Widget Image
HomeEconomicsThe Opportunities and the Financial Feasibility of Investing in the Renewable Energy Market for Debt and Equity Investors

The Opportunities and the Financial Feasibility of Investing in the Renewable Energy Market for Debt and Equity Investors

By Shruti Sethi

The rising oil prices, depletion of its resources and excessive dependence on imports for energy requirements have all contributed towards making “energy security” the top priority in both emerging and developed economies.

Even though post-independence, India’s primary fuel has been coal, globally the dependence on coal has declined both due to its environmental effects and due to the cost reduction in the renewable sources of energy

The growing disparity in energy delivery system between urban and rural areas and within states has aggravated the problem of a growing deficit in the energy market.

The following data from Ministry of Power on interstate electricity consumption in our country substantiates this argument:

The electricity consumption of the Western region comprising of Goa, Gujarat, Maharashtra, Madhya Pradesh, Chhattisgarh, Daman & Diu and Dadra and Nagar Havel was 1201.2 KWh in 2011-2012 which was 130 % more than the electricity consumption of Eastern region which comprises of Odisha,Sikkim,Jharkhand, Bihar and Andaman and Nicobar Islands.

Delhi and Punjab have more than double the electricity consumption of the National average while Bihar consumes less than 1/5th the National average.

This deficit has paved way for developing the renewable energy sources to meet excess demand and reduce the inequality in energy consumption whilst reducing the dependence on conventional sources of energy. As of December 2013, Renewable energy as a percentage of total installed power capacity in India was 12.59%.

With this the main focus of this paper is to examine the Renewable Energy market , the stakeholders facilitating the exchange of energy and opportunities for debt and equity investors to invest in this upcoming and promising venture.

I. Executive summary  

Availability of most of the conventional sources of energy is limited; this exerts an upward pressure on their prices hence we need to look for alternatives for generating energy with a twofold motive of satisfying the excess demand of electricity and getting returns on investments in the RE sector.

However the initial capital expenditure on the renewable energy projects is high and these projects usually require some incentives: fiscal or financial to propel them.

Various incentives for the investors in the market are as follows:

Feed-In-Tariffs: These are the subsides provided by the government to make renewableenergy cost competitive compared to the conventional energy sources. The government sets the price at a premium for these resources to compensate the producers of renewable energy, utilities are then required to purchase energy from the producers at these high costs; increasing their revenues.

Tradable Renewable Energy Certificates:

  • REC refers to additional revenue that can be generated from trading in the green attribute of the electricity generated.
  • There are two types of REC’s: Solar and Non Solar. They are both mutually exclusive and can’t be exchanged for each other.
  • 1 REC is equivalent to 1MWH of electricity supplied to the grid
  • Shelf Life of REC is two years from the date of issuance or 720 days
  • Trading Platform is Power Exchange under CERC
  • Repeated trading of the REC is not allowed , it’s a one transaction market instrument

Various Financial benefits include:

  • Excise duty exemptions
  • Accelerated depreciation of 35 % in the wind energy sector
  • Generation based incentives @50 paisa per unit with a limit of Rs 1 Cr per MW.

Goldman Sachs and Wells Fargo are some of the debt investors in the renewable energy market of India and there are a plethora of opportunities for projects to raise funds through debt. Debt is more easily available in foreign markets like USA and raising funds abroad is expensive mostly due to currency fluctuations and hedging, indexing a portion of the cost of the projects to the relevant currency can reduce this risk and be helpful in raising funds in an efficient manner.

The trading in REC’s is a financially feasible and a lucrative mechanism (as is shown in the paper in the last section).The Internal rate of return for 1 MW of Wind energy is 19 % (Project IRR): as is shown in the excel model.

II. Literature Survey

India had the second largest1 number of projects in Wind Energy only after Romania with its number of projects in 2012 at 40 (which were 6 less than Romania’s in that year) and it generated 3054 MW of wind energy in that year.


The consistently increasing dependence of the entire world community on non-renewable sources of energy can be established through the following statistics2

A country’s dependence on fossil fuels as a % of total energy requirements :

  • In 2009 and 2010 India maintained its dependence on fossils as a source of energy at 72.5%, It witnessed a 0.2% reduction in the year 2011 and its dependence on fossils dropped to 72.3%
  • The country with minimum dependence on fossils is Democratic Republic of Congo, recording its dependence at 3.7 % in 2009. It witnessed 0.5% increase in 2012.
  • The country with maximum dependence on fossils was United Arab Emirates.
  • Even though United States of America’s dependence on fossils was greater than

 India in 2009 ( as was in 2011) at 84.2% but it witnessed a faster reduction at the rate of 0.6%

However two problems in this sector that have grasped the attention of the entire world community are:

  • The rising international oil prices
  • Dwindling of oil reserves

These two problems have made safeguarding the energy security of all the citizens a primary concern for all countries especially developing countries like India. Energy scarcity is becoming a pressing concern for the world community.

