San Giorgio Group Case Study: The Role of Public Finance in CSP – Rajasthan Sun Technique 100MW CSP plant, India
Among the technologies capable of harnessing renewable energy to meet growing world energy demand, concentrated solar power (CSP) is of particular interest. Its potential to store the sun’s energy as heat allows it to deliver power when it is needed to balance out gaps in supply and demand arising from the fluctuating supply provided by other renewables, helping to maintain a stable energy supply. Energy systems with high levels of fluctuating supply from renewables like wind and solar PV will increasingly need technologies that can play this balancing role. While other renewable technologies like hydropower or geothermal power can also deliver power on demand, the renewable sources they harness are limited. The power CSP could potentially generate dwarfs theirs: solar is by far the most abundant form of renewable energy worldwide.
Financing challenges for CSP in emerging economies like India
CSP has particular promise in emerging economies with abundant solar resources, such as India and South Africa. However, after more than 20 years of limited deployment experience, CSP investment and production costs are still high compared to other more established conventional and renewable energy technologies. For now, the technology requires deployment experience in order to reduce costs and risks and so CSP projects still need public interventions to be financially viable. This implies particular risks for project developers, such as regulatory change, the high sensitivity of project economics to debt costs, and difficulties in securing enough investments. The public sector, on the other hand, faces the twin challenges of keeping costs for CSP deployment low and encouraging scale-up and replication.
Rajasthan Sun Technique CSP plant
Our analysis of the 100 Megawatt (MW) Rajasthan Sun Technique CSP plant in India indicates that, in this project, the public and private sector have addressed the financing challenges outlined above. As a result, the project developer is nearing completion of one of the most technologically innovative CSP plants worldwide. As well as being the world’s largest CSP plant using linear Fresnel technology, the plant will also be one of the first completed under India’s National Solar Mission (NSM). However, despite its ultimate success, construction of the plant was delayed. This was true of many plants tendered in phase one of the NSM, which did not meet its deployment goals in the expected time. In addition, neither the Rajasthan plant nor the other large CSP plants in India planned to date include heat storage technology that would allow them to deliver power more reliably and on demand even after the sun has gone down. By outlining what worked and what did not this case study can inform the design of future policies and the investment of both domestic and international public finance programs to deploy CSP, such as the Climate Investment Funds (CIFs), one of the key public investors in CSP in emerging economies.
A combination of national policy, public co-financing, and private risk management enabled investment in the Rajasthan Sun Technique CSP plant
The Rajasthan Sun Technique CSP project has involved a range of key stakeholders: the Government of India set the policy framework, foreign development banks and an export credit agency provided debt, Reliance Power developed the project and provided equity, and finally Areva Solar provided the technology. Our analysis suggests that each project stakeholder played a particular role in addressing the major financing issues and thereby enabling the project:
• The Government of India’s subsidized power purchase agreement (PPA) and payment security scheme were essential to ensuringthe project’s financial viability. By awarding a subsidized Power Purchase Agreement (PPA) through a reverse auctioning scheme, the government covered the cost gap between conventional power and CSP technology. The government is backing this PPA in two ways: first, through public-ownership of the power off-taker, and second, by establishing a payment security scheme that insures developers against the default of the sub-national distribution companies that will buy the CSP plant’s electricity from the PPA off-taker. In this way, the government also reduces off-taker risks.
• Foreign development banks and an export credit agency provided debt with substantially longer maturities than local financial institutions, making the project appealing to the local developer even at a very competitive power tariff for CSP. This was true even though the costs of hedging foreign exchange risks cancelled out a large part of the benefits of foreign debt. The USD 280 million in long maturity foreign debt provided by the Asian Development Bank, FMO (Dutch development bank) and the US Export-Import Bank (US Ex-Im bank) won’t need to be paid back for up to 18 years – much longer than the 7-10 year maturities of local debt. It reduced financing risks and increased the internal rate of return of project equity by around 250 basis points (2.5%), helping the developer to implement the project at a very competitive tariff for CSP. While the foreign public debt has lower interest rates than local lenders, they did not lower the high costs of debt because of the cost of hedging currency risks. However, they did improve the project economics through the longer maturity of debt.
• After the public sector PPA reduced the revenue risks and foreign public debt the financing risks, the private sector was able to manage the remaining risks, but not always at low costs. We find that the amount of risk taken by the private sector (developer and technology supplier) in this case is much higher than standard practice for similar projects in other countries. The project developer Reliance Power covered development and non-hedgeable foreign exchange risks, while the technology provider Areva offered comprehensive warranties. These and other companies involved in projects under the NSM took on technology and foreign exchange risks among others, partly in order to establish themselves in a highly promising CSP market.
