While India’s track record in large-scale solar installations is respectable – with about 20 GW of installations as of March 2018 – the rooftop solar segment has had a slower start. But that could be changing now. In the past one year, the segment has added almost 1 GW of capacity, accounting for 50 per cent of the entire installed rooftop capacity and more than the entire capacity added in the previous four years combined. Clearly, rooftop solar is emerging as the fastest-growing segment in the renewable energy space.
The growth is largely owing to the fact that rooftop solar power is now cheaper than commercial and industrial power in most states. Government incentives and policies to push rooftop solar installations have also contributed to the growth during the past year. Besides, costs have declined significantly over the past few years up till mid-2017, thereby leading to lower tariffs in successsive auctions for rooftop project allocations. Overall, because of increased competition in the solar power space and low solar panel prices, it has become cheaper to set up rooftop systems than before.
Until last year however, it was difficult to break into the rooftop solar market. Although the business case was strong, financing was difficult to come by. In solar plants, the largest capital investment goes towards the installation of solar panels, and must be made upfront. At current prices, this amounts to an investment of about Rs 50 million per MW. But banks have been hesitant to invest in the rooftop space because of the high perceived risks and limited information on the performance and track record of rooftop solar investments. As a result, for the longest time, the segment has struggled to arrange debt financing for project development.
Third-party model of project development attracts debt funding
Although the Reserve Bank of India (RBI) has identified rooftop solar as a priority lending sector, high upfront costs are a major hurdle in unlocking the potential 40 GW rooftop solar market. Domestic banks including the State Bank of India (SBI), the State Bank of Hyderabad, IDBI Bank, Punjab National Bank (PNB), DENA Bank (among public sector banks), and YES Bank and RBL Bank (among private sector banks) were the early movers in providing finance for rooftop solar projects under most of the central- and state-government programmes. However, until last year, there was no single popular large-scale lending model for rooftop financing.
In May 2017, the Asian Development Bank (ADB) and PNB signed a $100 million loan (to be guaranteed by the Government of India) to finance large rooftop solar systems on industrial and commercial buildings throughout India. Under the loan agreement, PNB will use the ADB funds to provide further loans to developers and end-users to install rooftop solar systems. This is the first tranche of the $500 million multi-tranche Solar Rooftop Investment Program (SRIP), approved by ADB in 2016. The financing includes $330 million from ADB’s ordinary capital resources and $170 million from the multi-donor Clean Technology Fund (CTF) administered by ADB. The first-tranche loan of $100 million is being financed entirely from the CTF.
This development was followed by the World Bank announcing a $625 million loan to SBI in June 2017, to provide discounted finance for rooftop solar installations on factories and institutions. To effectively disburse this amount, SBI developed financing models for providing loans at very competitive rates and long tenors. The market response so far has been very positive.
The lending models devised by SBI and PNB have been made possible due to the industry’s efforts to successfully demonstrate the RESCO model, or third-party model, of project development and financing. Under this model, consumers buy electricity from a developer (RESCO), which takes care of the financing, installation, ownership and operation of a rooftop solar plant on the consumer’s property. The developer then sells the power to the consumer under a long-term power purchase agreement at a specified price during the contract term, typically for 15 to 25 years. The success of the third-party financing model hinges on the fact that developers are in a better position to manage financing challenges and performance risks – and the model shifts these responsibilities from the consumer to the developer.
In the initial few years though, limited access to debt finance remained the most significant challenge to the third-party financing model. Since the rooftop solar segment was new and transaction costs were high (due to the smaller projects), banks did not feel comfortable in lending to these projects. Due to limited access to debt finance, the third-party financing model was mostly driven by equity finance, which had limited potential for scale. However, the government’s push as well as favourable market factors helped RESCOs scale up to a sizeable level. The RESCOs remained mostly focused on the development of rooftop projects for the government/institutions and the industrial and commercial segments, thereby keeping the consumer credit risk in control. All these factors provided enough cushion for multilateral debt financing by ADB and the World Bank, which, in turn, gave the much-awaited push to take rooftop growth to the next level.
One of SBI’s first borrowers under its rooftop programme was Amplus Energy Solutions, a private renewable energy developer and an early mover in the rooftop solar development space. “World Bank-SBI financing has enabled us to borrow at 8.25 per cent – down from 12 per cent before. This has helped us lower the cost of solar energy we provide our customers,” said Sanjeev Aggarwal, managing director, Amplus Solar, in a media interview. Currently, Amplus has around 250 MW of solar plants either installed or under construction.
Growing focus on MSME segment
While RESCOs have managed to get access to finance, it is mostly directed at projects that have high creditworthiness of the final buyer. These developers have now started making inroads into the micro, small and medium enterprises (MSME) sector, which has huge potential for rooftop solar. In a significant development, the Singapore-based Green Climate Fund (GCF) has recently approved the National Bank for Agriculture and Rural Development’s (NABARD) proposal for a $100 million line of credit for rooftop solar installations in the commercial, industrial and residential housing segments in India. GCF is the financial arm of the United Nations Framework Convention on Climate Change, with a portfolio of $3,730 million invested in developing countries to help them reduce emissions and mitigate climate change. NABARD’s proposal is the first “private sector facility proposal” sanctioned by GCF in India, wherein NABARD has been accredited as a Direct Access Entity of GCF for channelling resources under the fund. Financing of this size will enable NABARD to help the industry scale up rooftop installations in the MSME sector. The proposed rooftop loan scheme will be executed through Tata Cleantech Capital Limited.
