regulatory issues for setting up wind power plant

WIND POWER PROJECTS• INTRODUCTION

• STAKE HOLDERS

• RISK MITIGATION

• DEVELOPMENT CONSIDERATIONS

• TENDERING

• CONTRACT

• OWNERSHIP

• FINANCE MODELS

• LEGAL FRAMEWORK

• INCENTIVES

• WIND POWER IN INDIA

INDIAN INSTITUTE OF TECHNOLOGY KHARAGPURI N F R A S T R U C T U R E R E G U L A T O R Y I S S U E S

Presented by: P R A T E E K D A S G U P T AP R A N A V M I S H R A

W I N D E N E R GY


India is blessed with 7517 km of coastline and territory up to 12 nm into the sea. This is where lies the potential of sustained energy growth.

India is 5th largest producer of wind energy in the world, with 16078 MW of installed capacity ( Dec. 2011)

658 wind monitoring stations are set up by MNRE, of which 75 are in operation.

Tamil Nadu, Maharashtra, Gujarat, Karnataka are leading wind energy producers in India.

Short construction period and low O&M cost makes it an attractive proposition.

Project life is 25 years.

S TA K E H O L D E R S


Ministry of New & Renewable Energy

IREDA (Finance) C-WET( R&D) (State agencies)

Implementing agencies and NGO’s

Manufacturer / vendors

Users or consumers

PRIMARY SECONDARY

Ministry of power

Ministry of environment and forest

Department of science and technology

Central and state regulators

Multilateral agencies

Education and research institutes

R I S K S A N D M I T I G AT I O N


Risk Mitigation

Wind availability Minimum 1-2 year site specific data

Equipments Performance data, warranties

Operations and maintenance Experienced managers, maintenance contracts

Revenue Power purchase agreements

Construction Fixed completion dates and penalties, performance bond

Force majeure Insurance

Transmission Interconnection agreements

Tax benefit utilizations

D E V E LO P M E N T C O N S I D E R AT I O N S


Choice of investment Contractual obligations

Major concerns

Type of development:• Third party wind developer•Small turbine•Commercial scale wind project

Legal issues

•Land agreements• Option to purchase

or lease• Purchase• Lease• Easement• Covenant• License

•Siting•Environment•Electricity•Other permissions

Financial issues

•Sources of initial project financing.•Steps in acquiring finance.• Seed money to evaluate feasibility.• Equity investment for pre construction

development• Debt/equity for construction and operation.

•Financial modelsBusiness structure

D E V E LO P M E N T C O N S I D E R AT I O N S


ENERGY AND ELECTRICITY SUPPLY POLICIES

• National Development policies and plan.

• Implementation mechanisms for National Development plan.

• National policies for the Energy and Electricity sectors. Perceptions of major constraints, priorities.

• Electricity tariff policies.

• Environmental Protection Policies and their impact on the energy sector.

FINANCIAL MECHANISM

• Mechanisms for International Financing.

• Mechanisms for Local Financing.

T E N D E R S


Information provided by the owner

1. INVITATION LETTER2. ADMINISTRATIVE INSTRUCTIONS3. GENERAL INFORMATION4. TECHNICAL REQUIREMENTS 5. SCOPE OF SUPPLY AND SERVICES6. NATIONAL PARTICIPATION7. BID EVALUATION CRITERIA8. DRAFT CONTRACT TERMS AND CONDITIONS9. COMMERCIAL CONDITIONS10. SAFETY AND SECURITY CONSTRAINTS

Information requested from bidders

1. GENERAL INFORMATION2. GENERAL TECHNICAL ASPECTS3. TECHNICAL DESCRIPTIONS4. SCOPE OF SUPPLY AND SERVICES5. ALTERNATIVES AND OPTIONS6. QUALITY ASSURANCE PROGRAMME7. TRAINING8. PROJECT SCHEDULE9. TECHNOLOGY TRANSFER10. GUARANTEES AND WARRANTIES11. DEVIATIONS AND EXCEPTIONS12. COMMERCIAL CONDITIONS

C O N T R A C T


•Definitions•General clauses•Object of the contract•Planning and execution of the work•Information, inspection, testing and control•Assignment of the work and subcontracting•National participation and technology transfer•Training of personnel•Changes and additional work•Transport and customs clearance•Risks and transfer of title•Liability•Insurances•Quality assurance

•Licensing•Delivery times•Documentation•Spare and wear parts, consumables and special tools•Guarantees or warranties•Take-over•Prices, price adjustments and terms of payment•Force majeure•Termination and suspension of the contract•Guarantee of title and proprietary information•Execution of the contract•Applicable law•Arbitration

Contract Components

C H O I C E O F I N V E S T M E N T


A landowner has a windy site and he wants to utilize the wind, he can choose to :

Deciding factors for a landowner may be :

•Their financial situation•Their comfort level with risk•Time they can commit to develop the project•Degree of interest

Commercial scale production

Install small turbine for on site energy use

Negotiate with the third party to develop project on his site

OW N E R S H I P


Commercial scale production

•Owner may invest directly on his own or with collaboration with others.•Power generated is sold for profit.•Expensive, time consuming and risky endeavor.•Legal issues related to land, government laws and liability concerns.•Financing to be secured.•Contract to sell in advance or PPA•Business structure•Access to the grid for transfer of electricity.

