My Funding Picks from Last Week (W01)

The first week of 2020 was understandably slow for deal announcements with Yourstory reporting a 73% drop in funding from last week. It was slim pickings for me to choose my funding picks, and I decided to choose just one.
Aeron Systems raised ₹2 crores from Bharat Forge
What does Aeron Systems do?
Copied from Traxcn: Aeron Systems focuses on the development of technology, applying its expertise in embedded electronics to domains encompassing aerospace, automotive, renewable energy, and agriculture. The company offers products in two technology segments, Inertial Sensors, and M2M devices. The IoT solutions include wireless data loggers, wireless data gateway, vehicle health monitoring systems, and a wireless weather monitoring system.
Why do I like Aeron?
Artha manages 5 renewable energy projects, and for a long time, I had an analyst to log weather data sourced from weather.com with each daily generation report. We would find trends that gave us a good idea of the next day’s generation. However, the weather.com data wasn’t accurate as it did not capture the weather at the project location but from their closest available weather station.
Therefore and in all honesty, it was their Weather Monitoring Station for Solar Power Plants that lured me into learning more about the company. I asked the Artha Energy Resources team to reach out to them and get a demo for our current and future projects and see if it is cost-effective.
Looking at their product portfolio, getting investment from Bharat Forge is a masterstroke!

I liked FarmERP investment as I am interested in Farming as a Service. However, there was nothing shared on the amount of financing, and since the company is over 14 years old it outside the contours of how I would define an “early-stage” start-up.

Decoding Sun Edison's Record Bid for Selling Solar Power in India – Realistic or Wildly Optimistic? (Part 1)

The recent brouhaha over Sun Edison’s record low bid of selling solar power at Rs. 4.63 per kWh has shaken up the entire solar universe (which just 3 GW in size… by the way) in India. On November 9th an article in the Business Standard mentioned that
there is nervousness among investors in the segment and the supply chain. Experts say leading project developers are putting aggressive bids for 50-200 Mw projects, to be relevant in the market
I am personally quite surprised at the record low rates that have been achieved. It is easy to appreciate that there has been very little (if any) progress with the financial institutions lending to this sector. Banks don’t bat an eye lid when asking for an arm, a leg and your dog’s kennel as collateral or putting deals through committee after committee while the project owner suffers. There was a brief ray of hope for investors when panel prices dropped below 50 cents per watt but a rapidly devaluing rupee nuked the opportunity created and the panel prices remain firm on a rupee level.
So when the reverse bidding prices for the sale solar output start touching record lows without much changing on the input sides – it intrigued me to further investigate how these projects made financial sense for investors.
Instead of assuming a certain project cost and then getting an IRR based on the bidding done by Sun Edison I decided to and was encouraged to (by a senior executive at a leading EPC) to  reverse calculate the project cost by using the tariff as the final product and taking CERC or market accepted levels of return for such projects to find out the truth for myself.
First I refurbished a worksheet that I found online on www.IndianPowerIndustry.com and utilised by the website for “Calculation of Solar Power Tariff”. The sheet is quite comprehensive but I found a few errors both clerical & logical that I corrected and figured that for a bid of Rs. 4.63 to make sense the project cost would have to be about Rs. 4.40 crore per MW (all inclusive).
The assumptions made were (all figures are in lakhs of rupees) :

Project Capacity MW 500 Return on Equity for 1-10 years Per Annum 18%
Annual Energy Production Lac Kwh 8322 return on Equity for 11-25 years Per Annum 22%
Total Project Cost Rs. Lac 440 Depreciation till loan repayment 5.83%
Project life Years 25.00 Depreciation after loan repayment 1.54%
Equity to be Invested Rs. Lac 66000 Total O&M expenses for 1st year 4000
Loan Component Rs. Lac  1,54,000 Escalation in O&M Expenses 5.72%
Loan repayment period Years             15 Discount Rate 9.88%

Please note: The discount rates input of “Return on Equity”  was 16% (post-tax) as per CERC guidelines. So the final calculation was (70% x 11% x (1-33.99%) + (30% x 16%) = 0.0988
The final calculations were (all figures are in lakhs of rupees):