Prior to this too, NABARD, along and the Small Industries Development Bank of India (SIDBI), was involved in providing financing for rooftop solar projects being allocated under various programmes. These institutions have also been investing separately in the segment. For instance, in March 2017, the Samridhi Fund, a Rs 4.5 billion facility owned by the private investment arm of SIDBI, made a Rs 200 million investment in Mumbai-based solar installation start-up Oriano Solar. The Series A investment comprises a mix of debt and debentures.
Dearth of financing for residential rooftop
While the RESCO model has proved successful for the industrial and commercial segments, it has not seen much uptake in the residential space so far. For a RESCO model to be commercially viable, project developers prefer to work for marquee clients that have good credibility. The creditworthiness of residential users is often weak.
In this context, a model that is being talked about for the residential segment is the leasing model. Under this, homeowners can have solar panels installed on their roofs with no upfront payment, and simply pay a monthly fee to the project developer. In India, there are two or three plans for solar leasing, which depend on state policies. For instance, Karnataka has come up with a solar leasing scheme that involves the renting of residential solar roofs to developers. These developers can install a solar PV plant on the rented residential rooftop and have the right to sell the electricity to the grid. In one of the leasing plans, the consumer pays a monthly rental for solar power. There is also the single payment plan, wherein a large lump sum amount is paid instead of a monthly rental to lease out the PV system.
However, the leasing model is not free of issues. There are no model lease agreements and no way of making these agreements between the solar company and the roof owner binding. This has been one of the factors inhibiting the success of large-scale rooftop solar installations in the residential space. A standard format for legal documents and agreements will go a long way is increasing rooftop installations even on residential apartments, and will give comfort to lenders and equity investors to invest in these projects.
Activity begins on the equity side
Only debt funding is not enough to meet the rooftop financing requirement; equity financing is also key. Currently, the majority of the investment in the rooftop space comprises promoter funds, and private equity and venture capitalists’ money. Merger and acquisition (M&A) activity in the segment has been minimal so far. One significant deal in this space was Amplus Energy Solutions Private Limited (a portfolio company of I Squared Capital) acquiring the commercial and industrial rooftop projects of SunEdison India in 2016. The purchase helped Amplus expand its client portfolio to include firms such as Intel, Amway, Standard Chartered Bank, Whirlpool and Delhi Metro.
With some of the players in the rooftop project development space having gained reasonable scale, M&A activity in the segment is likely to gain traction. According to market speculation, Shell is interested in acquiring a majority stake in Fourth Partner Energy, a Hyderabad-based rooftop solar power firm. The distributed rooftop solar project developer has so far installed over 50 MW of solar PV capacity across more than 1,400 systems in the country.
The way forward
Around $40 billion-$50 billion of capital investment is required to meet India’s rooftop solar capacity target of 40 GW by 2022. Going forward, innovations like solar investment trusts that provide equity funding to multiple small-scale projects, and sustainable energy bonds (SEBs) that channel finances from impact investors through non-banking financial companies can drive market growth as they invest in projects across sectors and thus diversify their risk profile.
A solar investment trust is an investment vehicle that can help small-scale industrial and commercial rooftop solar developers raise equity capital at a lower cost of financing. It is similar to a mutual fund, with the primary difference being that the trust can have a direct holding of the project special purpose vehicle (SPV), while mutual funds usually hold the shares of the company at the corporate level and not at the project SPV level. According to the Climate Finance Lab’s estimates, solar investment trusts can potentially mobilise more than $1 billion of capital for the rooftop solar segment within the next five years.
SEBs are a class of debt instruments meant for impact investors looking for debt exposure in the sustainable energy sector in its initial stages. They have a defined use of proceeds – financing sustainable energy projects – as well as clear and standardised evidence and benchmarks for project impact assessments that can establish performance track records at successive stages of the development of the sustainable energy market.
In India, SEBs were launched by cKers Finance in early 2017. The firm provides debt capital in the range of Rs 20 million-Rs 150 million. It is backed by global sustainability firm cKinetics, cleantech catalyst Infuse Ventures, and IIM Ahmedabad’s Center for Innovation Incubation and Entrepreneurship. As of end-2017, the company had invested in at least five firms operating in the rooftop solar, solar home systems and solar pump segments. In the long run, SEBs will help establish a track record for mainstream debt investors to invest at a later stage, by channeling impact investments and raising the confidence of other classes of investors. SEBs are also an aggregation model that can streamline investments into small-scale projects, thereby lowering transaction costs. cKers Finance estimates that SEBs can mobilise $3 billion in the decentralised renewable energy and energy efficiency segments, and $1 billion in the energy access segment.
Green asset-backed securities also enable access to mainstream financing for small-scale projects (such as rooftop solar) and provide opportunities to free up bank capital that can be ploughed back into green projects. In the near future, the industry may also see the revitalisation of municipal bonds, with the potential to be classified as green bonds. In June 2017, the six-fold oversubscription of bonds issued by the Pune Municipal Corporation for water infrastructure is evidence of this renewed interest in municipal bonds. Blended finance, which leverages public or philanthropic funding to crowd-in private investment, also holds enormous potential in India.
Summing up, at a time when the country is gearing up to meet the 40 GW rooftop solar capacity target, developments on the green finance front spell good news for the segment. Financiers, both on the equity and the debt side, which were earlier hesitant to invest in the rooftop segment, have turned bullish for many reasons. Moreover, new classes of investments are emerging, which will bring in much-needed finance for small-scale as well as large rooftop projects in the country.