RE debt financing gets tougher


RE projects are facing increasing financing challenges. Liquidity in the Indian financial system has dried up considerably pushing up cost of debt finance by 1.0-1.5% over last year. To make matters worse, we understand that most private banks and non-banking finance companies (NBFCs) are unwilling to finance RE projects at present. Tough financing conditions are expected to pose a formidable challenge for about 10,000 MW of RE projects reaching financial closure stages.

Financing difficulties are expected to persist at least until H1 2019;

Small IPPs and developers are likely to be the worst affected as lenders shut down most new business;

Expected impact on projects is completion delay of up to 3-6 months and/ or reduction in equity returns by about 1-2%;

Debt financing environment for RE projects had been relatively benign in the last few years. Despite rapid growth in capacity addition, project developers were able to raise total estimated debt of INR 420 billion (USD 5.8 billion) for the 12,000 MW of new utility scale capacity addition in 2017-18 relatively easily. Precise numbers are hard to obtain, but we estimate that more than 75% of the total requirement was met from domestic sources including Indian banks, financial institutions, NBFCs and local capital markets. Balance came mainly from international financing agencies (World Bank, ADB, IFC, KFW) and international capital markets. Despite project viability concerns in the face of falling tariffs, interest rates fell steadily to about 9.5%. Other terms and conditions including tenor also became progressively more favourable.

Figure: Indian interest rates

Source: BRIDGE TO INDIA research, www.investing.com

Private NBFCs – L&T Infrastructure Finance, IL&FS, Tata Cleantech Capital and Reliance Capital, amongst others – have been a key source of finance for the sector. We estimate that these NBFCs provide up to 20% of total debt funding for the sector. They play a vital role in the value chain by sanctioning loans quickly and aggressively down-selling to banks and FIs. A spate of bad news including concerns about asset quality, tightening liquidity and falling INR have led to crisis like conditions for NBFCs. This has, in turn, led the financial system to freeze and forced lenders to suddenly question viability of 20-year debt financing for RE projects.

We expect the financing challenges to persist for another 6-8 months, until general elections in H1 2019, at the minimum. Small IPPs and developers are likely to be the worst affected as lenders restrict new business to top-tier players. The news comes at a highly inconvenient time with developers already struggling with GST, safeguard duty, falling INR and rising commodity price risks.

How can the government help? MNRE is believed to be pursuing relaxation of priority sector lending norms for the sector but we think that is highly unlikely to happen. Instead, it should seek to address increasing concerns around DISCOM payment risk and grid curtailment.

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Of bonds, green and not so green


A green bond is a green bond is a green bond – is that true?  Unfortunately, “green bond” is not a standard, well defined term.  Green bonds come in all shades of green, from the lightest tea green to the darkest ocean green, if you like.  A good way to evaluate the “greenness” of a bond is to see, if it makes a material difference to investment decision of the investors – in terms of an outright yes/ no, the maturity, the return expectation or the risk appetite. The bigger such influence, the “greener” the bond.

The green bonds currently available in India are marketing gimmicks

A real green bond needs to impact investment choices and improve financing conditions for developers

This would be a good option for the government to accelerate the market

With severely restricted bank lending appetites for the Indian power sector, we desperately need new sources of financing for the growing renewables sector. Recently, Yes Bank and EXIM Bank of India have both launched “green” bonds and there is much excitement in the market that this could be the magical solution to India’s renewable financing needs.

A closer look shows, however, that the bonds issued by Yes Bank and Exim Bank are of the lightest tea green type. This money may be raised for financing renewable projects but there are no specific covenants or structural limitations on end use or any cost of capital advantage associated with them. They are essentially called “green” for marketing purposes, to capitalise on the growing buzz around the renewable sector. And in all likelihood, the buyers of these bonds would have gone ahead and bought these bonds even if they were not “green”. The classification really made no critical difference to them beyond perhaps, a gentle feel good factor.

