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Solar Opportunity - Business Model Options

Infrastructure & Government Solar Opportunity - Business Model Options Santosh Kamath Director, KPMG Advisory Services Private Limited Agenda Solar Photovoltaic Technology Solar Thermal Technology – Concentrating Solar Power (CSP)

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Solar Opportunity - Business Model Options

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  1. Infrastructure & Government Solar Opportunity - Business Model Options Santosh Kamath Director, KPMG Advisory Services Private Limited

  2. Agenda • Solar Photovoltaic Technology • Solar Thermal Technology – Concentrating Solar Power (CSP)

  3. Solar Photovoltaic (PV) - Business Model Options & Critical Success Factors • Product Design • Marketing & Distribution Appliance Manufacturer Stand-alone Manufacturer EPC Player Developer Grid Crystalline Silicon PV Thin-Film PV • Engineering capability • Tie-ups with suppliers • Managing contracts including PPAs • Land Bank • Financing • Low cost manufacturing • Manufacturing Innovations • Technology innovation

  4. There is currently oversupply in the value chain but supply dynamics could change based on demand visibility Zone of uncertainty Wafer and cell production could expand to meet the demand Wafer, ,Cell and Module capacities have lower gestation periods and can quickly ramp up production once there is more visibility on demand “Expect 2 Years With No Profits” Morgan Stanley Analyst Polysilicon shortage has led to a large addition of capacity OVERSUPPLY Source: Needham, Company reports, EPIA, KPMG analysis

  5. Global Competitive Behavior – Past Trends (1/2 ) UPSTREAM DOWNSTREAM Systems Integration/ Developer Poly silicon Wafer Cell Module Key Strategic Initiatives Expansion into poly-silicon space PV Crystalox ,LDK Solar Strategic tie-ups with silicon manufacturers Yingli acquires Cyber Power Group Ltd., a solar-grade poly-silicon production company Trina Sola, Yingli Acquire other system integration companies in different geographies Sun power Strategic tie-ups with upstream manufacturers Conergy, Solon, Centro solar Expansion into wafer segment Canadian Solar …A vertically integrated presence to capture profits across value chain

  6. Global Competitive Behavior – Recent Trends (2/2 ) UPSTREAM DOWNSTREAM Systems Integration/ Developer Poly silicon Wafer Cell Module Key Strategic Initiatives REC Solar, SolarWorld Downstream move – Equity Stake in solar farm developer Stake through subsidiaries in thin-film technology firms JV Partnership with LDK to develop PV systems in Europe and China Q cells Solarfun, Suntech, Evergreen solar, JA Solar JV to develop solar farms Suntech – Acquires MSK and EI Solutions System Integrators Thin-film Module First Solar*, Ascent Solar ,Energy Conversion Devices First solar acquires solar power project pipeline n USA *Strategic land rights of approximately 136,000 acres (approximately 210 square miles) with the potential to deploy up to 19 gigawatts …An increased focus on market access

  7. CSFs for Business Model – Crystalline PV Manufacturing Poly silicon Wafer Cell Module Capital & Energy Labour Technology • Ability to secure low cost and good quality inputs ( Poly-silicon, Wafer, Cell) • Ability to get market access – Increase capacity utilization …. Advancement in wafer and cell technologies are considered to be the key drivers in the overall cost reduction possibilities for crystalline PV

  8. CSFs for Business Model – Thin Film Manufacturing Players Concern CSF CIGS – Copper Indium Gallium Selenide CdTe – Cadmium Telluride A-Si – Amorphous Silicon

  9. Build-up of scaleAcross the value chain, the median capacity of the industry has been going up, which is most significant in the case of Wafers and Cells Crystalline Thin film The bars correspond to actual/planned capacity additions by year Expected economies of scale in thin film is likely to see capacity scale-ups

  10. Players in Thin-film - CIGS technology is supported by new start-ups with strong venture capital funding… CdTe CIGS A-Si Solar Thin-film – Industry Profile Production > 25MW First Solar Mitsubishi Uni-solar Kaneka Production > 5MW Sanyo Honda Sharp Schott Wurth Solar Solyndra ersol Development Status Sontor Pilot Production Nanosolar Terrasolar NexPower Miasole Free Energy CSG Heliovolt Solon Kenmos Plant Construction / Ramp up Calyxo Signet Malibu Avancis Scheuten R&D Johanna PV Flex CIS Solartechnik 2006 or earlier 2007 2008 2009 2010 Year of Market Entry (Expected) Source – KPMG Analysis, EuPD Research 2008

  11. Industry clustersCapacity expansions along the value chain are clustered around certain key geographies Cell Wafer USA, Japan and Germany are hot-beds of thin film technology, while China and Taiwan are growing manufacturing bases for crystalline wafer and cell USA’s capabilities in research make it a significant thin film player China is gearing up to be a major cell and wafer player a-Si Cd-Te

  12. CSFs for Business Model – Project Developer Solar Farm Roof Top • Ability to sign a PPA with govt /utility • Ability to secure low cost and high quality equipments • Developing land banks and managing grid interconnections • Ability to get access to customers • Marketing and customer relationships • Manage customer service and performance. Supply chain to manage multiple/retail customers CSF PPA with utility PPA with customers • Key challenges - • Risk of default from customers • Dealing with utility / electricity metering & measurement, grid connections etc. • Permits and clearances • O&M of equipment at customer premises

