India's rooftop solar segment hinges on scaled up financing

Financing needs to be scaled to drive India's rooftop solar potential, IEEFA argues.

Accessible financing is a prerequisite to drive growth in the rooftop commercial and industrial (C&I) solar market in India. Presently, this segment accounts for almost 75% of the total rooftop solar installations in India with annual additional installations of 1.3 gigawatts (GW) to 1.8GW in the last few years.

Since 2015, rooftop solar project developers have raised more than US$2b, 48% (US$985m) of which came from equity funding and 29% (US$599m) from debt. Approximately 45% of these investments have been raised within the first eight months of 2021 alone, indicating a significant growth trend ahead. Almost all (99%) equity investments in this sector came from foreign entities looking to tap the Indian market, given the high growth potential and healthy return on equity.

The US$625m World Bank-State Bank of India (SBI) credit line and the Green Climate Fund (GCF)-Tata Cleantech credit lines are two major lines of debt funding that specifically target the rooftop solar sector in India. 

The operating expenditure (OPEX) model accounts for only 10% to 15% of the total number of borrowers. In terms of quantum of loan, however, the share of OPEX is as high as 80% to 85%, due to the large project sizes that translate to larger loan sizes. Of the cumulative ~2GW of OPEX rooftop solar installations in India, almost 40% of these installations are financed via the two biggest concessional credit lines—the World Bank-SBI credit line and the GCF-Tata Cleantech line.

Installation trends in the C&I rooftop solar sector

The rooftop solar installations witnessed a slight year-over-year decline of 13% in 2020 due to COVID-related disruptions. However, this period has also seen interest from customers in solar rooftops on account of the increasing need to optimise cost. 

Also, the lapse of safeguard duty on solar modules at the end of July 2021 signifies the onset of the duty-free period for solar modules, which can bring the overall installation costs down. This period will last until 31 March 2022, after which a new basic customs duty of 40% will be applied to solar modules. These factors combined could translate into an estimated 2,500 megawatts (MW) of new capacity during 2021, a 37% year-on-year increase in installations. 

OPEX or CAPEX model 

The two most adopted business models for rooftop ownership in the Indian solar industry are capital expenditure (CAPEX) and OPEX models. The OPEX model of rooftop solar financing has been gaining market share (in terms of annual capacity additions) gradually in recent years, as depicted above. The OPEX project tariff rate is about Rs3.5-4/kilowatt-hour (kWh; US$0.047–0.053), less than half the average of most state C&I grid tariffs.

According to JMK Research estimates, it is predicted that the share of OPEX projects for 2021 is likely to be 34%, or approximately 850 megawatts (MW). In terms of the number of borrowers, the OPEX model accounts for only 10% to 15% of the total number of borrowers. However, in terms of loan amounts, the share of OPEX is as high as 85%, due to the larger project sizes that translate to larger loan sizes.

Investments in the first eight months of 2021 in C&I rooftop solar segment have seen a sudden surge, compared to the previous two years (excluding the Amplus acquisition in 2019). The surge was mainly driven by substantial equity investments in Fourth Partner Energy in June 2021 and CleanMax Solar in August 2021.

Equity investments

An interesting trend to note here is that almost all equity investments come from foreign entities (99%) that are looking to enter the Indian market for the following reasons. The Indian solar market is viewed as a high-growth potential market by international investors. Also, solar installations generally have healthy rates of return on equity investments (as much as 14%) compared to investment options in other developed countries. In India, these entities can own as much as a 100% stake in renewable energy projects, which is not possible in other countries due to their respective regulations, along with longer power purchase agreement (PPA) durations (usually 10 to 15 years). 

Foreign organisations are looking for investments to meet their Paris Agreement and net-zero emission pledges. More than 45% of the total equity investments were raised in 2021. The key reasons behind equity investments being concentrated within the players are their relatively higher experience in the Indian solar market, sizeable portfolios, bankable track records, and the distribution of portfolios across different states in India, which reduces risks for investors.

