Energy Efficiency Business Models

On 11th September, I attended the USAID-India and BEE’s workshop on Capacity Building for Financing Energy Efficiency Projects in Mumbai.

The workshop did prove to be an eye-opener in terms of on-ground realities in India’s energy efficiency market.
Mr.Gaur, GM [EE], Small Industries Development Bank of India and Mr.Jaisingh Dhumal, Chief General Manager, ICICI Bank spoke on the kind of energy efficiency projects their banks had supported in India. These banks have a focused department and understanding of the energy efficiency concept and have managed to come up with innovative financial solutions to address the needs of the Indian market.

Not surprising because…

According to the World Bank Study, the estimated potential of energy efficiency in India is ~50 billion kWh, with investment potential of INR 140 billion.

Some of the more focused sectors within the Indian economy are:
1. Agriculture
2. Municipal Pumping
3. Commercial Buildings
4. Street Lightning
5. SMEs

This potential has given a boost to the Energy Services Market in India with the rise of:
1. Energy Service Companies [ESCO]
2. Energy Auditors
3. Equipment manufacturers
4. Engineering firms
5. Contract Energy Management Companies

Energy Services Agreement= ESA
Financing Agreement = FA

The Energy Service Business Models are:
1. Shared Savings— ESA between ESCO and host. ESCO finances project and receives share of actual measured cost savings.
FA is between ESCO and financial institution. ESCO finances project with equity and debt from financial institution. ESCO then pays from the % savings shared with host.

2. Guaranteed Savings — ESA is between ESCO and host. ESCO implements project and guarantees cost savings. Host pays ESCO. If savings are lower than guaranteed, ESCO pays the difference; if higher ESCO gets bonus
FA between financial institution and the host; equity from host and debt from financial institution. Host makes repayment plans from the energy savings guaranteed by ESCO.

3. Deemed Energy Savings—ESA between ESCO and host with a fixed price for services provided.
FA is signed between ESCO and financial institution. ESCO repairs loan from payments received from host for the energy management/services rendered.

4. Outsourced Energy Management —-also called Energy Supply Contracting. Agreement between ESCO and host under which ESCO takes over O&M of energy-using equipment in host facility. ESCO sells output to host at an agreed price.
ESCO is expected to invest in all equipment upgrades, repairs, etc to improve energy efficiency.
The ownership of the equipment typically remains with the host facility; however the recent times have seen ESCO assuming ownership.

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India InterSolar Awards 2014

The India InterSolar Awards are back!

The solar projects in India category pays tribute to outstanding projects or products that have been incorporated into a project realized in India.

Solar companies can apply between July 1 and September 12 in the following sub-categories:

1. Off-grid Solutions
Use of solar energy for off-grid electrification solutions with a special emphasis on increasing the quality of life and stimulation of productivity and education

2. Industrial and Commercial Use
Use of Photovoltaics and Solar Thermal Technologies for the industrial production process and the supply of buildings

3. Utility-Scale Projects
a. PV Power Plants (Commercial & Utility-Scale)
b. Solar Thermal Power Plants

The registration can be done here:
http://www.intersolarglobal.com/en/award/registration/registration-form.html?no_cache=1

A picture from InterSolar India Awards 2013:

InterSolar India Awards 2013

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Open Access for Solar Projects in Maharashtra

M/s Green Energy Association, a non-profit organization with its head office in Mumbai, focuses on development of renewable energy including solar energy.

They filed a Petition on 28 January, 2014 praying for directions against Maharashtra State Electricity Distribution Co. Ltd [MSEDCL] to comply with provisions of the Electricity Act, 2003 and MERC (Distribution Open Access) Regulations, 2005 and issue Open Access permissions to the members of the Petitioner pursuant to their respective applications.

Some of the pending open access projects include:

Open Access to Solar in Maharashtra BharatVasandani

The Petitioner, 36 members in the State of Maharashtra, had set up solar PV power plants within the state with the inclination to sell power to third parties for which PPAs were also signed. They then had sought Open Access permission from MSEDCL and filed requisite applications.

