff for various renewable energy sources and applicable for FY2016-17). SERC parameters: In this case, calculations have been done on weighted average parameters by considering anticipated state wise capacity addition in the ratio of their wind potential. 23

Table 7: Weighted average SERC parameters State Proportionate capacity addition (in terms of wind potential) Tariff (Rs/kWh) PLF Capital cost (Rs lakh/mw) Tamil Nadu 3807 4.16 27.15% 620 Maharashtra 5113 5.56 22% 608.8 Gujarat 9510 4.19 25% 615 Karnataka 6292 4.5 26.60% 600 Rajasthan 2114 4.46 21% 580 Madhya Pradesh 1181 4.78 23% 575 Andhra Pradesh 4982 4.83 24% 600 Weighted Average 33000 4.59 24% 605.81 The table below shows the various parameters used under the two sets of calculations. Table 8: Various parameters used during the calculation General Parameters Units Amount Tariff Rs/unit SERC-4.59, CERC- 6.6, 6, 5.28, 4.4, 4.13 for Zones- 1, 2, 3, 4 & 5 respectively Total Project Cost Rs Lakh/MW 605.81 (SERC) 619.81 (Zone-1 to 5) CUF % 24% (SERC), 20% (Zone-1), 22% (Zone- 2), 25% (Zone-3), 30% (Zone-4), 32% (Zone-5) Equity % 30% Loan % 70% ROE for 1st 10 years % 16.30% ROE 11th year onwards % 16.06% Interest on Loan % 12.76% Repayment Period Years 10 Moratorium Period Years 0 Life of the project (Years) Years 25 Salvage Value % 10% IT Depreciation rate % 15% Depreciation rate for 1st 12 years % 5.83% Depreciation rate for 12th year % 1.34% onwards Operations Parameters O&M Expenses for FY 2016-17 Rs. Lakhs 11.24 O&M Escalation (%) % 5.72% Working Capital requirement Receivables Months 2 24

O&M Expenses Months 1 Spares % of O&M Cost 15% Interest rate on WC Borrowing % 13.25% Interest Cost % 12.76% Income Tax Benefit Tax Rate (%) % 30% Surcharge (%) % 7% Education Cess (%) % 3% Effective tax (%) % 33.06% MAT Rate (%) % 18.50% Effective tax (%) % 20.39% Acc. Depreciation (%) % 40% (plus additional 20% in first year) 6.1.1 Based on Revenue Neutrality The revenue neutrality requirement indicates that the total value of GBI is capped at the equivalence of the tax benefit in case of accelerated depreciation (AD). Thus the government does not spend/gain any additional revenues in case of GBI as compared to AD. Revenue neutral GBI has been calculated considering the levelised value of the total equity cash flow (post tax), thus taking cognizance of the tax benefit of AD for each year. The table below shows the comparison of required GBI levels based on revenue neutrality to AD, as per both- the survey as well as the CERC Zones. A key assumption in the analysis is that a project opting for AD route is availing balance sheet financing wherein the other businesses of the company is in position to absorb the tax benefit due to accelerated depreciation. On the other hand, a project opting for GBI route is assumed to be availing project financing. Table 9: Appropriate level of GBI based on Revenue Neutrality Category GBI for AD neutrality SERC/CERC Rs per unit SERC 0.51 CERC Zone-1 0.64 Zone-2 0.58 Zone-3 0.51 Zone-4 0.43 Zone-5 0.40 The key inferences from the above analysis are: Based on revenue neutrality to AD, the required level of GBI is coming to be in the range of Rs 0.40 per unit to Rs 0.64 paisa/unit 25

