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Analysis | September 2011

Solar mission financing

First phase of the mission will face financing issues but the experience gained during this period will assist solar projects to become mainstream power projects, says Vibhash Garg.

The National Action Plan on Climate Change (NAPCC) has envisioned eight missions to attempt the problems of fossil fuel shortages and climate change related concerns and the National Solar Mission (NSM) is one of those proposed missions. As renewable energy (RE) becomes more common, it is important to take a careful look at its costs, technology and financing issues. Important objectives of the mission are to:
  • Set up enabling environment for solar energy technology penetration
  • Encourage technology development and manufacturing indigenously  
  • Establish India as a global leader in solar energy
The NSM has set several time-bound targets. By the end of the 13th Plan in 2022, it aspires to accomplish (a) 20 GW of grid-connected installed solar capacity comprising solar PV and thermal (b) 2 GW of off-grid solar PV (c) 20 million sq metres of solar collectors for low temperature applications, and (d) 20 million solar lighting systems for rural areas. The additional goals of the NSM are to (a) promote R&D, public domain information, and develop trained human resource, and (b) expand the scope of incentives for industries to set up solar equipment manufacturing.

The phase-wise and annual targets set by the NSM along with the existing installed capacities and systems till 2011 as provided by the ministry of new and renewable Energy (MNRE) are given in the table below:

RE financing in India

In India, RE financing has picked up recently, after years of being shunned by commercial banks and other financial institutions due to the perceived risks associated with renewable energy, particularly relating to technology, policy and regulatory structures.

RE financing is dominated by asset (project) financing and wind power is the largest recipient of these funds. With a better policy framework and reduction in RE capital costs, more private sector participation in project financing has been observed- mainly in the now mature wind sector. Major Indian banks and FIs have started financing renewable energy projects in India and also raised millions of dollars from bond issues and equity investments which will primarily be used to finance infrastructure projects in India including RE projects.

Government agencies like Indian Renewable Energy Development Agency (IREDA) has been financing these  projects and have disbursed $1.41 billion from 1987 to 2009 and has been instrumental in installing 4.38 GW of renewable energy. IREDA is currently implementing a loan scheme where it will provide loans to RE project developers against securitised future cash flows of RE projects. To fund solar projects under the NSM, MNRE has considered issuing green bonds, similar to infrastructure bonds and IREDA can be the issuing agency for this. IREDA has also been actively raising awareness among commercial banks in the country.

According to the table above, the solar sector in India has received financing of $100 million, of which $50 million was invested in companies engaged in production of solar power system components and R&D.

Issues with solar power

The particular issues to solar projects that make financial institutions (FIs) sceptical are:
Power purchase agreements (PPAs) - The JNNSM has provision for a "trader PPA" with NTPC Vidyut Vyapar Nigam (NVVN) - a wholly-owned subsidiary of NTPC, which ultimately passes on the default risk by state discoms to the developer. Although provision has been made, looking at the past history of many discoms, FIs find it difficult to believe the sanctity of PPAs.
Solar radiation data- Project output depends on the radiation. High quality solar radiation data is the most important parameter for output projections and requires several months for measurement of radiation. As of now, on-ground radiation data is imprecise and the only option for projecting the generation is simulation models, where accuracy is yet to be established.

Solar technology - Crystalline cells and modules are proven for years together and are comparatively less risky as they are guaranteed for the project life. However, most projects, proposed for development under the NSM are thin-film PV. Although thin-film provides lower up-front costs, they are yet to be proven in the Indian context.

Power evacuation - Areas identified for large solar projects are remote and isolated from the grid. The grid, if at all available, does not have the capacity to transmit proposed quantum of electricity. It will require placing new transmission lines which are often contentious, because of the enormous investment and the potential of damage to the environment.

Funding for NSM

To meet the target of the 20 GW of solar capacity by 2022, it is imperative to assess the fund requirements for supporting such an initiative and also scout for funds from various sources.
Electricity generated from solar projects will be procured at the Central Electricity Regulatory Commission (CERC) set feed-in tariffs for 25 years. The solar power would be bundled with cheap unallocated quota of thermal power from NTPC and thereby sold to distribution utilities. The projects covered under this mechanism present a firm off-take option for power and hence guarantees fixed revenue streams and lenders find these projects relatively comfortable for financing. With the advent of the REC mechanism, the transaction cost associated with trading of solar energy will be reduced. During the initial period of market operation with shortage of solar power, it can be envisaged that generators of such RE certificates may dictate the price of the REC component. This can certainly provide assurance to the revenue streams for the solar developer and thereby make the project more bankable. The prevailing routes for financing are:

a. Balance-sheet based financing - This option suits lenders for financing projects being promoted by large groups with strong balance sheets. While it provides comfort to lenders, it may create a lot of burden on the group balance sheets if the project under-performs.
b. Project financing - This is the preferred option from the developer's perspective. The lending institutions would provide finance for the project and would have a lien on the project's cash-flows. Since this structure does not provide a guarantee from existing resources, lenders will need ensured arrangements for returns from the project.

Other contemporary financing options for solar projects could be:

Multi-lateral funding - Many multilateral agencies provide finance in solar space in India. Finance from such organisations is cheaper and routed through Indian banks and FIs.

Foreign funding - Large groups can opt for international bank funding but it comes with the risk of currency fluctuations.

Green energy fund - Many such funds are available in the market and can provide equity as well as debt financing.

Venture capital (VC) and private equity (PE) fund - VCs and PE fund are also funding RE projects. Projects with a sustainable business model can look for finances.

EXIM finance - Exim bank provides finances for the projects, which import part of the project components. Solar projects with import components can opt for this funding option. However, mission targets to have the projects developed in-house indigenously, which restricts the said  
wfunding option.

Looking at issues with the development of solar projects, the first phase of the solar mission will continue to have challenges in securing the finance. However, it can be envisaged that by 2013 with the completion of phase 1, both developers and lenders will have considerable experience which ultimately will support solar projects in achieving the grid parity and thereafter these projects will be mainstream power projects.

The author is Manager, Energy & Utilities, PwC India. Views are personal.
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