Financing Needs

India has set ambitious targets to increase the share of renewable energy in its energy mix. The government plans to install 175 GW of renewable energy projects by 2022 and 450 GW by 2030. At the end of 2020, the total installed energy capacity in India stood at 379 GW, of which 93 GW, or 25 per cent, was renewable energy.

So far, the government has been focusing primarily on grid-scale solar for renewable energy expansion. However, achieving India’s ambitious renewable energy targets will also require an increase in distributed renewable energy (DRE) projects. If a more favourable regulatory and policy environment is created, DRE projects, though smaller in size, will have greater scalability potential. They will also reduce the long lead times and execution bottlenecks associated with public sector offtake projects.

A report titled “The Future of Distributed Renewable Energy in India”, published by the Climate Policy Initiative (CPI) in May 2021, outlines the benefits and market potential of India’s DRE sector, assesses the current policy and institutional landscape, and provides recommendations for different stakeholders. Renewable Watch presents a summary of the report, with a focus on the financing of DRE projects…

The 2022 target of 175 GW of renewable energy includes 100 GW of solar capacity, of which 40 GW is earmarked for rooftop solar and off-grid solar. There are several market opportunities for rooftop solar and off-grid solar. The government previously introduced policy frameworks for multiple downstream off-grid solar applications such as agricultural pumps, cold storage and home systems. Multiple other DRE downstream applications are emerging, such as energy storage, electric vehicle (EV) charging, and rural non-farm productive use appliances. All of these opportunities mean that DRE can play a vital role in achieving India’s sustainable energy targets in the coming decade.

To achieve these targets, India will require a significant increase in annual investments, from $2 billion in 2019 to $18 billion by 2024. This level of investment will not be possible without significant changes to India’s existing DRE policy framework.

DRE subsegments

The potential of DRE in India is huge. The following subsegments have the highest growth potential for meeting the government’s sustainable energy targets in the coming years, but have fallen short so far on this front.

Rooftop solar

Despite the potential for capacity installation, and the availability of investment opportunities in the emerging business models, the rooftop solar segment has witnessed limited growth in India. This can be attributed to the lack of access to institutional finance – both debt and equity. According to the report, an estimated total investment of $25 billion-$30 billion is required to achieve the 40 GW rooftop solar target. Moreover, as the current installed capacity of rooftop solar is only 5.25 GW, India will require a compound annual growth rate of over 100 per cent (or more than double capacity addition every year) to reach this target.

Solar agri-pumps

Access to reliable water remains a key challenge in Indian agriculture as only about 50 per cent of the agricultural land in India is currently under irrigation. This presents a unique market opportunity to provide solar-based irrigation solutions to around 80 million households in India. Under the KUSUM scheme, the Government of India has targeted a cumulative installed capacity of 1.75 million solar water pumps (around 6 per cent of the total agricultural pumps in the country) by 2024. At the current average price of agricultural pumps – around Rs 200,000 – the estimated annual market size would be Rs 100 billion.

Solar cold storage

The cold storage industry in India was worth around $3.5 billion in 2017 and is expected to reach $9.5 billion by 2024. Access to grid-based electricity has been a challenge for the rural population in India. This presents an opportunity for solar-based cold storage solutions. The government has launched a nodal agency called the National Centre for Cold Chain Development, which promotes a number of subsidy schemes for setting up cold chain elements in India. With an average connected load of 20-25 kW, cold storage offers a significant unaddressed potential for the use of decentralised solar energy.

On a conservative basis, the report estimates that over the next seven years, the contribution of solar cold storage to the overall cold storage market will increase from 1 per cent to 10 per cent. This would translate into a market opportunity of $3.3 billion.

Distributed energy storage

Energy storage is a critical tool for enabling the effective integration of renewable energy and unlocking the benefits of local generation as well as clean and resilient energy supply. The technology is valuable to grid operators around the world for manage the variable generation of solar and wind energy. However, the development of advanced energy storage systems has been highly concentrated in select markets, primarily in developed economies.

In India, factors like operational inefficiencies in the state distribution system, cross-subsidisation of agricultural and residential customers, and huge infrastructure development costs to support government schemes (such as rural electrification) have created a huge revenue gap for discoms, leading to an increase in tariffs for commercial and industrial (C&I) customers. With energy storage costs continuing to fall, a combination of rooftop solar with energy storage is expected to become cost competitive with grid tariffs for C&I consumers in the near future, resulting in an increasing trend of grid disintermediation (going “behind the meter”). This would also reduce the need for net metering and allow DRE to operate unconstrained in the market without subsidies.

Research carried out by Council on Energy, Environment and Water shows that the energy storage market for off-grid renewable energy in India is expected to be worth $2.36 billion by 2024, with rooftop solar accounting for 80 per cent of the total.