Year 1 2 3                4                5                6                7                8                9             10             11             12             13             14             15             16             17             18             19             20             21             22             23             24             25
Energy Sold (degrading by 0.84% per year) 8322  8,252.10  8,182.78  8,114.04  8,045.88  7,978.30  7,911.28  7,844.83  7,778.93  7,713.59  7,648.79  7,584.54  7,520.83  7,457.66  7,395.01  7,332.90  7,271.30  7,210.22  7,149.65  7,089.60  7,030.04  6,970.99  6,912.44  6,854.37  6,796.79
O&M Expenses (includes OPEX) 4000.0 4228.8 4470.7 4726.4 4996.8 5282.6 5584.7 5904.2 6241.9 6598.9 6976.4 7375.5 7797.3 8243.3 8714.9 9213.3 9740.3 10297.5 10886.5 11509.2 12167.5 12863.5 13599.3 14377.2 15199.6
Principal Repayment 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest on Term Loan 16422.4 15293.1 14163.7 13034.4 11905.1 10775.7 9646.4 8517.1 7387.7 6258.4 5129.1 3999.7 2870.4 1741.1 611.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Return on Equity (Pre-Tax) 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0
Total Outflow 42569.1 41668.5 40781.1 39907.5 39048.5 38205.0 37377.8 36567.9 35776.3 35004.0 36892.1 36161.8 35454.4 34771.1 34113.2 23733.3 24260.3 24817.5 25406.5 26029.2 26687.5 27383.5 28119.3 28897.2 29719.6
Cost per Unit of Electricity 5.1 5.0 5.0 4.9 4.9 4.8 4.7 4.7 4.6 4.5 4.8 4.8 4.7 4.7 4.6 3.2 3.3 3.4 3.6 3.7 3.8 3.9 4.1 4.2 4.4
Discount Rate for Net present Value 0.099
Discount Factor 1.0 0.9 0.8 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1
NPV of Cost per Unit 4.65
Therefore Tariff (Rs./Kwh) 4.65

I also devised an alternate sheet of my own which wasn’t as comprehensive as the one created by  IndianPowerIndustry.com but was based on IRR versus NPV. In this approach I estimated the investment cost by charting out the net cash-flow at the project level and hitting a target IRR (14% post tax) at the project level.

Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Generation 8760 8686 8613 8541 8469 8398 8328 8258 8188 8120 8051 7984 7917 7850 7784 7719 7654 7590 7526 7463 7400 7338 7276 7215 7155
Tariff ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63
Revenues ₹ 40,559 ₹ 40,218 ₹ 39,880 ₹ 39,545 ₹ 39,213 ₹ 38,884 ₹ 38,557 ₹ 38,233 ₹ 37,912 ₹ 37,594 ₹ 37,278 ₹ 36,965 ₹ 36,654 ₹ 36,346 ₹ 36,041 ₹ 35,738 ₹ 35,438 ₹ 35,140 ₹ 34,845 ₹ 34,552 ₹ 34,262 ₹ 33,974 ₹ 33,689 ₹ 33,406 ₹ 33,125
O&M -₹ 3,000 -₹ 3,172 -₹ 3,353 -₹ 3,545 -₹ 3,748 -₹ 3,962 -₹ 4,189 -₹ 4,428 -₹ 4,681 -₹ 4,949 -₹ 5,232 -₹ 5,532 -₹ 5,848 -₹ 6,183 -₹ 6,536 -₹ 6,910 -₹ 7,305 -₹ 7,723 -₹ 8,165 -₹ 8,632 -₹ 9,126 -₹ 9,648 -₹ 10,199 -₹ 10,783 -₹ 11,400
OPEX -₹ 1,000 -₹ 1,057 -₹ 1,118 -₹ 1,182 -₹ 1,249 -₹ 1,321 -₹ 1,396 -₹ 1,476 -₹ 1,560 -₹ 1,650 -₹ 1,744 -₹ 1,844 -₹ 1,949 -₹ 2,061 -₹ 2,179 -₹ 2,303 -₹ 2,435 -₹ 2,574 -₹ 2,722 -₹ 2,877 -₹ 3,042 -₹ 3,216 -₹ 3,400 -₹ 3,594 -₹ 3,800
Cash Before Tax ₹ 36,559 ₹ 35,989 ₹ 35,410 ₹ 34,819 ₹ 34,216 ₹ 33,601 ₹ 32,972 ₹ 32,329 ₹ 31,670 ₹ 30,995 ₹ 30,301 ₹ 29,589 ₹ 28,857 ₹ 28,103 ₹ 27,326 ₹ 26,525 ₹ 25,698 ₹ 24,843 ₹ 23,959 ₹ 23,043 ₹ 22,095 ₹ 21,111 ₹ 20,090 ₹ 19,029 ₹ 17,926
Effective Tax Rate 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Tax ₹ 3,656 ₹ 3,599 ₹ 3,541 ₹ 3,482 ₹ 3,422 ₹ 3,360 ₹ 3,297 ₹ 3,233 ₹ 3,167 ₹ 3,099 ₹ 3,030 ₹ 2,959 ₹ 2,886 ₹ 2,810 ₹ 2,733 ₹ 2,652 ₹ 2,570 ₹ 2,484 ₹ 2,396 ₹ 2,304 ₹ 2,209 ₹ 2,111 ₹ 2,009 ₹ 1,903 ₹ 1,793
Net Cash Flow(s) -₹ 2,00,000 ₹ 32,903 ₹ 32,390 ₹ 31,869 ₹ 31,337 ₹ 30,795 ₹ 30,241 ₹ 29,675 ₹ 29,096 ₹ 28,503 ₹ 27,895 ₹ 27,271 ₹ 26,630 ₹ 25,971 ₹ 25,293 ₹ 24,593 ₹ 23,872 ₹ 23,128 ₹ 22,359 ₹ 21,563 ₹ 20,739 ₹ 19,885 ₹ 19,000 ₹ 18,081 ₹ 17,126 ₹ 16,133
IRR 14.14%