So what would a dark green bond look like? Such a bond should have structural distinguishing characteristics from a plain vanilla bond. It should have a material impact on the intentions of the bond issuer as well as investors and play a key role in the investment decision process. That could be achieved in multiple ways. For example, the government could give tax incentives, whereby if an institution like IREDA or even a private company issued bonds specifically for financing the renewable sector, the investors would get certain tax benefits. Such a benefit is already provided by the government for many other sectors, including housing (HUDCO), railways (IRFC) and roads (NHAI). On the back of such incentives, these institutions are able to raise up to 20-25 year monies at attractive rates, which wouldn’t have been possible otherwise.

Or the government could also impose an investment obligation on mutual funds, pension funds or insurance companies to invest a certain percentage of their corpus into instruments for financing the renewable sector. The structural differentiation doesn’t have to come from the government alone. Many institutional investors in the West have specific investment mandates whereby they earmark a certain share of their corpus for investment in socially and environmentally beneficial projects. Hence, the issuers specifically target these monies and are happy to provide covenants on end uses of these funds. In turn, they get the benefit of cheaper capital.

Unfortunately, there is unlikely to be investor driven demand for green bonds in India as we simply don’t have the same level of environmental consciousness in India as in the West. This market needs government diktat or incentives to take off.  Otherwise, the prospects of ocean green bonds appear dim for now. More funds at lower rates and longer tenures is exactly what the market needs to thrive. The government has understood that – it has been mentioned many times by the Minister of Energy Piyush Goyal. However, we are still waiting for the action. An ocean green bond would be a very effective tool to transform the government’s ambitious targets from fantasy to reality.

Vinay Rustagi is the Managing Director at BRIDGE TO INDIA

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India exploring solar bids in dollar terms to bring down tariffs


Based on a recent report (refer), the government seems to be considering to cut solar tariffs in India by offering power purchase agreements through bids in dollar terms. The idea is that the ministry would help create a (real) hedging fund with a corpus of INR 60 billion (approximately USD 1 billion) primarily by charging developers a hedging fee of INR 0.90/kWh (1.5 US cents/kWh). Such a scheme would help developers access international capital and avoid reduce the currently high hedging costs of around 6%.

Pooling of hedging costs coupled with government’s support likely to  make solar option attractive to discoms

According to BRIDGE TO INDIA, a realistic expectation for solar tariff would be INR 5.8/kWh, around 9% lower than current tariffs

We believe that government to focus on increasing the tenor of debt financing from ca. 14 years to 20 years, that alone could reduce solar tariffs by about 7%

The thought behind this is that pooling the hedging costs and putting the government’s weight behind it, will significantly reduce the cost of currency hedging in the market. This would reduce the cost of capital and thereby the cost of solar power, making it more attractive to distribution companies. This is a creative, new idea and shows that the government is thinking out of the box to make its ambitious solar targets real.

The report states that the mechanism could reduce solar tariffs by as much as 40% to bring the down to INR 3.60/kWh (6 US cents/kWh). With the proposed hedging cost of INR 0.90/kWh (1.5 US cents/kWh), effective tariff would be INR 4.50/kWh (7.5 US cents/kWh), very close to the world’s lowest as currently seen in the Gulf region.

BRIDGE TO INDIA’s own calculations show that with an effective interest rate of 5%, the tariff for a 50 MW solar project could be in the range of INR 4.9/kWh (8.3 US cents) to INR 5.5/kWh (9.2 US cents/kWh). This is 14-23% lower than the current tariff/kWh of about INR 6.4 (10.6 US cents/kWh) but considerably higher than the government’s estimate of INR 3.60/kWh (6 US cents/kWh). With the hedging cost of INR 0.90/kWh (1.5 US cents/kWh), a realistic expectation for solar tariff would be INR 5.8/kWh, around 9% lower than current tariffs. To us, therefore, it seems that the numbers indicated by the government are too aggressive.

Another moot point is the level of international lending appetite for Indian solar projects. Our view is that apart from certain multi and bi-lateral financing institutions (for example, IFC, US Exim, KFW), there is actually very little demand for Indian solar projects in the international debt markets.  Hence, irrespective of the proposed cost benefits, any approach that targets hedging costs is unlikely to be a silver bullet solution for reducing the costs of Indian solar projects.

