TV NORD CERT GmbH P.O.

Box 10 32 61 45032 Essen Germany

TV NORD CERT GmbH Langemarckstrasse 20 45141 Essen Germany

CDM Executive Board

Phone: +49 201 825-0 Fax: +49 201 825-2517 Info.tncert@tuev-nord.de www.tuev-nord-cert.com

TV
Our / Your Reference Contact Direct Dial Date

Rainer Winter E-Mail: rwinter@tuev rwinter@tuev-nord.de

Phone: -3329 Fax: -2139

07.10.2011

Initial Comments to Request for Review of project 12.25 MW Bundled Wind Power Project in India" (Ref. no. 4377) 4377 Dear Honourable Members of the CDM Executive Board, Please find below the response of the TV NORD JI/CDM Certification Program to the request for review for the above mentioned project No. 4377. If you have any questions do not hesitate to contact us. Yours sincerely, TV NORD JI/CDM Certification Program

Rainer Winter

Headquarters TV NORD CERT GmbH Langemarckstrae 20 45141 Essen Phone: +49 201 825-0 Fax: +49 201 825-2517 info.tncert@tuev-nord.de www.tuev-nord-cert.com

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Registration Office Amtsgericht Essen HRB 9976 VAT No.: DE 811389923 Tax No.: 111/5706/2193

Deutsche Bank AG, Essen Bank Code: 360 700 50 Account No.: 0607895000 BIC (SWIFT (SWIFT-Code): DEUTDEDE IBAN-Code: DE 26 3607 0050 0607 8950 00 IBAN

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Question Raised by the EB 1 The DOE is requested to further substantiate how it has validated the suitability of the input values to the investment analysis in line with VVM 1.2, paragraph 111(b), in particular: total investment cost for each of the 5 sub-bundles; Changes Made in/ Reference PDD FVR Financial Models ER Sheet Additional Comment by PP Additional Comment by DOE VR provides the total investment cost of each of the 5 sub bundles. The total investment and the cost per MW are given below Total Investment (Rs in million) as Cost per MW (Rs in million) per as per Offer letter Purchase order Offer letter Purchase order 278.00 252.24 55.60 50.44 66.50 63.21 53.20 50.56 146.00 134.31 60.83 55.96 152.00 144.04 63.33 60.02 55.00 55.78 45.83 46.48 Page 45, 46

RSIL (Phase I)-5MW NSAIL-1.25MW RSIL (Phase IIA)-2.4 MW RSIL(Phase II B)-2.4 MW RGL-1.2 MW

DOE validated the investment cost based on the offer letters, which were available to the PP at the time of decision making (conformity to guidance 6 of Annex 5 EB 62.). It could be observed from the data given above that the project cost ranges from 45.83 Million/MW to 63.33 mn/ MW. While validating the investment cost, DOE compared the cost with other registered wind power projects, which took the investment decision around the same time. The comparison reviled that the cost was ranging from Rs. 49.7 Million/MW to Rs 66.37 Million/MW with majority of the projects assuming a cost around Rs.60.00 Million/MW. Sindhiya Infrastructre (3046)1 has assumed a cost of Rs. 66.33 million/MW; Taurian Iron and steel (3511) has assumed a cost of Rs. 58.73 Million / MW; Lal Mahal Limited (3578) has assumed a cost of Rs. 60.67 million/MW; Aradhya Steel (3584)
1

The numbers given within brackets refer to the registration number of the respective projects with UNFCCC.

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has considered a cost of Rs. 63 million/MW and Vikram Traders (3575) has considered a cost of Rs. 62.67 million/MW. Thus, it could be seen that the project cost is well within the range, rather at the lower end of the range. Besides, DOE also compared the cost as per the purchase order, which represents the actual investment made by each of the PPs in the bundle. Based on the purchase order, it was observed that in all the cases, except (RSIL phase I), the difference between the cost as per the purchase order and the offer letter has been less than 10%. As the VR reveals, the project remain additional even when the project cost is subjected to 10% variation indicating that the projects would remain additional even if the actual investment made is taken into consideration in financial indicator calculation. In the case of RSIL Phase I the difference in the cost between offer letter and purchase order is 10.23%. However, as the breakeven point of the financial indicator to the project cost is 11%, the project would remain additional even if the purchase order (which represent the actual investment made) is taken into consideration for computing the financial indicator. In the above background, DOE was convinced that the investment cost is appropriate and in line with VVM Para 111 (a), (b) for each of the 5 sub bundles. The VR has been updated by incorporating the above mentioned explanation. Other/Additional documents

