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Financing Decentralized and Off-grid Solar in India

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Deployment of utility-scale Renewable Energy, particularly Wind and Solar Power, has progressed rapidly over the last few years despite recent challenges.
 
pg17 Ecoforge Sagar Gubbi 1
Sagar Gubbi
Managing Partner 
Ecoforge Advisors Pvt Ltd, Bangalore, India
 
India’s energy and electricity sectors are rapidly undergoing transformation. Deployment of utility-scale Renewable Energy, particularly Wind and Solar Power, has progressed rapidly over the last few years despite recent challenges. Significant progress has also been made by the Central Government under its Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) program. According to the Rural Electrification Corporation’s (REC) Grameen Vidyutikaran (GARV) dashboard, out of the 18,452 villages in India that were unelectrified in 2014, over 15,000 have been electrified as of Nov 2017. With this, over 99.5% village electrification rate has been achieved and 100% village electrification rate will be achieved soon, which is a major achievement! However, achieving 100% household electrification rate in India is still a challenge. About 40 million households in India lack access to grid electricity as of mid-2017, which translates to over 200 million people. The government’s ‘Saubhagya’ program, launched in September 2017, aims to electrify all households in India by December 2018, and targets 24x7 reliable electricity to all households by 2022. 
 
While the government’s focus on grid-based electrification is admirable, experience from states in India and from other countries that have achieved universal rural electrification in recent years shows that decentralized solutions play an important role in providing reliable and stable access to electricity, while meeting rapidly growing demand. This fact is acknowledged by the NITI Aayog’s Draft National Energy Policy (NEP) released in July 2017, wherein an estimated 46-52% of India’s overall energy mix in 2040 is likely to be composed of renewable energy, and about 30-35% of this renewable energy is estimated to be from decentralized infrastructure such as mini-grids and rooftop solar. In addition, Solar Home Systems (SHS) have an important role to play in providing low-cost, affordable and rapid access to reliable, clean electricity in rural areas.
 
Grid (discom) electricity tariffs have risen in recent years in most large states, particularly commercial and industrial (C&I) tariffs. At the same time, cost of solar power has fallen rapidly, making rooftop solar installations cheaper than grid electricity for C&I customers in many large states, while also replacing expensive diesel generator sets used as backup power. In addition, most large states in India have net metering policies and tendering-based procurement of rooftop solar. Hence, deployment of rooftop solar across India for commercial, industrial and government customers has achieved significant scale recently.
 
For rural, off-grid areas, renewable energy mini-grids and SHS offer cost-effective and reliable options. While policy support from the government could help, companies such as Simpa Energy, Greenlight Planet and OMC Power have proven that rural customers are able to pay for non-subsidized SHS and mini-grids if monthly pricing is affordable and affordable consumer finance is available. 
 
In rooftop solar, while a few C&I customers pay for capex upfront, most prefer to enter into Power Purchase Agreements (PPAs) or staggered payment plans, wherein the capex risk is borne by the rooftop solar developer until financial payback is achieved. Despite this progress, a large majority of solar capacity installed in India is still utility-scale, estimated to be about 90% of all capacity installed in the country (over 14 GW as of June 2017). Installed mini-grid and SHS capacity is negligible when compared to utility-scale capacity. 
 
Key challenges to scaling up decentralized solar in India are relatively lower policy and regulatory focus and limited availability of low-cost asset finance and consumer finance. Financial support for rooftop solar has increased drastically in the last 2 years, with World Bank-SBI, KfW-IREDA and ADB-PNB credit lines becoming operational. Specialized rooftop solar developers such as Cleanmax Solar have also raised capital from Private Equity funds. However, an overwhelmingly large portion of financing is being deployed for installations for high creditworthy C&I customers, with installations for next tier of C&I customers finding it difficult to raise financing. 
 
Hence, structures such as credit guarantees could potentially reduce the risk perception of such installations, and pooled asset finance/warehousing facilities, asset-backed securitization (ABS) and receivables financing structures also need to be explored. A foreign currency hedging facility could enable these companies raise lower-cost debt from abroad. Organizations such as IREDA, International Finance Corporation (IFC) and Climate Policy Initiative (CPI) have been involved in pioneering work in structuring such innovative financial structures.
 
In the SHS and mini-grid verticals, available sources of finance are more modest in comparison. Banks such as RBL Bank and YES Bank have setup consumer finance facilities for solar sold on asset finance/payment plans. Addition of renewable energy to Priority Sector Lending (PSL) has helped too. However, large scale debt finance is still not available. Targeted concessional credit lines channelled through local commercial banks and small finance banks to SHS providers, mini-grid developers and consumers could help, while more complex instruments such as securitization and receivables financing could be explored in future.
 
It is also important to note that there is a general lack of equity financing for decentralized/distributed renewable energy. While it is important that actual deployment of assets is debt-financed, it is also important that equity financing is made available for companies to build their internal processes, mechanisms to assess customer creditworthiness, build up their product development capabilities, and optimize their supply and distribution channels.
 
Author Bio: Sagar Gubbi is the Managing Partner of Bangalore-based Ecoforge Advisors Pvt Ltd, which is a clean energy, energy efficiency and electric mobility focused advisory and consulting services firm working in India, South East Asia, East Africa and Central Asia.
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