6.1.2 Based on NPV equal to zero The NPV of equity cash flow without GBI/AD benefit is coming to be negative Rs 40.38 lakhs which is an unwanted situation from project viability perspective. Accordingly, in this second methodology, the required GBI has been calculated based upon keeping NPV equal to zero. The table below shows the comparison of required GBI levels based on NPV equal to zero, as per both- the SERC as well as the CERC Zones. Table 10: Appropriate level of GBI based on NPV equal to Zero Category Project IRR (Pre Tax) Project IRR (Post Tax) Equity IRR (Pre Tax) Equity IRR (Post Tax) NPV GBI SERC/CERC % % % % Rs Lakhs Rs per unit SERC 13.73% 12.09% 14.13% 11.26% 0.00 0.48 Zone-1 15.08% 13.24% 16.43% 13.23% 43.18 - Zone-2 15.08% 13.24% 16.43% 13.23% 43.18 - Zone-3 15.08% 13.24% 16.43% 13.23% 43.18 - Zone-4 15.08% 13.24% 16.43% 13.23% 43.18 - Zone-5 15.08% 13.24% 16.43% 13.23% 43.18 - The key inferences from the above analysis are: GBI required for NPV equal to zero 0.48 Based on NPV (of equity cash flows- post tax) equal to zero, the required level of GBI is coming to be Rs 0.48 per unit at SERC level Even at this GBI level of Rs 0.48 per unit, the equity IRR (post tax) is coming to be 11.26%. It is to be highlighted here that this value of required GBI (Rs 0.48 per unit) is due to inadequate wind tariffs in States. This gets substantiated by the fact that there is no requirement of GBI benefit considering CERC specified tariff and parameters. 6.1.3 Based on Target Equity IRR In this third methodology for calculating the required level of GBI, the approach of target equity IRR has been used. The target equity IRR gauges the return to the investor on the equity put into a project. It is to be mentioned here that in present scenario in India, the investors are generally willing to invest only if the equity IRR (post tax) is in the range of 14%-16% or higher. The table below shows the comparison of required GBI levels based on target equity IRR (post tax), as per both- SERC as well as the CERC Zones. Table 11: Appropriate level of GBI based on target Equity IRR Category GBI (Rs per unit) corresponding to Equity IRR (post tax) SERC/CERC EIRR-14% EIRR-15% EIRR-16% SERC 1.08 1.28 1.48 Zone-1 0.23 0.50 0.77 26

Category GBI (Rs per unit) corresponding to Equity IRR (post tax) SERC/CERC EIRR-14% EIRR-15% EIRR-16% Zone-2 0.22 0.45 0.68 Zone-3 0.18 0.40 0.60 Zone-4 0.15 0.33 0.50 Zone-5 0.13 0.30 0.47 As evident from the above table, the required GBI level based on target equity IRR is coming to be higher than those calculated as per the earlier two methodologies. The required GBI level in this case is in the range Rs 1.08 to Rs 1.48 per unit in case of SERC parameters and Rs 0.13 to Rs 0.77 per unit in case of CERC parameters. Similar to the earlier methodology, the required GBI level in this case too highlights the inadequacy of wind tariffs in States. 6.2 Option 2-GBI benefit to discom One of the key challenge faced by the wind sector is lack of non-solar RPO compliance (including in states with no wind potential) as well as recently observed reluctance of discoms to procure wind power due to their weak financial health or due to its potential impact on the retail level tariffs for consumers. Therefore, suitable mechanisms need to be developed to use GBI to encourage discoms to procure wind power, make timely payments and also prevent forced backing down of wind power. This procurement incentive may be provided to the DISCOM till such time utilities payout for wind power is greater than the marginal cost of conventional power or average power purchase cost as well as its likely impact on the retail tariffs & its financial health 8. Further, the GBI scheme was launched with an objective to promote generation efficiency in the wind sector when the sector was struggling with poor efficiency levels, which the GBI scheme has been successful in addressing and also promoting investment that are through project finance 9. Therefore, there is a need to shift from generation based incentive to a procurement based incentive by incentivizing utilities to comply with RPO targets including states with lack of RE resources, Accordingly, a suitable procurementbased incentive (PBI) is structured to help reduce the purchase cost of wind power for states. Such a change will enhance transparency, facilitate timely payment to generators and ease out the administration of the incentive with the central government would only need to deal with the discoms than with investors. With the objective to compensate discoms for the comparatively high cost of wind power over average power purchase cost (APPC cost), the appropriate level of GBI benefit is arrived at by computing the difference between lowest cost of wind generation (lowest wind FIT of Rs 4.16/kWh) and national level average power procurement cost (Rs 3.40/kWh 10 ). Therefore, an achievement-linked PBI is proposed to be offered to utilities, based on the following achievement levels: Table 12: Proposed PBI incentive under FIT and competitive bidding route S. no. Achievement vis-à-vis state wind targets (MW) specified by MNRE Procurement-based incentive for 2017-18 1 85% and above (till 2017-18) 75 paisa/kwh 2 Below 85% and up to 60% (till 2017-18) 50 paisa/kwh 3 Below 60% (till 2017-18) 25 paisa/kwh 8 Financial health is likely to improve by 2019-20 post implementation of UDAY scheme and its operational targets and benefits 9 The same can be observed from increase in normative CUF levels considered by Regulatory Commissions over the last 5 years such as Maharashtra (CUF increased from 20% to 22%), Gujarat (CUF increased from 23% to 24.5%), and Karnataka (CUF increased from 24.5% to 26%) 10 http://www.cercind.gov.in/2015/orders/so15.pdf 27

