Photo Credit: UK Department for International Development
The Indian government has rightly made rooftop solar power one of its top clean energy priorities -- here’s how the country can jump-start the nascent market.
With a bold goal of delivering 100 gigawatts of solar power by 2022, India is helping to create one of the world’s fastest-growing solar markets. Impressive progress has been made toward building out the 60 gigawatts of utility-scale solar necessary to make good on the goal. However, the remaining 40 gigawatts of rooftop solar need a boost. Getting this market right can help put a serious dent in the energy poverty suffered by 80 million households currently lacking electricity, and it is critical for supporting the country's growing middle class.
Rooftop solar power has experienced steady growth in recent years. It offers electricity consumers a lower electricity bill (on average 30 percent savings for businesses and 18 percent for industry) and a reliable alternative to intermittent electricity from the grid.
However, while the market is growing at a "blistering 300% pace," even more is needed to get from approximately 1 gigawatt today to 40 gigawatts in 2022. A new report from the Climate Policy Initiative (CPI) shows we can unleash even greater growth. We outline the report's key recommendations below.
Support third-party financing
A third-party financing model consists of a rooftop solar developer, a third-party financier, and a customer. The developer installs a rooftop solar plant on a consumer’s property, and the third-party financier invests in the project. The consumer agrees to purchase electricity at a specified price for 15 to 25 years, usually with no upfront cost.
This financing model has been a significant driver of growth in the rooftop solar industry globally, especially in the U.S., where up to 72 percent of rooftop solar installs in 2014 were third-party owned. The model has also gotten traction recently in other countries, including China and Japan.
But in India, this model only supports 13 percent of rooftop solar installations under operation or construction. The industry believes there is potential to increase the total installed capacity under the third-party financing model to more than 20 gigawatts by 2022, meaning that it could unlock more than half of the government’s 40-gigawatt target.
The third-party financing model is also an attractive opportunity for investors. With government incentives, all states in India offer internal rates of return (IRRs) of at least 14 percent and as high as 42 percent for rooftop solar projects financed by third parties. And, as the cost of solar falls, more sectors in Indian states are becoming profitable without these incentives. Over 40 percent of solar opportunities already offer IRRs of 14 percent to 34 percent, even without government incentives.
Train banks to help unlock local debt
Solar is capital-intensive. That means access to debt finance is critical to its long-term success. Since the rooftop solar sector is new and transaction costs are high (due to the smaller size of projects), bankers don’t yet feel comfortable lending to projects. The most significant challenge to the third-party financing model today is limited access to debt finance.
To increase access to debt for rooftop solar power, the Ministry of New and Renewable Energy (MNRE) can work with development banks to provide a system of trainings to bankers in India to increase their understanding and comfort with rooftop solar loans. Trainings can include how to assess rooftop solar projects, how to process solar loans, and the dynamics of the rooftop solar industry and associated risks.
Given the depth and breadth of the local banking system, and the $625 million it now has to solve this problem thanks to the World Bank, high-leverage interventions like these can get the money flowing.
Get public distribution companies in the game
Another important step is addressing consumer credit risk. Consumer credit risk is the second-biggest challenge to the third-party financing model. Low availability of credit assessment procedures, low enforceability of agreements, and lengthy and costly legal processes in the case of a dispute or payment default all converge to hold back investment.
One way to reduce consumer credit risk is for the Ministry of New and Renewable Energy and state governments to include India’s state-level public electricity distribution companies (DISCOMs) as a party to the power-purchase agreement between the developer and the consumer. While DISCOM balance sheets don’t exactly inspire confidence, they do have the power to terminate grid supply, which can help ensure customer payment.
DISCOMs are also responsible for implementing net metering, which has been passed in nearly all states. However, at present, there is little incentive for DISCOMs to prioritize net-metering implementation, which means most rooftop solar companies don’t take advantage of it. One way to overcome their reluctance would be to fulfill their Renewable Purchase Obligation (RPO) requirement by providing 30 percent more credit to rooftop solar power generation compared to utility-scale solar power.
Invest in financial innovation
Financial innovation has been key to unlocking clean energy abroad. It's likely to be useful within India as well. The India Innovation Lab for Green Finance, a public-private initiative managed by CPI modeled after the successful Global Innovation Lab for Climate Finance, has helped develop several instruments that have the potential to drive significant investment into third-party financing for rooftop solar power.
The first, Loans4SME, is a peer-to-peer lending platform that connects investors directly with borrowers, and could help improve access to debt financing for the rooftop solar industry.
The second, the Rooftop Solar Sector Private Financing Facility backed by the IFC, could increase access to debt financing for the rooftop solar industry by creating a warehouse structure that aggregates and purchases large numbers of small projects, thus helping to inject liquidity into the market. This also enables an aggregate deal size large enough to attract more attention from investors, especially institutional investors.
Taken together, these policy and financial solutions can jump-start India’s rooftop solar industry and put it on track to achieve the government’s target of 40 gigawatts of rooftop solar power by 2022. That's a goal the whole world should get behind.
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Gireesh Shrimali is the Director of CPI’s India program, and a Fellow at the Steyer-Taylor Center for Energy Policy and Finance at Stanford University. Justin Guay is the Packard Foundation’s climate program officer.