According to the report over 1.2 billion people3 are without any access to electricity worldwide. This situation demands a shift to other sources of generating energy and paves way for a greener alternative and secures future via the renewable sources of energy. The shortage of electricity is further aggravated by the increasing dependence of counties on imports which is prone to an economic crisis.

The increasing emergence of Solar and Wind energy is seen as a long term solution to this problem, it’s not only seen as a cleaner and a greener option but also a lucrative option.

With the increasing investment in renewable sources and excessive R&D expenditure by countries the cost of harnessing solar and wind power has been drastically reduced in the recent times. Given that the high cost of renewable energy sources compared to conventional sources was seen as one of the major impediments for a country to rely on renewable sources the evidence of increasing competitiveness in the world community in the prices of such sources is extremely encouraging for the industry.

In a span of three years India has increased the installed capacity of solar power from 30 MW to more than 2000 MW4.

The significant Jawaharlal Nehru National Solar mission has reduced the cost of solar energy to $0.15 per KWH making India amongst the lowest cost destinations for grid connected solar PV in the world.

The JNNSM has contributed towards reducing the dependence of our country on imports of diesel and coal for energy generation .This can help India to reduce emissions per unit of GDP by 20-25% by 2020 over the 2005 levels.

There are several positive developments in the renewable energy sector both with respect to cost reduction and improvement in its efficiency. A study by Junginger (2005) reveals an average progress ratio of 80% in wind farm technology implying that unit cost capital reduces by 20% for every doubling of capacity.

A study by Greenpeace (2005) has found evidence regarding the growing importance of renewable energy in future .The worldwide wind power capacity which was 32 GW at the end of 2002 is expected to reach 1250 GW by 2020 which is anticipated to supply 12% of world’s electricity needs.

III. Solar Energy


  • Indian Government has committed to Solar Energy targets of 20 GW by 2015 and 200 GW by 2030.
  • Among the various renewable sources available , solar potential is the maximum in our country
  • States enjoying maximum insolation are Gujarat and Rajasthan. Other states which enjoy good insulation levels are: Tamil Nadu, Andhra Pradesh, Madhya Pradesh, Maharashtra and Chhattisgarh.


Cost of Solar Photo Voltaic technology has declined:

Screen Shot 2014-07-19 at 11.19.09 pm








Rs cr/MW 2010-2011 2011-2012 2013-2014
Solar PV 15.20 14.42 10.00


The falling cost of harnessing Solar energy is good news for the energy sector, investments in R&D for both solar and wind energy technologies have exerted a downward pressure in the cost of these technologies worldwide.

Slowly solar and wind electricity is approaching grid parity to the conventional coal sources witnessing a convergence in their prices as the solar energy prices fall and those of the coal based sources rise.

This has further contributed towards a reduction in the benchmark tariff:


Rs/KWH 2010-2011 2011-2012 2012-2013
Solar PV 17.91 15.34 10.39


Screen Shot 2014-07-19 at 11.22.00 pm











IV. Wind Power

Wind power is conversion of wind energy into useful energy using wind turbines, windmills or wind pumps.

There are two kinds of Wind Energy

  • Onshore: This type of energy is competitive and sometimes cheaper than fossil fuels; utility companies often buy surplus electricity from domestic wind turbines.
  • Offshore: This type of energy generation is steadier than Onshore but the setting up cost is considerably higher.

Current Scenario In India

  • Installed capacity of wind power in India was 21136.3 MW as of 31st march 2014 mainly in Tamil Nadu, Maharashtra, Gujarat and Karnataka.
  • India is the 5th largest wind power producer in the world with an installed capacity close to 20 GW.
  • The wind energy witnessed a surge in investments post 2002 and all was well as the sector enjoyed Accelerated Depreciation benefits till April 2012, which when discontinued posed a problem of incentives for investing in the wind energy. Even though the generation based incentives were discontinued in 2012, they were reintroduced in the union budget in 2013.
  • The government plans to launch a National Wind Energy Mission as this sector witnessed a decline post 2011 continuously.

