U.S.-India Clean Energy Investment
SCCCL’s Clean Energy Investment-India project took place from 2010 through 2012. The purpose of the project was to facilitate U.S. investments in clean energy projects in India, an estimated $1.1 trillion market. Toward this aim, the project developed contracts drafted in consultation with leading U.S. and Indian attorneys and experts. The Sujana Group generously provided financial support for this project.
Prepared in consultation with the project.
- Click to download the Credit Agreement in a PDF version that allows copying
- Click to View the Credit Agreement
The Clean Energy Investment US-India Project aims to enable U.S. investors and solar and other renewable energy equipment manufacturers to access the Indian market. So far, investment in this expanding market has been limited by high transaction costs. Funded by a generous grant by the Sujana Group and with the assistance of experienced lawyers, bankers and industrial corporations in both the U.S. and India, the Project prepared contract templates that can be used in order to better manage those transaction costs.
Investment in Indian clean energy projects can potentially earn high returns for U.S. investors, lower greenhouse gas emissions and decrease production costs for Indian companies. The burgeoning Indian energy market is estimated at $1.1 trillion by McKinsey, with an estimated potential of reducing 2.8-3.6 billion tonnes of GHG, if it can access the needed finance. Of the $1.1 trillion, it is believed that $333 billion are financially attractive projects, with “positive IRR ratings” (in banker parlance).
Investment Structure Proposed
- Quasi-Project Finance Model: The proposed model follows non-recourse finance, along the lines of standard project finance. Lenders will work with an Indian Corporate Sponsor and form a Project Special Purpose Vehicle (“Project SPV”), for financing the captive or independent power project.
- The Project SPV: The Lenders will finance the power project through the Project SPV. The Loan Agreement between the lenders and the Project SPV will govern the terms of the loan. This Project SPV will be owned by equity investors, including the Lenders, Corporate Sponsor and/or other private investors.
- Corporate Power Purchase Agreement (“Corporate PPA”): The Project SPV will rely on one or more Power Purchase Agreements between the Project SPV and the Corporate Sponsor in order to provide contractual assurances that the power produced by the project will be purchased by the Corporate Sponsor, thereby generating cash flow to repay the loan.
- Government Power Purchase Agreement (“Government PPA”): Some Corporate Sponsors may have already negotiated orders to supply power to the government. Some state governments have started executing agreements to buy certain amount of power from renewable energy sources at higher prices than applicable for purchase from coal sources. Such existing supply agreements with governments and demonstrable earnings may assist the financial viability of the project, subject to reviewing the legal terms in these Government PPAs.
- In addition to the Corporate PPA, it will be important for the Corporate Sponsor to demonstrate that the arrangements for a reliable engineering, procurement, construction contractor (to build the plant), operation and maintenance, grid connection (to the state electricity grids) etc. are in place. The grid connection will allow for a Plan B – the ability to sell to someone other than the Corporate Sponsor in case of excess supply or for any other reason and is hence, quite important from a lender’s risk perspective.
New Income Streams
- In addition to the income stream from the Corporate PPA, the Clean Energy Investment US-India Partnership Project will also enable the Lenders to include earnings from green income streams and tax allowances.
- Green Credits – Renewable and energy efficient plants in India can potentially register for and earn carbon credits under the United Nation Clean Development Mechanism (“UNCDM”) (created under the Kyoto Protocol). If for any reason the power project is not eligible to receive credits (by the UNCDM and related bodies), the project should still potentially earn credits under voluntary offset mechanisms or national regimes that the Indian Government has proposed. The Indian Government has proposed a Perform, Achieve, Trade (“PAT”) Scheme for installing more energy efficient technology, or Renewable Energy Certificates (“REC”) for renewable power plants.
- Moreover, the Indian Government also provides tax benefits for energy efficient and other green power plants, which could be utilized to finance the power project.
- Including multiple income streams and assets will reduce the lender’s risk and in turn, the Corporate Sponsor could benefit from better loan terms. Presently, we propose including these incomes as “Mandatory Prepayments”, whereby it is agreed that whenever income is realized from these sources, that income will automatically be paid to the Project SPV and applied against the loans made by the lenders (and not retained by the Corporate Sponsor).
Thus, the Project has drafted and made available for free download the suite of documents needed for a corporation to put up the power plant and obtain the loan necessary. The Credit Agreement is available from the links above, and additional documents are below.
Proposed Investment Structure
Prepared in consultation with the project.
Note on Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of India, 2002
Prepared by the Additional Solicitor General of India, Mohan Parasaran, for the project.