In order to capture inflation cost under national level average power procurement cost, PBI incentive will be computed on an annual basis. A multiplier of APPC n-1/appc n will be computed, based on CERC computation of national level average power procurement cost each year. For e.g., in case CERC determines average cost of power procurement as Rs 3.60/kWh, the multiplier will be 0.94, i.e. 3.40/3.60. Accordingly, the PBI incentive will be Rs 0.71 /kwh for 2018-19 (0.94 multiplied by 0.75) under the first performance category. 6.2.1 Eligibility for availing PBI incentive The PBI will be offered under both procurement modes, i.e. procurement under FIT route, and procurement through competitive bidding route. Further, all new wind projects, including standalone wind projects, wind-solar hybrids and repowering projects, should be eligible under the scheme. The payment of PBI incentive to discoms will be built in with the following pre-conditions: Utilities should clear pending invoices for wind power projects to be eligible Utilities should submit documentary evidence of timely payments to wind generators along with the PBI claim application on a monthly basis Moreover it is clarified that the PBI incentive should not be monetized by utilities and banks for financing purpose 6.2.2 Control period of PBI scheme The PBI scheme will be operational for a period of 3 years i.e. till FY 2019-20. Such PBI incentive will be paid for a period of 5 years for the contracted capacity during the control period. It is expected that the utilities financial and operational health will significantly improve within the next 3 year period with the help various government initiatives including implementation of UDAY scheme. The scheme will be reviewed after a period of 3 years and re-evaluated depending on RPO targets met, utilities financial situation etc. 6.2.3 Impact on exchequer The financial impact of the PBI scheme on the exchequer will depend on actual performance of utilities, in terms of compliance with wind targets. Under base case of 100% compliance, the cumulative financial impact is estimated at Rs 10276 crore. Table 13: Estimated financial impact on exchequer 2017-18 2018-19 2019-20 Proposed wind capacity targets under PBI scheme (MW) 4000 5000 6000 Expected generation per year (MU)*-A 7709 9636 11563 cumulative generation (MU) 7709 17345 28908 PBI incentive (Rs/kWh)**-B 0.75 0.71 0.68 Estimated PBI (Rs crore) for a period of 5 years (A x B x 5/10) 2891 3445 3940 Cumulative PBI (Rs crore) for a period of 5 years 10276 (*assuming 22% CUF level and ** considering 100% compliance and estimated increase in APPC cost at 4.91% (based on historical CAGR for WPI from 2004-05 to 2015-16)-actual PBI incentive will depend on actual compliance and actual APPC cost for particular year)) 6.2.4 Sale of wind power under competitive bidding (both intra and inter-state sale to discom) 28

With Ministry notifying guidelines for introduction of competitive bidding for procurement of 1000 MW wind projects by non-windy states, it is important to evaluate the need for GBI under competitive bidding route. Considering the fact that under competitive mode, the distribution company is the end procurement party, it is suggested that GBI/PBI scheme should be applicable under competitive bidding mode also. Therefore, along with offering PBI incentive to utilities under FIT regime, similar PBI incentive should be offered to procuring utility under competitive bidding route. Further, the Government of India has projected an ambitious target of 175 GW of renewable energy by 2022 comprising of 60 GW from wind power. While potential of wind power is not a challenge for India, there are concerns in terms of non-uniform spread of the wind energy potential across states and lack of inter-state wind energy sale. The launch of renewable Energy Certificates was expected to cater to this limitation, but it has failed in its objective not only because of lack of RPO enforcement but also due to the fact that consumers/utilities have preferred to buy renewable energy power rather than buy just renewable energy certificates. Therefore, both intra as well as inter-state sale to discom under competitive bidding route should be covered under the PBI scheme i.e. offering incentive to utilities for procuring wind power. 6.3 Methodology for determination of GBI incentive for alternate offtake options 6.3.1 Sale of wind power under repowering scheme Most of the wind-turbines installed up to the year 2002 are of capacity below 500 kw and are at sites having high wind energy potential. It is estimated that over 1500 MW capacity installation are from wind turbines of 500 kw or below and installed prior to 2002. In order to optimally utilise the wind energy resources repowering is required. Accordingly, MNRE has notified draft repowering policy for promotion of wind repowering. Figure 10: Repowering potential in India As observed from the table above, nearly 56% old turbines installed prior to 2002 were in the state of Tamil Nadu. Hence in order to evaluate a uniform GBI incentive to be offered to repowering projects we have benchmarked it against GBI requirement in the state of Tamil Nadu. The assumptions used to arrive at the GBI incentive is tabulated below: 29