  13. CSFs for Business Model – Standalone Applications VALUE CHAIN Equipment Supply System Solution Design Distribution & Installation Maintenance & Service • Source Equipments - Tie-ups with Manufacturers • Secure supply of good quality and low cost modules • Procure balance of system components – battery, inverter, cables, electrical components from vendors • System assembly and installation • Adhere to standards & specifications • Install and connect the system through meters and other equipments • Provide quick and high quality service at customer end • Local infrastructure in-place to respond to breakdowns or any other problems • Design and develop solar solutions • Customize solutions • Configuration - Stand-alone systems; grid connection etc • Appropriate Size and Orientation Description • Cost competitiveness • Product design • Assure high reliability and performance • Good quality service CSF

  14. To Summarise for PV • Business Model Options Include: • Wafer & Cell Manufacturing: Scale, Government incentives and ability to innovate in manufacturing processes and access to cell technology are key drivers. Strategic tie-ups for supply contracts are also key differentiators. • Modules: Likely to be low margin game. Could be a potential entry point for a new entrant. Can also be part of integrated play with cells and wafers. • Polysilicon: Ability to source cheap energy and negotiate Government incentives will be key drivers • Thin-Film: Access to technology will be the key factor • Standalone Systems: Product design and marketing will be key capability requirements. Potential could be large.

  15. Agenda • Solar Photovoltaic Technology • Solar Thermal Technology – Concentrating Solar Power (CSP)

  16. Solar thermal technologies - Brief Snapshot

  17. Solar Thermal Technologies – Value Chain Operations EPC Project Development Key Industry Themes Engineering Manufacturing Land Permits Financing R&D Technology Construction Epuron Schott Solar , Rioglass, Flabeg • Market Access – • PPA’s with utilities • Strategic Alliances • Amongst Technology, EPC, Financing players. Solargenix Energy LLC Ausra, Solel, Skyfuel • Diversification strategy in solar (Renewable portfolio, Solar Portfolio) Iberdrola, ENEL, Energias de Portugal, FPL • Vertical integration- Presence across the entire value chain Solar Millennium AG, Abengoa S.A, BrightSource Energy, Acciona Energia

  18. CSP - Business model options Technology Supplier/ Manufacturer Turn key EPC Provider Developer Niche or Integrated Presence • Market Access – PPA with utility • Efficient power plant operations • Land Selection – Build land bank • Technology R&D Innovation – Drive costs towards grid parity • Low cost manufacturing • Core Component Access – License or partnerships for – components like :- Heliostats, Absorber tubes, Curved mirrors and receivers etc • EPC – Project Management and Construction Capability

  19. Santosh Kamath Director KPMG Advisory Services Private Limited +91 99670 16369 skamath@kpmg.com 18 Thank You

  20. APPENDIX

  21. Solar power offers immense potential as a clean alternative to meet the growing grid and off-grid energy requirements of the country • Grid Power - • India’s energy shortage is about 10%* • Peak deficit about 17%* • Government announced the “National Solar Mission” - which envisages capacity addition goal of 1000 MW of solar power per year • Potential in Remote Villages - • 33% of India’s population has no access to grid electricity • Replace kerosene lighting consumption per household – 50 to 70 liters per year • Solar Lamps could be used for lighting load • Commercial Applications - • Replace diesel generators in stand-alone systems like telecom towers, oil & gas platforms, railway communications etc …Solar power can be used to meet energy requirements for centralized as well as decentralized applications as solar systems can be built for capacities varying from Wp to MWp *CERC

  22. Government has taken several investor friendly initiatives to promote solar power development in India Incentives for solar power generation in India • Along with incentives for power generation, there are favorable incentives for setting up manufacturing facility in India. • Semiconductor policy - Government will bear 20 % of Capex during the first 10 years, if a unit is located within Special Economic Zones (SEZs) and 25% for industries not located in an SEZ. Capital subsidy can be in the form of investment grant and interest subsidy

  23. A portfolio of technologies at different levels of maturity and outlook are available for consideration.. Established – Efficiency Improvements Solar Power Nascent - Innovation Stage Solar Thermal Technologies (CSP) Amorphous Silicon CdTe – (Proprietary Technology) Parabolic Trough Power Tower Dish Sterling CIGS Module System Assembly / Integration Poly-Silicon Wafer Cell Key challenge :- Outlook on grid parity for different solar technologies

  24. Detailed Approach – Real Options Evaluation Framework Option 1: Start as an EPC Player, License Technology as soon as industry growth is visible ILLUSTRATION Year 4 Year 0 Year 1 Year 2 Year 3 Year 5 Slow growth pattern of the Industry EPC Player, Tech agnostic EP = -10 Modest Returns EP = +20 P = 50% Rapid Growth commences in Year 4 EP = -100 Specific Technology EP = +500 Right Bet P = 70% P = 30% EP = +500 EP = -200 P = 30% Wrong Bet (Switching Costs) Rapid Growth EP = +700 EP = -200 Multiple Technologies P = 70% All Win EP = +600 P = 30% Some Win Option 2: Take Technology Position Now (Acquire, JV, In-house) P = 70% EP = -50 EP = +700 One Technology Rapid Growth EP = +1000 Multiple Technology P = 30% EP = -100 Expected payoffs and probability of the event shall be estimated by studying past trends in similar technology oriented industries.

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