V. Renewable Energy Regulatory Framework

The sections of electricity act 2003 pertaining to the ambit of the centre and the state in the renewable energy sector are as follows:

The sections are:

3(1) and 3(2):

Central Government shall prepare and publish the following in consultation with the State governments:

  • National Electricity Policy
  • Tariff Policy

For development of power systems based on optimal utilization of sources such as renewable sources of energy

Section 86(1) and 86(1) (e)

  • State commissions shall promote generation of electricity from renewable sources through determination of tariff
  • Specify Renewable Purchase Obligation
  • Facilitate grid connectivity

Renewable Purchase Obligation

Obligated entities are mandated to purchase a percentage of total electricity consumption as Renewable energy;

The obligated Entities refer to the following:

  • Distribution Companies
  • Open Access Consumers
  • Industries consuming captive power

The National Tariff policy was amended in 2011 to increase the Solar RPO from a minimum of 0.25% in 2012 to 3% 2022. National Action Plan for Climatic Change (NAPCC) suggests increasing the share of renewable energy in the total energy mix to at least up to 15 % by 20205.


Screen Shot 2014-07-19 at 11.28.32 pm










Renewable Energy Certificates:

Renewable energy certificate is a market based instruments for the two fold motive of:

  • Promoting the use of renewable energy
  • Facilitating the compliance of state regulatory bodies to fix RPO targets at an interstate level

This caters to a mismatch between the renewable energy availability and the requirement of obligated entities to meet their RPO targets.

REC is the green attribute of energy generated from the renewable energy sources.

There are two power purchase mechanisms in India namely:

  • Feed-in-tariff mechanism under which state fixes preferential tariffs for theprocurement of power from the Renewable Energy Sources. These are subsidies given by the government to compensate the producers for the high cost of RE, the utilities then buy the electricity at a premium price from these producers.
  • New mechanisms of market based instruments- Renewable energy certificate which has been introduced to promote RE generation and provide a platform for trading the green attribute of RE generated to help the states to comply with their SERC fixed RPO.










Screen Shot 2014-07-19 at 11.30.41 pm












The commodity electricity thus generated can be sold separately and the environmental attribute embodied in a certificate is the REC:


  • The commodity electricity is sold at either mutually agreed price between the parties or the Average Pooled Power Purchase Cost (APPC) to the DISCOM’s.
  • The green attribute is sold separately in form of REC’S which can be traded at


CERC fixed Floor and Forbearance price.

REC has come to be known as the currency of the renewable energy generation.


Determination of the cost of electricity generated from renewable energy source can be done in the following two stage method.

  • Cost of electricity generated equivalent to the conventional energy sources
  • Cost of environmental attribute

And these environmental attributes can be exchanged in the form of REC’s for achieving the RPO attributes by the OE’s in case of a mismatch between the availability of renewable energy sources and the target achievement .

This leaves the Renewable Energy generators with the following two options:

  1. Sell the renewable energy at the preferential tariff.
  2. Sell the electricity generation and environmental attribute separately in  form of REC’s.

VII. The stakeholders in the REC Market are as follows:

1. Ministry of New and Renewable Energy (MNRE)

This is the nodal agency for promoting renewable energy generation in the country and is the facilitator for REC mechanism in India.

2. Forum of Regulators

It is a common platform for the electricity regulators of our country. It facilitates the implementation of REC mechanism in India and also seeks to resolve any issue which may arise during the implementation of REC mechanism in any state.

3. Central Electricity Regulatory Commission (CERC)

CERC is a facilitator of REC framework at an interstate level.

One of the main functions performed by the CERC is to develop and establish principles regarding the pricing of the RE technology which may also be used by the SERC’s to determine the price of RE in their respective states.

CERC also regulates the REC exchange platform.

4. State Electricity Regulatory Commissions (SERC’s)

This is a regulatory body for intra state level transactions. It determines the tariff rate for RE technology in the state, it also determines the tariff for procuring electricity component of the Renewable Energy.

  1. State Load Dispatch Centre

The mandate of SLDC is as follows:

  • Energy accounting : Account for energy fed into grid and Account for RE procured by obligated entities
  • Issuing power generation certificate to REC registry.
  1. Monitoring Committee

The Primary task of the Monitoring Committee is to monitor the compliance of all the OE’s to their specific RPO targets.



  • Captive generators
  • Open access users
  • State electricity distribution companies
  • Other Obligated entities


1 REC=1 MWH of electricity


1 time only


Within 730 days of issuance


Price determined within Power Exchange within forbearance and floor price determined by CERC.

The Forbearance and floor price applicable from April 2012, valid till FY 2016-17


Non Solar REC (Rs/MWH) Solar REC (Rs/MWH)
Forbearance Price 3300 13400
Floor Price 1500 9300
Source: REC registry India


REC Floor and Forbearance price has been declining over the period; this has the following two consequences:

On the Rate of Return of Projects:

Most project developers use floor price for determining how lucrative the RE market is and base their investment decisions on those. With the reduction in the floor price the projected returns on the investment projects fall and thus the investment in this sector is declines.