Table 14: Assumptions for computation of GBI incentive for repowering projects Parameter Unit Assumption Old WTGs Capacity MW 10 CUF % 14% Tariff FIT during 2002/03 Rs/kWh 2.70 Cost Details Capital Cost Rs Cr/MW 4.00 Residual Value % of Project Cost 10% Remaining Life of the Asset years 5 (i.e. 15 years completed) Repowered Asset Capacity Details New MW capacity MW 20 CUF % 28% Tariff Preferential Tariff Rs/kWh 4.16 Cost Details Capital Cost Rs Cr/MW 6.00 Capital Structure Debt % 70% Equity % 30% Financing Interest Rate % 12% Repayment Period years 12 Moratorium Period months 6 Return of Equity (Pre-Tax) % 20% Depreciation IT Rate % 15% Book Tax Rate % 5.83% MAT Rate % 20.96% Corporate Tax Rate % 33.99% Operation & Maintenance O&M Expense Rs Lakh/MW 11.24 Escalation % 5.72% Interest on Working Capital O&M Charges 1 Maintenance Spares 15% Receivables for Debtors 2 Interest Rate % 12.50% Levellised cost of generation Rs/kWh 4.46 30

Considering the assumption that power generated corresponding to generation prior to repowering would continue to be procured on the terms of existing PPA and tariff (i.e. Rs 2.70/kWh in case of TN) and remaining additional generation would be purchased by Discoms at Feed-in-Tariff applicable in the State at the time of commissioning of the repowering project, i.e. (Rs 4.16/kWh in case of TN), weighted average FIT of Rs 3.80/kWh for repowered project (considering generation till 14% CUF is sold at Rs 2.70/kWh and generation above 14% is sold at Rs 4.16/kWh) The GBI incentive for repowered wind projects of Rs 0.66/kWh is arrived by considering the difference between cost of generation from repowering project (i.e. Rs 4.46/kWh) and the weighted average feed-in-tariff (i.e. Rs 3.80/kWh) 6.3.2 Sale of wind power under wind solar hybrids Solar and wind power being infirm in nature impose certain challenges on grid security and stability. Studies revealed that solar and winds are almost complementary to each other and hybridization of two technologies would help in minimizing the variability apart from optimally utilizing the infrastructure including land and transmission system. Considering its advantages, MNRE has notified Draft Wind Solar Hybrid Policy. The Policy aims to encourage new technologies, methods and way-outs involving combined operation of wind and solar PV plants. Therefore it is suggested that wind power generated from wind solar hybrid project should be made eligible under GBI scheme. Table 15: Assumptions for computation of GBI incentive for wind-solar hybrid projects S. No. Assumption Head Sub-Head Sub-Head (2) Unit Tariff Parameter 1 Power Generation 2 Project Cost 3 Sources of Fund Capacity Capital Cost/MW Wind to solar capacity ratio 1.5 Wind capacity MW 1.50 Solar capacity MW 1.00 Composite capacity MW 1.50 (for Dep, ROE & Interest ) Wind CUF % 24.50% Solar CUF % 19.00% Wind Deration Factor % 0.50% Solar Deration factor 0.50% Useful Life Years 25 Power Plant Cost (composite cost for 1.5 MW system) Rs lakh/mw 950 Debt: Equity Debt Component Debt % 70% Equity % 30% Total Debt Amount Rs Lacs 1103 Total Equity Amout Rs Lacs 472.5 31

