Promoting Rooftop solar systems through Municipal Corporation

Promoting solar Rooftop systems under third party financing model has had limited success due to inadequate availability of that capital to the project developers. The third party financing model is also known as RESCO (Renewable Energy Service Company) model. The limitation of RESCO model is that the payment security mechanism from the off-taker his challenge and collecting the payments by integrating Municipal Corporations can also be one of the medium to promote large scale deployment of rooftop solar. Though government is already promoting Rooftop solar through discoms, however, municipality corporations can also be considered as one of the possible entity for large scale deployment of solar rooftop systems. Recently, Solar Municipal Bond model (SMB) has been suggested by a report “Scaling up Rooftop Solar Power in India: The Potential of Municipal Solar Bonds”. The report highlights the advantages of municipal solar bonds.

Municipalities have several market advantages in their potential role as finance aggregators for rooftop solar:

• Institutional goals and mandates: Municipalities have target-based responsibilities to increase renewable energy deployment under the Solar City Program, so they have a built-in incentive to increase rooftop solar.
• Access to debt capital markets: Compared to rooftop solar developers, municipalities are in a better position to access the debt capital market due to their larger balance sheets.
• Superior credit profiles: More than half of the rated municipalities – 94 in total – are investment grade (i.e. BBB- or above); whereas almost all rooftop developers are below investment grade. The better credit profile of municipalities compared with project developers can help in raising debt capital at lower costs.
• Access to public guarantees: Compared to private project developers, municipalities (as public entities) have relatively better access to public guarantees that are typically required to achieve the risk-reduction necessary to attract institutional investment.
• Diverse revenue sources: Municipalities have multiple sources of revenues (e.g. property taxes), which can provide additional security to investors.
• Good consumer engagement: Given municipalities’ relatively good proximity with the consumers, the government can quickly facilitate rooftop solar project aggregation.

Innovative transaction structures would be required to facilitate the role of municipalities as finance aggregators. A particularly attractive structure is where a municipality-owned master special purpose vehicle (SPV) or a corporate municipal entity (CME) would raise the bonds and disburse the proceeds of these bonds to SPVs owned by project developers via capital lease arrangements.