Declining penalty on non-adherence:

Since the penalty of noncompliance of RPO target as imposed by SERC is to deposit an amount equivalent to the shortfall in the REC at the forbearance price which is to be managed by the SLDC.

Therefore falling of forbearance price implies a declining penalty of noncompliance.

A few important trends for the future as well as the current scenario regarding the adherence of state level RPO targets6.

  • Lack of coherency between the national renewable energy target set by NAPCC at 7% and state level targets being lower than this has resulted in confusion and has finally led to a deficit.
  • 22 out of 29 states failed to meet their RPO targets in 2012
  • Situations in various states was as follows:

While Meghalaya set its RPO target of 0.75% and achieved 4.10%, Tamil Nadu achieved 19.14% against 9%. Among the worst-performing states were Delhi, Maharashtra, Punjab, Andhra Pradesh and Madhya Pradesh.

  • Delhi did not even achieve 1 % of the target and Punjab and Maharashtra achieved only 50% of the target.
  • If high RE targets are set then the increase in the tariff would only be 15-30 paisa nationally (2013-2020) implying that renewable energy is not costly.
  • In Tamil Nadu, Himachal Pradesh and Karnataka the tariff will decease below the current tariff by 2020.



Sources of Financing:

The reason why renewable energy market is not the automatic choice for investors is because of the significant high amount of initial capital expenditure (CAPEX) and the consistent variable ongoing funds required for the RE projects.

At the same time due to heavy R&D investment in this sector fuelled by the government intervention in the market whilst offering fiscal incentives to the investors and power producers has helped in bringing the cost for the renewable energy projects down to the extent that they have started making commercial sense and have brought us a step closer to achieving grid parity in the renewable energy sector.

The Key investors in this sector include:

  • Equity Investors ( including FDI)
  • Debt investors
  • Development Financial Institutions (DFI) ( like IREDA , the financing branch of MNRE which manages the funding for such projects)

Debt Financing is hitting a major roadblock in this sector; Banks which contribute majorly towards the funding of these projects have the following challenges:

  • Banks have sectorial limits and can’t lend beyond a threshold level in any particular sector
  • The Renewable Sector has high requirement of funds initially in form of high CAPEX as a result of which funding in the form of raising loans from banks is inhibited.

Debt Investors are more risk averse than the equity investors and are willing to accept low returns in return for lower risk.

Equity investors on the other hand are relatively more risk loving and care for variable but higher rate of return, better than expected.

Diversification of the risk profile ensures a better return than using a pure strategy of using only debt or using only equity.

A significant amount of projects which use a combination of debt and equity are currently in operation in our country.

On an average the debt to equity mix for projects in the Renewable energy sector is 75:25, i.e. 75 % of the investment amount is raised via debt and the remaining 25% inequity investment.

IX. Current Scenario and some projections: 

We shall explore the two routes of Financing Renewable Energy Projects: -debt


According to the climate policy initiative report (CPI 2012) the short and medium term prospects for debt and equity are as follows:

Screen Shot 2014-07-20 at 12.32.20 am







X. Opportunities for Debt Investors

 Financing Renewable energy project is a very critical decision especially in a developing country like India because the capital markets are not fully developed and there is competing need for funds in various fields and sectors, such as infrastructure.

This increases the demand for debt and hence it is not as easily available as in the developed countries, this increases the cost of debt and makes it scarce.


Debt forms a major part of the project and most RE investment projects raise money for the project in a debt: equity mix of 75:25. However this requirement faces various boulders in terms of extremely high cost of debt, the interest rate charged on debt in India for example is around 14% for most projects while that for USA is 7%.


A possible solution and an opportunity for debt seeking projects is to raise debt via European and US debt investors to reap the benefits of lower cost of renewable energy projects.


According to an analysis conducted in the CPI report 2014, this opportunity for the Debt Investors becomes more expensive due to currency exchange risk and hedging against this outweighs the benefit of using foreign debt. Hence the government should index a portion of the payments made for the RE output to the relevant foreign currency to make the terms more attractive.


If the payments are indexed then the lower cost of the RE projects will cause the Levelized Cost of Energy (LCOE) cost of Renewable Energy to reduce by 30 %. (CPI 2014 analysis)


The same report emphasizes upon the need to reduce the cost of debt and that would significantly reduce the need for the government to provide support schemes that seek to provide incentives over and above the market price like the GBI in the wind energy market.