S. No. Assumption Head Sub-Head Sub-Head (2) Unit Tariff Parameter Loan Amount Rs Lacs 1102.5 Repayment Period Years 10 Interest Rate % 12.00% 4 Financial Assumptions 5 Working Capital 6 Operation & Maintenance Equity Component Depreciation O&M Charges Receivables for Debtors Maintenance Spares Interest On Working Capital power plant (First year) Escalation Equity amount Rs Lacs 472.5 Return on Equity for first 10 years % p.a 20% (pre tax) RoE Period Year 10 Return on Equity 11th year onwards (pre tax) % p.a 24% Discount Rate 12.00% Depreciation Rate for first 10 years % 7.00% Depreciation Rate 11th year onwards % 1.33% 1 month O&M expense Months 1.00 2 months receivables Months 2.00 15% of O&M expense % 15% Interest Rate % 13.0% Considering 1% of total project cost Rs 10.5 Lakh/MW Annual escalation % 5.72% Levellised cost of generation (Rs/kWh) 4.91 Based on the assumption above, the cost of generation from the hybrid projects, works out to Rs 4.91/kWh. Considering composite tariff of Rs 4.30/kWh (i.e. composite tariff worked out based weighted average tariff of wind FIT of Rs 4.19/kWh and estimated wind generation of 3.22 MU from 1.5 MW wind project and assumed solar bid tariff of Rs 4.5/kWh and estimated solar generation of 1.66 MU from 1 MW solar project), the GBI incentive works out to Rs 0.61/kWh. 6.3.3 Captive Consumption Currently, the captive consumption of energy generated from wind power plants is not eligible to avail GBI benefit. It is suggested to continue to be ineligible for GBI scheme as the generators would be selling this power at higher/ appropriate tariffs, and thus making considerable/ reasonable profits. 32

6.3.4 Third Party Sale Currently, the third party sale of energy generated from wind power plants is not eligible to avail GBI benefit. It is suggested to continue the third party sale as ineligible for GBI scheme as the generators would be selling this power at higher/ appropriate tariffs, and thus making considerable/ reasonable profits. 6.4 Recommendation on Incentive Level and Cap Under Option 1-GBI incentive to investor The three different methodologies used under Section 6.1 provide the different levels of required GBI. However, considering the primary objective of GBI scheme to maintain a balance between promoting investments in wind space and also limiting impact on tariff, it is suggested that GBI incentive level should be considered in a worst case investment scenario wherein NPV equal to zero. The analysis shows that the present level of GBI (i.e. Rs 0.50 per unit) is adequate and is close to required level of Rs 0.48/kWh needed under NPC equal to zero scenario. The calculation of required level of GBI assumes availability of incentive for 10 years. It is thus suggested that there should not be any further annual or overall cap. This has been explained further in the points below. The calculation methodology equates the levellised cash flows (post tax) required to make NPV equal to zero; hence there is no requirement/rationale for any further cap. In case any cap is imposed to the scheme then it will reduce the availability of GBI for the 10 years period as assumed in the calculation. This, in turn, would lead to reduced levellised benefit in case of GBI and it would no longer offer NPV equal to zero. The removal of cap is also supported from one of the objective of the scheme- to incentivize higher generation efficiency. Annual or overall cap to the scheme would restrict the efficiency by limiting the amount of generation that would be eligible for GBI. This would be in conflict to the scheme objective itself. There has been apprehension that with no annual/ overall cap, wind projects may go for higher CUF with improved technology and thus it would be entitled for higher incentive quantum. It is to be mentioned here that if wind power investor opts for better technology (such as newer turbines, higher hub height, etc), it would lead to increase in capital cost too along with the CUF. Considering these, it would be fair to provide un-capped incentive to power plants that have opted for higher capital investment so as to get better CUF. Considering the above mentioned points, it is suggested that there should not be annual or overall cap to the GBI benefit that can be availed by wind power plant. Special GBI for wind repowering projects and wind-solar hybrid projects. Wind Repowering-The GBI incentive level for wind repowering projects is arrived at Rs 0.66/kWh. The calculation of required level of GBI assumes availability of incentive for 10 years. It is thus suggested that there should not be any further annual or overall cap due to reasons cited above. Wind-Solar hybrids- The GBI incentive level for wind-solar hybrid projects is arrived at Rs 0.61/kWh. The calculation of required level of GBI assumes availability of incentive for complete useful life of 25 years. It is thus suggested that there should not be any further annual or overall cap due to reasons cited above. Under Option 2-GBI incentive to discom 33