But these applications have been pending for more than 121 days, and more than 290 days in some cases; thereby creating a financial impact on the petitioners [solar power developers].

What has been further frustrating for the developers is that MSEDCL failed to inform the applicants within what time frame the said Open Access permissions would be issued or reasons for such inordinate delays.

In response, MSEDCL has pointed out that has submitted that it has always promoted Renewable Energy (RE) generation and does not have any objection/reservation for solar power generation. MSEDCL has been allowing Open Access permissions to consumers availing power supply from various other renewable sources such as Wind, Bagasse, Biomass, Small Hydro Generators and the same is in accordance with the directions of the Commission. The Commission has issued broad directives/guidelines in case of Open Access for these type of RE generators.

But due to absence of any guidelines regarding Open Access through solar generator, it is not clear whether to pass the benefits such as Energy Banking, Non reduction of Contract demand and Concessional cross subsidy surcharge to solar projects as is being done with other Renewable Energy Projects.

MAHARASHTRA ELECTRICITY REGULATORY COMMISSION’s Analysis:

After hearing the parties, the Commission analyzed following issues:

1. Open Access permission through solar generator as single source and
2. Open Access permission through more than one source

Issue No.1: Open Access permission through solar generator as single source:-

The Commission was of the opinion that Open Access is the right of the consumers and it is casted upon by the Electricity Act, 2003. The Electricity Act, 2003 has defined the Open Access as non discriminatory provisions for use of transmission lines or distribution system or associated facilities by any licensee or consumer or person engaged in generation.

The plain reading of Section 2(47) and Section 42 (2) of the Electricity Act, 2003 indicates that MSEDCL cannot discriminate amongst different RE sources. Energy is coming from whatever source, it is inject in the system as a Unit. The Commission observes that MSEDCL has allowed open access permission for sale of solar energy to BEST Utility (eight Nos. of generators has been also permitted Open Access permission for sale of solar energy to Utility (BEST),) for certain period. The Commission disagreed with MSEDCL submission that it delayed the Open Access permission on absence of guidelines/policy for Open Access through solar generator.

In view of above the Commission directed MSEDCL, on 6th May 2014, to allow the Open Access through solar generator as single source. The Commission also directed MSEDCL to continue the procedures followed for allowing Open Access permissions through RE generators during previous financial year.

Issue No.2: Open Access permission through more than one source:-

MSEDCL submitted that MERC (Distribution Open Access) Regulations, 2005 do not provide for wheeling of power under Open Access from more than one generating company/ source. MSEDCL submitted that there are operational and billing difficulties for allowing Open Access from more than one source.

The Commission, on 6th May 2014, observed that MSEDCL has denied Open Access permission for sourcing power from more than one source on the ground of operational and billing difficulties which cannot be ignored.

In view of above, the Commission said that in the present circumstances it is not appropriate to allow Open Access permission through more than one source without considering all relevant factors including operational and billing difficulties involved in it and framing it into proper Regulatory mechanism. The Commission is in the process of amendment of the existing MERC (Distribution Open Access) Regulations, 2005. The Commission shall endeavor to expedite the process of amendment of MERC (Distribution Open Access) Regulations, 2005 after incorporating the concerns raised by all stakeholders.

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Valuation of Solar Companies in India

Recently, Economic Times had an article “Solar power stocks see multi-fold jump on hopes from Narendra Modi govt” where the writer had shown that some of the solar stocks in India had returned good financial returns in the last one year.

The 3 month stock return as of 25th June 2014 was:
Swelect Energy–90.08
Ujaas Energy–171
Websol Energy–385
IndoSolar–275

This was after the elections 2014 and before the budget.
Companies with exposure to the solar power segment saw a bull-run since the beginning of this year, with stock prices jumping three-and-half times. They gained on expectation that the Modi government would implement the successful Gujarat solar-power model elsewhere, too.

I have used the comparable valuation method to see where the stocks stand today; and found that unfortunately the bull run in these stocks don’t have a substantial base.

