Dearer Debt

New ECB framework could make renewable energy projects unsustainable

The availability of domestic finance has been one of the primary challenges for the renewable energy sector in India. High capital costs, falling margins, grid integration and transmission issues all contribute to the high risk profile of these projects. The poor discom payment track record and curtailment are some additional factors that deter investors from funding green projects. Even if finance is available, it is often inaccessible, given the high cost of capital. Financing is especially difficult for projects in the pipeline as the risks associated with them are considerably higher than those of operational projects. The risk-averse nature of lenders, domestic or international, leads to a tricky situation for renewable energy projects, often resulting in delayed financial closure and cost overruns. Meanwhile, despite falling capital costs, renewable energy projects remain capital intensive.

Renewable project developers in the country, therefore, take the refinancing route to fund their projects. In the absence of low-cost finance, developers typically take pre-construction and under-construction rupee-based loans at higher interest rates to get the project started. Once operational, the developers refinance their projects through foreign currency denominated external commercial loans at lower interest rates. This is owing to the low risks associated with operational projects and the high investor interest. Over the years, this has become an accepted funding practice in the renewable energy sector in the country for projects that are unable to procure easy finance. These borrowings are governed by policies defined by the Reserve Bank of India (RBI) under its external commercial borrowings (ECB) policy.

On January 16, 2019, RBI revised its ECB policy. The new ECB framework has certain key features such as merging of tracks, expansion of the eligibility criteria for borrowers, revision of the lender profile, definition of the minimum average maturity (MAM) period, and the procedure for the regularisation of delayed reporting. Of these, merging of tracks for borrowings has the largest implication for the renewable energy sector and project development.

Changing tracks

Before the revision, the RBI policy defined the borrowing tracks as follows – Track I for medium-term foreign currency denominated ECBs with a MAM of three to five years; Track II for long-term foreign currency denominated ECBs with a MAM of 10 years; and Track III for Indian rupee denominated ECBs with a MAM of three to five years. As per the new framework, Tracks I and II have now been merged and are denoted as “foreign currency denominated ECBs”, while Track III and rupee denominated bonds have been merged as “rupee denominated ECBs”. Further, the negative list given in the new framework includes “repayment of rupee loans except from foreign equity holders” as one of the end-uses that cannot utilise ECB proceeds.

Until now, foreign currency loans in the form of bonds were used to refinance the rupee loans taken for the development of renewable energy projects. However, with the merging of tracks and repayment of rupee loans clearly defined in the negative list, the renewable energy sector will be unable to use the refinancing route to fund projects with international capital. To this end, the National Solar Energy Federation of India (NSEFI) has written to the Prime Minister’s Office (PMO) urging it to intervene and direct RBI to exclude the repayment of rupee loans from the negative list.

Pranav Mehta, chairman, NSEFI, stated in the letter, “NSEFI apprises you that till date, RBI allowed external borrowing in the form of security bond/loan in US dollars to replace Indian rupee loans having a tenure of 10 years or more, given by domestic banks/financing institutions. As per this notification, the erstwhile Tracks I and II are merged as “foreign currency denominated ECB” and Track III and rupee denominated bonds framework are combined as “rupee denominated ECB” to replace the current four-tiered structure. However, the existing permissible end-use of repayment/refinancing of rupee loan availed of under Track II of ECB has not been considered in the merged foreign currency ECB framework in any form.”

Impact analysis

Renewable energy projects are currently in a dual-pressure situation – profit margins are shrinking owing to falling tariffs, while the cost of domestic finance remains high despite a reduction in capital costs. Tariffs have stabilised somewhat over the past few tenders. However, access to competitive finance remains elusive with multiple issues coming into play.

Land acquisition is the foremost challenge for renewable energy projects. Unless the project is part of a solar park or a wind farm, the responsibility to find and acquire land rests on the developer that has won the capacity. Lack of adequate transmission capacity is another challenge that is becoming greater with each MW of renewable energy capacity being added in the country. The power transmission network in the country was designed for stable output from coal- and hydro-based power plants. However, with intermittency and variability being inherent to renewable energy sources, their integration into the existing transmission network is proving difficult. In fact, projects in some states have experienced curtailment due to lack of transmission capacity despite must run status. Meanwhile, with safeguard duties in place, the cost of procurement of solar modules (60 per cent of the total project cost) has become higher. These challenges greatly enhance the risk profile of the project, varying according to the project location and implementing agency. As a result, the lending rates are high.

Project refinancing using low-cost foreign currency ECBs presents an alternative to high-cost capital for the entire duration of the loan, amidst low-profit conditions. With the new RBI framework expressly prohibiting the use of ECBs for repayment of rupee loans unless a foreign entity is an equity holder in the project, the refinancing route may become unavailable. In simple terms, projects owned and developed by domestic entities will not be able to procure ECBs to repay their rupee denominated loans. High-cost loans are, therefore, the only available option to finance renewable energy projects.

Dearer capital will lead to increased project costs, which will put further pressure on developer margins. Most recent tenders have seen sub-Rs 3 per kWh tariffs, while some states have defined a ceiling tariff of a similar nature. Unless tariffs are allowed to increase, margins will remain constricted. This could question the financial sustainability of renewable energy projects, throwing the debt service coverage ratios and internal rates of return (two financial benchmarks that define the feasibility of renewable energy projects) out of tune.


In his letter to the PMO, Mehta writes, “NSEFI requests your good offices to intervene in the matter and provide suitable direction/advice to RBI to carve out a special category like the erstwhile Track II with ECB having a MAM period of five years and above within the new merged foreign currency ECB category to permit solar/wind project developers to repay their rupee loans to domestic lenders from ECB proceeds.” The letter further seeks the removal of the repayment of rupee loans from the negative list of the framework.

The concerns raised by NSEFI are relevant for the sustainability of the domestic renewable energy sector. The revision of the ECB framework could also prove to be detrimental to the ambitious 2022 targets specified by the government. With safeguard duties already in place and the growth of domestic manufacturing moving slowly, the RBI move could threaten to derail the progress made by the renewable energy sector in the country so far. At this critical juncture, policies facilitating finance for the renewable energy sector need to be introduced, instead of frameworks that jeopardise the handful of mechanisms available to reduce the project costs.

By Ashay Abbhi


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