According to the UNEP report on the global trends of renewable energy sector, the trends in investment in 2012 have been “bittersweet”

  • The year was bitter for the investment in the renewable energy sector in 2012 which declined compared to the 2011 level. Solar Investment declined by 11% and Wind Investment declined by 10%.


  • Asset finance of utility scale renewable energy projects fell 18 % in 2012 reflecting policy uncertainty.
  • However it was higher than the 2009 level and there was a massive increase in megawatt power of RE installed worldwide
  • There was a fall in utility scale PV system cost of about 40% between 2011-2012.The wind capacity installed hit a record of 48.4GW, up from 42.1GW in 2011
  • India, China and Brazil stood first, seventh and ninth in the overall renewable energy investment resp.
  • They stood first, third and sixth in the asset finance (Renewable energy sector).
  • They also made use of competitive reverse auctions to attract renewable investment at the lowest possible cost.

 XII.    The Market Players in the Renewable Energy Sector (EQUITY)

1. Suzlon Group

Market share/alliances: Ranked 5thlargest wind turbine supplier in terms of installedcapacity and market share as of 2013. 50%+ market share in India as of FY2008-09.

Outreach: Asia, Australia, Europe, Africa, North and South America

Capacity: 24,200MW of wind energy installed across 30 countries

Headquartered at: Pune, India


2. Moser baer Solar Limited and Moser baer PV ltd

Market share/alliances: Alliances with several companies in the USA:

  1. Solfocus USA has an alliance with MBSL and gives exclusive rights for distribution of CPV technology in India
  2. Equity stake in Solaria, US based firm in low concentration solar technology firm sector.

Outreach: India, SAARC and Africa

Capacity: 250 MW in the solar sector

Headquartered at: India


Market share/alliances: 240 MW geothermal energy plant in Indonesia (owns a stake)

Outreach: Within India (Maharashtra, Tamil Nadu, and Karnataka

Capacity: 500 MW in renewable energy

Headquartered at: India



Market share/alliances: Largest Independent Producer/developer of RE power plants inIndia.

Outreach: All over the country

Capacity: 510.335 MW of installed capacity (424.335 MW wind energy)

Headquartered at: Chennai, India


5. Kenersys

Market share/alliances: Full scale turbine manufacturer, has production facilities inGermany and India

Outreach: All over the world


Capacity: Annual capacity is 950 MW from the two plants at Germany and India.


Headquartered at: Germany

XIII. Foreign Equity Investors in Indian Market

1. Olympus Capital Holding Asia

Market share/alliances: Private Equity firm specializing in buyouts. Investsin Manufacturing, Food, Clean energy, Environment

Investments: Prefers to invest in Middle East, Africa and Asia focussing onChina, India, Japan, South Korea and South East Asia. OGPL raised US$ 55 million led by the Olympus Capital Holdings Asia group in the Renewable energy sector

Headquartered at: New York

2. Bessemer Venture Partners (BVP)


Market share/alliances: Venture Capitalist; has made investments in the pastin Skype and Veritas which became household names.

Investments: Invested $10 million in OGPL in the same deal as OlympusCapital Holding Asia and helped OGPL raise Equity Investment of $75 million.

Headquartered at: USA


XIV. Debt Investors in the RE sector in India

1. Goldman Sachs Alternative Energy Group ( Private Equity)

Company Profile and features: Goldman Sachs is an Investment Bank and the GoldmanSachs Alternative energy Group is a dedicated platform for deploying capital in the alternative energy sector.

Invests a wide array of debt and equity across capital structures in private and publicly held company.

Projects Details in the RE sector: Has invested close to 1000 crore in Renew Wind Powerplants

Several other players like Bank of America, Morgan Stanley, and Wells Fargo are all major players investing in the Renewable energy in India.

These are all the major Debt, Equity players and Private Equity firms investing in the Renewable energy sector in our country.

But the question remains:

Why are the investors investing in this sector?

The answer probably lies in the argument:

The Indian Wind market is now more mature which is not only driven by small CSR or individual tax driven motives but it now has large Individual Power Producers (IPP) procurements reducing the cost of developing Renewable Energy making this industry a lucrative destination.

We now move to the most important part of this paper which is to see the reasons why Equity and Debt investors are investing in the clean energy market especially in India.

The reasons for the same are discussed in the next section along with a financial feasibility of the trading in the REC are V/s Preferential Tariffs and the various incentives and returns to the investors.

XV. Incentives for Debt and Equity Investors


The equity investors are more risk loving and they take up a project based on the risk return analysis and financial indicators of the project such as the:

Project IRR: To see if the project itself is lucrative enough, keeping aside the debt arrangements.


