Solar Municipal Bonds

Innovative financing mechanism to support rooftop solar growth

India’s drive to achieve its solar energy targets is evident from the series of tenders that have been rolled out in recent months. With a cumulative solar capacity of about 20 GW, the country still has a long way to go to meet its 100 GW by 2022 target. As of December 2017, India had about 2,101 MW of rooftop solar capacity. It is estimated that 6 GW of rooftop solar needs to be added every year to reach the 40 GW target.

Even though utility-scale solar tariffs have come down to Rs 2.44 per kWh due to the drastic reduction in solar panel and equipment prices, the rooftop segment has not benefited from this and the tariffs still hover around Rs 4-Rs 5 per kWh. A key reason for the higher tariffs is the lack of financing for promoting rooftop solar installations. As of now, most rooftop tenders have been released by government agencies. In addition, it is mostly industrial consumers that have been opting for rooftop solar power systems to save on the high discom tariffs. However, a solar revolution is impossible without the inclusion of residential consumers in the rooftop sector, promoted by the discoms. A recent report by the Climate Policy Initiative (CPI) proposes “Solar Municipal Bonds” (SMBs) as a potential solution to finance rooftop solar in India by bringing down costs and making rooftop projects financially viable for a wide range of consumers. SMBs are similar to other types of bonds released by municipal agencies for raising low-cost finance to promote projects in their jurisdiction.


The SMB model follows a bottom-up approach to facilitate financing for rooftop projects. The model is based on public-private partnerships at the city level, wherein municipalities can issue bonds and then transfer the proceeds to private rooftop solar developers through special purpose vehicles (SPVs). The profits made from these projects would then be used to pay back the investors.

The SMB model proposed by CPI aims to remove the three key barriers hampering the growth of the Indian rooftop solar segment. Broadly, these are the high upfront capital expenditure required for rooftop solar power system installations, perceived performance risks and limited access to debt capital.

Rooftop solar projects can be largely deployed using two modes: capex and opex. The opex mode, which utilises the facilities provided by a renewable energy service company (RESCO) through a power purchase agreement (PPA), has been proposed as a suitable method to run projects funded by SMBs.

The CPI report reveals that the issuance of municipal bonds could increase the debt availability for rooftop solar project developers and lower rooftop solar costs by up to 12 per cent. The bonds can help reduce the levellised cost of solar by increasing the debt tenor. The cost would depend on the credit ratings of the municipalities and the bonds, collateralisation of the bond, and the upfront payments needed for the capital lease.

Building a case for SMBs

Many cities including Delhi have come out with rooftop solar programmes with definitive targets. In addition, many municipalities have been given responsibilities under the Solar City Programme to promote distributed solar within their jurisdiction. While the targets set under this mission are quite modest, the cities have the option to increase them.

Municipalities are expected to be in a better shape than private developers for raising capital by issuing bonds. Moreover, they already possess good credit ratings and enjoy state guarantees, making them more likely to attract long-term institutional investors. Since municipalities have relatively better proximity to the consumers, they can aggregate rooftops for larger capacity. This is necessary because the small size of rooftop systems is a challenge faced by many private developers. The economy of scale model is hard to apply to solar power units set up on small rooftops for consumers with low load requirements. Therefore, multiple developers can aggregate their projects in a municipality to access the debt capital raised by the municipal bonds, thereby reducing the risks associated with investments in rooftop solar.

As compared to many other projects under a municipal corporation, rooftop solar projects have lower risk as the PPAs largely assure a constant stream of revenues. Moreover, the management required for such projects is limited and helps the municipal corporations gain experience to issue larger bonds for different infrastructure projects in the future.

Inhibiting factors

The Securities and Exchange Board of India guidelines mandate a bond size of at least Rs 1 billion for a public issuance, which would guarantee better transaction costs. The municipal corporations may not be interested in issuing a bond of this scale initially. However, there is an option to go through the private issuance mode. The funds raised from the SMBs are proposed to be provided to projects being set up under the RESCO model. This model is more suitable for non-residential consumers as they are more likely to honour PPAs compared to residential consumers, thereby assuring lower payment default risks. CPI recommends that the initial funds raised from such bonds should be disbursed for industrial/commercial rooftop projects and then, based on the experience,  given to residential projects.

In addition, the initial debt for the projects would need to be financed through a short-term loan from a conventional lending agency. This is because the bonds are not suitable for funding when project portfolios have not reached a certain scale. Therefore, until the rooftop solar market in India grows, the projects portfolio would need to be built through short-term loans. This would not be a major challenge as banks would be more likely to provide loans to aggregated projects under a municipal corporation and short-term loans would be paid or refinanced though municipal bonds after the market size is sufficiently large. Similarly, a warehouse line of credit has also been proposed to initially finance rooftop projects. India has a relatively shallow debt credit market and hence high credit ratings of solar bonds would be essential for receiving financing and making the model successful.

Another inhibiting factor is that there is no statutory mandate for municipal corporations to promote electricity generation, which may discourage the adoption of this model. In addition, municipalities are required to provide a minimum equity contribution of 20 per cent of the project cost. However, most Indian municipalities are still struggling to cater to the investment demand for basic infrastructure services and it could, therefore, be difficult to meet this regulation. Supporting regulations to facilitate the SMB model are essential as they could allow municipal corporations to act as financial companies, which is not provided for as of now. Moreover, the government agencies are yet to follow transparent accounting practices without which it would be difficult to raise the municipal bonds.

Future roadmap

The report proposes a roadmap for the successful implementation of an SMB model through a series of measures. First, it is recommended that municipal corporations should develop a detailed project development plan by assessing the solar energy potential within their jurisdiction, engaging with project developers, pre-selecting developers on the basis of merit or specific criteria, developing investment plans and getting them approved. The municipal corporations also need to formulate the capital structure for the proposed funds. They need to assess project feasibility reports submitted by interested developers, select projects, ensure the signing of PPAs between consumers and developers, etc. The next step would involve the creation of a master SPV (or a corporate municipal entity) to manage the assets and liabilities of municipal corporations. This will assist with lowering risks, achieving higher credit ratings, lowering funding costs, etc. The municipal bonds would have to be evaluated by a credit rating agency. According to CPI, this rating would differ from the municipality’s credit rating, as the proposed bond would be issued by an SPV. The other procedural steps would involve credit enhancement measures to reduce risks, and the identification of underwriter and cornerstone investors for the bond issuance.

The report finds that even if the targets set under the Solar Citiy programme are met, the capacity additions will be insufficient to meet the national targets. Therefore, there is an urgent need for promoting innovative mechanisms like SMBs to give an impetus to rooftop solar growth. To this end, appropriate measures along with a push from the regulatory bodies can help solar municipal bonds go a long way in providing cheaper financing for clean energy and ultimately help in achieving the set targets.


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