WORLD BANK ENERGY WEEK 2006 MARCH 4 TH 6 TH PANEL DISCUSSION ENERGY SME S FINANCING

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1 WORLD BANK ENERGY WEEK 2006 MARCH 4 TH 6 TH PANEL DISCUSSION ENERGY SME S FINANCING BY S. CHANDRASEKHAR MANAGING DIRECTOR BHORUKA POWER CORPORATION LIMITED BANGALORE- INDIA

2 ENERGY SME s ELECTRICITY SECTOR WHO ARE THEY? -RENEWABLE ENERGY DEVELOPERS -ENERGY SERVICE COMPANIES -CARBON EMISSION TRADING COMPANIES FOR RE & EE PROJECTS AMONG THESE RENEWABLE ENERGY DEVELOPERS CONSTITUTE MORE THAN 80% OF THE SME SECTOR. RENEWABLE ENERGY PROJECTS ARE RURAL BASED.

3 RURAL POPULATION AS PER AVAILABLE DATA BANGLADESH 76% CAMBODIA 81% INDONESIA 57% LAO PDR 75% MONGOLIA 43% PHILIPPINES 40% VIETNAM 74% INDIA 65% LATIN AMERICAN COUNTRIES AFRICAN COUNTRIES 65% PLUS (AVERAGE) 75% PLUS (AVERAGE) RENEWABLE ENERGY MAKES LOT OF SENSE FOR THESE COUNTRIES ADVANTAGE : RURAL POPULATION

4 RENEWABLE ENERGY BUSINESS MAINLY CONSISTS OF PROJECTS USING FOLLOWING RESOURCES: WIND SMALL HYDRO BIOMASS SOLAR THERMAL PHOTO VOLTAIC SOLID WASTE TODAY 90% OF THE SME BUSINESS ARE IN DEVELOPMENT OF WIND, SMALL HYDRO AND BIOMASS PROJECTS.

5 RURAL POWER OTHER THAN POPULATION IRRIGATION CANALS / RIVULETS SMALL HYDRO POWER ABUNDANT WASTE LAND AND GOOD BREEZE WIND POWER AGRICULTURAL WASTE BIOMASS POWER FROM VALUELESS RURAL RESOURCES TO HIGH VALUE RURAL PRODUCTS FROM POVERTY TO PLENTY, INCREASE IN RURAL GDP

6 RENEWABLE ENERGY RURAL ECONOMY:- IRREVOCABLY LINKED AVAILABILITY OF RENEWABLE RESOURCES MAINLY IN RURAL AREAS IMPROVES RURAL ECONOMY LOCAL RESOURCES GIVES VALUE TO INCREASES EMPLOYMENT OPPORTUNITIES NEW AVENUES IN THE RURAL AREAS IMPROVES QUALITY OF POWER DISTRIBUTED GENERATION IMPROVES RURAL INFRASTRUCTURE LOCAL FACILITIES BECOME BETTER

7 CENTRAL UTILITY CENTRAL GENERATION CUSTOMERS FACTORY CUSTOMERS OFFICES OFFICES

8 DISTRIBUTED UTILITY WIND CENTRAL GENERATION GEN SET REMOTE LOADS SMALL HYDRO CUSTOMER EFFICIENCY BIO MASS

9 DISTRIBUTED POWER REFERS TO A VARIETY OF SMALL MODULAR POWER GENERATION TECHNOLOGIES THAT CAN BE COMBINED WITH ENERGY MANAGEMENT AND STORAGE SYSTEMS THAT CAN IMPROVE THE ELECTRICITY DELIVERY SYSTEM. DISTRIBUTED POWER SYSTEMS RANGE IN SIZE AND CAPACITY FROM A FEW KILOWATTS TO 50 MW.