Question Raised by the EB (b) the tariff used for the RGL sub-bundle given that it is lower than the other subbundles supplying to the grid and why it does not consider any increase; and Changes Made in/ Reference PDD FVR Financial Models ER Sheet Additional Comment by PP Additional Comment by DOE Reference for RGL tariff is changed (reference number 37 ) Page 133 and 134 of Annex 3 of the report Reference for tariff (RGL) is added in form of web-link.

The question consists of two issues, viz., a) The reason for low tariff; and b) Reasons for not subjecting it to escalation : Both the issues are addressed in seriatim in the following paragraphs: SO1-FO41-ruchi_ik.docx

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a) Reason for the low tariff:

This is because while other projects are wheeling power for captive consumption, RGL sub-bundle is selling power to the grid. In the case of power wheeled for captive consumption, tariff which the company would have paid had it imported from the grid is the relevant tariff; However, in cases where the power is sold to the grid, the tariff paid by the grid (which is determined by the ERC) is the relevant tariff. The rate at which the grid sells the power is always higher than the rate at which it purchases power. Since RGL sub bundle is selling power to grid (grid is buying power) the tariff assumed for RGL sub bundle is lower than the tariff assumed for other sub-bundles. b) Reasons for not subjecting the tariff to escalation The RGL sub bundle is located in Tirunelveli district of Tamil Nadu. The project is exporting the entire power to the grid, As mentioned earlier tariff for the power supplied to grid is determined by the Tariff Order of the ERC. As per paragraph 10.2 of TNERC tariff order on non conventional energy sources (May 2006 page 91)2 Since the agreement period proposed in this order is twenty years, the terms and conditions including the purchase rate ordered now will continue to be applicable till the end of agreement period. When the Commission revisits that tariff and allied issues after the control period, the revisions will be applicable to the generators of renewable energy sources commissioned after such revised order. Therefore, the tariff is fixed. It is for the above reason that the tariff used for the RGL sub-bundle is not considered for any increase as the tariff order was available during the decision making. Moreover, a sensitivity analysis conducted by subjecting the tariff to reasonable variation as required by paragraph 20 and 21 of Annex 5 EB 62, reveals that the project would remain additional even if the tariff is escalated by 10% as the IRR works out to only 8.08% as against the benchmark of 10.5%.
The VR has been updated by incorporating the above mentioned explanation. Other/Additional documents

Question Raised by the EB (c) no increase in tariff for sub-bundles RSIL Phase I Erode, RSIL Phase IIA and RSIL Phase IIB while other cost such as the O&M costs consider an yearly increase. The DOE shall also explain the validity of these tariffs at the time of investment decision and whether the tariffs used are tariff paid by the grid or tariff related to electricity savings. Changes Made in/ Reference
2

http://tnerc.tn.nic.in/orders/nces%20order%20-approved%20order%20host%20copy.pdf

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PDD

Reference and value for tariff is changed (reference numbers 33, 34, 35), page 24, 25, 26 IRR values and sensitivity analysis table from electricity bills earlier to the publicly available web-links Page 47, 48, 49 The tariff values applicable based on state electricity tariff rates have been applied for (RSIL- IIA, RSIL-IIB, RSIL-I)