Install small turbine for on site energy use

•Energy is used for own purpose•May cell excess electricity to grid.•Net metering•Will have to comply vast array of regulations like land use restrictions, environmental regulations.

Negotiate with the third party

•Selling or leasing their rights to someone else who will construct and operate wind energy power plant.•The developer will do all the work to develop, build and operate the plant.•The owner will receive some rental or part of revenue, as decided between them.•Less risk to land owner.•No initial capital investment required.•Land owner’s risk lies in carefully negotiating legal agreements to ensure fair compensation, allocation of rights, responsibilities and risk.•Usually, a developer approaches a land owner.

F I N A N C I N G


ModelsSole ownership

If the land owner has resources to put the project and can provide required equity.

Local investor ownership

•Groups of individuals who have purchased shares in the project.• formed as LLC (Limited Liability Corporations)•Investors are insulated from liability and profit losses flows through to individual members.

Joint ventures

•An outside corporate investor joins hand with local investors.•Entails complex legal and tax challenges.

Loan to own

•Local investor group makes a loan to corporate investor.•Local investors would earn interest only over term of the loan.•Initially, corporate body is 100% owner and receives all the project’s income, losses and tax benefits.•At the end of the specified period, corporate investors sell the project to local investors at a pre negotiated price.

F I N A N C I N G


ModelsProject ‘lease’

•It involves, leasing the development rights to outside investors.•Land owners will do the pre-development work. ( wind monitoring, zoning, permissions, PPA ) and contracting with project operator.• they lease the wind rights and assign a portion of PPA to investors.•The investor would own the project for pre negotiated period and landowner would receive a negotiated royalty.•At the end of the period, landowners have option to purchase the project at fair market price.

Sweat equity

•It is similar to the project lease model.•But in this model, local investors are not retaining any ownership stake, either upfront or later.•Rather, they receive a more generous royalty stream.•It avoids legal tax and management issues associated with splitting ownership interests between corporate and local investors.

Joint ventures

•An outside corporate investor joins hand with local investors.•Entails complex legal and tax challenges.

F I N A N C I N G


Sources

EQUITY

•One of the greatest hurdles for wind projects•Potential sources for equity financing are :• Strategic investors, such as

utility companies or their subsidiaries.

• Institutional investors, usually for large commercial scale projects.

• Corporate investors, who wants to reduce their tax liabilities by investing in green energy projects

DEBT

•Can be a challenging and time consuming process.•Requires developers to complete all the pre development work.•Potential sources of debt financing are :• Local lenders• Regional agricultural

lenders• Commercial banks• Commercial finance• Vendor financing

•Most projects are structured with 40-70 % debt.

F I N A N C I N G


Following information are required :

•A comprehensive wind monitoring study (minimum 1 year of data) conducted at the site•A project feasibility study by a credible consultant•Proven expertise in managing a wind project or an agreement with a qualified 3rd party project manager•Zoning and site permitting approval•Turbine performance data•Turbine warranties and operations and maintenance agreement•A completed interconnection study•A long-term power purchase agreement (at least 10 years and preferably 15 years) with a creditworthy utility that will purchase the electricity generated at specified prices•Commitments for all required equity•A business, financial and risk management plan for the project including complete proforma•financial statements

For getting a project financed…

F I N A N C I N G


Schematic summary of wind financing structures

L EG A L F R A M E WO R K


Siting

•Measuring the wind resource.•Access to electric grid.•Impact on neighbors.•Environmental impacts

Wind and land agreement

•Property requirements.•Property rights.• Land • Wind ( easements )

•Type of agreement• Option to lease or purchase• Right to first refusal• Sale• Lease• Easement• Permit or license

Other issues to regulate are :

•Duration of agreement.•Compensation.•Uses of land•Taxes•Liabilities•Assignment of contract by developer.•Termination of agreement.•End of project life.•Dispute resolution.•Eminent domain

Permissions

•Land use•Environment ( air, water, land, wetland)•Local building and electrical codes•Permission from aviation ministry.•Historic preservation.•Statement of need



Electricity regulatory commissions act, 1988

•The state commissions are key players for regulating the electricity sector and including determining electricity tariffs

Electricity Act. 2003

•Promotes generation of electricity from renewable energy.• Section 3 - National Electricity policy and plan including optimal

utilization of renewable energy.• Section 4 – national policy permitting stand alone system for those

based on renewable source of energy.• Section 61- appropriate commission while determination of tariff

shall be guided by promotion of generation and co generation of electricity from renewable energy.

