corporate renewable energy procurement - why and how

CORPORATE RENEWABLE ENERGY (RE)PROCUREMENT:WHY & HOW?

Perspectives and experiences from WRI and corporate leaders about renewable energy procurement in IndiaASHOK THANIKONDA, DEEPAK KRISHNAN

Bangalore

ContentsPart A: The theory of RE procurement1. Drivers: Why buy Renewable Energy?2. Targets: How much to buy?3. Business model: Which business model to choose? What are the costs involved in each model?4. Tendering: How to prepare tenders and receive bids?5. Due diligence: How to mitigate the transaction risks?6. Negotiations: How to get the maximum value for your money?7. Contract signing: How to close the deal?8. Communications: How to communicate with your stakeholders about your leadership in

sustainability?

Part B: Experience of corporate leaders9. Cognizant’s experience with wind energy procurement10. Coca Cola’s rooftop solar power procurement

Part C: Annexure – List of permits/ clearances needed for RE projects

Part A: The theory of RE procurementDrivers Targets Business

model Tendering Due diligence Negotiations Contract

signing Communications

Business case Regulatory compliance Sustainability commitments

Diesel power

₹ 14

₹ 30

Grid power

₹ 5.85

₹ 8.5

Solar power

₹ 6.5

₹ 7.5

Wind power

₹ 5.5

₹ 6.5

Cost per kWh of electricity from various sources in India,

2015

4.3 %

2.5 %

3.5 %

4.5 %

6.09 %

4.46 %

6.56 %

4.76 %

% average annual increase in electricity tariffs (FY11-15)

TANGEDCO BESCOM

• Fossil fuel-based electricity prices are rising sharply and continuously

• Power deficit is a critical business risk

• RE is already cheaper or competitive with grid power and supplements/ augments it




• Renewable Purchase Obligations (RPOs) mandate businesses that procure power from third parties to procure a share of such energy from renewable energy sources

• 21 Indian states have notified RPOs

• Obligated buyers can procure Renewable Energy Certificates (RECs) in the absence of RE to fulfil their RPO compliance.

• Enforcement of penalties for RPO non-compliance is slowly becoming the norm Karnataka

(> 5MVa)Tamil Nadu(> 1 MVa)

0.05

0.0025

Renewable Purchase Obligations(2015-16)

Non-solar RPO Solar RPO

Specifics under

deliberation


http://www.iexindia.com/Uploads/NewsUpdate/18_05_2015Final%20Order_Hindustan%20Zinc%20v%20RERC%20(2).pdf

http://www.wri.org/blog/2015/06/india%E2%80%99s-supreme-court-reinforces-renewable-energy-targets-industry

http://reconnectenergy.com/blog/2015/09/oerc-order-on-rpo-compliance/




• Consumers increasingly prefer products/ services of companies that adhere to the principles of sustainability and operate accordingly

• Reducing Green House Gas (GHG) emissions by shifting to renewable energy is proven to be an effective way of reducing impacts on the environment. Forums like the India GHG Program help businesses plan such strategies.

• Corporates are increasingly aware of this and consider it as one of the elements of their CSR strategy. They also include this as part of their brand positioning by communicating to their consumers about their leadership in sustainability


http://www.nielsen.com/us/en/insights/news/2015/sustainable-selections-how-socially-responsible-companies-are-turning-a-profit.html

http://indiaghgp.org/




• RPOs usually help buyers by serving as the first benchmark for RE purchase ambition

• In the absence of RPOs, internal sustainability targets based on realistic assessments can define the quantum of purchase

• Depending on the location and the tariff design, buyers usually stand to benefit to minimise their grid power consumption during a certain time block. This, in addition to the need to optimise diesel and grid power, can also impact the quantum of renewable energy procurement

• Typically the base load on non-working days acts as reference to decide on the quantum of renewable energy purchase




Commercial buyers

Industrial buyers

Surplus capital

No surplus capital

Capital investment

Power Purchase

Agreement(Savings right

away)

Capital investment

Power Purchase

Agreement(Initial hedging

& savings later)

1) Capital investment (Captive plant/ Capex business model)

• Buyer invests the equity and/ or raises the debt. An EPC (Engineering, Procurement and Design) seller installs the plant as per buyer’s requirements.

• Buyer is eligible for the Accelerated Depreciation (AD) Tax benefit (100% of the plant value written off as cost in first 2 years)

• Buyer needs to pay the Grid usage charges* (Wheeling, banking, scheduling etc.) to the utility in case of a grid connected plant. Cross Subsidy Surcharges (CSS) are not applicable.