All the above 4 companies are currently trading at an average of 65-70% of their 52 week high; as of 30th July 2014 prices.

WebSol Energy and IndoSolar both have negative net profit and EPS since the last 2 years. The positive side is that the losses have decreased in the FY 2013-14.

There is no clear trend on the industry EBITDA and Net Profit margins. Maybe I will need to add some more companies as we move along.

Similarly, the valuation metrics are also not very useful in terms of a trend.

P/EPS does not look very favorable to currently invest in solar stocks in India.

More details in the attached pdf file.Blog 31st July 2014- Indian Solar Companies

Please increase the view size in pdf file to see the nos clearly

Please note that the financial nos are from moneycontrol.com and currently I have not adjusted for “off-the normal revenue/expenses”.

 

 

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Discoms not buying high cost power

In continuation to the previous blog where we discuss the increase in subsidy for discoms and the increase in power tariff due to increase in freight costs, cess & customs duty; we now look at another aspect of discoms’ working pattern.

Coal prices have recently slumped to their 10 year low but power plants in India are not importing coal. This is despite coal shortage being faced by most power plants in India. The reason being that discoms are not willing to pay for costly power fuelled by imports.

According to Economic Times, the prices of 4,200 kcal/kg thermal coal in international markets are now around $36.50 per million tonne as against $52 per million tonne two years ago.

But this decrease in price has encouraged Indian power producers to import coal.

In 2013, the government allowed power producers to recover cost of imported coal from consumers but most state utilities are against buying expensive power. But this is not happening on the ground.

Recently, Power and coal minister Piyush Goyal told Lok Sabha that of the 54 million tonnes coal expected to be imported, power firms imported only 17 million tonnes.

So on one hand the discoms are utilising state money to stay afloat and increasing tariff upto an extent to pay for the new duties/taxes levied by the government but unable to buy expensive power because they are not able to pass the higher tariff to the consumers for reasons [political and inefficiency] pretty well known.

Unless and Until, Discoms are made to work like a company which is responsible for its profit & loss with no political interference; we may not be able to see sustainable discoms inspite of the financial restructuring.

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India to brace for electricity price hike and more subsidy to Discoms

Two little coincidences from the sector:

1. Power tariffs are expected to rise across the country to reflect the increase in fuel cost due to higher railway freight, doubling of clean energy cess and rise in customs duty on coal

2. The subsidy burden for distribution utilities of 16 states is estimated at Rs 72,000 crore, 17% higher than the previous financial year, due to higher costs and cheaper tariff for the farm sector.

With the increase in railway freight in the recent budget, the coal transportation prices [approximate impact of 2-3 paise per kWh for places near coal centres and upto 8-10 paise per kWh for places far from coal centres] are also expected to increase. What has not helped is the doubling of clean energy cess and the rise in customs which are expected to add another 2-3 paise per kWh to the electricity prices.

At the same time, the subsidy to discoms to stay floating has also increased. Where prices should have been increased due to a unsustainable economic environment created by the government; tariff increases for 2014-15 have been very modest across the country. One of the reasons being the elections. Maybe the discoms will be more free to take steps next year.

Before the budget, the discoms were already in a financial mess due to lower selling price and higher purchasing costs. The recent increase in freight, customs duty and cess have further added to the challenges. No wonder the subsidy has seen an increase.

So the common man will need to brace themselves for price hike in electricity prices; for the discoms to survive. If the prices are not increased, the government will need to support the discoms through subsidy which again will come from taxes from the common man. So it is a two edged sword for us.

Every challenge brings an opportunity and this price hike will certainly give a boost to energy efficient appliances, solar and also I hope there will be a change in behavior pattern where people will be more aware of the importance of saving electricity as much as possible.

Maybe it is time the government does the same [increase prices] for water in India because it is time that the common Indian man understands the importance of power and water and shows respect to two things without which a society cannot live.

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Will Solar Rooftop model disrupt Utility model?

As the Indian State Governments encourage solar rooftop for captive and net-metering models; Utilities are trying to understand the kind of impact the rooftop model will have on their business.