Long-term financing 

Financing under this category is usually obtained from concessional credit lines made available by development banks and multilateral agencies. The associated loan tenure is typically longer, ranging from 10 to 25 years. The World Bank-State Bank of India (SBI) fund for rooftop solar is a US$625m fund, with an additional US$23m allotted for technical assistance and first-loss coverage. The program started in May 2016 and the deadline is November 2021. The program is likely to be extended, given the number of unspent funds. As of December 2020, the World Bank had disbursed US$463m to SBI, of which US$228m (49%) was disbursed by SBI for a cumulative project portfolio of 451MW. Whilst there is no distinction as such between OPEX and CAPEX, minimum project sizes are 100 kilowatts for CAPEX models and 1MW total portfolio for RESCOs. Within the SBI network, 116 SME branches across the country have been designated to handle the World Bank credit line. To boost smaller projects, a customised loan product for projects as large as 1MW capacity is eligible for funding. 

Tata Cleantech-GCF 

Tata Cleantech is another major lender in this space, which has obtained funds from the GCF. These loans are offered at an interest rate of 9% to 10%, and the loan tenure depends on the length of the PPA term and the creditworthiness of the customer. A majority of the projects financed by the fund are based on the OPEX model. As of August 2021, Tata Cleantech has contributed to the development of around 300MW of rooftop solar projects. In January 2021, Tata Cleantech received another line of debt funding from the Commonwealth Development Corporation Group, amounting to US$30m, which will be used towards financing clean energy projects, as well as water and e-mobility solutions. In March 2021, it signed an agreement with Japan International Cooperation Agency (JICA) for as much as 10b yen (approximately US$91m) in a loan for renewable energy projects. The loan will be disbursed through the private sector investment finance scheme of the JICA and will be co-financed with the Sumitomo Mitsui Banking Corp. Other than the concessional credit lines, there are also public NBFCs like the Indian Renewable Energy Development Agency that offer loans to the C&I segment.

Indian Renewable Energy Development Agency (IREDA)

With the equity infusion of Rs15b by the government of India during the Union Budget FY2021/22, IREDA will be able to extend an additional loan facility of Rs120b, in addition to its existing book size of Rs270b. The additional equity will also improve its capital adequacy, which will help IREDA in borrowing at lower interest rates, thus lowering the interest rates for developers. It is expected to now be able to finance around 4.5GW of renewable projects worth Rs180b-190b.

MSME Financing

The nature of the micro, small, and medium enterprises (MSMEs) is such that they are in constant need of finance to grow their business whilst looking out for frugal ways to run their day-to-day operations. Given that electricity costs account for between 5% and 20% of operation costs (depending on the nature of the industry), rooftop solar offers MSMEs an excellent cost-optimisation avenue.

Under its current rooftop solar fund, the World Bank has allotted US$23m as a risk cover against default as a first-loss cover. This enables SBI to lend prospective customers who are perceived as a risk. This was a pilot project to allow the bank to absorb the initial risk. After its success, reports suggest that the World Bank is lining up another US$100m fund to allow MSMEs to obtain concessional credits under the scheme.

The C&I market has made significant strides in adopting rooftop solar in the last four or five years in India. These are mostly good creditworthy customers with BBB+ ratings that have easy access to finance. Top project developers are also focusing on this segment. However, with this market getting saturated, most big project developers are now either taking the open-access route or tapping into the international market to scale up growth.

The MSME sector represents a future gold mine for rooftop solar adoption, considering the significant potential in electricity cost savings it can offer. Textile, food and packaging are among key industries in which there is substantial rooftop solar adoption potential. However, a major barrier to rooftop solar adoption in the MSME segment was financing due to a lack of good credit ratings. Credit enhancement schemes are now needed to cater to the risks of this segment. 

Whilst these positive steps have been taken to make financing for rooftop solar more accessible, there is a need for innovations to scale up the financing of rooftop solar in India, especially in untapped market segments.

