1.    Introduction

Government of India is encouraging adoption of solar energy by every Indian. To promote convenient adoption and use of solar energy, public sector banks & private banks have been given statutory instruction by Ministry of Finance to offer loan at reasonable cost as per Government of India & Reserve Bank of India Instructions to Public Sector Unit Banks & Private Banks on financing.

The financing of solar PV projects is typically arranged by the developer or sponsor. It comprises two parts: an equity investment and project financing to cover the debt portion.

Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. Both the equity partners and project finance partners typically conduct an evaluation of the project covering the legal aspects, permits, contracts (EPC and O&M), and technical issues prior to achieving financial closure.

The project evaluations (due diligence) identify the risks and methods of mitigating any risks prior to investment. Where the project has inherent risks, the exposure to these risks will be negotiated between the parties and reduced wherever possible with insurance. The following sections cover each of these steps and processes.

2.    Structure of Solar Project Financing

The equity portion can be provided by the developer or from equity partners that sign agreements or letters of intent to purchase the projects from the developers. Equity partners may be individual firms, developers or equity funds managed by management firms, bank equity fund managers or pension fund managers.

The equity funds can be used as the seed capital to start the construction of the project, following completion of the design and environmental studies, legal analysis, permit applications and grid connection applications. The equity is typically around 15-30% of the total project investment cost.

It is not unusual to see an equity financing fee involved in the provision of equity to the project. In some cases, the equity partner provides operations management for the project over the long term.

The special purpose vehicle (SPV) signs the EPC and O&M contracts, and the project revenues are paid to the SPV. The working capital requirements and debt servicing are taken from the revenue to determine the returns for the equity partners from the projects, typically in the form of dividends.

In some cases, the equity partners will not commit equity to projects unless they have received firm commitments of debt project finance or leasing finance.

The debt portion is typically provided by an investment bank providing project finance or leasing finance. The debt portion is the larger investment, which is typically 70-85% of the total project cost.

Large corporations and utilities may develop solar plants without the need for project finance; these projects are financed from the corporate balance sheet. But the corporation or utility will still conduct a similar due diligence review before committing the project funds.

It is critical to select a solar financing option that suits for Project. The usual cost of setting up a plant comes to around INR 50 Millions / MW. Debt financing is usually available with recourse, i.e., the investor will have to submit a collateral security against the loan he plans to take.

Debt financing without recourse is an option only for big players with large scale solar installations and with a good track record. MW solar plants, in India, are financed by a debt-equity mix. The chart gives an understanding of the solar financing pattern in India.

3.   Major Solar Project Financing Institutes in India

Indian Public Sector and Private Banks

Almost all  public sector banks like, State Bank of India (SBI), Punjab National, Bank of Baroda, Central bank etc, provide debt finance for various types of solar projects. Private Banks i.e. ICICI, Yes Bank, Axis Bank also provide loans for solar projects.

As per the prior release form Indian government in public “among public sector banks, SBI will be financing the biggest capacities of 15,000 MW. The Banks provide loans for any solar projects at interest rates of 9.5% to 10.5% per annum.

IREDA

Indian Renewable Energy Development Agency (IREDA) is a Non-Banking Financial Institution (NBFC) under administrative control of Ministry of New and Renewable Energy (MNRE) for giving term loan for renewal energy and thermal energy efficiency projects.

IREDA provides finance upto 75% of the cost of the solar project venture. IREDA conducts credit rating for all grid associated projects and provides grading in light of the risk assessment. The interest rates are connected with the grades. The interest rates are set by a “Committee for fixing interest rates” from time to time in view of economic situations.

IREDA extends loans to the solar energy project developers that bear low interest rates. The funding is routed through various modes, such as direct lending and lending through various financial intermediaries such as providing various lines of credits to NBFCs, and underwriting of debts etc.

IREDA also uses the NCEEF to provide subsidized debt at a low rate of interest to renewable energy projects through select banks. IREDA often sources funds from international agencies and banks to provide such loans for renewable energy projects.

IFC

International Finance Corporation (IFC) is the financing division of the World Bank is involved with the financing of solar power undertakings in India.

IFC is a universal monetary organization that offers consultative, investment, and asset management services to support the development of private sector in developing nations.

Apart from providing advisory services to state governments and investing in companies at a corporate level, IFC has been actively involved in providing debt to solar projects and project development companies. IFC funds in Solar Technologies Company,

ADB

Asian Development Bank (ADB) is actively involved in financing solar in India. ADB has risen as the primary loan provider to advance solar power projects in India.