We believe that the government should instead be looking at developing indigenous financing solutions, particularly with a view to increasing the tenor of debt financing from ca. 14 years to 20 years. That alone could reduce solar tariffs by about 7%.

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Time for a big-bang financing solution


In view of the BJP government’s strong commitment to the solar sector and the much trumpeted 100 GW target, there was mighty anticipation about what the budget would bring by way of cheaper financing, tax incentives and other promotional measures to grow the sector. But the budget turned out to be bit of a damp squib and it is not clear how the government hopes to realise its solar vision with the current, incremental approach. Here is our proposal for a big-bang financing solution to achieve India’s goals.

Debt cost in India are too high and there is far too little of it available to meet the ambitious solar targets

The government should provide low cost and long tenure debt through new, dedicated renewables financial institutions

This initiative would cost less than USD 2 bn per year – a bargain, given the various political, social and environmental benefits of solar

There are many challenges ahead for the solar sector – offtake risk, land acquisition, transmission, grid stability and storage to name a few. But there seems to be a mistaken perception that financing will automatically fall in place, with leading Indian and international companies making “commitments” to develop 266 GW of renewable capacity.

There is ample liquidity in the global financial markets. With global macro-economic growth rates slowing down in many parts of the world (Europe, Russia, China, Japan) and interest rates coming down to all-time lows, fund managers are desperately chasing attractive avenues for investment and are increasingly willing to take more risk. So why not finance the Indian solar sector?

But of course it is not so simple. We need to break financing into two parts – equity and debt – and look at these separately. For the reasons discussed above, it seems fair to expect that international utilities, power sector companies and developers will be keen to come to India and invest in solar projects. We can see hard evidence of this on the ground.

The debt part, however, is a completely different story. Debt financing options in India are severely limited. By far the biggest source of debt in India for long-term project financing is Indian banks (floating rate, high cost of debt with an interest rate of typically 12.5 – 13% and debt tenor of < 15 years). But the banks are saturated with power sector debt and many of them are burdened with “non-performing” (i.e. distressed) loans to distribution companies and IPPs. To expect Indian banks to provide the bulk of the financing for 100 GW is not only overly optimistic but also sub-optimal for their own balance sheets and for the solar sector.

The other plausible options for debt financing today are also severely limited by their potential capacity and/or appetite – Indian institutions such as IREDA and PTC Financial (relatively small size but competitive cost), finance companies such as L&T Infra Finance and Tata Capital (low capacity, high cost), international institutions and export credit agencies such as IFC, KFW, DEG and US-Exim (very low appetite, low cost). International banks are not keen to commit long-tenor debt and the capital market route simply does not exist. There have been multiple suggestions on how to finance solar at more competitive terms – priority sector lending, hedging cost benefit, investment tax credits etc. In our view, these measures are either not practical in the Indian context or suffer other operational shortcomings.

So how can 100 GW of solar be debt financed in the next years? We need a radical approach, aiming to bring down the cost and extend the tenor of debt financing. The government needs to create dedicated renewables financing institutions funded with gilts, coal cess monies and tax free bonds. And given all the social, environmental and macro-economic (improved energy security, low currency risk, improved growth prospects, significant job creation) benefits of renewable energy, there is a rather strong case for the government to not only do this but also provide a flat 4% financing cost benefit to the sector. We believe that this could bring down the cost of solar by 18% to Rs 5.35 per kWh and go a very long way in making the 100 GW target achievable.

The cost of doing so is actually quite modest – it peaks at about USD 2 bn per annum (0.1% of GDP) and is estimated in aggregate at only about USD 26 bn. The beauty of this structure is that it is very easy to administer and if the government does go ahead with this, it can remove all other incentives such as accelerated depreciation, capital subsidies/ VGF etc and remove operating and financial distortions in the sector. That in turn means that the total cost of following this approach will be more like USD 15-20 bn, which in view of all the benefits is probably one of the best ways for government to spend the money.

Vinay Rustagi is the Managing Director at BRIDGE TO INDIA.

