Demand for Weather Risk Transfer

1. Demand for Weather Risk Transfer WRMA 2007 Meeting February 26th, 2007 Mumbai, India

2. Panel members Participants • Mr. Ajit Joshi Assistant Vice President, Enercon Financial Consultancy • Mr. Shailesh Naik Head – ITC e choupal Financial Services • Mr. P. Gunaranjan Manager-Insurance Business, BASIX Moderator • Mr. Valter Stoiani Regional Head – Insurance and Weather Derivatives, Asia ABN AMRO Bank, Hong Kong

3. Enercon Ajit Joshi

4. Wind Power in India Wind Energy Potential • Eight principal states have commercially feasible wind potential • Mapped Potential - 45,000 MW as per estimate done in 1998. As per the industry estimate the potential is more than 75,000 MW. • Installed capacity as on March 2006 – 5,339.43 MW • Government of India through Ministry of New and Renewable Energy Sources has proposedcapacity installation of 10,000-12,000 MW of renewable energy sources by Financial Year 2012 • President of India wants to see a installed capacity of 25,000 MW from renewable energy sources by 2020

5. Wind Power in India Growth of 57% Investments made into Wind Energy Projects are allowed depreciation on a fast track basis – current allowable rate is 80 percent of the project cost Wind Power Projects are eligible for a 100% tax holiday under Section 80IA of Indian Income Tax Act for a period of 10 continuous years during the first 15 years of operation post commissioning..

6. Wind Power in India – Regulatory framework • Ministry of New and Renewable Energy source. • India is the only country in the world to have a separate ministry dedicated to renewable energy sources • Drives and monitors the growth of non-conventional energy sources with policies and programs • Aggressively promotes wind energy • The power sale in India has been dominated to the State Electricity Boards (SEB) wherein the tariff is determined for a period between 10 to 20 years upfront. • The Electricity Act 2003 attempts at changing this situation to a more competitive environment by delicencing power generation and competition in distribution.

7. Objective for such a product • On a levellised cost basis over the total project life, the cost of the wind power is far more competitive. For a larger growth of the sector large wind energy power projects need to be developed. • The average size of the project is anywhere from 25 MW upwards. Such large size projects can not be done based on the balance sheet funding but require the standalone project funding. • For such a stand alone project finance following three risk need to be mitigated • Wind risk • Technology risk • Offtakers payment risk • One of the ways to mitigate the wind risk is through the wind insurance/derivative product. Such a product will also act as a credit enhancement to the prospective lender which will indirectly reduce the cost of funding.

8. What wind energy producer expects • An insurance or derivative product to mitigate the risk of the variation in the wind speed. The product should only take in to account the variation in the wind speed and should ignore the other factors which contribute the generation of the final output. • The viability of the project fully depends on the accuracy with which the actual wind speeds match with the estimated wind speeds. Since the tariffs of any wind energy project are predetermined for a period of 10 years and above, the variation in the wind speeds directly effect the revenue generation. • The product should have the following main features • The product should take care of the variation in the wind speed irrespective of the actual energy generated at the end of the period • The policy should be for a long term period and not restricted to one year only. This is essential since the certified life of the wind energy converter is 20 years. • Product should be able to replicate itself on a larger base. The product could be structured in such a manner that it will have the natural hedge over the multiple states / cross sector across the country.

9. What wind energy producer expects • The back bone of such a insurance policy is the historical data of the wind energy project. Even though the wind energy is in infant stage, the wind data is maintained by the Indian Metrological Department. (IMD) However certain bottlenecks which will be noticed are as follows • The data from IMD may not be available in terms of exact location. • The data is measured at a very low height which may not be representative. • Today developer does its own wind assessment for a minimum two years before putting up the project. This analysis is on the exact location and the hub height of the wind turbine. This data is also verified by the external agency before putting up the project. The data is continued to be collected even after the commissioning of the project. • With this the average data available with the company will be around 5 to 6 years. • Based on the above the insurance industry is requested to look at the authenticity of the wind data instead of availability in terms of number of years.

10. ITC context setting and wish list Shailesh Naik

11. ITC – Rural economy – Weather Correlation • ITC – IBD division - is one of India's largest exporters of agricultural products • Division’s supply Chain initiative – ITC e Choupal has transformed rural economy in MP , UP , Rajasthan and Maharashtra • Better rates for farmers – Advance information on rates - lower waiting time – electronic weighing • Access to better quality & door step delivery of FMCG , Non FMCG , consumer durables, agri inputs and financial products and services • Revenue Model of ITC echoupal and its stake holders – Farmers , Sanchalak , ITC and Network companies is dependent on high traffic of transactions through e choupal • Health of Rural economy determines the traffic of transactions both on procurement and sales • Health of rural economy is highly dependent upon agriculture which is in turn dependent on weather variables • Thus Weather shocks will impact ITC in • Procurement – Affect supply chain dynamics of ITC – Processed food division • Product & services Sales – on account lower disposable incomes . • Weather Insurance sale would cover more than a 100000 farmers this year and next year we expect WI to cover over a quarter million farmers.

