India has embarked on
the phase II of JNNSM and the latest bidding (Feb 22, 2014) saw a good
response. To improve bankability of projects, government has revised certain
norms. These include Viability Gap funding (VGF) support from the national
clean energy fund (NCEF), Credit Guarantee, and reduced FiT (to foster
innovation). While these are few policy measures, real thrust to improve the
availability of finance is missing.
The rising
demand for energy, limited sources of conventional energy which is becoming
costlier day by day and the concerns for climate change have propelled India
towards tapping the omnipotent source of power – the solar energy. But it comes
with an initial price tag and financing solar has become the biggest challenge
today.
The Status Quo
Under National Solar Mission(JNNSM) and various state level
policies various measures like capital subsidy, tax incentives, Feed in Tariff
(FiT), PPAs, REC mechanism etc. are being undertaken to promote solar in India.
On the back of these, more than 2 GW of solar capacity has been installed
within a span of 4 years. However various problems have been observed vis-à-vis
finance.
Although labor & construction costs are low and there is
high resource availability, the high cost of financing increases the cost of
Renewable energy (RE) in India. This has been highlighted in the CPI-ISB
report on “Meeting India’s
Renewable Energy Targets: The Financing Challenge”.
The cost of debt is high due to general high rate of
interest and a short tenor but variable interest rate debt. Commercial banks,
which dominate the debt market, are facing an asset liability mismatch and
reaching the lending limits. Moreover, lenders avoid financing on project basis
(non recourse) because of unreliability of irradiation data, technology risks and
off taker risk (due to poor health of SEBs).
In this climate of lack of access to low cost debt, the equity
investors have to take on more risk y assuming more debt. They find it
difficult to recycle the equity capital into the next project, as equity gets
stuck in one project. Regulatory restrictions further limit the access to
alternate sources of equity capital. Even Renewable Energy Certificates (REC)
market is weak due to poor enforcement of Renewable Purchase Obligations
(RPOs).
So overall, there is much that is desired on the policy as
well as at the finance front.
We need to diversify
our sources of finance. The report on “Financing Renewable Energy in India”
by Nextant Inc(under PACE-D) has suggested various innovative mechanisms
which can give a boost to sustainable flow of finance in Indian solar sector.
These include green bonds, Off grid Fund
and infrastructure debt fund backed
by sovereign guarantee. In order to enhance access to tax benefits, India can
make tax credits tradable (like in USA) and even allow tax efficient trusts
(like in Singapore). REC market Maker (RMM) is a particularly interesting
concept to increase bankability of RECs. Besides, securitization of loans,
crowd sourcing, risk insurance instruments, etc. are few other innovative
mechanisms worth exploring, which are being used in certain parts of world.
As per the PwC report on “Financial engineering as a
means to support Jawaharlal Nehru National Solar Mission”, India will
require an estimated INR 172,338 crores of investment to meet the target of 22
GW of solar power by 2022. We need to explore ways to catalyze private sector
participation in providing capital for manufacturing as well as project
development.
The India is one of the sun’s most favored nations, blessed
with about 5,000 TWh of solar insolation every year. The solar technology is
maturing, projects like Green Corridor are being implemented and even grid
parity projections have improved to as early as 2016-17 from end of the current
decade. Reasons to be optimistic are manifold.
With right policies and best financial instruments, solar
power can make energy accessible to the vast Indian population, besides create
millions of jobs and help India achieve energy independence.
