1. What are the key characteristics that qualify this project as project finance? The Indian power sector has seen significant investments in recent years; however, there still remain approximately 400 million people in the country without electricity, representing close to 35 percent of the country’s population. The overall energy shortage in the country is immense; power supplies are estimated to be at about 10.3 percent of what the Indian economy needs, with the peak shortage being as high as 12.7 percent. These shortages have led to the emergence of the power sector as a critical bottleneck for economic growth and poverty alleviation efforts in the country.

As a result, the government of India is actively seeking to address these shortages and is also striving to achieve a good balance in its energy mix between conventional and renewable energy sources in order to mitigate the adverse impacts of climate change. Against this backdrop, the Indian government has provided the impetus for the growth of renewable energy sources (RES). Traditionally, the RES capacity addition has largely been driven by wind, biomass, and small hydroelectricity projects.

Solar power, though technically feasible for a long time, has not seen much growth because of very high capital costs and lower efficiency. Recently, however, solar power has enjoyed renewed attention due to decreasing costs, increasing conventional fuel prices, and heightened concern about climate change.

In 2008, the prime minister launched the National Solar Mission, which envisions 20,000MW of power generation from solar energy by the end of 2017. This is part of a broader plan to ensure that 5 percent of the energy requirements of the country will be met from renewable sources. In accordance with this policy, many Indian states have specified a set percentage of the total electricity purchases by state electricity boards to be made from renewable sources, ranging from 1 percent to 10 percent over the next few years. Regulators have also determined preferential minimum tariff levels for procurement of energy from such sources. Such tariff floors have been set separately for individual renewable sources on a normative cost-plus basis against benchmarked capital, fuel, interest rate, and operation and maintenance costs. The tariff has been determined primarily by targeting a minimum return on equity of 15 percent.