2) Power Purchase Agreement (PPA/ Opex business model)

• An IPP (Independent Power Producer) developer installs and owns the plant as per buyer’s requirements.

• IPP is eligible for the AD Tax benefit.• Buyer only pays a mutually agreed tariff for the electricity during a fixed tenure to the IPP.

This will also include CSS and Grid usage charges* (Wheeling, banking etc.) in case of a grid connected plant.

*Grid usage charges are not applicable in case of rooftop-solar projects and on-site renewable energy projects; that are connected behind the

utility meter of the buyer.

Basics In-depth




Corporate buyer

DISCOMs

Captive (Self) consumption

Third Party Sellers

Within State

Outside State

Preferential green tariff

Normal grid usage/ Open Access charges as per CERC

Concessional grid usage/ Open Access charges

Normal grid usage/ Open Access charges as per SERC

Yes

Yes

Yes

Procurement of Renewable Energy

through the grid

Buy from the utilities

(if such option is available*)

Set up (own) the plant

themselves

Power Purchase Agreement

(PPA) with third party sellers

Source Charges applicable*

Within State

Project Location

Ownership of Renewable Energy Certificates (RECs)

Within State

Outside State

Mutually agreed tariff + Normal grid usage/ Open Access charges as per CERC + Cross Subsidy Surcharge (CSS)

Mutually agreed tariff + Concessional grid usage/ Open Access charges + Cross Subsidy Surcharge (CSS)

Mutually agreed tariff + Normal grid usage/ Open Access charges as per SERC + Cross Subsidy Surcharge (CSS)

Yes (With buyer/ seller based

on contract structure)



* Grid usage charges (wheeling, banking, scheduling) are not

applicable in case of rooftop-solar projects and on-site renewable energy

projects, that are connected behind the utility meter.

Basics In-depth




DISCOMs


Third Party Sellers

Within State

Outside State

Can be availed by the HT Industrial and HT Commercial buyers after paying ` 0.5 / kWh over and above their current utility tariff

“0” inter-state transmission charges & losses. Other charges as per CERC guidelines. Zero CSS

“0” wheeling, banking and CSS for 1st 10 years of projects commissioned before 31st March 2018

3.79% HT wheeling & 8.49% LT wheeling charges. 2% banking charges. Zero CSS Yes

Yes

Source Grid usage charges applicable: Solar

Within State

Project Location


Within State

Outside State

“0” inter-state transmission charges & losses. Other charges as per CERC guidelines

“0” wheeling & banking for 1st 10 yrs of projects commissioned before 31/03/18. CSS `/ kWh 0.63-

0.98 (Industrial) 0.94-1.94 (Commercial)

3.79% HT wheeling & 8.49% LT wheeling charges. 2% banking charges. CSS `/ kWh 0.63-0.98

(Industrial) 0.94-1.94 (Commercial)





Yes

As per CERC guidelines. Zero CSS

5 % wheeling charges , 2% banking charges for 1st 10 years of projects commissioned before 31st March

2018. Zero CSS

3.79% HT wheeling & 8.49% LT wheeling charges. 2% banking charges. Zero CSS

As per CERC guidelines

5 % wheeling & 2% banking charges for 1st 10 yrs of projects online before 31/03/18. CSS `/ kWh 0.63-

0.98 (Industrial), 0.94-1.94 (Commercial)



Grid usage charges applicable: Wind

Basics In-depth: Karnataka

Part A: The theory of RE procurement

DISCOMs


Third Party Sellers

Within State

Outside State

-

“0” inter-state transmission charges & losses. Other charges as per CERC guidelines. Zero CSS

30 % of [18.87 paise/ kWh wheeling charges]. Zero CSS

40 % of [18.87 paise/ kWh wheeling charges , 2% banking charges]. Zero CSS Yes

Yes

Source Grid usage charges applicable: Solar

Within State

Project Location


Within State

Outside State

“0” inter-state transmission charges & losses. Other charges as per CERC guidelines

30 % of [18.87 paise/ kWh wheeling charges , 2% banking charges]. 100% of [CSS `/ kWh 3.25-3.51

(Industrial) 4.98-5.23 (Commercial)]







Yes

As per CERC guidelines. Zero CSS

30 % of [18.87 paise/ kWh wheeling charges]. Zero CSS

40 % of [18.87 paise/ kWh wheeling charges , 2% banking charges]. Zero CSS

As per CERC guidelines





Grid usage charges applicable: Wind

Drivers Targets Business model Tendering Due

diligence Negotiations Contract signing Communications

Basics In-depth: Tamil Nadu




• Refer to other renewable energy procurement tenders for preliminary understanding

• Employ internal technical, procurement and legal teams to prepare tender documents based upon your requirements

• Hire external consultants if needed




• Ensure that the eligibility criteria for sellers to participate in your procurement are reflective of the minimum capabilities needed to serve your demand

• Check the standing of the sellers against verified ranking systems: CRISIL ratings, MNRE empanelment etc.

