India is seeing an increased uptick in solar power installations. As of May 2022, its solar power capacity stood at 57 GW. In 2021 alone, it added 10 GW of solar capacity, the highest 12-month capacity addition so far. Despite these encouraging numbers, several challenges loom large in the segment. Unlike many European markets that have promoted rooftop solar installations and decentralised projects, the Indian solar market has focused largely on utility-scale renewable projects, with over 42 GW coming from ground-mounted solar PV projects alone. About 7 GW of rooftop solar has been installed against the cumulative target of 40 GW of rooftop solar installations by 2022. A large capital flow in the segment has been limited to utility scale. Moreover, as per the 17th Lok Sabha Standing Committee Report on Energy 2021, India requires an additional funding of Rs 2.61 trillion to achieve 175 GW of renewable energy by 2022. However, over the past five years, the average annual investment in the sector has been Rs 823 billion, far short of the actual requirement.
To meet the 2030 solar energy target, an average solar capacity of 30 GW is required to be installed each year, until 2030. The rising power demand in the country also calls for a robust solar energy segment. Among other factors, achieving these goals would primarily entail streamlining solar project solar project financing. Attracting investments in emerging segments such as floating solar, solar heaters, decentralised solar solutions and hybrid projects is also crucial. Thus, interventions on both demand and supply sides need to be pursued in order to achieve the 2030 goals.
With a consistent policy push from the government over the past few years and subsequent reciprocation from the renewable energy industry, the solar financing segment has seen several developments over the past few months. In April 2022, Tata Power entered into a contractual agreement with a consortium led by BlackRock Real Assets, which includes the Mubadala Investment Company. A total investment of Rs 40 billion will be made in Tata Power Renewable Energy Limited (TPREL), a subsidiary of Tata Power, in exchange for a 10.53 per cent stake in TPREL in the form of equity/compulsorily convertible instruments, corresponding to a base equity valuation of Rs 340 billion. The State Bank of India and Tata Power Solar Systems have also collaborated on a financing scheme for commercial and industrial (C&I) solar projects up to 1 MW. The Surya Shakti Cell aimed at loan applications for solar projects, for installation in households and businesses, has been created under the partnership. The cell will work as an end-to-end digital platform for loan applicants who wish to finance solar projects.
In the same month, Shell Plc also bought Actis Llp’s Indian renewable energy platform, Sprng Energy, at an enterprise value of $1.55 billion. In March 2022, the International Finance Corporation announced financing of a 600 MW solar power park being developed by TUSCO, a joint venture between THDC India and the Uttar Pradesh New and Renewable Energy Development Agency. Funding of up to $26,800 per MW is expected to be received by the company.
Recently, Vikram Solar Limited, a solar module manufacturer, filed its draft red herring prospectus with the Securities and Exchange Board of India. An initial public offer comprising an issue of up to Rs 15,000 million has been announced by the company. In the same month, Avaada Energy, a leading solar project developer, raised Rs 14.4 billion through green bonds in the Indian capital market at a rate of 6.75 per cent. The bonds have a three-year maturity period. This funding marks India’s largest AAA-rated green bond by any renewable energy developer. Having earned the highest CRISIL ratings, the green bond issue attracted significant participation from banks and financial institutions.
In other developments, Adani Green Energy Limited (AGEL) extended its construction financing framework to $1.64 billion by raising a $288 million facility for its under-construction renewable asset portfolio through definitive agreements signed with a group of leading international lenders in March 2022. The loan comes under the category of a certified green hybrid project loan and will be utilised to finance a 450 MW hybrid portfolio of solar and wind energy projects being set up in Rajasthan by AGEL. The participating banks include BNP Paribas, Coöperatieve Rabobank U.A., Intesa Sanpaolo S.p.A., MUFG Bank, Limited, Societe Generale, Standard Chartered Bank, and Sumitomo Mitsui Banking Corporation. In February 2022, Azure Power announced the successful refinancing of its existing project finance facility of Rs 23.5 billion, which was used to build the company’s largest solar project of 600 MW.