What analysts say:

IEEFA Energy Economist Lead India Vibhuti Garg

The market needs more liquidity with more players coming in as the potential is large. The big and small players need to improve their credit rating demonstrating their strong financial health for banks and financial institutions (FIs) to lend money. Further, raising funds via loans from banks or non-banking financing companies (NBFC) is another possible route other than the concessional credit lines. There are also public NBFCs, like the Indian Renewable Energy Development Agency, that offer loans to the commercial and industrial (C&I) segment. Developers need to raise money through such funding, gain experience, and build a credible portfolio. This will enable them to raise debt from banks and FIs at a reasonable rate. Further, small developers can raise funding through consolidation in order to de-risk capital.

For smaller-sized rooftop projects, it is difficult to get access to affordable financing by virtue of the project sizes. Challenges resulting from the smaller size of projects can be mitigated by aggregating them in large quantities by EPC contractors, so that the entire portfolio can apply for financing. Such aggregators should be able to receive better terms from financial institutions, owing to lower transaction costs and more attractive offers from system installers. Developers need to look at other business models like building projects through offsite open-access private solar parks to cater to the C&I segment.

More risk capital in the form of equity funds is needed to manage first-loss risk. Partial credit guarantee funds to hedge the risks of the micro, small and medium enterprise (MSME) segment can be extended from various bilateral and multilateral organisations to other lenders, as well. At present in the rooftop solar segment, this arrangement is only with Electronica Finance Limited from USAID.

As of June 2021, total rooftop solar capacity stood at 7.7 gigawatts (GW), well below the installation rate required. The pace of installation has been slow and it needs to be accelerated by providing policy certainty and access to finance at reasonable rates.

Only 3.5% of the power procured by India’s C&I segment is from renewable sources. In the C&I segment, MSMEs will be the new market to start adopting rooftop solar aggressively in the next few years. According to an Ernst & Young study, it was estimated that MSMEs hold a potential of 16GW to 18GW of rooftop solar. For MSMEs, electricity costs can be as high as 50% of total expenses, so cutting these costs can improve their competitiveness considerably.

Rystad Energy Junior Analyst Shubhang Dwivedi 

Amongst the measures that can be taken to support the financing of the rooftop sector in India include holding outreach campaigns to make people, especially the MSMEs, aware of the intricate details, such as financial benefits to be accrued from investing in rooftop solar infrastructure, as well as the expenses incurred in the maintenance of the equipment. MSMEs are reluctant to take a step towards investing in rooftop solar. To tackle this issue, a well-thought-out media and outreach strategy is required to percolate the information regarding benefits and incentives that MSMEs may accrue from its installation. 

The main concerns of the financial institutions have been regarding the non-bankable situation of many MSMEs. Options like the credit guarantee mechanism or CGS might offer the financial institutions some incentive to extend lending MSMEs for uptake of rooftop solar. Moreover, insurance coverage for performance shortfall of the equipment, equipment defect, irradiation uncertainties amongst others will give more confidence to both lenders as well as borrowers.

The growth of rooftop solar power in residential segments has been slow due to lack of finance and untimely delivery of subsidies. Even in the C&I sector, electricity costs are a major part of their total expense, so cutting such costs via solar power sustainably improves their competitiveness in a big way. Clearly, there are ample growth opportunities in C&I rooftop solar, but two fundamental issues must be tackled to speed up adoption in this segment. The first is financing because it is still difficult for consumers to get credit approved as lenders do not identify a rooftop solar project as a standalone asset. Second, due to low MSME project capacities, rooftop solar projects are not particularly attractive to banks and financial institutions that cannot aggregate portfolios of rooftop assets. 

Due to the lack of funding, the solar rooftop installation in India accounts for less than 15% of the total solar installed capacity. India has a target of 40GW of rooftop solar by 2022, but only less than 6GW has been installed by the end of September 2021 (as per the Ministry of New and Renewable Energy).

The National Solar Mission has an ambitious target to increase India’s solar capacity to 100GW (40GW of rooftop) by 2022. 1134.40 MW of rooftop solar installations were made between the period of April – September 2021.