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Weekly Update | India looking at all options for low cost financing of solar projects in the country


The Indian government clearly understands the impact and importance of low cost finance for the solar sector in the country and has taken up efforts to woo international institutional capital to the sector. Latest step in this direction is a Memorandum of Understanding (MoU) between US-EXIM and IREDA for a financing support of up to USD 1 billion (INR 61 billion) for made-in-America renewable energy goods and services (refer). This MoU is expected to be signed next week at the India-U.S. Technology Summit.

 Steps are being taken by the government to enhance access to financing and certification of off-grid technology

Multi-pronged approach to attract institutional capital to the solar sector is a welcome step

BRIDGE TO INDIA believes that the government should put additional effort towards ensuring more of private sector participation

Image source: Theenergycollective.com

Apart from this, the World Bank is already collaborating with the Solar Energy Corporation of India (SECI) for financing an ultra-mega solar project in Madhya Pradesh. The government hopes that due to the low cost of financing and the large scale of the project, there will be little or no need for providing any additional viability gap funding.

 For decentralized generation, the government is seeking a loan of EUR 1 billion (INR 77 billion) from the German development bank, KfW (refer). If approved, this fund might be used for a proposed 1.5 GW rooftop solar plan. The government is still trying to formalize the modalities of this.

 For off-grid projects and rural electrification, the US government has launched the Off-Grid Alliance. This program is expected to enhance access to financing and the certification of off-grid technology. Other similar efforts with regards to off-grid solar are expected to be taken up by the government in the future.

 This multi-pronged approach to attract institutional capital to the sector is a welcome step. However, as these are all work in progress, the impact of these efforts is only expected to start bringing results towards the latter half of 2015.Due to the involvement of developmental capital and sovereign guarantees, some of these proposals lean towards a larger role for public sector. BRIDGE TO INDIA believes that the government should put additional effort towards ensuring that these mechanisms allow as much private sector participation as possible.

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Why opening up ‘Open Access’ is crucial to the success of India’s solar story


Gujarat recently announced a ban on private power consumers sourcing electricity from outside the state (refer). This is detrimental to India’s power sector reforms and hinders with the deployment of large-scale solar energy plants. The government should reconsider the decision, if it wants Gujarat to be a solar energy leader.

India’s solar market is currently undergoing a transition from being policy-driven to being parity-driven. Rapid scale under a parity-driven market can only happen under a robust open access regulatory framework.

Open access can work only if the country’s power sector reforms are pushed through. Given that national elections are underway in India, these reforms are unlikely to happen very soon.

Large-scale power plants are critical to reducing the cost of solar, increasing efficiency and helping India meet its energy requirements. All large-scale power plants outside policy allocations must use the open access route to reach consumers.

The implications of this policy change are significant, especially for the solar sector. Gujarat leads the country in terms of total installed solar capacity with over 1 GW of installations. All this capacity has come as a part of state or national policies that promote solar power. In India, the solar market is now transitioning from policy-driven to parity-driven as several consumer segments reach grid parity with solar. For this very promising new market to develop successfully, smooth open access rules and practices are key.

Although open access is guaranteed to all consumers above 1 MW, utilities restrict this by refusing to grant applications. Often, grid congestions are cited as the reason. Although there is some merit to this, the concern is often not based on actual load flow studies. In many cases, the grid could well take solar power. Utilities also lobby at the state electricity regulatory commissions (SERCs) to increase open access changes – especially the Cross Subsidy Surcharge (CSS). India’s power tariffs are structured in such a manner that industrial and commercial consumers subsidize residential and agricultural consumers. When industries and commercial clients sign private power purchase agreements (PPAs), the utility loses out on these high value consumers. This is why a CSS is levied on consumers that shift to open access. While the interests of utilities have to be kept in mind, levying CSS and other charges does not help anybody. It keeps the utilities inefficient and hinders rapid deployment of renewable energies by keeping out private players from the power sector.