10 NEED FOR DISTRIBUTED POWER ELECTRICITY DELIVERY SYSTEM IS HIGHLY STRAINED. DEMAND FOR POWER CONTINUOUSLY ESCALATING. QUALITY PROBLEM ON THE INCREASE. LARGE CENTRAL PLANTS TAKE YEARS TO COME MATCHING INVESTMENTS IN TRANSMISSION SYSTEMS REQUIRED. ENVIRONMENTAL IMPACT OF LARGE STATIONS COSTLY TO MITIGATE. DISTRIBUTED POWER OFFERS QUICKER ALTERNATIVES. ADDRESSES SOME OF THE CONSTRAINTS MENTIONED ABOVE.

11 Renewable Energy Potential and Current Achievements in India Sl No. Sources/Technologies Units Aprox Potential 1 Wind MW 45,000 1,870 Achievements 2 Small Hydro Power MW 15,000 1, Biomass Power/Cogeneration MW 19, Biomass Gasifiers MW Energy Recovery from Wastes MW 1, Solar Photovoltaic Power MW 20 MW/sq.km 2.50 Power from Renewables (Total) MW 81,200 3,950.93

12 ECONOMICS OF RENEWABLE ENERGY Sector Capital Cost (US$ Million/MW) Cost of Generation (US Cent/kWh) Small Hydro 0.9 to Wind Energy 0.95 to Biomass Power 0.8 to to 6 Bagasse Cogeneration Biomass Gasification 0.6 to to to to 6 Solar PV 5.21 to to 41.70

13 SME SECTOR ENERGY STAKE HOLDERS PRIVATE SECTOR THE MOST IMPORTANT PLAYER IN RENEWABLE ENERGY DEVELOPMENT WORLDOVER THE OTHER KEY STAKE HOLDERS ARE GOVERNMENT, UTILITY, BANKERS & REGULATORS GOALS AND RISK PERCEPTIONS DIFFERENT FOR EACH OF THEM RURAL ECONOMY AND RURAL POPULATION A VITAL FACTOR IN ENERGY SME BUSINESS

14 RISK PERCEPTION ENTITY GOAL RISK PERCEPTION VISION PVT. SECTOR - MAXIMISE PROFIT LEAST RISK LOSS / BANKRUPTCY MED. TERM BANKER - MAXIMISE PROFIT LEAST RISK LOAN TURNING NPA MED. TERM UTILITY - MAXIMISE GEN. LEAST RISK HIGH COST OF ENERGY PURCHASE SHORT TERM REGULATOR - CONSUMER INTEREST HIGH COST TO CONSUMER SHORT TERM GOVERNMENT - ENERGY SECURITY EMP. GEN. GHG RED OTHER EXTERN MISPLACED SUBSIDIES AND INCENTIVES LONG TERM

15 VIEW POINT NO SINGLE POLICY CAN SATISFY ALL THE STAKEHOLDER A BALANCED OUTLOOK SHOULD BE BASIS OF POLICY ANY POLICY SHOULD BE DRIVEN BY LONG TERM VISION EVERY RISK MITIGATION ADDS TO COST MOSTLY WE TALK OF RISK MITIGATION THROUGH FISCAL POLICIES THERE ARE NON FISCAL POLICIES OF EQUAL IMPORTANCE RISK AVOIDANCE THROUGH MORE INFORMATION AND NOT SIMPLY RISK MITIGATION THROUGH FISCAL MEASURES SHOULD DRIVE POLICY INTERVENTION FOR PROMOTION OF RENEWABLE ENERGY

16 PROJECT ECONOMICS KEY FACTORS THAT DETERMINE THE ECONOMICS ARE: RESOURCE AVAILABILITY / GENERATION POTENTIAL / PLF PROJECT COST OPERATION & MAINTENANCE COST ANNUAL RATE OF ESCALATION IN O & M COST RATE OF INTEREST RATE OF RETURN ON EQUITY AUXILLARY CONSUMPTION MINIMUM TAX WORKING CAPITAL LOAN REPAYMENT PEIROD TODAY WE WILL CONCENTRATE ON THE FINANCING ASPECTS

