Effective Deployment of Multilateral Low-Cost Debt in India’s Rooftop Solar Market

India’s grid-connected rooftop solar power market is witnessing a surge in activity. The Cabinet Committee on Economic Affairs, chaired by Prime Minister Shri Narendra Modi recently approved the budget, allocating Rs 5,000 crore as subsidy support to select consumer segments till 2019–20. Also, the Ministry of New and Renewable Energy (MNRE) is negotiating gigawatt-scale capacity allocation to various Government of India (GoI) ministries, departments, and agencies and is investing in large-scale capacity-building and training activities to sensitize different market stakeholders. In addition, rooftop solar power is reported to have achieved grid parity for commercial and industrial consumers in a number of states. These indicate that the country’s grid-connected rooftop solar power sector is at the threshold of rapid market expansion and capacity deployment. However, this growth is contingent on suitable and timely intervention concerning a number of diverse issues: one of which concerns the availability and accessibility of low-cost debt finance.

Some of the efforts taken by the government in this regard are briefly discussed in Table 1. Support from multilateral organizations is the other potential market driver for low-cost debt finance in the market. Several multilateral organizations, such as The World Bank, Germany’s KfW Development Bank, Asian Development Bank, and the BRICS development bank, have given attention to the sector. The cumulative lowcost debt support for India’s rooftop solar power market is upward of $2 billion, which is roughly equivalent to Rs 13,000 crore. At a 70 per cent average debt component in project cost, this amounts to debt availability for nearly 3 GW of capacity deployment.

Rooftop Solar Market Segments

The rooftop solar market in India can be broadly divided according to consumer segments, with each consumer segment exhibiting some distinctive characteristics relating to business models, financial viability, policy incentives, market drivers, etc.

These consumer segments are:

• Residential
• Commercial and Industrial
• Institutional which includes schools, colleges, universities, hospitals managed by not-for-profit trusts, NGOs, etc.
• Government including government ministries, public sector units (PSUs), departments, etc.

Table 2 illustrates some characteristics of each consumer segment. Given the financial viability and motivation for cost savings, the commercial and industrial segment is expected to drive demand and deployment. This will be supported by Government departments and PSUs with whom MNRE is currently engaged for allocating capacity targets for rooftop solar deployment.

Debt Requirement in Each Market Segment

Until now, the capacity installed has not made significant use of debt, owing to very low availability of debt in the market, low-cost or otherwise. While some projects have been able to secure project debt from various sources, a majority of the projects have been installed by early adopters with equity investments alone on the part of the system owner. However, as the market matures, project debt will have increasingly prominent role to play in project development. Residential projects, which are expected to continue mostly through CAPEX business model (supported by GoI’s capital subsidy incentive), will require project debt in the form of consumer loans, characterized by small ticket size, large volume, and need of loan accessibility at bank branch level. The GoI’s initiative to promote inclusion of rooftop solar project in home loan/home improvement loan products of banks was an effort to meet requirement of this nature of project debt. In contrast, the small proportion of aggregator-based residential RESCO projects will require project debt of a different kind, likely of a project finance nature. Considering an estimate of the total capacity of residential installations up to 2022 of around 20–25 GW, the total size of debt finance required for this segment up to 2022 would be upward of Rs 80,000 crore, which is roughly equivalent to $13 billion. However, in the current state of affairs (viz. cost of rooftop solar power and want of grid parity), it is expected that the residential segment will see rapid deployment only after a few years from now. On the other hand, the commercial and industrial segment is expected to see speedy deployment at this time; however, this will be highly contingent on the availability of low-cost debt, of which there is presently not much in the market. The segment will likely continue to see both CAPEX and RESCO installations. The estimated total capacity of commercial and industrial installations up to 2022 is around 10–15 GW; the total size of debt finance required for this segment would be upward of Rs 40,000 crore, which is roughly equivalent to $6.5 billion. This requirement would be mostly for debt characterized by mediumto-large ticket size loans through project finance or business loan route, as opposed to consumer finance. The institutional segment, which is expected to continue largely through RESCO mode, may be expected to add around 4–5 GW up to 2022. This capacity will have a total debt requirement of around Rs 16,000 crore, which is equivalent to $2.6 billion. Growth in this segment is expected to rely significantly on GoI’s capital subsidy incentive.

Lastly, the Government segment, which comprises PSUs and government ministries and departments, is being aggressively pushed by GoI for rapid capacity deployment and has a market size of more than 7 GW. The major part of this capacity is expected to be deployed on RESCO model. The total debt requirement for this segment at 7 GW capacity estimate will be around Rs 28,000 crore, which is equivalent to $4.5 billion.

In all, the market has a requirement for three kinds of debt:

• Consumer loans → for CAPEX projects in residential segment;
• Project finance → for both CAPEX and RESCO projects; and
• Business loans → for RESCO businesses, encompassing all consumer segments in the market, particularly in the Government and commercial and industrial segments.

Effectively Deploying Multilateral Funds

While considering the most effective method to use low-cost multilateral debt finance, it is important to first be clear what outcome one desires out of it. One objective could be to ramp up deployment quickly and consequently have a more mature and experienced market. For this, capacity addition in the Government and commercial and industrial segments would need to be supported. Another objective could be to increase the pace of growth in residential segment as it has the largest total market potential of all the consumer segments. At present, the rooftop solar power market is in a blossoming but nascent stage, with only a fewhundred megawatts capacity installed and a number of issues such as relatively slow pace of growth, lack of participation of distribution utilities, issues in quality infrastructure, etc. In comparison, the large-scale solar power market crossed the 4 GW mark in 2015, and is in a significantly better position comparatively. Rapid capacity addition in the rooftop solar power market at the present time is critical to the future growth of the entire sector, as it is closely linked to market experience, stability of the supply chain, technology awareness, and mainstreaming, and most importantly the experience of lenders with rooftop solar projects. This is more feasible in the government and commercial and industrial segments as compared to the residential segment due to larger system sizes and greater financial viability. The implementation of the last-mile lending mechanism for the kind of debt primarily required for these segments, that is, project finance and business finance, is also likely to be easier than that for consumer loans. This makes a compelling argument for using the multilateral funds to fuel growth in the Government and commercial and industrial segments. It is to be noted that this holds true if the multilateral finance is made available in the market at the earliest possible moment. Delays in this matter would progressively decrease the effectiveness of these funds.

Mr Adwit Kashyap, Research Associate, RETA, TERI, New Delhi. Email: [email protected] and Mr Shirish S Garud, Director-EETD, RETA, TERI, New Delhi. Email: [email protected]