The real solution is to bring in an even power pricing mechanism and eliminate all subsidies. If power has to be subsidized for certain disadvantaged sections of the society then the subsidy amount must be borne by the state governments rather than passed on to the utilities. The Universal Identification Number (also called the Aadhar Card) could perhaps be used to target power subsidies to the poorest. Such a change in the power pricing structure requires strong political leadership. Gujarat has demonstrated such leadership in the past. Gujarat did two things rather successfully:

1) It freed up the State Electricity Regulatory Commission (SERC) from political interference and allowed periodic increases in tariffs. It also brought in a uniform power pricing and reduced cross subsidies significantly (see graph).

2) Gujarat separated unreliable agricultural feeders from domestic feeders for farmer’s homes. This meant that subsidized electricity was being used only to power water pumps and not farmer’s homes. Although this meant power prices went up for farmers, they now had reliable uninterrupted power. Farmers unanimously opted for paid power. The state government now subsidizes only the agricultural feeder (see graph). This resulted in a saving of INR 23,000 crore (INR 230 bn.) for the government[1].

Graph: Comparison of Gujarat’s power pricing across consumers with other states and India’s average.

Despite these tough measures that were considered political time bombs, Mr. Modi was voted back to power three times in a row. This goes to show that change is possible without jeopardizing political interests.

It therefore, comes as a particular surprise that Gujarat, which has so far led the transition towards a modern, competitive electricity economy, has decided to ban open access. This not only goes against Mr. Modi’s image as a pro market politician, but also jeopardizes his state’s electricity and solar success. Worryingly, this might just be a precedent for other states under pressure from entrenched utility interests to also ban open access.

[1] Business Today. http://businesstoday.intoday.in/story/gujarats-power-sector-turnaround-story/1/21750.html. February 5th 2012.

Akhilesh Magal is Senior Manager, Consulting at BRIDGE TO INDIA.

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Weekly Update: Kerala moves forward with distributed solar power generation


Kerala’s Agency for Non-Conventional Energy and Rural Technology (ANERT) has chosen 14 companies to be eligible to set up battery backed 1 kWp projects under the state’s 10,000 rooftop solar power programme (refer). It is expected that more than 4,000 applications have already been received from homeowners interested in setting up such systems.

Kerala is the first state to incentivize individual solar power systems at this scale

The chosen companies have provided pre-determined prices for the rooftop solar systems. Customers will also receive subsidies from the state government

Issues related to grid infrastructure and net-metering need to be addressed for India to create a market ecosystem around distributed solar power

The homeowners can now choose from any of these 14 companies to get their systems installed. The eligible companies include Millennium Synergy Pvt. Ltd., Power One Micro Systems, Gensol Consultants,  Adithya Solar Energy Systems, Solar Integration India, Su-Kam Power Systems, Tata Power Solar Systems, Surana Ventures, UM Green Lighting, Ammini Solar, Waree Energies, Luminous Power Technologies, Eversun Energy and Chemtrols Solar. The companies have provided pre-determined prices at which such systems will be available. Millenium Synergy has been able to provide the minimum price of INR 177,541 (USD 3,347) for a system with 1,000 Wp solar modules, 7,200 Wh battery bank and a 1 kW inverter. The state government will provide a subsidy of INR 92,262 (USD 1,742) on this system. Therefore, the effective cost of such a system to the homeowner will be just INR 85,279 (USD 1,605) or INR 85.30/Wp (USD 1.61/Wp).

Such systems will be especially useful for rural and remote locations where the grid is unreliable and in many cases unavailable. A 1 kW system is suitable to run two tube lights, two fans and a television.

Kerala is the first Indian state to incentivize individual solar power systems at this scale. The incentive for battery backed systems makes a lot of sense under Indian conditions as grid connectivity of distributed power generation systems in India is still far from reality.

Given the high irradiation, high power deficit and unavailability of grid infrastructure in large parts of the country, India perhaps has the highest potential for distributed solar power generation among all emerging markets. However, most policies in the country have focused on utility scale solar power projects as the implementation authorities feel that this is the easiest way to meet solar targets.

However, strategically it makes more sense for India to create a market ecosystem around distributed solar power generation and Kerala has taken a step in the right direction. Issues related to grid infrastructure and net-metering need to be addressed to make the market grow faster.