The appropriate level of GBI benefit in case GBI is offered to discoms is arrived by computing the difference between lowest cost of wind generation (i.e. lowest wind FIT of Rs 4.16/kWh) and national level average power procurement cost (Rs 3.40/kWh 11 ). Therefore, appropriate GBI/PBI should be offered to discom based on the performance levels and meeting the eligibility criteria. The scheme suggested to be applicable for a period of 3 years i.e. April 1, 2020 and under both the scenarios of sale under FIT route and procurement through competitive route. Further, such payment will be made for a period of 5 years for the eligible projects commissioned during the control period of 3 years. 11 http://www.cercind.gov.in/2015/orders/so15.pdf 34

7. Assessment of implementation procedure This section covers assessment of the implementation procedure of the PBI incentive and recommendation pertaining to its improvement. Based on interactions with wind power developers during the primary survey, it was found that the implementation procedure of the GBI scheme is efficient as well as simple to follow. Besides, the entire process is web-based, making it effective, time-saving and minimizes the requirement of hard copy of documents. Some of the concerns observed under the existing implementation procedures and also raised by stakeholders include the following: Separate payment pool for PBI-While IREDA allows monthly claim of GBI benefit, there have been instances of delay in release of GBI claims to developers, mostly due to non-availability of funds from MNRE. In order to prevent delay in disbursal of PBI, it is suggested that MNRE should create a separate pool of 35

amount equivalent to targeted annual PBI payments, and the amount should be monitored and budgeted annually. Execution of PPA as a pre-condition for availing GBI payments- The GBI scheme currently makes it mandatory for wind power projects to register with IREDA within 6 months of commissioning, to be eligible to avail GBI. To register on GBI web portal, it is desirable that signed PPA is available with the applicant. However, the applicant will be allowed to register on GBI web portal pending signing of PPA subject to condition that they shall be eligible to claim GBI only after signing of PPA. Considering the fact there have been issues related to delays in execution of PPA even after project commissioning in state like Maharashtra, such projects are not eligible under the present guidelines. It is suggested that such projects where the project is commissioned but PPA with state utility for sale of power under preferential tariff has not been signed due to any unforeseen reasons should be allowed to avail GBI benefit from the commissioning date and not PPA execution date. Implementation procedure for PBI payments to utilities-it is suggested that existing procedure followed under the existing GBI scheme for small solar and solar rooftops systems (RPSSGP) should be followed under the PBI scheme for wind projects as well subject to eligibility criteria discussed above. 36

8. Other key aspects This section is related to implementation of GST and DTC and their likely impact on the country s wind power sector. 8.1 Impact of GST and DTC Impact of GST With the implementation of GST, all other taxes, such as central sales tax, value-added tax (VAT), service tax and excise duty, will be abolished. The GST framework is more tax efficient, and would reduce cascading impact of sales tax/vat. However, it is likely that GST would have an adverse impact on all renewable energy projects: Presently, all wind projects are exempted from excise levy. In the GST regime, though, all projects (except for a few) would be under three broad GST duty regimes - 12%, 16% and 20% All renewable energy-based projects would have an input GST credit of 16% of the sales price. As electricity, which is the end product of renewable energy projects, is currently not subsumed, none of the renewable energy producers would be able to claim output credit of the GST. In other words, the project cost would increase 16% in form of GST, against the current excise exemption Accordingly, the capital cost for wind power projects would increase 16% in the proposed GST regime Impact of DTC The government, in an effort to simplify the tax regime, has tabled the Direct Tax Code (DTC) Bill in Parliament. The government, which has reiterated that it wants to reduce the gap between corporate tax structure and minimum alternate tax, is working on making structural changes to the existing income tax provisions. It is to be mentioned here that, Section 80 IA of the prevailing Income Tax Act provides an income tax holiday for 10 years. Also, considering that a fair amount of infrastructure projects were commissioned, the central government has been extending the Section 80 IA from the past two years. However, the same is set to expire on March 31, 2017, with no decision on its extension yet. 37