FVR Financial Models

ER Sheet Additional Comment by PP Additional Comment by DOE This question consists of two issues, viz., a) validity of tariff and the nature of tariff b) not escalating the tariff while O&M cost is subjected to escalation; and Both the issues are addressed in seriatim in the following paragraphs: a) Validity of tariff and the nature of tariff We submit that in all the three cases referred to by the EB, the power is wheeled for captive consumption and hence represents electricity savings. The tariff considered in the financially indicator calculation represents the tariff prevailing at the time of investment decision3which is publicly available and pertaining to the decision making period. The tariff rates are as follows; RSIL Phase I Erode in TN, decision in July 2006 tariff at Rs. 3.5 per unit kWh RSIL phase IIA in MP decision in Jan 2007 tariff at Rs. 3.75 per unit kWh RSIL Phase IIB in MP, decision in July 2007 tariff at Rs. 3.80 per unit kWh b) Not escalating the tariff while O&M cost is subjected to escalation The DOE has assessed the tariff rates in the host country which are based on the individual tariff
The tariff prevailing in Tamil Nadu at the time of decision making (July 2006) can be accessed at the website http://www.tneb.in/template_3.php?tempno=3&cid=0&%20subcid=54 The tariff prevailing in Madhya Pradesh at the time of decision making (January 2007) can be accessed at the Website (Page 7, 33KV Industrial) http://www.mperc.nic.in/HV_Rate_schedule_Final%20_31-3-06_Ver_1.pdf The tariff prevailing in Madhya Pradesh at the time of decision making (July 2007) can be accessed at the website (On page 8, 33KV Industrial) http://www.mperc.nic.in/Retail-Tariff-Sch-HV-FY08%20Final_20070330%20v2.pdf

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orders for each state. The tariffs for state of MP and Tamil Nadu are as follows; For the state of Tamil Nadu: Tariff Year INR/Unit Reference w.e.f. 16/03/2003 3.50 http://www.tneb.in/template_3.php?tempno=3&cid=0&%20subcid=54 w.e.f. 01/08/2010 4.00 http://www.tneb.in/TariffDetailsNew.php

For the state of Madhya Pradesh:

Year 2006-07 2007-08 2011-12 Tariff Page INR/Unit No. Reference 3.75 7 http://www.mperc.nic.in/HV_Rate_schedule_Final%20_31-3-06_Ver_1.pdf http://www.mperc.nic.in/Retail-Tariff-Sch-HV3.80 8 FY08%20Final_20070330%20v2.pdf 3.50 181 http://www.mperc.nic.in/Tariff-order-FY%2011-12-final.pdf

Thus for the state of Tamil nadu the tariff has remained fixed for 7 years and has been revised in 2010 while in the state of MP the tariff have actually reduced during the period from 2007-08 to 2011-12, thus it is clear that tariff variation does not follow a single trend in each states, thus no escalation was considered as it was not possible for the PP to predict the trends for each state. The similar scenario exists in case of selling the electricity to the grid. In most of the states the electricity tariff for electricity selling remain fixed for 20 years. Further the increase in trariff was already taken into account considering the sensitivity analysis for Tariff. However, unlike the electricity saving, O&M cost is not fixed and is subject to periodical increase as enshrined in the offer letter and subsequently in the O&M agreement. Since the O&M cost represent mainly wages & service, stores & spares and repairs & maintenance, all of which are subjected to inflationary forces, O&M cost cannot remain constant. It is for the above reason that the tariff has not been subjected to escalation while the O&M cost has been subjected to escalation. Nevertheless as per the EBs comment no increase in tariff for sub-bundles RSIL Phase I Erode, RSIL Phase IIA and RSIL Phase IIB while other cost such as the O&M costs consider an yearly increase the DOE has assessed the IRR by keeping the inflow and outflow constant, i.e the escalation in O&M has been removed for the demonstration purpose. The results are as follows;

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Project * Project IRR Benchmark RSIL I 10.14% 11% RSIL IIA 9.59% 11.75% RSIL IIB 8.72% 11.34% A separate sheet for calculation is attached keeping the escalation for O&M as zero as Annex 1, 2 and 3. Thus it can be observed that while keeping the escalation in Tariff and O&M as constant the project still remains additional. The VR has been updated by incorporating the above mentioned explanation. Other/Additional documents Annex 1: IRR sheet for RSIL I Annex 2: IRR sheet for RSIL IIA Annex 3: IRR shet for RSIL IIB

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