Jasmeet Khurana works on project performance benchmarking, success factors for module sales, financing and bankability of projects in India.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE. Sign up to our mailing list to receive these updates every week.

You can view our archive of INDIA SOLAR WEEKLY MARKET UPDATES here.

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With the falling rupee, will international export financing remain a viable option for Indian developers?


Mr. Mohit Anand heads the Market Intelligence team as Senior Consultant at BRIDGE TO INDIA. Mr. Anand will be speaking on the ‘PV Landscape in India’ at the PV Manufacturing Summit in New Delhi on August 1st 2012.

As the rupee depreciates and reaches an all-time low against the dollar, projects that have opted for international financing without full or partial hedging of the debt might see a fall in cash flows.

International financing has been the favored source of funds for project developers in India

The Rupee has depreciated by 24% since January 2011

The slide of the rupee to record lows will have a negative impact on the balance sheets of the developers that have relied on un-hedged or partly hedged overseas borrowing for projects

Complete non-recourse debt financing is an exception rather than the norm in India. Interest rates from Indian banks are not only relatively higher but Indian banks have also not been keen on lending to the solar sector at all. Currently very few projects have claimed to have received non-recourse financing. Another trend in the market is to initially finance the project on a pure equity or recourse debt finance basis and operate the plant for up to a year. After that, developers look to refinance the projects on reduced interest rates (~11%). This refinancing option is feasible because after a year of operation, there is less risk (as construction has already finished by then) and operation data is available. Therefore, banks are more confident of financing the project on reduced interest rates. A large number of developers in the Indian solar market, though, rely heavily on international financing through Export Credit Agencies (ECAs). Module suppliers play a key role in this transaction.

Developers that have gone in for international financing are concerned. Factors like a high current account deficit, policy stagnation, low capital in-flows and strengthening of the US dollar in the wake of the Euro zone crisis have led to the depreciation of the Indian rupee by 24% since January 2011. The slide of the rupee to record lows will have a negative impact on the balance sheets of the developers that have relied on un-hedged or partly hedged overseas borrowing for projects under batch one of phase one of the NSM and projects under phase one and two of the Gujarat Solar Policy. The principal and interest payments are to be made in the currency of the loan and the revenue is in the weakening Indian rupee. This is bound to nullify the cost advantage they enjoyed through a lower cost of capital. Further, the currency volatility in the last one year has also left many developers with projects under the batch two of phase one with confusion on the right hedging strategy for financing.

Following the interest rate cuts in economies like China and other Southeast Asian countries, it is expected that the Reserve Bank of India (RBI) will also cut rates. This rate cut will make fully hedged external borrowing unviable. The only reason a developer might still look for external borrowing is because Indian banks are still skeptical of lending to the sector.

Subscribe to the INDIA SOLAR COMPASS now to get detailed analyses on the market. A preview of the report is available on our ‘Reports‘ page.

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What India can learn from the US in building its solar industry: Financing


Mr. Jasmeet Khurana covers projects as a consultant in the Market Intelligence team at BRIDGE TO INDIA.

India is promoting large utility-scale installations in solar to achieve the targets under the National Solar Mission (NSM). Distributed generation, which holds the true potential for Indian conditions, has largely been ignored till now. For distributed solar adoption to flourish in India, a domestic financing ecosystem is required. US has been able to create such a financing ecosystem by developing innovative business models. There is an opportunity for Indian and US companies to collaborate and adapt successful solutions to Indian conditions.

Promotion of only large solar power plants in India is hampering the creation of a solar financing eco-system that can help fund a distributed adoption of solar power

Business models created for the US solar market can be adapted to Indian conditions

Indian banks alone will not be able to drive a large scale adoption of solar

It is expected that there will be a large gap in the demand and supply for the financing requirements of solar in India

Third-party financiers from the US or other mature markets may enter the market to fill in the gap

Solar power plants are financed through debt and equity. The mix varies from 90% debt in for example, Germany to 70% debt in India, depending on the maturity of the market and the comfort of the banks. The equity comes from the project developer. These can be independent power producers (IPPs), smaller developers, utilities or private equity players. India has over 200 project developers that have been allocated FiT based projects under various policies. Smaller project developers have faced challenges in arranging finance and commissioning their projects. The solar policies in India have started favoring larger project sizes for allocation processes. The average project sizes have gone up considerably with batch two of phase one of the NSM and other new state bids like those in Karnataka, Odisha and Madhya Pradesh. This is causing the FiT driven market to shift towards a smaller number of key project developers like Welspun, Mahindra Solar, Kiran energy and Azure Power among some others. With large project pipelines, these project developers are able to raise equity either through their own balance sheets or through private equity backing.