• Compare the product technical sheets against the prescribed standards

• Ensure that the seller signs performance guarantee clauses that are backed by suitable bank deposits

• Dedicate qualified personnel and other resources to ensure highly scrutinised contractual terms




• Undertake market research to assess the price points

• Negotiate with as many credible sellers as possible to discover a competitive price point

• Engage technical, financial, legal and procurement teams during negotiations

• Levellised Cost Of Energy (LCOE) is calculated by dividing the Net Present Value (NPV) of all the future payments incurred by the buyer, by the total lifetime units (kWh) generated by the RE plant. LCOE is a useful metric to compare bids with various combinations of upfront/ buyout payments and annual tariffs (escalating/ flat)




• Crosscheck with all the teams internally before signing the contract

• Ensure tight deadlines about the project completion and force majeure clauses are embedded in the contract

• Sign the contract with the developer that meets your technical, financial and other parameters




• Design a communications and outreach strategy about your renewable energy procurement

• Engage your stakeholders through annual reports, press releases and social media etc.

• Engage with platforms like the India GHG Program to measure your sustainability performance and communicate it with your peers and all other stakeholders

http://indiaghgp.org/

Part B: Corporate experienceWind Energy - Cognizant (Rooftop) Solar power - Coca Cola

Energy securityHedging against the rising coal (grid) and diesel prices Sustainability targets

Renewable Energy procurement offered the company an effective strategy to meet its internal sustainability targets.

Reliance on diesel generators because of the power deficit in the state of Tamil Nadu was a big operational and business risk. Wind energy offered energy security.

Grid prices were on the rise constantly. Diesel prices increased by 36% between 2012 and 2013 alone.

Drivers Business model Risks perceived Procurement

Part B: Corporate experience

Policy framework Changes in corporate charter

Renewable Energy Certificates (RECs)

The investment was made with an exit clause after 5 years. Renewable Energy Certificates (RECs) were purchased separately by the buyer.

The state’s policies favored group captive business model in which companies can co-invest in a single wind farm and consume at least 51% of power generated. Cognizant invested equity in 4 MW wind plant, with an exit planned in 5 years to procure power for all its facilities across Tamil Nadu.

Cognizant’s corporate charter already had clauses that permitted its investment in power generation.


Wind Energy - Cognizant (Rooftop) Solar power - Coca Cola


Demand quantification Optimising Diesel consumption Capital gains tax

At the end of 5 years, Cognizant planned to exit with its investment from the project. Internal financial teams were concerned about paying capital gains tax on the potential rise of book value of the wind plant.

To maximise the savings from wind procurement Cognizant had to optimise the consumption from the grid at various blocks of time.

Similarly diesel based power consumption had to be optimised to maximise the benefits of wind power. This has proven to be difficult given the unpredictable nature of wind power generation.


For most of these risks Cognizant’s counter strategy was to learn by doing. In addition to recruiting an external consultant, the team attended conferences and workshops to understand the relevant policies. The team arranged in-house training programs, whenever required, for the facilities and electrical teams.

Learning by doing: A business strategy



After signing the contract, there were immediate savings

During peak wind season, the wind mills were disconnected from the grid because of the grid instability. Biomass power was sourced during this time to balance the shortfall.




Sustainability targets

Renewable Energy procurement helped the company meet its internal sustainability targets.


Hedging against the rising coal (grid) and diesel prices

Grid prices were on the rise constantly. They increased by 22% between 2009 and 2013 for industrial consumers in Karnataka.

Energy security

Availability of a large roof that can support 1 MW posed an opportunity to offset expensive diesel and provide reliable supply.



Stakeholder sign-offs for investments in non-core

businesses

Tenure and pricing of third party power purchase contracts

Policy changes and reevaluation of strategy

The potential increase in cost due to an import tax on solar panels led to a strategic preference in capital investment mode.

Capital investment decisions, especially beyond a certain quantum, have to be cleared by the headquarters.

Typical tenure of third party solar power purchase contracts is 7-10 years. Buyer wanted to sign a contract only for 5 years and exit easily. Rooftop solar at ` 7.5/ kWh in a third-party purchase contract was attractive to the seller.




