In order to raise the necessary funding many debt sources such as domestic and foreign commercial banks, infrastructure bonds and foreign development agencies will need to be tapped into, Oskar Von Maltzan, Director, KfW, informs R Srinivasan.The Director spoke about the massive investments needed for the Indian power sector in the next eight years, the difference between funding for coal-based and renewable sectors and the bankability of documentation that developers need to submit to secure financing in solar. Excerpts of the interview:The Indian power sector will require an investment of about Rs 12,50,000 crore in the next 8 years of its growth. So where will this investment come from?India requires considerable investment in the power sector and from different sources to fuel and sustain its high economic growth rates. In order to raise the necessary funding many debt sources such as domestic and foreign commercial banks, financial institutions, infrastructure bonds, and foreign development agencies such as KfW and the ADB would need to be tapped into. However, to improve the comfort level of potential investors, it is imperative that appropriate measures are taken to address and speed up issues such as land acquisition, fuel linkages, environmental clearance, and financial health of distribution companies etc., which the sector is currently grappling with.In view of power market dynamics, what is the difference between funding for the coal-based and renewable sectors?Funding for coal power projects is leveraged by the long track record of the sector and established market players. As a result, returns are relatively predictable. Insurance and pension funds could be considered as suitable investors owing to the better matching of asset and liability tenors. However, due to limits on sector exposure, only a certain percentage of insurance and pension fund portfolios can be allocated to the energy sector.The renewable sector was until recently viewed worldwide as a peripheral activity in the power market. Germany was a pioneer in mainstreaming renewable-based power generation through targeted incentives and well-designed national plans for the development of small and large-scale grid-connected renewable power plants. Such incentive programmes for renewable energy are designed to create success stories, thereby improving bankability and creating a “pull” effect for capital and, as a result, bringing down energy costs through economies of scale in the industry. Yet, for the success of renewable energies in India it will be crucial that the Indian government remains supportive and that financiers regard this policy support as credible in the long term.The Indian equity and debt market cannot finance the huge requirements of the power segment. So should foreign direct investments (FDIs) be incentivised to meet the huge investment requirements?Well, there are already incentives in place. In India, FDI of 100 per cent is currently permissible for projects relating to power generation, transmission and distribution (except nuclear power) with no ceiling on project size. The existing policies of a five-year tax holiday, import duty concessions and tradability of power, among others, are significant incentives for FDI in the energy sector, although this is taken up mostly in power generation only. Additionally, in the renewable energy sector, Exim banks such as KfW’s IPEX have become more active in offering financial packages for foreign investors.Since questions persist around the bankability of documentation that developers need to submit to secure financing in solar, what should be done for the same?Key bankability issues relate to the experience of project developers and the availability of equity. Banks often do not have sufficient experience to verify the projected electricity yield, the status of permits or the nature of performance data. These bankability issues are under active review and multiple stakeholders are making a concerted effort to address them. These include, for instance the mapping of solar radiation in 50 solar energy ‘hot-spots’ of India. With the mandate of the MNRE, a country-wide solar and meteorological mapping effort is being implemented by India’s Centre for Wind Energy and Technology (C-WET) in technical collaboration with Germany’s Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH. On completion, this effort will mitigate the uncertainty arising from using extrapolated data in plant technical design and bring down risk premiums.Furthermore, as per the GoI’s policy paper on the Climate Investment Plan, risk-sharing facilities are being planned for commercial banks to bring down the cost of financing solar projects.Lastly, unlocking economies of scale through large-scale projects such as solar parks is underway. The scale achieved through this route will bring down costs for the whole industry and significantly. On behalf of the German government, KfW has for instance recently signed a loan agreement amounting to 250 million Euros with the Indian government that will enable Mahagenco to set up a 125-MW solar PV power plant in Maharashtra with the option for a further expansion by 25 MW. This solar power plant, by the way, would be the largest of its kind in Asia. And the relevant stakeholders will gather from this project, we believe, that large-scale use of solar energy is feasible in the Indian context.KfW plans to lend Euros 800 million in 2011-12 to finance various renewable energy projects in India. It has provided funds to North Eastern Electric Power Corporation (NEEPCO) and NTPC for hydro and solar-based projects, and provided Euros 200 million to IREDA. What is the status of these initiatives?We have extended a loan to finance the Pare hydro-electrical power project of NEEPCO for which construction is underway and disbursements have already commenced. NTPC, our long-standing partner, is currently preparing the construction of a 15 MW solar-thermal power plant in Anta in Rajasthan. Construction for this is due to start in 2012 and will be supported by a financing facility from us. A number of projects have been approved by KfW and IREDA, the pivotal agency for funding renewables in India and a key partner for KfW. In March 2011 we signed a credit line worth 200 million Euros to support IREDA, in financing innovative and new renewable energy technologies. These include solar and small hydro systems up to 25 MW and co-generation in the sugar industry. The three initiatives mentioned by you are only but a few, KfW will continue to strengthen and widen its support to India’s renewable sector over the years.About KfWTo promote development of renewable energy (RE) in India, Germany’s Development Bank, KfW, acting on behalf of the German Government, signed a loan agreement with the Indian Renewable Energy Development Agency (IREDA). The loan, which is its fourth line of credit to IREDA, seeks to promote innovative renewable energy business models, involving either new technologies, financing mechanisms or institutional arrangements, across a variety of RE sources – solar (both PV and thermal), wind, biomass and cogeneration, and small hydro. The agreement forms part of the financial cooperation between India and Germany. Since the 1950s, it has sanctioned over 9 billion Euros. It is one of the largest banks in Germany and about 14 energy projects with its loan commitments of over 1.5 billion Euros are in various stages of execution in India.
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