Construction financing and term debt for solar projects in India comes primarily from Indian banks, development funding institutions (DFIs) and international banks (mostly through Export Credit Agencies or ECAs). DFI and ECA financing is available only to projects with capacities greater than 10MW. Indian banks continue to be skeptical towards financing solar projects in general. Almost all financing of solar projects in India continues to be recourse financing.

The phase two of the NSM is expected to come out with even larger project sizes. This trend towards larger projects will help the government achieve the installation targets and lower the cost of solar power. Also, financing these large projects is easier for companies with strong balance sheets.

On the other hand, this restricts the creation of a solar financing ecosystem that can fund a distributed adoption of solar power. As per BRIDGE TO INDIA’s market model, more than 60% of the total 12GW solar installations in India till 2016 will come from non-FiT segments like commercial tariff parity driven projects, RPO/ REC mechanism projects, telecom towers and diesel parity driven projects. This goes to show that the future realization of solar power in India will come from outside the FiT segment and from distributed power generation. Currently, there is no solar financing ecosystem in India that can support this growth. This will cause a large gap between the demand and supply of financing options for solar power in India.

Adopting solar power as a large component of the energy mix is critical to India’s energy security in the years to come. If India has to realize its true solar potential, the financing ecosystem in India needs to be strengthened. Learning from the solar financing ecosystem that is being developed in the US will be the first step in the right direction. US solar financing has been similar to the Indian financing scenario today but it is now evolving to the needs of distributed solar growth. Solutions created in the US solar market for distributed growth can then be adapted to Indian conditions.

Commercial and residential consumers are not keen on locking up their liquidity to meet the upfront costs associated with solar installations. The rise of distributed solar has led to the creation of many new business models in the US. This has led to the creation of new financing entities. They provide small scale financing services to commercial and residential consumers via a lease or PPA. They source financing through large investors like pension funds, mutual funds, insurance funds, sovereign wealth funds, private equity and hedge funds among others. Companies like SolarCity and Sunrun in the US have increased their valuation to over USD 1billion through this model. They are called third-party financiers. Their model also gives investors a diversified opportunity to back solar. In this scenario, the role of connecting the actual investors with these third-party financiers also opens up. Companies referred to as third-party intermediaries like Clean Power finance do this job.

Various models used across the US solar industry include:

Utility scale PPA model

This is the traditional model, as it exists in India. Developer invests equity into a project and a lender provides recourse or non-recourse project debt.

Host-owned model

These are typically small installations by the power consumer. It is similar to the subsidy based model in India. In US they have tax credits and net-metering that makes these projects more viable.

Vertical model

Under the vertical model, an integrated player handles customer leads, installation, engineering, maintenance and financing services via a lease or a PPA. Such firms essentially serve as both installer and third-party financier to the home or business owner that receives generation from the PV system.

Semi-vertical model

In this model, third-party financier does not undertake the installation themselves but pay an installer to do it for them. The PPA/lease is still signed with the third-party financier.

Financial market model

This model brings in various investors of different types to compete with each other. Here an intermediary provides an interface to match large lenders with small borrowers.

The actual models followed by third-party financiers and third-party intermediaries are much more complex than the ones explained above. A whole solar finance marketplace has been created in the US. A third-party financier or an installer can now select from and combine multiple financing sources in a competitive environment.

In India, banks alone will not be able to drive a large scale adoption of solar. With the potential that the Indian solar market possesses, installers, third-party financiers, third-party intermediaries and investors from the US or other mature markets, perhaps in collaboration with some Indian entities, may enter the market to fill in the gap.