Equity IRR: To see if after incorporating for the Debt Equity mix the project gives high returns

A debt investor is more risk averse and he is concerned about the principal returns of the debt along with its timely interest repayments.

The incentives are as follows:

1. Demand Supply Mismatch

One of the reasons why the energy sector is hot with investments especially in the clean energy sector is a much higher demand than the supply of energy.


We need to add 1600-1800 MW of energy every year to meet our annual energy demand, but the conventional sources can’t meet this requirement alone as the energy prices are surging up due to shortage in supply and excessive import dependence of our country on coal.


One possible and profitable solution for the same is Renewable Energy sources, their abundant supply and huge investments have brought the cost of the technology down , together with an array of fiscal incentives offered by the government this has now became a possible reality .


The trading in REC’s is slowly gaining popularity which is evident from the two trading sessions of REC’s.


REC TRADING SESSIONS FROM 2011-2014 (May to May) Non Solar

Screen Shot 2014-07-19 at 11.43.33 pm









source: IEX

REC TRADING SESSIONS FROM 2011-2014 (May to May) Solar

Screen Shot 2014-07-19 at 11.46.46 pm











The trading in Non-Solar is an already established market; while the solar market is slowly picking up starting from 2012 the number of RECs sold has increased phenomenally.


Comparative cost analysis of Renewable Energy and Coal based energy


The cost structure of the Renewable energy compared to the conventional sources of energy is as follows:


Source Cost per KWH


The continuous decline in cost of Renewable Energy sources relative to the coal based energy sources:

The solar energy market has come a long way in terms of cost reduction and it is approaching grid parity with coal.

The marquee attraction for investments in the Renewable Energy sector is the trading in the REC’s. The price per unit for the REC is determined through the Average Pooled Price (APPC) which is determined according to the demand and supply of the RECs, the APPC has been increasing making this industry more lucrative for the trading.


The latest APPC for FY’15 has been determined at Rs 2.66 per unit by the Madhya Pradesh



The next step of the project is to show the financial feasibility of the trading in REC’s.

I have taken the case of solar energy and REC trading in Karnataka, below is a financial analysis of the trading:

Assumptions for the model:

  1. APPC for FY2014 Karnataka is 3.14
  1. Increase in APPC is 5 % p.a
  1. REC price declines by 30 % every 5 years

Screen Shot 2014-07-20 at 12.36.42 am
In this the REC+APPC model is compared with the stable Preferential Feed in tariffs.

This model incorporates for trading in REC for the environmental green attribute which can be traded while the electricity component is sold at the average pooled prices (here we have taken the APPC for FY’14 Karnataka @3.14.

The APPC prices can only increase because the pooled prices are determined on the basis of cost of power generation from fossil fuel based plants .The APPC will then increase due to the following two reasons:

  • Scarcity in supply of fossils in the future
  • Price increase of fossils in the future caused due to scarcity which will further increase in the APPC


REC prices will decrease in future as Renewable Energy approaches Grid Parity, due to the R&D investment in RE.

This analysis reveals that the new REC trading mechanism is comparable and at times better than the stable preferential tariff (old scheme).

This scheme ensures high though variable return compared to the Fit tariff which provides stable and medium returns.


  • Foreign Direct Incentive (FDI)

More and more overseas investments are happening in this sector due to the attractive fiscal policies by the government which paves way for foreign investments in the RE sector. According to the KPMG report: India is 3rd largest investment destination in Renewable Energy only after USA and China.

  • FDI up to 100% is permitted for oil and natural gas exploration
  • 100% FDI in the power sector is permitted
  • 100% FDI in the renewable energy generation and distribution projects subject to provisions of the Electricity Act 2003.

Total FDI inflows in the Power Sector touched USD 7.8 billion in April 2000- March 2013

(4 % of the total FDI inflow in India)



  1. Generation based incentives:

The MNRE announced a scheme for Generation Based Incentive for grid connected wind power projects, the broad aspects of the same are:

Under this scheme the ministry provides benefit of Rs 50 paisa per KWh of electricity for a period of ten years to eligible project promoters.

This is over and above the tariff provided by various SERC’s.

This benefit will however stop once the pay-out reaches 1 crore per MW of capacity.

The scheme will take place retrospectively, i.e. projects set up in the previous year too would be eligible to get registered under this scheme.

The eligibility criteria for this scheme are as follows:

  • GBI scheme is not applicable for those power producers who are availing the accelerated/advanced depreciation benefits scheme under the Income Tax Act
  • This scheme is applicable only for the individual power producers who have a minimum installed capacity of 5 MW and whose capacities are commissioned for the sale of power to the grid after announcement of the scheme.
  • This scheme is not applicable for those who set up capacities for captive consumption, third party sale and merchant plants.

