Conceptualised in 2018-19, Aerem aims to address three key challenges in distributed solar: financing, trust and last-mile delivery. Its three key business verticals are Netzero Finance, a Reserve Bank of India (RBI)-licensed non-banking financial company (NBFC) focused exclusively on solar financing; Aerem Store, a marketplace for distributing solar components; and an Independent Power Produce business that owns distributed solar plants and enters into Power Purchase Agreements (PPAs) with offtakers. The NBFC has financed close to 3,000 solar plants, with about 80 per cent of the portfolio comprising Micro, Small, and Medium Enterprises (MSMEs). Around 10 per cent of the book is residential, and another 10 per cent is financing to Engineering, Procurement, and Construction (EPC) for short-term working capital. It has financed around Rs 6.5 billion and has an asset under management (AUM) of approximately Rs 3.5 billion. In an interview with Renewable Watch, Vikesh Agrawal, Co-Founder, Aerem, discussed the company’s business model, challenges in the solar financing space and the targets going forward. He also shared policy suggestions to improve the solar financing landscape. Edited excerpts…
What is the geographical and project size profile of your MSME portfolio?
We have a pan-India presence, although Jammu & Kashmir and some parts of the Northeast were initially outside our coverage. We have recently started operations in West Bengal following the introduction of its net metering policy. Our key markets include Maharashtra, Rajasthan, Uttar Pradesh and Gujarat, along with the southern states. Our projects typically range from 20 kW to 4-5 MW, with ticket sizes ranging from Rs 1 million-Rs 1.5 million to Rs 100 million-Rs 150 million.
Typically, the customer contributes around 20 per cent while the lender finances 80 per cent. For smaller projects with a 30-40-day installation period, we also provide 100 per cent financing in a single tranche. For larger projects with a 90-120-day gestation period, disbursements are made in tranches, with the final amount released once the plant has been installed to the customer’s satisfaction. The typical loan tenor is five years, as this allows the customer’s electricity savings to exceed the EMI.
Why will MSMEs choose an NBFC over a bank?
The customer can typically be paying Rs 9.5-Rs 14 per unit for electricity, while solar, including financing costs, can cost around Rs 3.50 per unit. This creates a significant savings opportunity. However, recent changes such as time-of-day (ToD) norms have affected this calculation to some extent. Our interest rates are generally in the 9-12 per cent range, depending on the risk profile of the customer. If the customer is not making an upfront contribution and we finance the entire project, the rate can be slightly higher.
MSMEs often prefer NBFCs because of agility. Banks can take 30-60 days to process a case, whereas an NBFC can appraise a case in around 24 hours and disburse within 48 hours, even for a ticket size of Rs 100 million.
Another issue is that MSMEs often have relatively unstructured financial data, making assessment difficult for banks. NBFCs can use surrogate data to evaluate these businesses. Further, existing lenders may cross-collateralise a solar loan against the customer’s existing assets, reducing their ability to borrow against those assets in the future. A specialised asset financier can avoid this issue.
What are the key challenges for distributed solar financing?
Execution remains the main challenge, along with regulatory changes. Recent changes in commercial and industrial policies, including ToD and domestic content requirement norms and the mandatory battery energy storage system (BESS) requirement in Maharashtra, disrupted the MSME market for several months. Regulatory stability is therefore important. At the same time, these changes are moving the sector towards greater self-sustainability. The eventual direction could be towards customers sizing solar and BESS together rather than relying entirely on net metering.
What financing structures are emerging in distributed solar?
Capital currently comes through several channels. In the capex model, larger and well-rated customers can access bank financing, while MSME projects are served significantly by NBFCs and smaller financial institutions. In the opex model, capital can come from high-net-worth individuals and smaller investors investing in PPA-based projects. EPCs can also borrow against their balance sheets and bridge the gap between the shorter financing tenor available from NBFCs and the longer PPA tenor. There are also structured funds investing in portfolios of distributed solar assets, as well as professional venture capital and private equity capital for larger PPA portfolios. At present, capital itself is not the main constraint; structuring remains a challenge.
What specific policy or regulatory changes would you recommend to the RBI to support solar financing by NBFCs?
One key area is refinancing. NBFCs such as us borrow capital from large banks, add equity and deploy the funds towards solar financing. However, solar financing is sometimes treated as an unsecured asset, whereas it is a specialised asset class. The RBI could consider a dedicated refinancing mechanism for NBFCs that finance solar projects.
At present, in the absence of a dedicated framework, solar financing can be equated with personal loans or unsecured business loans. However, specialised lenders understand the underlying solar asset and its recoverability. For a bank, a solar panel may have limited value, whereas a specialised lender understands how to recover and redeploy the asset. A refinancing mechanism could therefore help capital reach the distributed solar segment through specialised NBFCs, which may be better positioned than banks to penetrate the smaller-ticket market.
RBI has also introduced the concept of green deposits, under which solar qualifies as an eligible asset class. However, there is limited practical utilisation of this mechanism, and banks are not very aggressive in raising green deposits.
Solar is also included under priority sector lending (PSL), but banks have several other eligible segments, including MSMEs and weaker sections, where they can meet their PSL requirements. Solar therefore does not necessarily receive sufficient priority.
One possible approach would be to specify that a portion of the PSL requirement be directed towards solar, particularly MSME solar. Similarly, a defined portion of green deposits could potentially be deployed towards solar. Such measures would indirectly channel more institutional capital into the sector, either directly or through specialised platforms and NBFCs.
Beyond financing, what are your views on the regulatory direction for net metering, ToD tariffs and BESS?
I would not describe this as a specific policy recommendation. Rather, I see this as the eventual direction of the market. Discoms cannot continue to store surplus power through net metering and supply it to customers during non-solar hours indefinitely. At some point, net metering will have to reduce or eventually come to an end.
The customer will then have to think about meeting their entire electricity requirement through their own generation and storage. For example, if a customer requires 1,000 units of electricity, with 500 units consumed during the day and 500 units in the evening, the solar and BESS would need to be sized accordingly. The grid would then become more of an emergency or supplementary source when the solar system is not operating. From the EPC perspective, the current changes can create volatility. If the rules change after a customer has sized a plant based on net metering, part of the installed capacity may no longer provide the expected benefit. This can affect project economics and customer decision-making. This is why some EPCs are now saying that a clear move away from net metering could provide greater visibility and predictability. Customers may then size solar and BESS based on their actual consumption rather than relying solely on the grid.
From the customer’s perspective, net metering remains beneficial in the short term because it can reduce the need for BESS. However, as ToD charges and other changes evolve, customers may increasingly have to consider BESSs as part of the overall solar solution.
What are Aerem’s growth priorities?
We raised around $15 million in our last funding round and are adequately capitalised for approximately another year of growth. The NBFC has around Rs 1.2 billion of equity, giving it the ability to reach roughly Rs 5.5 billion-Rs 6 billion of AUM. The marketplace has around Rs 550 million of equity and can support significantly higher turnover through leverage and capital churn. Geographically, we want to deepen our presence in south and east India, including Assam, Bihar and West Bengal. We are also investing in lending technology and exploring data science and AI applications. Our focus will remain on MSME distributed solar. We have also entered BESS financing and component distribution, as we see solar and BESS becoming increasingly integrated.