India has a great potential for rooftop solar, but still a lot needs to be done in the field of creating awareness, easy funding, and policy structure to utilise this potential and meet the set targets.

Asia Clean Energy Partners Senior Partner Richard Edwards

Regulatory certainty and a predictable enabling policy environment are critical to growth in rooftop solar electricity in India’s C&I segment. The uncertainty of net metering regulations at the time served to constrain further growth, but recent measures to clarify them should help increase demand going forward.

In a similar vein, a lapse in duties on solar modules in July 2021 has given a boost to new installations by lowering costs. This duty-free period is slated to last until the end of March 2022, at which time a new basic customs duty of 40% on solar equipment is planned. Extending the moratorium for another year would certainly boost installations and have a particularly strong impact in the MSME market segment

.The World Bank recognised that to improve the impact of financing rooftop solar installations a comprehensive US$12.93m technical assistance and awareness raising effort,covering policy and regulatory assistance, capacity building, demand aggregation, process streamlining and media and outreach, was needed to build capacity as an important complement to their lending program. India’s potential need not be constrained by a lack of funding. Large amounts of capital are available from public and private sources, and the key is bringing viable projects and funding sources together. Raising awareness of funding opportunities and connecting rooftop solar project developers with investors and lenders through programs such as UNIDO’s Private Finance Advisory Network coordinated in Asia (including India) by Asia Clean Energy Partners will be critical for ensuring that India’s potential further growth in rooftop solar energy is not constrained by lack of funding.

As of December 2020, the World Bank had disbursed US$463m to SBI, of which only US$228m (49%) was disbursed by SBI, with a cumulative project portfolio of 451MW. Given the level of unspent funds to date, the program is likely to be extended.

India’s rooftop solar segment outlook is bullish and is on an upward trajectory, dominated by the C&I segment with huge potential for the MSME sector, especially considering the potential for power cost savings in industries like textiles, food and packaging. As COVID-19 declines, demand should grow even faster. Recent improvements in the policy and regulatory environment, such as finalizing the net metering cap, are helping, with an observed surge in investments in 2021.

Challenges remain, however. Raj Prabhu, CEO of Mercom Capital Group recently observed that inconsistent rooftop solar policies across states and a lack of support from distribution companies “are holding back the sector from realising its true potential to bring in new investment, create jobs, and drive the clean energy economy forward.” Since 2015, rooftop solar project developers have raised more than US$2b, 48% (US$985m) of which came from equity funding and 29% (US$599m) from debt. Approximately 45% of these investments have been raised within the first eight months of 2021 alone, indicating a significant growth trend ahead.



Join Asian Power community
Since you're here...

...there are many ways you can work with us to advertise your company and connect to your customers. Our team can help you dight and create an advertising campaign, in print and digital, on this website and in print magazine.

We can also organize a real life or digital event for you and find thought leader speakers as well as industry leaders, who could be your potential partners, to join the event. We also run some awards programmes which give you an opportunity to be recognized for your achievements during the year and you can join this as a participant or a sponsor.

Let us help you drive your business forward with a good partnership!

The contract is in line with Keppel's Vision 2030 for sustainability.
Advanced digital solutions can cut China’s LCoE by up to 12%, reports said.
Under the bill, the Singapore regulator will be allowed to be a market player.
The NFE project is the only significant LNG investment recorded amidst the clean energy transition.
The deadline for submission of proposals is on 1 April 2022.
Grid stability and commercial viability are key in the clean energy transition.
Currently, renewables comprise 21% of India’s total power generation.
Analysts said the sector will face risks in the next 1-2 years of decarbonisation.
Following the launch of SolarShare, the company faced contractor issues in Singapore.
The Grid Digital Twin is being developed in anticipation of the increasing electrification complexities.
With such a price, the 36.4 Gt of carbon emissions in 2019 would amount to about 4% of the world GDP.
SG's membership in the PPCA reflects its efforts to phase out unabated coal.
The ETM Southeast Asia partnership is the first of its kind in Asia and the Pacific.
Over 50 companies were awarded in this year’s Oscars of the power industry.