Many green friendly funds are also available which can give equity at a less expensive rate and back off the cost of financing for these solar projects. It provides financing support under the India Solar Generation Guarantee Facility (ISGGF), under its Asia Solar Energy Initiative (ASEI) to promote the development of solar energy in developing member countries. ADB also considers direct financing and/ or guarantees for projects greater than 25 MW.

REC

The Rural Electrification Corporation (REC) with its focus on promoting solar energy projects through its business activities, REC provides financial assistance for setting up power generation projects. The debt-to-equity ratio as proposed by REC, the debt-to-equity ratio would be 70:30 for private-sector borrowers.

However, REC proceeds with the lead Banks, NBFCs & financial institution’s (FI) debt-equity ratio, subject to a maximum ratio of 3:1, when the lead FI is funding on the basis of a different debt-equity ratio. And, in case the lead FI is REC, 70:30 will be the debt-equity ratio.

KFW

Germany’s Kreditanstalt fuer Wiederaufbau (KfW) bank is also doing finance at the Indian solar market. In their respective first deals. KFW is German bank and Germany has committed to providing financing support through KfW Development Bank for solar photovoltaic investments.

NBFCs

Some of the prominent Non-banking financial companies (NBFCs) involved in debt financing of solar projects. Under the infrastructure development funds, the Infrastructure Leasing & Financial Services Limited (IL&FS), SBI Macquarie, and Taurus Infrastructure Fund provide the financing for project developers.

Further under the Infrastructure funds dedicated power sector financing, the Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) are the major fund provider in solar energy sector. Some investment banks e.g Larsen & toubro (L&T) finances, SBI Capital Markets, BNP Paribas invest in the large and small solar energy projects.

Other international financers

The World Bank-Clean Technology Fund (CTF) advance will bolster various solar photovoltaic (PV) technologies, to expand the reach of rooftop solar systems to an assortment of client gatherings.

The European Investment Bank (EIB) announced a long-term loan to SBI to fund mega solar power projects in the nation for India’s National Solar Mission.

EXIM Bank is the first foreign financing foundation to sanction solar power projects under India’s JNNSM and one of the first to support financings under the solar power policy of the Gujarat State.

4.   How Development Funding Institutions (DFIs) provide Finances

International Funding Bodies or Development Funding Institutions (DFIs) are multilateral or unilateral funding agencies, which provide credit in the form of higher risk loans and loan guarantees in developing countries. DFIs have a mandate to provide finance to the private sector for investments that promote development and many DFIs actively provide financing for solar energy.

DFIs sometimes use the same tools as Export Credit Agencies (ECAs) to carry out their loan disbursement, i.e., through direct lending, financial intermediary loans and interest rate equalization.

The main DFIs active in the Indian solar market are the Asian Development Bank (ADB), the International Finance Corporation (IFC), Overseas Private Investment Corporation (OPIC), and the Indian Renewable Energy Development Agency (IREDA).

Many public sector banks have come forward to help the DFIs in this regard. Many foreign development banks have also been aiding the funding of solar power projects in India through public sector and private banks. IFC, ADB, KFW, EXIM have already announced billion dollars funds to support the development of Indian solar industry. European Investment Bank (EIB) is additionally intrigued by financing solar parks in India.

DFIs provide funds through the following strategies:

• Almost all Indian Public Sector Banks provide the loans for grid connected solar projects. Banks like, State Bank of India, Punjab National bank, bank of Baroda, Bank of India, Central Bank of India, Punjab National Bank, Allahabad Bank, Indian Bank and Indian Overseas Bank are directed to provide loans for grid connected rooftop solar systems.
• Some public sector banks have been affiliated with international funding agencies/DFIs to accelerate the finance for solar industry in India. i.e. State bank of India, Punjab national Bank, Bank of Baroda, Yes bank.
• For solar project financing, The World Bank affiliated State Bank of India (SBI) to support Grid-Connected Rooftop Solar PV installation on the rooftops of commercial, institutional and industrial buildings in India.
• International Finance Corporation (IFC), the financing arm of the World Bank is occupied with financing of solar power projects in India. US based EXIM Bank is providing debt for loans of solar power projects.
• Asian Development Bank (ADB) has affiliated with Punjab National Bank (PNB) and approved a multi-million dollar funding for installation of rooftop solar systems in India.
• In private banks, Yes Bank along with European Investment Bank (EIB) has come forward to renewable energy financing program for India. Yes Bank has announced $5 billion for financing solar energy projects in India till 2030.
• Bank of Baroda has announced a partnership with Germany’s KfW Development Bank to extend funding of USD 113 million to refinance solar power projects in India. The tie-up will be funding solar power projects as a part of the Solar Partnership II – Promotion of Solar PV in India scheme
• IREDA & REC lends at lower rates, both institutes provide the funds through banks, NBFCs and Financial Institutions on subsidize interest rates.
• Indian banks provide loans at interest rates in the range 10-12%, Non-banking financial Corporation (NBFCs) could be lending at marginally higher rates.
• Domestic finance are generally given for the period of 7-10 years; however numerous Indian banks are currently agreeable to lend the money 15 year tenures through the funds of DFIs.