References:Re-imagining US solar financing – US SOLAR – WHITE PAPER – BNEF

This blog has been written by Jasmeet Khurana, Consultant, Market Intelligence

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Quo Vadis, India I: A debt burden putting pressure on growth



The Euro-crisis has further sensitized investors for sovereign debt levels in the wake of slowing economic growth. As one of the most promising emerging markets following China, India has witnessed a string of negative macroeconomic news recently:

Real GDP growth slowed to 5.3% in the fourth quarter (ending March 2012) of 2011 the lowest rate in 9 years

Quarter over quarter gross fixed capital formation has fallen ever since the beginning of 2009 in every consecutive period

Overall budget deficit (including states and off-balance sheet items) is expected to approach 9% this year

Gross public debt is expected to reach 68% of GDP in 2012

In the wake of the Euro-crisis, slowing economic growth in emerging markets has caught the attention of investors. Deemed as the new rising star following China, India s current state of economy has particularly raised concerns. But recently, there have been several worrying developments in terms of newly proposed legislature, which might seriously alienate investors. No doubt, India has tremendous growth potential but political action is needed urgently as reforms seem to have reached a dead end. It is now on Indian politics to prove that the great optimism investors and business executives have shown towards India for so long was not a mistake.

While the economy grew at an average of 9% annually for five straight years up to 2007 (IMF, 2012), India now seems to have fallen into a second slump since the inception of the financial crisis. In part driven by high oil prices and weakening external demand, GDP grew only by 5.3 percent in the fourth quarter (ending March 2012) of 2011 the lowest rate in nine years and way below IMF expectations. While this figure is still impressive, for an economy with a population of 1.2 bn this is not enough to alleviate India s masses (around 30% live below the line of poverty) from poverty within a satisfactory time frame. Ten million young Indians enter the labor market every year clearly, growth is needed to create these jobs. By the same token, India would need an annual growth of at least 6% to maintain financial stability. Lower growth rates will increase the weight of India s debt burden and can lead to a dangerous debt spiral. Greece is an illustrative example how high debts increase the cost of further borrowing. In order to drive down these costs, the government has to cut spending and increase taxes which both have a negative impact on growth. Lower growth rates again mean lower government tax income which makes it even harder to repay the debt.

In India, excessive public borrowing and high inflation, which has been close to 10% for a couple of years now, have led to high costs of debt financing. Furthermore, legal limits on foreign activities in sectors such as multi-brand retail, pharmaceuticals, pensions and insurance have deterred Foreign Direct Investments (FDIs). Several attempts for reform in this field have been blocked by the ruling Congress party s coalition partners, such as the Trinamool Congress. Taken together, high private sector interest rates and procedural obstacles such as land purchase and policy uncertainties have resulted in disappointing industrial investments. Ever since the beginning of 2009, quarter-over-quarter investments (gross fixed capital formation) have fallen in every consecutive period from 32% of GDP to around 28% in the third quarter of 2011. Investors have been further discouraged by governmental arbitrariness like the levying of retrospective taxes on companies (see the Vodafone case as an example). The 2012 World Bank Doing-Business ranking (132 out of 183) indicates that India s legal business environment needs to be improved with particular focus on contract enforcement and investor protection which deteriorated recently.

Source: IMF Fiscal Monitor Data

With an expected overall fiscal deficit (including the states and off-balance sheet items) of 8.5% in 2012 and gross public debt of around 68% of GDP, the government will find it hard to revive growth through fiscal measures. Consequently, Finance Minister Pranab Mukherjee announced that taxes will be raised and subsidies for fuel and food are to be cut. At the same time, the defense budget of the world s largest arms importer is expected to increase by 17% this year. With little fiscal leeway and monetary policy strained by stubborn inflation, the only way to get back to a higher growth path will be structural reforms. India still has some way to go to become the number one destination for global investors, as announced by Mr. Anand Sharma, India s Minister in charge of Commerce, Industry and Textiles at a recent visit in Hamburg.

READ THE NEXT PART OF OUR QUO VADIS, INDIA SERIES about “Fragile political environment & darkening investment climate soon.

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