17 BANKER S HOLD THE KEY ON FOUR MAJOR ISSUES ACCEPTABLE DEBT SERVICE COVERAGE RATIO LOAN REPAYMENT PERIOD RATE OF INTEREST LOAN SECURITISATION NORMS

18 COMPARATIVE NPVS FOR HYDRO AND THERMAL FOR A 10 & 15 YEAR TERM (value in US$) ASSUMPTIONS: HYDRO THERMAL TERM REPAYMENT PERIOD CAPACITY CAPITAL COST (in Million US PLF 33% 70% Gross Generation Aux Consumption 1% % NET GENERATION Coal Cost Escalation 0 5% O & M 2.50% 2.5% Escalation 5.00% 5.0% Debt 70% 70% Equity 30% 30% Return on Equity 16% 16% Taxation 1 TO 10 YRS 7.50% 7.50% 11 TO 15 YRS 35% 35% Discounting factor 5% 5% SL NO PROJECT 10 YR TERM 15 YR TERM 8% 11% 8% 11% 1 NERIA HYDRO PROJECT CONVENTIONAL THERMAL PROJECT RATE OF INTEREST AND LOAN TENURE MAKE A LOT OF DIFFERENCE AND HELP IN KEEPING THE TARIFFS AT AFFORDABLE LIMITS IN DEVELOPING COUNTRIES

19 COST COMPARISON OF HYDRO AND THERMAL WITH GRID TARIFF (value in US$) NERIA HYDRO COST AVG COST NPV OF COST THERMAL COST AVG COST NPV OF COST GRID TARIFF AVG TARIFF NPV OF TARIFF ASSUMPTION : DISCOUNTING FACOR AT 5%

20 COMPARATIVE RETURNS ( Value in US$) 10 YR TERM 15 YR TERM TARIFF IRR TARIFF IRR GRID HYDRO % % THERMAL % %

21 BHORUKA POWER - FINANCING TRENDS PROJECT NAME SHIVPUR SHAHAPUR MADHAVAMANTRI SHAHAPUR D-9 MANDHAGRE NERIA CAPACITY 18 MW 6.6 MW 4.5 MW 1 MW 3.50 MW 9 MW DATE OF COMMISSIONING Under implementation PROJECT COST (Rs. In lacs) MEANS OF FINANCE TERM LOAN EQUITY TOTAL FINANCED BY IDBI,ICICI,IFCI IREDA IREDA,IDFC IREDA SBI SBI RATE OF INTEREST 16% 12.50% 12.00% 12.50% 9.88% 8.25% ROE- 10 YRS 12% 12% 19% 17% 15% 19%

22 BHORUKA POWER - FINANCING TRENDS contd EVOULATION OF INTEREST V/S TARIFF % 19% % % 15% 0.14 AVG TARIFF in $ RATE OF INTEREST ROE- 10 YRS VALUE % 12% 12% % % 10% 8% UNIT AT CURRENT GENERATION LEVEL

23 LOAN SECURITY NORMS LATE 1990s First charge on all the immoveable properties of the company pertaining to the project and of all the moveable properties of the project. Escrow Account on the receivables of the project. Bank Guarantee to an extent of 10% of the loan amount. Furnishing of Post dated cheques in respect of principal repayment of loan as well as interest payments First charge on all the immoveable properties of the company pertaining to the project and of all the moveable properties of the project. Trust and Retention Account on the receivables of the project. BANKER S CONFIDENCE FOR ENERGY SME s HAS INCREASED

24 MATURING OF SME ENERGY SECTOR THE ATTRACTIVENESS OF THE SME SECTOR CAN BE GAUGED BY THE INCREASE IN NUMBER OF FINANCIAL INSTITUTIONS AND BANKS PARTICIPATING IN FINANCING SUCH PROJECTS : IREDA, IDBI (Very Limited) - 2 BANKS 2005 : ALL FI s AND BANKS EXCLUDING SOME OF THE SMALL NEW PRIVATE SECTOR BANKS - OVER 20 BANKS