The last quarter of 2021 saw investments in solar projects by various international lending agencies and banks. Reliance Industries Limited (RIL) secured a $736 million green loan to fund its largest foreign acquisition, REC Solar Holdings in Norway. This marked RIL’s first green credit, consisting of a $250 million six-year term loan, a $150 million working capital loan and a $336 million five-year bank guarantee facility. In December 2021, Rural Electrification Corporation Limited also signed an agreement with KfW Development Bank for availing of an official development assistance term loan of $169.5 million under the Indo-German Bilateral Partnership. Funds are expected to be utilised to partially finance solar PV technology-based power projects in India at low interest rates.
Further, CleanMax received $34 million in funding from the Danish Investment Fund for Developing Countries. The funding will be used to enhance the company’s C&I renewable energy portfolio with new solar, wind and hybrid projects lined up in India, Southeast Asia and the Middle East. In October 2021, the Indian Renewable Energy Development Agency also disbursed a loan amount of Rs 11 billion to Vector Green Energy, setting a record for the highest disbursement to a single group in one day. The loan will be utilised for six solar projects under Vector Green. At present, the primary sources of financing include equity, debt and green bonds. Going forward, the market can expect innovative instruments such as sovereign green bonds and blended finance tools for better risk management.
Key risks and challenges
Despite a continuous impetus given to the solar industry by the government and industry alike, the solar segment faces several challenges today. The foremost challenge relates to contracts, be it in terms of timely payments from discoms or signing of power purchase agreements in time or threat of tariff renegotiation or uncertainties related to “change in law”. To build investor confidence, it is critical that these issues are addressed, especially at the state level.
Another issue is associated with solar energy’s inherent nature of intermittency. Due to variability in power supply, standalone solar projects may not be optimal from the perspective of an investor. As a result, there is a growing need to tap into wind, solar-wind hybrid, battery storage and green hydrogen projects to attract greater investments in the overall renewable energy sector. Furthermore, the rooftop solar segment is constrained with certain bottlenecks that need to be addressed.
There also exists a lack of access to finance, especially for small and medium enterprises. In addition to facing a lack of collateral and poor creditworthiness, these enterprises lack awareness regarding the right model of funding and right institutions to approach. Therefore, allocation of a large sum of funds is skewed towards a limited number of large players in the market. It is also crucial to carefully analyse the risks associated with a project and allocate such risks as per the risk-bearing capacity of each entity. Moreover, as the risk of a project is not stable throughout its lifetime, risk allocation must be monitored throughout the life cycle of a project.
While there is a paucity of investments in the sector, the report of the 17th Lok Sabha standing committee on energy states that the solar segment has also witnessed very low utilisation of the actual allocated funds. This is primarily due to the land-intensive nature of solar power, lack of adequate proposals received from state governments and unviable tariffs. As a final point, it is essential to perform extensive environmental checks to ensure the sustainability of solar projects. A focus on the disposal and recycling of solar modules and equipment will be significant in making solar power truly clean. While at present the recycling and disposal market is highly fragmented and unorganised, this can be corrected using extended producer responsibility norms in the long run.
To meet the government’s goal of installing 500 GW of non-fossil fuel-based power capacity by 2030, solar energy is expected to take the lead. If the above-mentioned challenges are tackled effectively, given the current level of incentives, the segment will continue to attract financiers and investors. In the coming years, it is crucial to ensure not only the provision of funds but also that these are channelled in the right direction.
Addressing the issue of stranded and non-performing assets in the thermal sector and undertaking due diligence can also boost a greater flow of funds towards renewable energy. The ESG (environmental, social and governance) norms are also expected to bring in more investments into the solar energy segment, with a key focus on decentralised solar solutions. Moreover, greater emphasis on tenders for wind-solar hybrid models and storage projects will mitigate the intermittency factor. As there are several risks attached to off-takers, it is crucial to avail of guarantees, promote innovative credit instruments and distribute risks effectively among various stakeholders. Tapping into clean financing, in line with global standards, will also boost international investor confidence in the Indian market. N