By Vedant Rathi
The Indian solar industry has grown about a hundredfold in the past four years, from 36 MW in March, 2010 to 2,600 MW in March, 2014. The Modi government has set an ambitious target of reaching a 100 GW installed capacity by 2022. As a developing nation, India faces many financing and policy barriers to reach this target. This blog addresses potential solutions to solar financing in India.
What is the problem?
Like any other nation, commercial banks (both in the public and private sector) constitute a major source for financing for infrastructure projects, including renewables in India. Compared to the US or Europe, banks in India have high interest rates. For example, State Bank of India (SBI) and other national banks provide debt at interest rates of about 11% to 13%. Compared to this, international development banks like KfW and US Export-Import Bank and multilateral banks like Asian Development Bank and the International Finance Corporation provide funding at rates as low as 4%. Additionally, project developers have expressed concerns over insufficient debt tenors in India. Higher costs and inferior terms of debt in India may raise the cost of renewable energy by 24-32% compared to similar projects financed in the US or Europe. High inflation, growth, intense competition (even outside of renewable energy) to get investments, and inherent risks of a developing nation are all factors that contribute to high interest rates in India.
What are the potential solutions?
This blog discusses a few potential solutions to obtain low-cost capital for solar projects. While this is not an exhaustive list, the author has focused on solutions that have been successfully implemented in other countries and thus have a proven track record.
1. Government Loan Guarantee Program – The Department of Energy (DOE) in the U.S. offers loan guarantee programs for early stage renewable projects without capital. Through this program the DOE ensures that if the renewable energy manufacturing or generation project defaults on its loans, the DOE will repay the outstanding balance. The Indian Ministry of Finance approved a program that would provide a guarantee of up to 20 percent of the debt financing of projects in the power sector, including projects in renewable energy. The guarantee allows projects to attain a higher credit rating, thus broadening the investor pool to include pension funds and insurance companies, and lowering interest rates.
2. National Development Banks/Funds – The National Clean Energy Fund (NCEF) was announced in FY 2011 to encourage renewable energy generation in India. The Indian Renewable Energy Development Agency (IREDA) in collaboration with the NCEF announced a refinancing scheme under which as much as 30% of the clean energy loans issued by commercial banks could be refinanced at 2%. The refinancing is subject to the condition that the interest rate from the lending institution does not exceed 5% per annum. This limits access to low-cost financing given that solar projects borrowing from national banks are generally paying an interest of 11%-13% per annum. As of June 2014, the NCEF has allocated just over 1% of the available funds to the Ministry of New and Renewable Energy (MNRE). For NCEF to be truly effective and widely accessible, limiting factors on interest rates need to be relaxed.
Brazil has a similar growth and financing environment to India. The Brazil National Development Bank (BNDES) is a great example of an institution that has been successfully and consistently offering low-cost, long-term, financing solutions to renewable energy projects. In 2012, BNDES offered a 15-year interest rate of 2.5% which is less than a third of Brazil’s benchmark interest rate. BNDES has exclusive access to low-cost, risk-free funding from a workers’ welfare fund (FAT). According to a 2012 study by Deutsche Bank Climate Change Advisors, the availability of BNDES loans cut renewable energy costs in Brazil by as much as one fifth.
3. Green Bonds – Green Bonds were first issued by the European Investment Bank in June 2007. Green Bonds are similar to any other asset-backed bond expect that they are used to finance green projects. A green project may include any project related to renewable energy, energy efficiency, or sustainable land use. Green Bonds can be issued by national/state governments, local municipalities, banks, and international financial institutions. The National or State governments may offer low-cost, long-tenured funds by using Green Bonds. The Climate Bonds Initiative Study indicates that in 2014, $36.6 billion worth of Green Bonds were issued. A recent study indicates that clean energy costs may go down by one-fourth if India would issue its Green Bonds.
4. Infrastructure Debt Funds (IDFs) – As tradable instruments that are attractive to domestic and international long-term investors, IDFs can act as vehicles to refinance existing debt for infrastructure companies at more favorable terms. In 2011, the Reserve Bank of India (RBI) issued guidelines for the operation of new IDFs, structured either as mutual funds or companies, but they have not yet been used for renewable energy projects in India. In the recent budget, a National Investment and Infrastructure Fund (NIIF) with an annual flow of US$3.2 billion was announced. This will help raise investments as equity in infrastructure finance companies which can further fund the renewable projects at competitive pricing. A central authority like IREDA or Solar Energy Corporation of India (SECI) with a high credit rating is well-positioned to successfully utilize NIIF to not only refinance existing debts low-costs but also provide low-cost capital to new projects.
In addition to facilitating low-cost finance, other potential options like tapping into public equity markets by forming solar yieldcos and encouraging foreign investment by developing new PPA structures to minimize forex risks can boost the solar industry in India. The solar market is upbeat and such suitable financial policies present a great opportunity to make hay while the sun shines.
The author would like to thank Andrew Gilligan from Sol Systems LLC and Michael Kline from The Brattle Group for their inputs.