While Indian national CSP policy resulted in low costs for the government, it has not deployed CSP at the planned scale and time horizon
In analyzing the broader aims of Indian national CSP policy, we find that, among the projects awarded, only those few with financially strong developers that were able to source public investment are on track to be completed. As a result we find that Indian CSP policy did not deliver fully on its objectives for installing CSP capacity, creating jobs, and increasing learning on CSP technology:
• The Government of India awarded a subsidized PPA through a reverse auctioning system. Strong competition among project developers resulted in several bids submitted at prices much lower than the initial reference tariff and also lower than most CSP tariffs worldwide. Thus, the program met one important objective by delivering CSP power at lower costs for the government. The average tariff resulting from the auction process is 25% lower than the reference CSP tariff for the phase one of the NSM and also lower than tariffs in other major CSP markets such as Spain and South Africa.
• Project delays, possible cancellations, and difficulties in sourcing technologies and financing indicate that the subsidized tariff alone was not sufficient to deploy CSP at the desired scale. There were several reasons for the delays: the low quality of the solar resource data made available before the closing of the auction resulted in winning bidders overestimating potential plants’ performance and returns. Additionally, the novelty of CSP within the country may have – in combination with the tight timeline for placing bids – led project developers to underestimate some of the costs and risks of CSP, particularly the sourcing of technology abroad and the establishment of a local supply chain. Lower-than-expected solar resource and higher costs, in turn, reduced margins so far that some winning bidders that have faced major financial and technological issues are now unlikely to build their plants. In fact, the case of CSP in India may be an example of the ‘winner’s curse’ phenomenon under auctioning schemes. This ‘winner’s curse’ can partly explain the very low bids, but strategic first-mover behavior might have also been a reason for the low bids.
• The only winning bidders able to build CSP plants at the low tariffs that resulted from the competitive bidding process were those that were financially strong and able to source public debt. The three (nearly) completed out of the seven CSP projects under the NSM (Godawari, Megha, and Rajasthan Sun Technique) are all backed by financially strong parent companies able to strategically invest in high risk projects with relatively low margins. These projects also all managed to source debt with relatively long tenors from public-owned banks, thereby improving their projects’ economics.
• Implemented projects enabled learning on CSP, establishment of local supply chains and investment in basic infrastructure. This led to local benefits, such as job creation, and may reduce CSP technology costs both in India and abroad. In the case of the Rajasthan Sun Technique plant, both the technology provider and the local developer have learnt substantially from building their first CSP plant of this scale. The project developer also made longer term investments. The local content of the project’s investment value is estimated at 61-71% and included the establishment of a local supply chain, and the construction of water and electricity infrastructure. These investments created hundreds of local jobs many of which were high-paying, and should enable future plants to be built more quickly and cheaply. However, these learning and cost reductions benefits would have been higher had the original plan of 500 MW CSP power installed by mid-2013 been achieved. Now only 150-200 MW are projected to be completed by mid-2014.
Many elements of this project could be replicated and scaled up in India and elsewhere, but there is substantial room for improving the policy design and mobilizing local finance
Our findings suggest that this project offers valuable lessons to policymakers, international donors, and development finance institutions looking to scale up CSP in India and abroad. They are:
• If a reverse auctioning scheme is used in India for future CSP programs, the design could be substantially improved. Given that this program led to some project implementation and that reverse auctions have been used successfully for CSP in other countries, we see no evidence to indicate that a reverse auction scheme for CSP could not be successful in India. However, improvements in the auctioning scheme can substantially increase the likelihood of project implementation. Our conversations with stakeholders identify potential improvements including stricter qualification requirements for bidders, setting out more realistic timelines for bidding, making better solar irradiation data available, and allowing sufficient time for construction and then enforcing penalties more strongly for delayed projects. Furthermore, in order to promote learning and future cost reductions in energy storage – a key advantage of CSP over other renewable energy technologies – future bidding rounds may need to provide incentives or separate windows for plants using energy storage. Incentives for storage are planned under phase two of the NSM.
• The Rajasthan Sun Technique financing model combines debt from foreign public institutions with local private investment. This model could be replicated for other innovative projects, but, for scaling up CSP in India, more local financing has to be secured. International debt providers limit their exposure to specific sectors and countries, so local banks are needed for scaling up. More local debt financing could theoretically become available after local finance institutions become acquainted with the technology. However, policy makers have to address financing issues specific to the Indian context, such as short tenors and high costs of debt, which could be addressed with low-cost public loans. As long as foreign debt remains important for CSP in India, partial denomination of tariffs in foreign currency would reduce exchange rate risks.
International donors and development banks can accelerate national efforts to scale up CSP technology and reduce its costs by mobilizing local private investment, supporting the design of relevant policies, and covering part of the subsidies. Credit enhancement and building capacity at local banks would help them to increase financing to CSP. International expertise may improve the design of reverse auctioning schemes while the provision of financing with long tenors or at subsidized terms makes it more likely that CSP project developers can bid low and still implement their projects, thereby minimizing the cost to the public.