India has made an ambitious target of 40 GW grid-connected rooftop installations by 2022, in support the government has raised the budget up to INR 50 billion ($768 million).
According to Climate Policy Initiative (CPI), the rooftop projects require high initial capital investment and low operating costs. The typical rooftop project has a size of less than 200 kW, considering C&I space. The average life of the project is 25 years, where, the debt-equity ratio stands at 70:30. The average capital costs required for 100 kW is INR 5 million. And the installation time averages less than three months, inclusive of the time needed for the various permissions.
The rooftop projects are marked by the average debt service coverage ratio (DSCR) of 1.2 times. The expected equity IRR is moderate, that is, more than 12%, but confirm constant returns to the investor. And if proper bundling, higher ratings, and track record are sustained, then the sector can attract investors looking for continuous flows.
In the rooftop sector, the State Bank of India (SBI) together with the World Bank has sanctioned INR 40.7 billion ($625 million) for grid-connected solar rooftops. Similarly, Punjab National Bank (PNB) has received INR 32.5 billion ($500 million) multi-tranche facility by Asian Development Bank (ADB). IREDA and RBL Bank are also supporting the sector through loans.
The CPI has made this presentation during the recent seventh international solar alliance (ISA) get together, and stakeholders meeting held in New Delhi on November 15, 2017. The company has detailed the obstacles observed in ease of financing and has suggested the solutions for the same.
Problems and Solutions- Rooftop Solar
CPI has mentioned seven financial difficulties and proposed the solutions by analyzing the market needs.
|1||Rooftop resource assessment and off-taker credit assessment||Technology-driven platform to enable technical and risk assessment|
|2||Limited information and validation on bankability and impact of business projects||Technology-driven platform to enable technical and risk assessment; Project preparatory support|
|3||Small ticket size investments leading to high transaction costs||Project preparatory support|
|4||Concerns on the credit quality of off-takers||Payment security mechanism to address liquidity concerns|
|5||Lack of project financing options for small ticket sizes due to which collateral requirements are high||Portfolio level guarantee constructs to provide comfort to lenders|
|6||Shortage of long-term capital with Indian financial institutions makes funding for this sector more difficult||Financial facility to drive inflow of long-term foreign capital|
|7||Limited equity investments due to small ticket sizes and high return expectations||Blended equity model|
At the gathering, the company has presented two instruments through which these solutions can be implemented. One is USICEF, and the other is USICFP.
US-India Clean Energy Finance (USICEF) has been set up as India’s first project preparation facility for distributed solar projects to address the early-stage project capital gap and to push long-term financing. The initiative is sourced equally from US foundations and MNRE with Overseas Private Investment Corporation (OPIC) of US as the anchor lender.
CPI mentioned the critical objectives of the organization. First, to help prepare high-quality investment grade project proposals to increase prospects for getting debt financing from OPIC and other DFIs/ lenders. Second, to enable a critical mass of projects to unlock access to capital from public and private sources which in turn will benefit deprived communities in India.
USICEF has considered five applicants for the grant and 31 applications for empanelment with USICEF. The group, managed by CPI, provides a suitable partnership for investing in this sector.
According to CPI, the USICEF will play a “match-maker” role in facilitating discussions between US Investors and other non-US equity distributed solar players. The US Investors will benefit from gaining access to the pipeline projects sourced by USICEF, where only the viable and sustainable plans would be presented to Investors. Secondly, enabling players to be eligible for OPIC debt funding, thereby improving access to institutional financing for an Indian distributed solar sector. Lastly, by creating a pool of prospects, USICEF will also allow U.S equity investments through various selected investors.
The mechanism has targeted the following segments: Mini-Grid & Micro-Grid Power Generation, Market-Based Solutions, and Renewable Energy Infrastructure Catalyzers.
US-India Catalytic Finance Program (USICFP), advised by CPI, is a $40 million joint commitment which provides an opportunity to engage in risk mitigation in this sector.
The following catalytic financing interventions are selected for detailed design and structuring of ICFP:
- Rooftop Solar Financing Facility designed to aggregate financing requirements with potential evolution to warehousing and securitization, to provide debt finance for the projects.
- Foreign Exchange Hedging Facility for international financial institution loans to give a cheaper currency enclosing solution while maximizing leverage for public money.
- Rooftop Solar Payment Security Mechanism for mitigating off-take /payment risk on the projects to be developed on government-owned and managed buildings.
- Venture Debt Facility for off-grid and possibly Rooftop energy companies, where access to early stage debt is a significant barrier. And last, small and medium-sized enterprise support facility.
CPI highlighted that the India Innovation Lab for Green Finance, supported by MNRE, has already helped develop two of these mechanisms, the Rooftop Solar Financing Facility and the Foreign Exchange Hedging Facility. Additionally, CPI (outside of the Lab) has been developing tools, such as the Payment Security Mechanism, which can be further improved and implemented via USICFP.
CPI is playing two principal roles in USICFP. First, as a facilitator, where it will be serving as a communications liaison between the Government of India and the consortium of US foundations. Also, providing analytical support, preparing a report identifying the potential market development, best implementation methods and the risks associated with it.
Second, as an overseeing agency, where it will be providing flexible financing to attract commercial capital from domestic and international financing sources into high impact projects and mobilize capital flow in the distributed solar sector in India.