National Electricity Policy, 2005

•Aims at accelerated development of power sector, providing supply of electricity to all areas and protecting interests of consumers and other stakeholders



Integrated Energy Policy, 2006

•It emphasizes the use of renewable energy to reduce dependency on energy imports

Rural Electrification Policy, 2006

•The policy recognized that non-conventional energy sources can be appropriately and optimally utilized to make available reliable supply of electricity to each and every household.

National Tariff Policy, 2006

•SERCs to fox minimum percentage of purchase of energy from renwable energy sources, taking into account availability of such resources into the region and its impact on retail tariff.



Renewable Energy Policy

•The broad objective of the draft policy are to meet a minimum energy needs through renewable energy.

Foreign Investment Policy

•Foreign investors can enter into a joint venture with an Indian partner for financial and/or technical collaboration and for setting up of RE-based power generation projects•Hundred per cent foreign investment as equity is permissible with the approval of the Foreign Investment Promotion Board (FIPB).•The Government of India encourages foreign investors to set up power projects on BOO basis. Investors are required to enter into a power purchase agreement with the concerned state government•No prior approval of the government is required to set up an industrial undertaking with Foreign Direct Investment (FDI) by Non-Resident Indians (NRIs) or Overseas Corporate Bodies (OCBS)•The Reserve Bank of India (RBI) has permitted Indian companies to accept investment without obtaining prior approval from RBI. Investors are required to notify the regional office of RBI, of receipt of inward remittances within 30 days of such receipt.



Power Purchase Policy

•Policies introduced/incentives declared by the State Governments for private sector Wind Energy projects

Industrial Policy

•MNES is promoting medium, small, mini and micro enterprises for manufacturing and servicing of various types of RE systems and devices.•Industrial clearances are not required for setting-up of an RE industry•No clearance is required from Central Electricity Authority (CEA) for power generation projects up to Rs 1,000 million•A five-year tax holiday is allowed for RE power generation projects•Soft loans are available through IREDA for RE equipment manufacturing•Financial support is available to RE industries for R&D projects in association with technical institutions•Import of power projects are allowed•Private sector companies can set up enterprises to operate as licensee or generating companies•Excise duty on a number of capital goods and instruments in the RE sector has been reduced or exempted

I N C E N T I V E S


Incentives for Investing in Renewable Energy Technology

•MNES provides financial incentives, such as interest and capital subsidy•Soft loans are provided through:• IREDA, a public sector company of the Ministry• Nationalised banks and other financial institutions for identified

technologies/systems•The government also provides various types of fiscal incentives for the RE sector, which include:• Direct taxes - 100 per cent depreciation in the first year of the

installation of the project• Exemption/reduction in excise duty• Exemption from Central Sales Tax, and customs duty concessions on

the import of material, components and equipment used in RE projects

I N C E N T I V E S


Concession under Income Tax Rules

•Section 32 - Accelerated 80% depreciation on specified RE- based devices/projects.•Section 80 IA - Industrial undertakings set up in any part of India for the generation or generation and distribution of power, a 100% deduction is allowable from profits and gains for first five years and thereafter 30% of the profits and gains. Further, the Budget has also proposed a 10-year tax holiday for the generation and distribution of power, to be availed during the initial 15 years.

W I N D P OW E R I N I N D I A


The Ministry of New and Renewable Energy (MNRE) is the nodal Ministry of the Government of India for all matters relating to new and renewable energy. The broad aim of the Ministry is to develop and deploy new and renewable energy for supplementing the energy requirements of the country. Creation CASE and Ministry:•Commission for Additional Sources of Energy (CASE) in 1981.•Department of Non-Conventional Energy Sources (DNES) in 1982.•Ministry of Non-Conventional Energy Sources (MNES) in 1992.•Ministry of Non-Conventional Energy Sources (MNES) renamed as Ministry of New and Renewable Energy (MNRE) in 2006.

Ministry of New & Renewable Energy

Indian Renewable Energy Development Agency

Centre for Wind Energy Technology

State Renewable Energy Development Agency

(Finance) (Research) (State agencies)

W I N D P OW E R I N I N D I A


Other financial institutions

•PTC India•Gujarat Industrial Investment•ICICI•Industrial Finance Corporations•NABARD•SIDBI

Associations/societies

•Indian Wind Energy Association, •Indian Wind Power Association, •Indian Wind Turbine Manufacturers Association, •Winrock International India, •World Institute of Sustainable Energy

Consultants

•TCS, •TERI, •Hitech Wind Solutions, •Sri Ganesh Wind Power, •Power & Energy Consulatants,• Resurge Energy

Testing and certification

•C-WET, •Det Norske Veritas AS, •Germanischer Lloyed

Testing and certification

•Bajaj Allianz, •ICICI Lomabard, •IFFCO Tokio, •National insurance Company,• Oriental Insurance, •New India Assurance, •Reliance general Insurance, •Royal Sundaram,• Tata AIG, •United India Insurance

W I N D P OW E R P R OJ EC T S


regulatory issues for setting up wind power plant

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