25 TOTAL CUMMULATIVE LOAN SANCTIONS & DISBURSEMENT AS ON (USD in million) Sector Cumulative Loan Disbursement Sanctions Cumulative Wind Energy Small Hydro Cogeneration Biomass Power Solar Photo Voltaics Biomass Gassification Solar Thermal Biomass Briquetting Biomethanation from Industrial Effluents Energy Efficiency & Conservation Waste to Energy Miscellaneous

26 TERMS OF LENDING Financing Schemes Interest Repayment Minimum promoter rate (%) tenor (years) Contribution (%) Setting up wind farm on ownership/lease basis Mini Hydro upto 1MW Small hydro above 1MW and upto 5MW Small hydro above 5MW and upto 15MW Small hydro above 15Mw and upto 25 MW Biomass cogeneration Biomass Power Energy efficiency and conservation project Energy efficiency and conservation (equipment) Source: IREDA; Note: Maximum term loan amount varies between 70 and 80 percent of total project cost.

27 RECOMMENDATIONS RESOURCE AVAILABILITY STUDIES ON A LONG TERM BASIS IS KEY FOR VIABILITY PROJECTIONS ON A REALISTIC BASIS AUTHENTIC DATA NEED TO BE MADE AVAILABLE BY GOVERNMENT DEPARTMENTS BANKS COULD HELP IN KEEPING LOCAL CURRENCY INTEREST RATES BELOW 10% BANKS COULD ALSO HELP IN INCREASINGTHE LOAN TENURE TO 15 YEARS WHICH COULD HELP IN KEEPING TARIFF S DOWN IN THE INITIAL FEW YEARS WORLD BANK THROUGH IFC COULD HELP IN ACHIEVING BOTH THE ABOVE OBJECTIVES THROUGH LONG TERM DEDICATED FUNDS THIS COULD SERVE WORLD BANKS OBJECTIVES OF RURAL DEVELOPMENT AS WELL AS SUSTAINABLE ENERGY DEVELOPMENT

28 ABOUT BHORUKA POWER ABOUT BHORUKA POWER IT IS A LEADING RENEWABLE ENERGY DEVELOPER IN INDIA OWNING AND OPERATING 10 SMALL HYDRO STATIONS AND 2 WIND FARMS CURRENTLY. TWO MORE HYDRO PROJECTS ARE U UNDER IMPLEMENTATION WHICH WILL TAKE THE CAPACITY TO 80 MW BY EARLY 2006 AND TO 100 MW BY THE COMPANY IS ALSO INVOLVED IN EFFICIENCY IMPROVEMENT IN RURAL ELECTRICITY DISTRIBUTION NETWORK. THE COMPANY WITH CAPABILITIES RANGING FROM CONCEPT TO COMMISSIONING AND A STRENGTH OF 200 PEOPLE IS CERTIFIED FOR ISO 9001, ISO 9002 AND ISO IT IS TO RECEIVE THE OSHAS CERTIFICATE SHORTLY. BHORUKA CHARITIES THE SOCIAL ARM OF THE COMPANY IS INVOLVED IN VARIOUS ACTIVITIES LIKE EDUCATION, VOCATIONAL TRAINING ETC., FOR RURAL UPLIFTMENT

29 MADHAVAMANTRI PHOTOS

30 PHOTOS WIND PROJECT - JAISELMER SRD KATTE NERIA CHAYADEVI

31 WE WILL BE GLAD TO LEND OUR EXPETISE IN THE FIELD OF RENEWABLE ENERGY PROJECTS Contact Address: Mr. S. Chandrasekhar Managing Director Bhoruka Power Corporation Limited #48, Lavelle Road Bangalore India Tel: (Dir) / (Off) Fax: sekhar@bhorukapower.com

32 CONCLUSION FINANCING ENERGY SMEs IS A VERY PROFITABLE BUSINESS PROPOSITION WITH A HIGHLY POSITIVE SOCIAL IMPACT ON THE RURAL SECTOR WHICH IS A MAJOR OBJECTIVE OF THE WORLD BANK

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