In both models the total project cost I arrived at is between Rs. 4 – 4.40 crore per MW. Now comes the really important part… is that cost realistic or attainable?
So the few things that are constant in such projects are:

Interest free Performance Guarantee Deposit Rs. 10 lakh per MW
One-Time Solar Park Development Expenses Rs. 42 lakh per MW
Service Tax & Other Taxes which I will estimate at 5% of project cost Rs. 20 lakh per MW
Panel investment* Rs. 297 lakh per MW
Inverter Rs. 20 lakh per MW
Total = 389 lakhs or 3.89 crore per MW

*Panel costs (this is the tricky piece) for a project of this size should be quite low.. Below market quoted prices for sure. I estimated them to be $0.42-0.44 per watt. However with 30% of the capacity under the DCR category it is my estimation that the average per watt procurement cost will be $0.45 per watt. You can argue that the panel prices may/will fall 10% in 12 months i.e. when they are needed. I would say that the rupee will most like devalue 10% by that time as well negating the gains made in panel procurement cost. Lastly one should also note that a significant percentage of these modules are to be sourced from Indian Panel manufacturers who charge  a premium to international rates.
Even if I take the average of the “derived project cost” I get 4.20 crore per MW as my project cost.. Deducting the break-up above I get a balance of 31 lakhs per MW to cover the remainder of my expenses which are:

  1. Balance of Plant Investment
  2. Transmission Investment
  3. Labour Costs
  4. EPC Margin (this goes to Sun Edison if they do their own EPC)
  5. Project Monitoring Costs
  6. Legal Costs
  7. Equipment transportation
  8. Financing costs like:
    1. Processing fees
    2. DSRA
    3. IDC
    4. Bank Guarantees
    5. EMD Costs
  9. Stamp Duties & other taxes

Do you think that 31 lakhs can cover all this?

Cross Subsidy Surcharge: A Dacoit in Robinhood’s Clothing

Robin Hood
The verb “cross subsidize” as defined by the Oxford dictionary is “Subsidize (a business or activity) out of the profits of another business or activity.” But what happens if that industry is facing the awesome prospect of losing $27 billion per year from 2017 onwards as reported by the World Bank? To put the number of $27 billion into perspective, it is equal to the entire nominal GDPs of Nepal and Zimbabwe… combined!
In my honest opinion the in-sync folks at Wikipedia have defined “cross subsidization” aptly, as “the practice of charging higher prices to one group of consumers in order to subsidize lower prices for another group.” When I read that definition is immediately reminded me of a heroic outlaw in English folklore, Robin Hood, who is famously known for “robbing from the rich and giving to the poor”. In this post and the many more that I intend to write, it is my intention to bring to your attention the malaise that has spread in the Indian Power setup from the introduction and the subsequent revisions in what many of us see as a harmless line item in our electricity bills.
The current scenario in the Indian power sector is very grim when one concentrates on the sheer magnanimity of the numbers.

  •  India possesses the 5th largest power system in the world
  • 21% of the power generated by the India power generation companies is lost during transmission
  • Bangladesh loses a mere 10% in comparison
  • A World Bank report on June 24, 2014 stated that more than 300 million Indians (the entire population of the United States) still live without electricity today
  • 200 million of them live in villages that are supposedly “electrified”
  • The same report also stated that the sector was bailed out in 2011 with 1,90,000 crores
  • That number exceeds the GDP of Bahrain by 10%!
  • The sector was bailed out in 2001 with 35,000 crores of the tax-payers money

