Following up on the success of the Gandhinagar project, the Government of Gujarat is supporting the proliferation of the model to other cities in the state. In this replication program, greater flexibility is being made available for developers and rooftop owners to transfer ownership of plants to rooftop owners, therefore moving toward the model used in developed markets. Government officials sought IFC’s assistance in structuring a 5 MW rooftop solar project in the city of Vadodara. Here, the developer is responsible for identifying all the rooftops, the large majority of which are privately owned, and included homes, commercial buildings, and industrial facilities.
IFC recommended a 25-year concession on a build, own, operate (BOO) model. Under the agreement, the selected developer would install solar panels on hundreds of rooftops throughout the city of Vadodara, to be identified and accessed by the developer, with an aggregate capacity of 5 MW. As per the terms of the concession, the rooftop owners would receive rental income from the developer to lease their previously unused rooftop space. The developers would connect these individual systems to the local grid and sell the power generated to the local distribution utility at a pre-determined electricity tariff (gross metering model) determined through competitive bid process. Total project cost is estimated at $8 million, all of which would be financed by the winning bidder.
The contract was awarded to WAA Solar Private Limited. The 25-year Power Purchase Agreement (PPA) for the project was signed on June 19, 2014 between the distribution utility, Madhya Gujarat Vij Company Limited, and Madhav Solar (Vadodara Rooftop) Private Limited, an SPV set up by the winning bidder.
Transaction challenges in Vadodara
The Vadodara project attracted $8 million in private investment and is expected to result in 9,000 people receiving increased access to power and a reduction of 6,000 tons of GHG emissions annually. During the implementation of the Vadodara project, the project team faced several challenges, both technical and institutional in nature. The Vadodara project was more challenging than the Gandhinagar PPP for the following reasons:
Access to pre-identified rooftops
A large majority of the rooftops in the Vadodara were “uncommitted”—unlike Gandhinagar, where the government committed to earmark government-owned rooftops with a rooftop solar PV installed capacity of 4 MW or 80 percent of the total project capacity. Rooftop availability and acquisition is the most critical risk in implementing a rooftop solar PV project. Given that a majority of the rooftops in the project were to be identified and leased by the developer, IFC provided several options to mitigate this risk.
IFC was able to source satellite images of rooftops across the city from a state-owned agency. This data was made available to potential investors to assess the availability of suitable rooftop space across the city and help them identify the most attractive sites prior to the bid process.
In order to provide more flexibility to investors, IFC recommended that rooftops outside city municipal limits also be included within the project scope to allow developers to choose from a larger set of potential rooftops and thus mitigate the risk of not securing suitable and adequate rooftop space within the city limits.
There was also a considerable push from the client to specify that a large percentage of the rooftop space identified by the developer should be on residential rooftops. Given the difficult nature of entering into a long-term rooftop lease agreement with private individuals, this would have resulted in practical difficulties of implementing a 25-year project. IFC was able to convince the client of the increased implementation risk this requirement would impose on the project and recommended changing this minimum requirement of residential rooftops to an acceptable level of 10 percent of overall project capacity. This allowed private operators greater flexibility in choosing rooftops across other consumer categories such as universities, schools, commercial complexes, offices, and industries.
The team also allowed the developer flexibility in the minimum required installed capacity by incorporating a buffer of +/- 20% on the nominal required capacity of 5 MW. The developer was free to install anything between a minimum of 4 and a maximum of 6 MW.
To address the difficulty of entering into long-term rooftop lease agreements with private entities, an option was provided to the rooftop owner to buy out the operator’s interest in the installation at a price to be determined on a negotiated basis.
Power off-taker risk
The power off-taker in Gandhinagar was a private distribution utility that had a reputation for excellent grid availability. Further, a “deemed generation” guarantee was included in the project agreements. This guaranteed minimum annual grid availability by the private utility for the life of the project, failing which penalties would have to be paid to the solar developer.
However, the distribution utility for the Vadodara project is a state-owned company that did not agree to provide any grid availability guarantee. IFC convinced the utility to share information regarding the uptime of the distribution grid. This was provided to developers to help them estimate loss in energy sale due to grid failure, and factor this risk into their bids.
Given the large majority of privately owned rooftops in the project, rooftop availability was a key risk. GPCL, the client, had provided assurance in facilitating access to private rooftops through a project website, and it also conducted public outreach programs to ensure buy-in and participation of rooftop owners in the project. This was critical to ensure private sector participation in the project.
