The Indian solar industry, which has grown more than hundredfold in four years to reach over 2.6 GW of installed capacity in 2014, will not be able to continue on its trajectory of growth unless domestic lenders step in and play a larger role, according to a recent report by the Council on Energy, Environment and Water and the Natural Resources Defense Council.
The report titled ‘Reenergising India’s Solar Energy Market Through Financing’ said that obtaining financing for solar projects and the high cost of capital posed major challenges to scaling solar in India. In order to bring down the cost of capital and ensure the level of investment required to build 20 GW of solar power by 2022, the report stressed the need for continued innovation in policy and introduction of financial mechanisms.
During phase-I of the Jawaharlal Nehru National Solar Mission, multilateral financing and self-financing accounted for majority of the financing since domestic banks were reluctant to lend because of higher levels of perceived risks associated with solar. Even after phase-I, despite the increased familiarity and experience gained, many domestic banks continue to perceive significant risks in solar investment, partly due to information gaps and a continued lack of successful track record. The report pointed out that the burden on domestic banks would increase as international financing was expected to decline.
Evaluating the various mechanisms used for supporting the solar sector, both in India as well as globally, the report said that weak compliance of Renewable Purchase Obligations had resulted in failure to create demand for solar energy in the country, adding the issue needed to be addressed through stricter enforcement.
The report also discussed some of the financial mechanisms that were expected to become more viable once the Indian solar industry matured. It said that green bonds and Infrastructure Debt Funds could act as conduit for debt to flow into solar projects under more favorable terms. So far, such funds have not been used for the renewable energy sector in India.
Giving the example of Brazilian Development Bank, the report suggested that green banks could be a source of low-cost, long-term financing for renewable energy projects. It added though that further assessment was needed to understand the viability of such an initiative in the Indian context.
The report emphasised that stronger policies and mechanisms for financing solar energy were needed in order to achieve JNNSM’s cumulative target of 10,000 MW at the end of the second phase in 2017. To meet the target of installing 20,000 MW grid-connected solar capacity by 2022, the solar energy market has to be scaled eightfold in less than nine years.
The report gave a number of recommendations with a view to guide policy makers and other stakeholders in dealing with the financing challenges that plague the industry’s growth.
The key measures suggested in the report for overcoming the financial barriers faced by the sector call for deployment of viability gap funding within first year, establishment of a contractual link between Solar Energy Corporation of India and National Clean Energy Fund and carving out a clear role for SECI moving forward in the Mission, priority sector lending provisions for solar power, introduction of IDFs for investment in solar power and establishment of a green bank as well as a system of green bonds.
The report sought an information sharing platform for lending institutions and increase in transparency for solar market information. On the policy front, it said the central government needed to consider adopting the innovative and successful programs of states. It also highlighted the importance of enforcing RPO mandates and timely implementation of solar policies.
The CEEW is an independent non-profit policy research institution engaged in promoting dialogue and common understanding on energy, environment and water issues. NRDC is an international non-profit environmental organisation.