12. ITC’s wish list : India Specific • Improve Customer service- Insurance companies • Increase commitment to post sales service - Regular Data Availability - Inform farmers why claim is not being settled or being settled • Improve product Relevance • Map Weather variables with crop requirement /soil conditions • Increase number of Weather stations to reduce basis risk – Ensure Timely and Correct data • Reduce product complexity and cost • Sensitivity to Consumers • A pool to protect farmers in case crop failure is across the region and weather risk fail to map / solve the same • Regulation change / Government support • Market Development support fee for product development and creating awareness. : Film • Government endorsement for this product and support through advertising • Product subsidy for first unit ( Sample) • Discourage bundling with loans and Encourage voluntary purchase

13. ITC’s wish list : International community • Support from Insurance & reinsurance companies • Product Design • Training and development • Process Improvement and cost reduction consultancy • Global Success and Failure sharing forums

14. BASIX P. Gunaranjan

15. How does weather risk affect BASIX? • BASIX operates in over 12,000 villages spread over 9 states in India • With a mission to promote sustainable livelihoods • And by choice works in the poorer and arid districts of India • Where Agriculture is the predominant source of livelihood for households • (majority(80%) of whom have a land holding of less than 2hectares) • BASIX’s customer contact and interactions in the initial years of operations showed that while credit is necessary, it is not sufficient for promoting livelihoods • (as on Sep-06 BASIX made a cumulative disbursements of Rs 7 Billion and had an outstanding credit portfolio of Rs 2 Billion) • Risk management particularly for agriculture which was rainfall dependent, was identified as an important credit plus service to be offered to its customers • Between 1999-2002, BASIX carried out research and also undertook small pilots on testing an in house crop insurance scheme • Which culminated in the first weather insurance pilot done in 2003 in collaboration with ICICI Lombard and World Bank

16. BASIX’s wishlist • WHAT DO YOU WISH THE WEATHER MARKET COULD OFFER IN INDIA THAT IT DOES NOT AT THE MOMENT? • Need to reduce basis risk through • Deepening the network of weather stations to make the weather data more relevant to farms that are scattered over a wide geography • (but, is the investment to be private or public?) • Improved design of the product to increase the correlation of the indices to crop requirements • (yet simple enough for the easy comprehension of the majority of farmers, who are illiterate) • Integration of insurance with Business development services that focus on risk mitigation and productivity enhancement, so as to give a more complete solution to customers and to also reduce cost of transactions • (in the absence of this, there are undue expectations from farmers on the risks that a weather insurance contract can cover) • Greater investments to educate the target market on the concepts of insurance, its function and benefits.

17. BASIX’s wishlist • WHAT HURDLES NEED TO BE OVERCOME BEFORE YOU SUBSTANTIALLY INCREASE YOUR (WEATHER) TRANSACTION VOLUME? • Simplification of Premium collection and claim payment processes • through use of Information Technology solutions and • more enabling regulations on micro-insurance • Current Service tax rates levied reduce affordability and attractiveness of the product to customers • Improving the maintenance of existing IMD weather stations so that certified weather data may be made available more promptly • (In some districts it takes more than 3months to obtain certified data and such locations weather insurance loses one of its key promises of quick settlement of claims)

18. Bios • Mr. Ajit Joshi • Assistant Vice President _ Enercon Financial Consultancy which is 100% subsidiary of Enercon (India) Ltd – Subsidiary of Enercon Gmbh Germany • Responsible for designing and developing new financial structures to suit the requirements of customers and company’s own power projects. To achieve financial closures with new credit enhancements with non conventional instruments. • Education Qualification • MBA - Finance • Year of experience • 17 + experience in finance and accounts in diverse industries like Textile,cement,rubber, FMCG , smart card technology and wind power.

19. Bios • Mr. Shailesh Naik • Head - ITC e choupal Financial services • Responsible for Insurance and investment products that are sold through ITC echoupal channel • Education Qualification • MBA + Bachelor in Mechanical Engineering • Year of experience • 10 + experience in sales and marketing in diverse industries like financial services , FMCG , Automobiles .

20. Bios • Mr. P. Gunaranjan • Manager-Insurance Business, BASIX • Responsible for Development and implementation of Insurance services at BASIX, which now includes the following product lines: Life, Health, Weather, Livestock and Micro-enterprise Insurance • Education Qualification • MBA +Masters in Physics • Years of experience • 5years at BASIX (started with work in field operations at BASIX and then moved to the insurance wing of BASIX)