5.   How a Lender(s) & Financing Institutes Evaluate a Project for Funding

Both equity and debt finance investors typically evaluate the legal, permitting, consent and technical due diligence areas of the project. The due diligence conducted at the equity stage may be based on preliminary technical information.

On the other hand, the due diligence for project finance is conducted at a later stage and often supported with detailed technical information and designs.

The developer typically carries out the following tasks:

• Identifies the sites with the best resources.
• Negotiates the use of the land.
• Conducts an initial solar resource analysis.
• Completes an EIA.
• Conducts initial layout and design including initial equipment selection.
• Applies for and receives planning permits and consents.
• Applies for and receives grid connection offer or letters of intent.
• Applies for feed-in tariff (FiT) and/or PPA.

The equity investor typically evaluates the work in the list above. The next key step is to validate and confirm all the permits, consents and power purchase agreements.

Along with the equity partner, the project SPV can look towards securing the technical solution, detailed design and equipment supply. In some cases, these are carried out by the developer, depending on the stage in which the equity partner enters the project.

The project finance partner can often influence the choice of the equipment technology, based on what they perceive to be “bankable”. This often affects the selection of modules, inverters or mounting structures.

One way to avoid such issues is to have discussions early in the design phase with the project finance partner. This can help assess the equipment selection and satisfy the requirements of all partners.

The due diligence phase of evaluating a project takes three main forms:

• Legal due diligence – assessing the permits and contracts (EPC and O&M).
• Insurance due diligence – assessing the adequacy of the insurance policies and gaps in cover.
• Technical due diligence – assessing the technology, integration and technical aspects of the permits and contracts.

The due diligence process reviews the designs and equipment specifications against best industry practice and examines their appropriateness to the environment and design goals of the PV plant. Typical areas assessed in technical due diligence are:

• Sizing of the PV plant:
  • Layout in the land area available.
  • Appropriate buffer zone around the plant to account for shading/other activities.
  • Overall size appropriate for the grid connection.
• Layout of the PV modules, mounting and/or trackers, and inverters:
  • Assessment of level of inter-row shading.
  • Access to plant components for maintenance and installation activities.
• Electrical design layout and sizing:
  • Assessment of cable losses in the DC/AC cabling.
  • Assessment of appropriateness of the cable placement and connectors.
  • Appropriateness of the earthing and protection systems.
  • Compliance to safety standards
• Technology review of major components (modules/ inverters/mounting or trackers):
  • Suitable for environment.
  • Integration of components.
  • Track record of suppliers and models.
  • Quality and compliance certificates.
  • Compliance to safety standards.
  • Warranties.
  • Design life.
  • Degradation assumptions.
• Energy yield assessments:
  • Appropriateness of any assumptions made.
  • Source of solar irradiation data.
  • Assessment of shade.
  • Degradation assumptions.
  • Uncertainty analysis.
  • Model used and modelling techniques.
  • Check the theoretical Performance Ratio.
• Contract assessments (EPC, O&M, grid connection, power purchase and FiT regulations):
  • Looking for interface points and areas where there could be risks.
  • Examining construction timelines and ensuring that the critical path is clearly identified and mitigated in the contracts.
  • Assessing the warranty and guarantee positions within the contracts – protection for the lenders.
• Financial model assumptions:
  • Assessing that the assumptions used are complete and appropriate.

The process of due diligence can require considerable effort from the developer to satisfy the requirements of the lenders. It is important that the developers have realistic financial models with contingencies clearly shown.

Alongside, it is also imperative to have a sensible construction program, which takes contingencies into account. Such a program will clearly show that the target deadlines are realistic and achievable.

The due diligence process is likely to identify risks, and help develop solutions to mitigate the issues found. It may result in changes in the design or use of components in the plant to make the project “bankable” for the lenders.