The Indian Solar Industry has grown over 900 times in the last seven years, from a mere installation capacity of 17.8 MW in March, 2010 to nearly 15,611 MW in June, 2017. (MNRE, 2017). However, the real solar boom is yet to come, as the country works to realise its ambitious target of 100 GW of installed Solar PV capacity by 20221. The upward revision of the solar mission target from 20 GW to the mammoth 100 GW has been indicative of the government’s commitment toward solar power. It has also resulted in the solar landscape of the country changing rapidly. The government’s firm commitment to scaling up solar power, combined with initiatives such as ‘Make in India’ and ‘Skill India’, have the intention of giving impetus to solar developers, manufacturers and investors. However, availability of finance for solar projects has not kept pace with the optimistic commitments being made by the government and developers alike. With significant risks and challenges ahead, India needs to put its steps carefully.
At the February 2015 Renewable Energy Invest Meet & Expo, the Government of India invited Green Energy Commitments from developers, manufacturers, and financiers. This resulted in solar and wind developers committing to nearly 240 GW of capacity addition by 2022, but financiers submitting commitment certificates to finance only a fraction of that capacity2. Government estimates suggest that an investment of USD 92 billion (INR 600,000 Crore) would be required to reach the 100 GW target3. Independent analysis suggests that the investment requirement may be higher than government estimates. The investment required under optimistic conditions of rapid fall in module prices (30% decline by 2021-22) and the balance of system costs and a moderate inflation rate of 6.5%, amounts to USD 100 billion. However, in a conservative scenario with high inflationary conditions (~9%) and moderate decline in module and balance of system costs, an additional USD 13 billion (INR 80,000 Crore) would be required4. In 2015, total global investment in all renewable energy projects (excluding large hydro) was USD 285 billion, resulting in a capacity addition of 134 GW. India’s total investment in renewable energy in 2015 was USD 10.2 billion, 22% higher than the country’s renewable energy investment in 2014.
The financial structure of solar projects typically consists of 70% debt and 30% equity. Equity is usually contributed by the project developer, but there is a growing trend to raise privately funded equity from third parties such as Private Equity firms. Debt is currently raised almost entirely from asset financed bank loans, making the solar sector heavily reliant on bank debt, unlike other infrastructure projects which are also funded by government raised monies through issuing bonds. Despite the government’s commitment to the scaling up of solar power, it has yet to implement a policy to mobilise debt from outside the banking system. Public sector banks have committed USD 10 billion (INR 65,000 crore) to solar power projects over the next six years, with additional commitments being made by private banks such as YES Bank and ICICI Bank. However, the Indian banking system is already close to its recommended sectoral of 15% for the power sector, of which renewables comprise a small part, making every additional unit of investment hard to secure. The problem of availability of finance is further compounded by several risks specific to solar power projects that make access to finance for these projects even more tenuous.
The solar industry in India relies heavily on bank loans for accessing debt. This results in banks facing a problem of over-exposure, and the sectoral lending caps prohibiting any additional lending to power projects. Technology risks that may exist due to a lack of banker familiarity with solar energy technologies, or lack of irradiation data, performance data, information about the quality of parts etc. could also limit debt flows from banks to solar projects. Banks could also limit their financial commitment to solar projects due to lack of policy certainty over the enforcement of the renewable purchase obligations and the lack of support licensing bodies. The operational constraints of land acquisition and clearances, etc. could also pose a threat to the flow of finance from banks.
Institutional investors such as pension funds, provident funds and insurance companies also play a major role in solar financing by contributing debt or equity to solar projects. Institutional investors invest in low risk projects, with high credit ratings. There is, therefore, need to bridge the gap between the low risk appetite of institutional investors and the relatively high credit-risk profile of renewable energy projects. Credit ratings and institutional investor confidence in solar projects are also limited because several solar technology applications are still emerging technologies with no proven long-term performance standards.
The risk associated with acquiring land and the necessary clearances to construct a solar power plant is a significant roadblock to the flow of finance. Land acquisition, specifically, was identified by several respondents as a critical factor, with much finance flows being unavailable till the power producer had already acquired the land. Similarly, clearances, timely approvals and enforcement of policies often limit the flow of debt from banks. The high construction and regulatory risks result in a decline in the ‘ease of doing business’ making an investment in solar projects less attractive, especially for international investors of both debt and equity, including international organisations, due to their unfamiliarity with the Indian regulatory process.
Technology risk is a significant cause for low finance in the solar sector. Technology risks are determined by several variables such as the quality of the solar panels and the balance of system, resource data (irradiation data) availability and the margin of error in the data, and variability in the plant load factor. Given the relatively short history of solar power generation in India, there is lack of data on a lifetime of panels, their performance over time, and the impact of weather on their operations. These factors reduce the comfort levels of investors, especially debt investors. Technological uncertainty crawls into investment uncertainty.
However, amid all the risks and challenges in solar energy financing or renewable energy financing in India, there is a new hope in the form of green banks. Indian Renewable Energy Development Agency (IREDA), the country’s only non-banking finance company dedicated to clean energy funding, has begun work towards converting itself into a commercial bank — perhaps called ‘ Green Bank of India’. This move shall allow IREDA access to public funds in the form of deposits and correspondingly use that money to fund capital intensive renewable energy projects which shall include considerable investment in the solar energy sector as well. Similarly, green bonds have tremendous scope in the context of India’s renewable energy sector. In 2015, India was the fourth largest issuer of green bonds in the world, raising debt worth USD 1.1 billion, ahead of several major economies such as China, Japan, Norway and the UK. Scaling up the market for green bonds could further reduce the cost of capital, stimulate the flow of finance from institutional and retail investors and expand the base of issuers.
India’s national commitment to the scaling up of solar energy combined with one of the highest irradiation levels received by any country in the world, makes the solar sector ripe for investment. However, the risks plaguing the sector, ranging from those specific to solar technology to those specific to India’s finance market is restricting the flow of finance into India’s solar market. While investment in the Indian solar market is greater than ever before, the pace of advancement could gain impetus if certain risks were addressed.
Photo Credit - https://www.conserve-energy-future.com/various-solar-energy-facts.php
4 CEEW Cost Analysis [Utility scale capacity at INR 7 crore/MW and Rooftop capacity (with storage) at INR 10 crore/MW]
Deutsche Bank report: Make way for the sun – India solar power investments could surpass that of coal. (2015) Accessed from: https://www.db.com/cr/en/docs/Deutsche-Bank-report-Make-way-for-the-Sun.pdf
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