Changing Funding Needs

Moving beyond traditional financing models in the solar segment

With the evolution of the solar power segment comes the need for capital and financing for the targeted capacity of projects. As business models transform to cater to the prevailing low-tariff conditions, the need to move away from traditional financing tools to innovative low-cost sources of capital gains traction. The present set of challenges in the solar power segment is expected to deepen as greater capacity is added each year, which, in turn, affects the risk profile of projects. This indicates a stronger need for tools that can factor in payment security and power offtake risks to yield better returns from solar power plants.

It is estimated that about $100 billion of capital would be required to reach the country’s renewable energy target of 175 GW by 2022. The target now stands revised to 227 GW, which will require additional funds to be channelled into the sector. Along with availability, it is access to this capital that will be instrumental in developing the capacity to meet these ambitious targets. One of the primary responsibilities of financiers is to make available low-cost funds for developers in order to ensure low tariffs, higher returns and sustained investor interest.

Segment status

According to Khekiho Yeptho, deputy general manager, technical services, Indian Renewable Energy Development Agency (IREDA), the National Solar Mission (NSM) has not only promoted solar power development in the country, but has also provided access to a large amount of capital for the development of these projects. This is reflected in the large size of solar portfolios owned or financed by most financial institutions across the country. In the past five years, with IREDA’s experience as one of the foremost leaders in solar financing, no project has been a non-performing asset.

The schemes that began during the market’s initial growth phase have now evolved significantly. For instance, Yeptho says that IREDA started the rooftop loan scheme in 2015 for small rooftop projects being developed at the time. This has now grown into two separate types of schemes for smaller and bigger players. Meanwhile, a line of credit is also being initiated by IREDA. It is interesting to note that with the increasing scale of projects, the financing tools have also changed, with different terms and conditions for large and small projects.

According to Sitesh Sinha, assistant vice-president, PTC India Financial Services, even during the initial years of the NSM, when tariffs and risks were high and projects were few, funding was being provided. The experience gained from those projects was used to create better financial tools to cater to the growing demand in the sector. The stringent norms for collateral and payment penalties levied by financial institutions were relaxed as the time and experience in the solar segment increased. Moreover, there is increasing competition even in the financial lending and investment market for solar power, thereby creating opportunities for developers to gain access to competitive capital.

The projects that were installed as part of Phases I and II of the NSM have undergone refinancing a few times. Interest rates have increased, but for these projects they have remained below 10 per cent. The current trend of refinancing is, therefore, here to stay in the solar power market as the bankers have tested the benefits of the model.

Financial challenges

The solar power segment has a unique set of financial challenges in the Indian market that often impede growth. Access to capital as well as its availability continues to be a key issue in the sector. The subsidies provided in the rooftop solar space are not disbursed fast enough, further aggravating the issues. According to Yeptho, rooftop solar can contribute significantly to the achievement of the government’s target. However, a faster pace of auctions and other government interventions are needed to match developer interest.

According to Vikas Bansal, executive vice-president, corporate finance infrastructure banking, Yes Bank, it is the joint responsibility of the developer and the investor to prevent solar power assets from falling into the category of stressed assets, a route being taken by many assets in the power generation sector. In the context of the rooftop segment, there is a serious lack of standardisation across business models, power purchase agreement terms, locations and debt financing conditions, among others.

Even with a strong interest in the market, the numbers indicate that solar rooftop uptake has been limited, with access to finance still being a key barrier for developers. According to Vijay Nirmal, programme manager, US-India Clean Energy Finance, Climate Policy Initiative, most of the installed capacity in India is in the capex mode where the installations are owned by consumers. Meanwhile, the third-party sale model has not gained enough traction, contrary to industry expectations. A major contributing factor for this is the apparent lack of creditworthiness of the power offtaker in the third-party arrangement.

The perceived lack of credit-worthiness of discoms also impedes sector growth by increasing the risk profile of projects and thus increasing the cost of finance. One of the largest potential segments for rooftop solar – micro, small and medium enterprises – are largely unable to participate in the solar growth on account of such challenges.

Policy uncertainties

With projects now being supported by the Solar Energy Corporation of India (SECI), there are fewer regulatory issues in the rooftop solar segment. According to Yeptho, there may be challenges that crop up with time as the quantum of projects being installed increases every year. At present, the reluctance of discoms to approve projects is a regulatory issue that some developers have to face. This is expected to become easier with the introduction of the Sustainable Rooftop Implementation for Solar Transfiguration of India scheme, wherein the discoms have been appointed as the nodal agencies for rooftop solar approvals and a performance-linked incentive has been made available to them.

Net metering remains an issue despite it being theoretically present in 29 states. Nirmal says that approvals for net metering take longer than the gestation period of the project. Uncertainties owing to the recent draft policy of the Ministry of New and Renewable Energy, which proposes to withdraw subsidies for certain sectors, may hamper a further scale-up of rooftop solar in these sectors.

Sinha believes that tariff is the biggest challenge in the solar segment. As the tariff falls with each new tender, the challenge for financiers becomes more pronounced, given that their exposure in the project is directly related to the revenue and the tenor for which the investor chooses to remain in it. Moreover, the operational issues related to the delay in commissioning by agencies such as SECI or NTPC Vidyut Vitran Nigam also dampen investor interest. As the certificate of commissioning and the first tranche of revenues are delayed, the developer faces a liquidity crunch.

Emerging instruments

According to Nirmal, traditional financing instruments like domestic debt financing still remain largely untapped for the rooftop solar segment, while issues in access to capital have made stakeholders move to alternative sources of financing. Municipal solar bonds are ideal for small rooftop developers that do not have the financial strength to issue bonds. Here, municipalities are financial aggregators and provide a line of credit through the issuance of bonds and a capital lease mechanism to selected developers. However, since municipalities are not incentivised or mandated to perform this non-core activity, little interest can be seen at their end.

In addition to this, credit guarantee schemes, initial public offerings (IPOs) and green bonds have emerged as important financial instruments. The sector is waiting to see the outcome of the upcoming IPOs by leading solar power companies.

In conclusion, it is important to understand that the country’s solar power financing needs are huge. While new financial instruments are being introduced in the market, their success remains to be seen.

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