 

As consumers themselves become power producers and adopt energy efficiency models to decrease their electricity consumption from the grid, what kind of business scenario will this create for utilities?

 

An interesting update from Australia; source: http://reneweconomy.com.au.

 

Queensland electricity network operator Energex has conceded that its century-old business model is under threat from the increased use of rooftop solar, and a growing interest among its 1.3 million consumers to produce and manage their own energy needs.

 

This was included in the company’s annual report of 2013.  The report noted that despite the huge population growth in south-east Queensland, demand from residential customers fell 3.8 per cent in 2012/13 from a year earlier. Over the past four years, Energex says residential demand has fallen 10.4 per cent in south-east Queensland, one of the areas with the highest penetration of rooftop solar in Australia. Energex cited rooftop solar PV as the main factor for this reduced demand, along with milder winters and summers, and the use of more energy-efficient appliances.

 

“The rapidly evolving energy industry, changing energy use patterns and rising electricity prices are resulting in a trend toward energy management options for customers,” the company says in its annual report. “As energy management options such as smart appliances, energy management software, in-home generation and battery storage become more available and affordable, we expect to see a significant change in the way customers use energy and our network.

“This will have wide-ranging implications for the way the distribution network is planned, built and operated, as well as for our ongoing business sustainability.”

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This is not only being experience in Queensland alone but other cities and countries bringing to life the “democratisation” of energy via solar PV and other forms of distributed energy.

 

Now utilities would have to develop a new business model, one modeled around solar and storage, rather than the traditional model of centralised generation.

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Journalist for OmniMedia India

OmniMedia India, publisher of Energetica India and EcoConstruction India, is looking for journalists with 3 months to 1 years of experience.

Journalists looking to make a career in B2B magazines are welcome to send in their resumes to bharat.vasandani@energetica-india.net

 

The profile includes:

1.Managing EcoConstruction and Energetica India websites

2. Signing media partnerships with event organizers

3. Coordinating for the editorial section of the magazine

4. Attending press conferences and events

 

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Government further boosts Cleantech Sector

India has suddenly received a boost to help further drive its cleantech sector with 2 recent announcements from the Government.

1. The first being the concept of 100 smart cities as envisaged in BJP’s poll manifesto. These cities are expected to use GIS (Geographic Information Systems)-based town planning, using the latest technology and infrastructure, integrated waste management and advanced transport system.

 

2. The second announcement was that India will implement code for energy saving, green buildings construction by 2017.

It may soon be mandatory for all state governments to implement by 2017 the minimum requirements for energy efficient design and construction set by the central government to meet the challenges of depleting resources, increased urbanisation and rapid construction.

 

I am sure this will encourage green buildings, solar rooftops, rain water harvesting, waste & water management, energy efficiency, smart meters, etc

 

Correct and Timely Implementation remains the Key.

After RPO and REC’s failure [I still don’t see this as a complete failure but yes it is currently a failure with obligated entities not keen to follow the rules]. I expect this concept to revive in the coming 2-3 yrs], it will be important for the government to show that they actually mean what they say.

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US’s interests in India’s Renewable Energy Industry

Recently there was a lunch discussion on India’s renewable energy growth, challenges and the outlook with American Consul General Mr. Peter Haas.  There were 5 power professionals invited for the meet:

1.Mr. Prasad Modak, Dean IL&FS Academy for Applied Development and Chief Sustainability Officer at IL&FS

2. Mr. Anish Rajgopal from Chemtrols Solar

3. Mr. Anand Pattani. Vice President and Regional Director, EMEIA, energy business, Black & Veatch

4. Mr. D Radhakrishna from Deeaar Group

and myself

 

The meet focused on our thoughts on India’ renewable energy drivers and the challenges, the major growth areas and the how more relationships can be forged between India and USA in this sector.

 

The discussion cemented the fact that USA considers India as an important future growing market for energy efficiency, renewable energy and cleantech.

 

Looking forward to more such interactions with industry professionals.

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