2. Accelerated depreciation scheme

Under domestic income tax law, companies involved in renewable energy such as solar and wind energy was provided with accelerated benefits up to 80% in the first year, but this scheme is restricted to windmills installed on or before 31st march 2012.For the windmills installed post that they are eligible to depreciation of only 15 % under written down method. However depreciation benefit of 80 % is still applicable to solar power plants.

3.  Tax holiday under the domestic law

Undertakings engaged in generation and distribution of renewable energy are eligible for a tax holiday for a period of ten years if power generation begins before 31st march 2014.However the firm has to pay a minimum alternative tax at a rate of 20-21% (based on income) this can be offset in a period of 10 years7.

GOI allows for a 100 % of tax waiver on the profits of any single 10 year period for the first 15 years of the operational life of power generation project.

4. Feed-in-Tariff

  • These are preferential tariffs announced by the respective SERC’s
  • They are announced for a long term period (20-25 years)
  • They are determined in a cost plus manner

5. Other tax and fiscal incentives

Tax costs are a major part of any Engineering Procurement and Construction (EPC) Project and this cost forms about 10-20% of the total cost of the project. Keeping this in mind the GOI exempts the custom and excise duty on various products which are used up in the Renewable Energy projects.

XVII. Calculating returns & Explaining the excel model

  • The fiscal and financial incentives in the renewable energy markets are a major driving force for the debt and equity investors in the country
  • The equity investors are driven by the motive of high Internal Rate of Returns of a project , the Project IRR of generating 1 MW of Wind energy has been calculated in the excel model of the project . After incorporating for various regulations and the financial considerations it is 19 % while the equity IRR is 26 %.
  • The Model has the following features:
  1. The project cost of 6.8 crores per MW of wind energy has been broken down into :

Screen Shot 2014-07-19 at 11.50.33 pm



  1. The debt equity mix of the project is 75:25.
  1. PLF P75 has been assumed at 27%8.
  1. Corporate tax and 801A tax holiday for a period of 15 years has been incorporated for in the model.
  1. Industrial and commercial tariff structure has been assumed at 60% and 40% and has been calculated for a period of 15 years.
  1. The financial statement calculates EBITDA, PAT and the Cash flows after accounting for corporate tax and the tax holiday benefit.
  1. The Debt Repayment Schedule calculates the principal and periodic interest payments for a door-to-door tenor of 13 years.
  1. Finally the last sheet calculates the project and equity IRR of 19% and 26 % resp.
  • This market is slowly gaining momentum in terms of investments and in the near future as the renewable energy approaches grid parity with the conventional sources of energy and this exerts and downward pressure on the tariffs the solar and wind energy would become more and more reliable for people’s energy requirements.
  • Before 2011 it was impossible to imagine that big private equity firms would be investing millions of dollars in developing wind farms in India or that Renewable energy would be tradable! We have come this far and we have to go a long way.
  • Investment opportunities for both Debt and Equity investors are lucrative despite the initial high CAPEX; this is because of a very strong support system by the government.


World Bank Report statistics

World Bank data on country’s dependence on fossils as a % of total energy requirement.

WB report 2014

4 World Bank report 2013

5 Mnre.gov.in

6 A report by Greenpeace organization India “Powering Ahead on Renewables: Leaders and Laggards”

7 KPMG report

8 PLF P75 is the plant load factor: WTG achieves this level of efficiency with a 75% probability and fails with 25 % probability.



Fossil fuel energy consumption,The World Bank,Print.

http://data.worldbank.org/indicator/EG.USE.COMM.FO.ZS?order=wbapi_data_value_2012+ wbapi_data_value+wbapi_data_value-last&sort=asc

India, A global leader in the development of solar power,world bank,2013.Print.

http://www.worldbank.org/en/news/press-release/2013/12/12/india-poised-to-be-a-global leader-in-the-development-of-solar-power-says-new-world-bank-report

Annual global wind report, Wikipedia, 2014.Print

http://www.gwec.net/wp-content/uploads/2014/04/GWEC-Global-Wind-Report_9-April 2014.pdf

List of power stations in India, Wikipedia, Print. http://en.wikipedia.org/wiki/List_of_power_stations_in_India#Windpower

State of India by installed power capacity, Wikipedia, Print. http://en.wikipedia.org/wiki/States_of_India_by_installed_power_capacity

Electricity sector of India,Wikipedia, Print.


