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5th Nov

Providing Solar Energy Where the Sun Shines


Solar power is becoming increasingly prominent in India and the sector is generating considerable interest among investors with over $4.5 billion of new investments announced in the last twelve months.   


The cost of solar panels is falling as electricity costs are rising and it is now more economical for industrial and commercial consumers to switch away from conventional power sources, such as coal, towards alternative power sources.   

 This economic turning point—often referred to as “grid parity”—has contributed to a dramatic increase in India’s solar power capacity to 4.5GW (as of June 2015), of which 2GW was added in the last two years.   

A persistent power deficit and energy security concerns have led to the government of India to target solar power production of 100GW by 2020.   The economic trends underlying this growth are compelling: ·         

System costs have declined at 15% p.a. over the last eight years due to improved technology and competition, and economies of scale and other factors may lead to a further 30-40% reduction in costs over the next 4-5 years. 

Given the high cost of electricity in India  and large power deficit (national peak power deficit of 4.7% during 2015, with certain regions as high as 12.9%), private solar power production can yield strong returns on equity (“ROE”) -  Deutsche Bank estimates a 19% average ROE for typical solar projects in India (“India 2020: Utilities & Renewables”,  Deutsche Bank Markets Research, 19 July 2015).   

Seeking to narrow the country’s power deficit and reliance on coal imports, the Government of India has implemented a number of fiscal incentives to enhance the return profile of solar power investments and attract domestic and foreign investment. These include:  

 

  1. 1.      Feed-in-Tariffs (FIT): Preferential tariffs provided by central and state regulators for solar power production

  2. 2.      Concessional Charges: Reduced allocation of transmission charges and losses for renewable energy power plants 

  3. 3.      Open Access: State policies permit the sale of solar power directly to end users through open access to the electricity grid at concessional charges 

  4. 4.      Renewable Purchase Obligation (RPO): An obligation for power producers to procure renewable energy to meet the Indian government’s target of procuring 15% of its electricity consumption from renewable energy sources by 2020 (of which over 8% would be specifically from solar power) 

  5. 5.      Renewable Energy Certificates (RECs): Credits that are traded on power exchanges at market-determined prices with floor and cap prices fixed by the regulator to provide additional revenue to renewable energy developer
  6.  
  7. 6.      Direct Tax Benefit: Solar power plants may avail of a ten-year tax holiday provided 

  8. 7.      Accelerated Depreciation (AD): A company is allowed to claim depreciation benefits equal to 80% of capital expenditure for solar power production in the first year of plant operations 

  9. 8.      Priority Sector Lending: The Reserve Bank of India has included alternative energy investments up to INR 150m under priority-sector lending.   


  10. Solar power is now considered core infrastructure for India; if an additional 5GW of solar capacity is added each year from 2016-2020, India’s dependence on coal could decline by 8%.   

  11. In summary, this combination of fiscal incentives and the declining cost of solar power provides India with significant cost savings, making the provision of solar power a priority for the central government.   

  12. One of the leading investors in the Indian solar power is Nereus Capital (“Nereus”). Nereus is an alternative asset manager comprising a private equity team made up of individuals with collective experience of investing in excess of $1Bn in India and an operational team made up of individuals who have collectively developed over 1,800MW of Indian power assets.” 

  13. The firm has established two affiliate entities, Nereus Capital Investments (Singapore) (“NCIS”) and Nereus Capital Investments (Singapore) II (“NCIS II”), to develop, construct and operate utility-scale photovoltaic (“PV”) solar power plants in India.   The Nereus team is differentiated by its combination of a finance team with a development team. Members of the team have previously led ten transactions in Indian alternative energy and nine transactions in the conventional energy sector aggregating to US$500 million investment and over 1,800MW capacity.          

  14. The Nereus team’s approach to development enables high project-level returns with low variance through contractual risk mitigation. Power plants are constructed by reputed construction partners through fully wrapped contracts that guarantee the minimum efficiency of the plant. Energy generated by the assets is sold to creditworthy customers through long-term, privately-negotiated agreements creating visibility into contracted revenue and an attractive risk-return profile.         

  15. Through its experience in structuring global investments into India, the Nereus team is able to maximise distributable proceeds available from the projects by using optimal capital and transaction structures. These structures provide a high level of governance and security while enabling consistent annual distributions from the projects to investors.            

  16. Emerging market infrastructure investments can yield excess return if approached in a risk-aware manner by a manager with adequate in-market presence and expertise. Specialist asset managers in renewable energy infrastructure, such as Nereus, are ideally placed to take advantage the huge catalysts for solar power in India.  

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