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

03 July 2012 | Jasmeet Khurana

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.

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

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

Recent reports

Corporate renewable market -alternative procurement options

Corporate renewable market -alternative procurement options

Corporate consumers seeking to increase share of renewable power in their consumption mix have the option of using multiple short-term procurement routes like green power exchange, renewable energy certificates (RECs), I-RECs and green tariffs.

India Solar Rooftop Map | December 2023

India Solar Rooftop Map | December 2023

India Solar Rooftop Map is an info-graphic report providing a snapshot of rooftop solar market in India – capacity addition across states and consumer segments, market share of leading players and other key trends. Total rooftop solar capacity is estimated to have reached 14,484 MW by end of 2023. Total new installations in 2023 are estimated at 2,856 MW, up only 8% over previous year.

India Solar Map | December 2023

India Solar Map | December 2023

India Solar Map 2023 is an info-graphic report covering growth of utility scale solar sector – national and state-wise commissioned and pipeline capacity, leading market players and portfolio details of top 16 project developers. Capacity addition in 2023 fell 51% YOY to 5,924 MW taking total utility scale solar capacity to 59,840 MW. Total project pipeline stands at a record 74,161 MW.

India Corporate Renewable Brief | Q4 2023

India Corporate Renewable Brief | Q4 2023

This report provides an update on key trends and developments in the corporate renewable market including capacity addition, key players, policy & regulatory issuance, financing, PPA tariffs and other market trends.

India PV Module Intelligence Brief | Q4 2023

India PV Module Intelligence Brief | Q4 2023

This report captures quarterly trends in module demand and supply, import and domestic production volumes, supplier market shares, break-up by technology and rating, global market scenario, pricing trends across the value chain, key policy developments and market outlook.

India Solar Compass | Q4 2023

India Solar Compass | Q4 2023

This report provides a detailed update of all key sector developments and trends in the quarter – capacity addition, leading players, tenders and policy announcements, equipment prices, financial deals and other market developments. It also provides market outlook for the next two quarters.

To top