Perforation of roof

Buyer’s biggest concern was perforation of the metal sheet roofs during solar plant installation, which could lead to leakage onto their process line. So they have only chosen sellers who offer non-perforated solutions alone.




Negotiations underway

Buyer is currently making capital investments in rooftop solar for its facility in western India as a pilot before scaling up across the country. In addition, buyer has devised a comprehensive country level solar power procurement strategy. All the green field facilities of buyer will now source at least 25% of their power requirements from on-site solar plants.



Solar - Karnataka

1. Registration with KREDL for setting up solar power plant under IPP/ Captive/ REC mechanism:a) Download the application from KREDL websiteb) The generator has to submit the application to KREDL with all the

documents such as:i. Cover letter for the applicationii. Application form along with 2 sets of PFRiii. Net worth certificate – Certified by CA (as per the Govt. order)iv. Land documents (Sale deed or lease document to show the

availability of land with the generator)v. After the scrutiny will ask the generator to deposit the prescribed

fees from time to timevi. Timeline for approval will depend on the next committee meeting

Part C: Annexure – List of permits/ clearances

2. Land clearances under Section 109 of the Karnataka Land Reform Act

a) If the company has identified a suitable Agricultural land, the company needs to apply to the Govt. through the respective District Collector for purchasing the Agricultural land.

b) The company needs to deposit the prescribed fees for conversion (from Agricultural to Non-agricultural) and then start construction of the project. This is called deemed conversion.

3. Obtaining Power Evacuation Permission

a) Application to KPTCL / ESCOM (Depending on voltage levels)b) Power evacuation planc) Single Line Diagramd) Details about Conductor, Line, GSS etc.e) KPTCL/ ESCOM will approve the Evacuation planf) KPTCL/ ESCOM will ask to deposit the prescribed feesg) Bay allotment will be done by KPTCL/ ESCOM if availableh) Equipment approval, foundation etc. – KPTCL/ ESCOMi) Survey, Estimation – KPTCL/ ESCOMj) CEIG Drawing Approval – CEIGk) SCDA Approval – SCDA, KPTCLl) TAQC Inspection and Dispatch Approval – KPTCL/ ESCOMm) CEIG Commissioning Approval – CEIGn) RT and MRT Pre Commissioning approval – RT Departmento) PTCC Approval – BSNL (PTCC Cell – 11 kV, 33 kV –

Bangalore, Double circuit – Chennai)p) Interconnection Approval KPTCLq) Project Commissioning KPTCL and ESCOM

ABOUT WRI INDIA

WRI India is a research organization that turns big ideas into action at the nexus of environment, economic opportunity and human well-being. www.WRI.org

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes.

CII - Sohrabji Godrej Green Business Centre (CII Godrej GBC) is one of the 10 Centres of Excellence of CII which offers advisory services to the industry in the areas of Green buildings, Renewable Energy, Energy Efficiency, Water Management, Environmental Management, Green Business Incubation and Climate Change activities. www.CII.in

ABOUT CII

ABOUT THE AUTHORS

Ashok Kumar Thanikonda is a Senior Project Associate in the Climate and Energy Program at WRI India. He has expertise in renewable energy policies and business models. His work in the Green Power Market Development Group, India initiative involves helping corporate businesses increase the share of renewable energy in their energy mix. Ashok holds a Master’s in Natural Resources Management from TERI University in New Delhi. Contact: [email protected]

Deepak Sriram Krishnan is the Manager of the Green Power Market Development Group, India initiative. His work involves interacting with businesses, regulators, renewable energy developers and financers to scale up private investment in renewable energy. He is a certified Energy Risk Professional and has worked across the value chain on projects in mining, generation, transmission, distribution and renewable energy. Deepak is an electrical engineering graduate and hold a master’s degree in electric power systems from the Indian Institute of Technology, Delhi.Contact: [email protected]

ASHOK THANIKONDA, DEEPAK KRISHNANBangalore

Produced with support from

• The views and analyses represented in this document do not necessarily reflect that of Shakti Sustainable Energy Foundation. The Foundation accepts no liability for the content of this document, or for the consequences of any actions taken on the basis of the information provided.

• This material is based upon work supported by the Department of Energy under Award Number DE-EE0006096. This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States Government or any agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States Government or any agency thereof.

• This handout is meant for reference only. WRI or CII are not responsible for the outcomes of decisions based on this guide. Prospective RE buyers are advised to do their due-diligence to arrive at the final decisions. Please send your feedback to [email protected] or [email protected]

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