These poor metrics and massive bailout could have all been forgotten if the sector was aiding in “amp”ing up India’s GDP but when a FICCI report in 2013 points out that India loses $68 billion or Rs. 4,14,800 crores of its GDP due to power outages – it is time to sit up and take notice.
In my opinion the CSS (short form for Cross Subsidy Surcharge) is a dreaded dacoit that keeps raids the rich to buy narcotics and give it for free to the poor which give them the temporary high but the dacoit maintains its stranglehold. It should be noted that CSS was introduced by the previous BJP government when it passed the Electricity Act of 2003 and opened the power sector for competition. The intention at that time was to give the government run power companies some compensation for losing its customer base to cheaper and more efficiently run private power producers while they restructured themselves for this competition.
However this well intentioned move, atleast in hindsight, acted like treating a heroin addict by feeding him some more heroin and asking him to cure himself by reducing the amount of heroin he takes… such an approach rarely works! The government run entities latched on CSS like a lifeline and 6 years after CSS was to be abolished it is being used as a ploy to keep out competition and to harass consumers of power that can get cheaper power but that will not be in the best interest of the utility. The utility will tell you that they need CSS to provide free or low cost power for the agriculture sector and residential consumer but subsidization for one industry while upsetting the apple cart for all other industries is preposterous if not just plain illogical.
In certain states CSS is more than the cost of making power! For example TANGEDCO now charges a CSS of Rs. 3.40 to Rs. 3.61 per kwh while Maharashtra charges a CSS of Rs. 2.30 to Rs. 2.75 per kwh and both have increased their CSS in the last year. To see how ridiculous and anti-competitive these tactics are, just open the last annual report of Tata Sponge as available on its website. Their cost of power when they generated it for themselves was Rs. 1.47 but when they buy it from the open market or the utility the cost is upwards of Rs 8 – a large chunk of it attributable to the enormous CSS charges that are forced onto the customers.
This anomaly has led to a deathly downward spiral, one where the large users of power find it more feasible to own and operate captive power plants versus buying power from the open market or the utility. This leads to loss in valuable and profitable revenue for the entire industry – the power generator, the power transmission utility and the power distribution utility. The 3 are then stuck with power consumers that get power ridiculously cheap and below cost rates ranging from 0 (yes nada) to Rs. 2 per kwh and in the effort to balance their budgets they have to keep increasing the CSS charges and therefore driving out competition and customers too. This also has an adverse affect on inflation as electricity is a key cost for most industries.
In conclusion new government would serve the nation by ending this madness and abolishing the practice of CSS once and for all. If states want to subsidize power for residential and agriculture they should use their state subsidies budget to do the same and not lay the burden on other industries by charging them what is in effect an agricultural tax. Abolishment of CSS will give power and other industries the much needed shot in the arm (pun totally intended) to spur growth in the industry through an increase in power generation plants which will increase long-term employment and generate an affordable and growth filled future for our country.

Electricity Prices Set to Increase by 35 Percent!

A perfect storm for electricity consumers that was created by the policy paralysis of UPA-II, high interest rates and the slow pace of development of power plants as developers faced innumerable headaches and delays in securing 143 licenses and filing 1982 compliance reports. This storm will reach devastating strength as the states of Delhi, Punjab, Rajasthan, Chhattisgarh, Uttar Pradesh and Karnataka have decided to raise power tariffs by 10 to 35 percent!
The problems in India’s critical power sector have been simmering below the surface for a very long time and the burgeoning Indian population with its increasing usage of technology – from using smartphones to rural electrification schemes that has increased power consumption from 443 kwh per capita in 2004 to 684 kwh per capita in 2011 as per the data compiled by the World Bank.
The problems being faced by the Indian power sector are too many to list out in a single blog post but as a power consumer we should all beware that such large hikes in tariffs are going to be the norm moving forward – unless the government makes some serious and immediate changes to its power policy. If the government is serious about giving world class power infrastructure for supporting the needs of residential and commercial customers, it first has to ensure that setting up a power project is a pain free and an under-table ridden process.
The government should also seriously give a thought to replacing the defunct and often misused depreciation and subsidy based schemes and give power plant developers access to easy, low-cost and long-term debt. Climate Policy Initiative studied the impact high interest costs have on power tariffs, noting that unfavourable debt terms add as much as 32% to the cost of renewable power from wind energy alone! One can only imagine what an impact the adoption of business friendly policies would have on procurement cost of other sources of power. The same report also mentions that access to cheaper debt can reduce the subsidy burden of state and central governments by upto a whopping 78% just for wind power alone!
So while highly recommending power consumers to urge their local representatives in the power corridors (pun not intended) of Delhi to give the neglected power producers the support they need, I also recommend that the power consumers who have an empty roof-top, should look at sourcing their power from distributive solar power generation systems. These systems can provide the consumer access to long term solar power at an affordable and sustainable tariff while giving them valuable ‘day-time’ power – a time when most power distribution companies face tremendous power shortages.
More on that soon…