To partially mitigate this risk, IFC provided the agency with support in raising awareness of the program, building capacity among various stakeholders (government bodies, developers, rooftop owners, communities), and reaching out to rooftop owners who could participate. This dissemination exercise was conducted through several media platforms with the help of a communication consultant. The team helped the client in the design of a website where relevant project-related information, requisite documentation (such as application forms) and contact information was uploaded for public consumption. The team also provided assistance in the form of press releases in local newspapers to generate public interest in the project.
Client commitment risk
The implementation of a rooftop solar PV project requires addressing the concerns and objectives of several stakeholders, such as the power off-taker (distribution utility), potential investors, state government, regulator, and rooftop owners. Sometimes, it requires that the team go beyond the terms of its engagement in providing comfort to the client by addressing issues unrelated to the project.
For example, during implementation of the Vadodara project, the client stated that this project would be implemented only when the Gandhinagar rooftop solar PV project, on which IFC had earlier advised GPCL, showed significant progress. IFC went beyond its stated role and worked with the selected developers and relevant government agencies in ensuring rapid implementation of the pilot project in Gandhinagar.
Upon selection of the winning bidder, the team also had to liaise extensively with the off-taker to address its concerns on certain regulatory aspects of the project that were not raised previously. The team was able to convince them to comply with regulatory aspects of the bid process and eventually ensured signing of the Power Purchase Agreement.
It would be prudent for other teams working on similar projects in other regions to be aware of these challenges and prepare for them adequately during project implementation.
Identifying and securing rooftop space
Identifying suitable rooftops in an emerging market where urbanization is chaotic can prove challenging. It must take into account factors such as shade from trees, adjoining buildings, and water tanks, in addition to the varying sizes, heights, rooftop use and ownership (residential, commercial, or public buildings) patterns. For large-scale distributed rooftop solar projects covering hundreds of roofs, various technical and location-specific issues have to be resolved before shortlisting rooftops.
The identification of rooftops can be undertaken through a combination of site visits and secondary sources such as satellite imagery. The table below highlights the broad approach that was adopted for the Gandhinagar project, which can be adopted in other cities.
Possible approaches to overall eligibility assessment
Financing is a major factor restricting development of the rooftop solar sector. The problem is twofold: the financial viability of the system is uncertain, and/or financing options are not available.
The first issue can be tackled through financial incentives targeted at the various segments of stakeholders, established to kick-start development of the sector, with a phasing out over time. These incentives need to be backed by appropriate policy and regulatory mechanisms to provide mid- to long-term certainty to developers, lenders, and third-party service providers.
The second problem, which is now prevalent in emerging markets, can be handled by establishing innovative financing products, and attracting the commercial lending sector by implementing pilot projects with large third-party developers. The penetration of solar rooftop projects can be expedited by establishing an enabling financial environment that addresses the requirements of financiers, developers, third-party service providers, and consumers.
Sustainability means regulation
Regulation is also a critical element of sustainability. Regulators can encourage proliferation of renewable energy sources with several non-financial incentives, which will socialize specific costs of rooftop solar projects on the distribution grid. These could be in the form of mandatory purchase by utilities and waiver of wheeling and banking charges. In India, the Electricity Act of 2003 requires state regulators to specify a percentage of power to be procured by utilities from renewable energy sources.
Following the launch of the Jawaharlal Nehru National Solar Mission, central and state regulators have carved out a sub-category for solar energy with a target of 3 percent by 2020. This includes the solar renewable purchase obligation (Solar RPO). Given that rooftop solar generation is generally more expensive than generation from ground-mounted solar projects, even with the provision of solar RPO, utilities may prefer ground-mounted projects. Distribution utilities will therefore follow permit regulations and connect solar systems to the grid, but will not exercise discretion outside parameters specified by regulations.
Parameter type capacity target incentives for rooftop owner metering
Andhra Pradesh, Tamil Nadu, Karnataka, and Uttarakhand have also drafted state-specific regulations and guidelines including enabling provisions that encourage the private sector to become further involved. Recently, the Forum of Regulators proposed a draft model regulation on net metering. It provides for a consumer or a third-party player to develop a rooftop solar project and sell the power generated to the rooftop owner without open access or wheeling charges.
With this, a conducive policy and regulatory framework is emerging and attracting more private players to the market. Many private developers, recognizing the opportunity to diversify into a profitable business, have increased their participation in rooftop solar projects. The Solar Energy Corporation of India has invited bids in three phases to develop rooftop solar projects across the country under gross metering or captive schemes. This is attracting new private sector players.
Other regulations for the development of rooftop solar projects in India have also launched recently, triggered by central and state government policies identifying specific targets for solar rooftop projects and provisioning incentives. These considerations are applicable to most developing countries.
This article is adapted from Partnerships IQ: Rooftop Solar Public-Private Partnerships in India.