9. Conclusion and recommendations Conclusion The GBI scheme is having a positive impact on the wind power sector, and has been well- received by wind power developers/ investors and other stakeholders. It has rightly set a transition from investment-linked incentive to outcome/ generation-linked objective, and has resulted in improvement of wind CUF levels. Projects totaling 5,763 MW have been registered against the target of 15,000 MW by end of the Twelfth Five- Year Plan. The shortfall is attributable to lower offtake of wind power by discoms, resulting in lower GBI registration and low GBI preventing large scale wind capacity addition. At the same time, the share of GBI-based wind projects is increasing as a percentage of total wind installed capacity, with the percentage of AD-based projects decreasing; highlighting growing participation in the scheme. Based on discussion with stakeholders, the biggest challenge facing the wind sector is reluctance of discoms to procure wind power due to their struggling finances and the difference between cost of wind generation and average power purchase cost. Therefore, a suitable mechanism needs to be developed to use GBI as a tool encourage discoms to procure wind power by suitably incentivising them to move towards RPO compliance and ensure timely payments. Recommendations The biggest challenge facing the wind sector is reluctance of discoms to procure wind power due to their weak financial health. Therefore, suitable mechanisms need to be developed to use GBI to encourage discoms to procure wind power, make timely payments and also prevent forced backing down of wind power. Further, the GBI scheme was launched with an objective to promote generation efficiency in the wind sector when the sector was struggling with poor efficiency levels, which the GBI scheme has been successful in addressing and also promoting investment that are through project finance. However, later there has been delay or reluctance on the part of utilities in signing new PPAs as well as significant delay in payments to developers. Till such time utilities payout for wind power is greater than the marginal cost of conventional power or average power purchase cost as well as its likely impact on the retail tariffs & its financial health, utilities remain concerned of sourcing wind power. Therefore, it is imperative that utilities are incentivized to comply with RPO targets, and a suitable procurement-based incentive (PBI) is structured to help reduce the purchase cost of wind power for states. Such a change will enhance transparency, facilitate timely payment to generators and ease out the administration of the incentive with the central government would only need to deal with the discoms. Therefore the following mechanism is proposed for GBI scheme beyond 12 th plan period o Under FIT and competitive bidding route (for both intra and inter-state sale)-gbi/pbi payment to be given to procuring discoms as per table below Table 16: Proposed PBI incentive S. no. Achievement vis-à-vis state wind targets (MW) specified by MNRE Procurement-based incentive 1 85% and above (till 2017-18) 75 paisa/kwh 2 Below 85% and up to 60% (till 2017-18) 50 paisa/kwh 3 Below 60% (till 2017-18) 25 paisa/kwh In order to capture inflation cost under national level average power procurement cost, the PBI incentive will be computed on an annual basis. A multiplier of APPC n-1/appc n will be computed, 38

based on CERC computation of national level average power procurement cost each year. Further the payment of PBI incentive to utilities will be built in, with following pre-conditions: o Utilities should clear pending invoices for wind power projects to be eligible Utilities should submit documentary evidence for timely payment to wind generators, along with the PBI claim application, monthly. MNRE reserves the right to reduce PBI/GBI incentive in case of payment delays. Moreover it is clarified that the PBI incentive should not be monetized by utilities and banks for financing purpose It is suggested that the PBI scheme should be applicable till 2019-20, with an incremental wind capacity target of 15 GW. Further, such PBI incentive will be paid for a period of 5 years for the contracted capacity Under repowering and wind solar hybrid projects-gbi payment to be given to wind investor For repowering projects-gbi incentive is worked out at Rs 0.66 per unit For wind-solar hybrid projects- GBI incentive is worked out at Rs 0.61 per unit It is suggested that there should not be any further annual or overall cap. Implementation Procedures- Delays in GBI payment: While IREDA allows monthly claim of GBI benefit, there have been delays in release of GBI claims to developers, mostly due to non-availability of funds from MNRE. Separate payment pool for PBI payments: In order to prevent delays in disbursal of PBI incentive to utilities, it is suggested that MNRE should create a separate pool of amount equivalent to the estimated targeted annual PBI incentives, and the amount should be monitored and budgeted annually. Execution of PPA as a pre-condition for availing GBI payments- The GBI scheme currently makes it mandatory for wind power projects to register with IREDA within 6 months of commissioning, to be eligible to avail GBI. To register on GBI web portal, it is desirable that signed PPA is available with the applicant. However, the applicant will be allowed to register on GBI web portal pending signing of PPA subject to condition that they shall be eligible to claim GBI only after signing of PPA. Considering the fact there have been issues related to delays in execution of PPA even after project commissioning in state like Maharashtra, such projects are not eligible under the present guidelines. It is suggested that such projects where the project is commissioned but PPA with state utility for sale of power under preferential tariff has not been signed due to any unforeseen reasons should be allowed to avail GBI benefit from the commissioning date and not PPA execution date. 39

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