Alternative energy,Wikipedia,Print.


mnre.gov.in,Renewable energy regulatory framework,Print. http://mnre.gov.in/information/renewable-energy-regulatory-framework/

Shah,Rakesh.Renewable energy tariffs,2012.Print.

http://www.iitk.ac.in/ime/anoops/for12/2%20-%20Mr.%20Rakesh%20Shah%20%20 %20Renewable%20Energy%20Tariffs%20Regulations%20and%20Design.pdf

CERC regulation,Press Information Bureau,GOI,2010.Print.


Tracking REC regulatory framework, mnre.gov.in, 2013.Print. http://mnre.gov.in/file-manager/UserFiles/february_month_2013_rerf.pdf

Joshi,Balawant,Opportunities in financing in Renewable energy,Print. http://fs-unep-centre.org/sites/default/files/media/abps.pdf

Large scale grid integration of RE sources, cea.nic.in, 2013, Print. http://www.cea.nic.in/reports/powersystems/large_scale_grid_integ.pdf

Support schemes, kpmg, and 2013.Print.

http://www.kpmg.com/global/en/issuesandinsights/articlespublications/taxes-and-incentives for-renewable-energy/pages/india.aspx

Agenya carbon ventures,REC-a market ready for tradeoff,Print. http://www.slideshare.net/anujkaushikindian/rec-a-market-ready-for-takeoff

Power india,REC mechanism,slideshare.Print.


Sen,Sourabh,Assessing Risk and Cost in India,2014,Print.

http://www.renewableenergyworld.com/rea/news/article/2013/04/risk-and-cost-solars trajectory-compared-to-coal

Marcacci Silvio,Grid parity ,low LCOE driving REC by 2030,2013,Print.

http://cleantechnica.com/2013/10/18/grid-parity-low-lcoe-driving-34-global-renewables capacity-2030/

Finance in motion,Print.

http://www.efse.lu/media/pdfs/presentations/annual meetings/2012/financing_of_renewable_energy_projects.pdf


India wind energy outlook, GWEC, 2012, Print. http://www.gwec.net/wp-content/uploads/2012/11/India-Wind-Energy-Outlook-2012.pdf

Meeting India’s RE targets: the financial challenge, CPI, 2012,Print.

http://climatepolicyinitiative.org/wp-content/uploads/2012/12/Meeting-Indias-Renewable Targets-The-Financing-Challenge.pdf


M.Ramesh,Cabinet clears GBI incentives,Business Line,Print.

http://www.thehindubusinessline.com/industry-and-economy/cabinet-clears-generationbased incentive-for-wind-power-projects/article5019072.ece

REC v/s Preferential PPA, headway solar, 2011, Print. http://headwaysolar.com/blog/2011/12/16/rec-vs-preferential-ppa-for-10-years-post-2012/

Introduction to Renewable PPA’s, 2012, Print.

http://www.pwc.com/en_US/us/technology/publications/cleantech-perspectives/pdfs/pwc cleantech-introduction-to-renewable-ppas.pdf

REC band revised, EAI, 2011, Print.



Paul,Par,Renewable Energy Power Purchase mechanism,Print. http://www.cgrlegal.eu/renewable-energy-power-purchase-mechanisms-in-india

FDI opportunities in Indian Renewable Sector,nexus novus,,2013.Print. http://nexusnovus.com/fdi-opportunities-renewable-energy-sector-india

Indian brand equity foundation, 2013, Print.


REC v/s CDM, Reconnect, 2011, Print.


Suzlon Group,official website.


Moserbaer Solar, Official website. http://www.moserbaersolar.com/about-strategic-alliances.asp?links=ab5

Olympus Capital Asia,Official website.

http://www.olympuscap.com/en/news/2008/orient-green-power-raises-us$55-million-from investor-group-led-by-olympus-capital-holdings-asia.html

Alexander,Jacob, Sources of Financing in Renewable energy,2011,Print.

http://www.greatlakes.edu.in/gurgaon/sites/default/files/Sources_of_Financing_for_Renewab le_Energy.pdf

Rao, BV,Development of Renewable energy,2012,Print.

http://mnre.gov.in/file-manager/UserFiles/presentations-pwc-workshop 06092012/IREDA.pdf


Shruti is currently pursuing Economics Hons from St Stephen’s College in her final year.She actively participates in panel discussions , Model United Nation Conferences and International Relation Simulations.

After holding the post of Head girl at DPS RK Puram she contributed towards various college clubs and is currently the  Founding Vice President of Enactus, St Stephen’s College and Deputy Secretary General of the Model United Nation,St Stephen’s.
Her interests in Business and Finance have lead her to contribute actively to the Finance and Investment Cell of her college.
Her past internships have been at the Centre for the Study of Developing Societies , an International Socio- Political think tank , Avignam- a Development Consultancy based out of Africa, London and India and IndusInd Bank.