EV charging infrastructure

India has over 200 million registered vehicles, with the number of vehicles increasing by over 20 per cent every year over the past five years. This number is expected to increase significantly in the coming years as private motor vehicle penetration in India is only 4 per cent as compared to about 80 per cent in the US and about 55 per cent in the European Union. By 2030, it is estimated that India will have 600 million vehicles. In 2017, EVs accounted for less than 0.1 per cent of the total automotive sales in India. With technology development and favourable government policies leading to a fall in the total cost of ownership, it is estimated that EVs have the potential to account for up to 30 per cent of the total automotive sales in India by 2030.

The government is developing policies and providing incentives to promote the adoption of EVs. The National Electric Mobility Mission Plan 2020 was launched by the central government in 2013 to boost the manufacturing of hybrid vehicles and EVs in India. It aims to achieve the production of 7 million EVs by 2020. In addition, with the government deciding to fund up to 60 per cent of research and development (R&D) costs for the development of indigenous low-cost electric technology, global automobile players are investing heavily in the R&D of EV technologies in India. These initiatives have been complemented by the government’s demand-side incentives through its Faster Adoption and Manufacturing of Hybrid and EVs in India scheme. These factors are expected to present multiple opportunities in the EV value chain – charging infrastructure, design and engineering, manufacturing, fleet management, last-mile connectivity, mobility service providers, and software/ digital technologies.

Bilateral and multilateral support in financing

With the Indian government creating a favourable environment for growth, the rooftop solar sector in India is receiving strong support from bilateral and multilateral institutions.

  • The World Bank has committed $625 million in loans for rooftop solar projects, being on-lent by the State Bank of India.
  • The Asian Development Bank has announced a $500 million loan for financing rooftop solar systems through Punjab National Bank.
  • KfW has tied up with the Bank of Baroda to extend funding of $110 million to re-finance solar projects under the Indo-German Solar Energy Partnership.
  •  KfW has also signed a parallel agreement with the Indian Renewable Energy Development Agency Limited (IREDA) to finance up to $220 million of renewable energy projects.
  • The European Investment Bank has signed a loan agreement with IREDA for financing up to $200 million of renewable energy projects.

While some of these lines remain under-utilised due to the lack of investment-ready high-impact projects, other lines of credit have been disbursed to larger players with strong corporate backing.

In May 2020, CPI conducted a survey of rooftop solar developers that are beneficiaries of the US-India Clean Energy Finance Program. This was done to assess the fallout from the Covid-19 lockdown and the possible repercussions over the coming year. The survey consisted of 20 questions – 18 objective/multiple choice and two subjective questions. The objective questions were designed to allow participants to report their qualitative opinions on a quantitative scale.

In this survey, the lack of working capital was a concern for some respondents. Respondents were also concerned that the extension of due diligence timelines of lenders due to the fallout of the pandemic could become a significant bottleneck in accessing loans. Respondents indicated that positive lender actions such as faster due diligence and reduced interest rates would have the maximum positive benefit in mitigating the financing challenges arising due to Covid-19.


The rooftop solar industry is largely fragmented, with only a few players reaching a pan-India scale. These are mostly early entrants either backed by Indian corporate or foreign private capital. The remaining players are local installers, executing work orders for the larger players. The off-grid solar market also remains small and fragmented, with limited interest from private capital and largely reliant on philanthropic or subsidised private funding.

However, over the past few years, smaller rooftop solar and off-grid companies have been able to better develop their business models and are now in need of growth-stage funding. Information asymmetry, due to the lack of project preparation and a targeted transaction advisory, has been the primary cause of lack of access to capital.

While impact investors have scaled up their operations over the past decade, participation among private capital owners such as family offices, high-net-worth individuals, and corporates remains limited. With competing demands for capital from mainstream business models, such investors view DRE as less financially attractive. Blended finance instruments can potentially help bridge this gap.

The nature of impact investors in India is quite close to that of commercial financial investors, with a focus on generating market returns and development impact by investing in mature-stage companies/projects. Small and emerging companies in niche segments have the potential to scale up over the next few years and thus present a significant opportunity for investment.

After the start up and technology development stage, companies require further support in the form of seed capital and a technical assistance/strategic advisory to move towards commercialisation and to attract growth equity. Small rooftop solar and off-grid developers lack the required capabilities to navigate the entire credit appraisal process of lenders. This lack of expertise also reduces the probability of reaching financial closure. In these circumstances, philanthropies play an important role in stimulating the DRE sector, which needs a combination of policy advocacy, knowledge dissemination and catalytic finance.

DRE and its downstream applications offer an opportunity to meet India’s climate and energy access targets, as well as provide attractive returns to financial investors. It also provides pathways for India to reduce its dependence on crude oil imports, and create economic growth and job opportunities in the long run. Further, addressing the existing policy and financing gaps would allow for better targeting and risk-hedging of government spending programmes, and also allow capital to be recycled efficiently, thereby enhancing both the duration and the magnitude of the impact.

Based on the report, “The Future of Distributed Renewable Energy in India”, published by the Climate Policy Initiative in May 2021


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