Third-Party Financing Could Support Rooftop Solar in India

India’s government unveiled an ambitious rooftop solar program this year with the goal of installing 40 GW of rooftop solar power by 2022, according to the Ministry of New and Renewable Energy (see chart below).

CFL bulb at a store in India
This CFL bulb was photographed at a store in Bangalore, India.

Falling costs and favorable policies have helped the Indian solar industry grow significantly in recent years. But total installed capacity was still just 0.74 GW as of March 2016, according to the renewable energy consultancy Bridge to India.

In the United States, the third-party-financing model was a catalyst in helping the solar industry take off over the past decade. Can India ride a similar wave?

In a new paper by Climate Policy Initiative (CPI), “The Drivers and Challenges of Third Party Financing for Rooftop Solar Power in India,” authors Sandeep Gupta, Jai Sharda, and Gireesh Shrimali propose specific policies to address the perceived challenges of the third-party-financing model in India.

We recently spoke with Shrimali, who is the director of CPI’s India Program, to learn more about why third-party financing for rooftop solar is an attractive option for India, what challenges remain, and what the next steps are from a policy perspective.

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CEFF: Why is third-party financing an attractive option for rooftop solar power?

Shrimali: The target for rooftop solar in India is 40 GW by 2022 (out of a total solar target of a 100 GW), but only 1 GW of rooftop solar has been installed to date. There’s a lot going on in the space right now. There are several different models of rooftop solar that have emerged – primarily self-owned systems and some third-party-financed systems.

However, the default is self-owned systems. These have several barriers to scale:

  1. the high upfront cost of installation,
  2. general distrust and lack of information with respect to the performance of solar panels, and
  3. lack of access to finance.

A lot of these issues stem from the underlying problem of information asymmetry. Sufficient data regarding performance and consumers’ credit scores are not easily available in India. Third-party financing seeks to overcome these problems. It’s obvious how it does this:

  1. there’s no upfront cost for the panels,
  2. the consumer only pays for the electricity consumed, and
  3. the burden of raising capital is transferred to companies that are suited to raise finance.

CEFF: How would you compare challenges faced in the United States to the challenges in India?

Shrimali: Third-party financing will take some time to pick up in India. India has very country-specific challenges – take the lack of credit scores, for example. While some institutions do enforce them, in general, consumer credit risk is a much bigger issue in India.

How do you make sure consumers will pay back their loans in India? Some banks are trying to overcome this problem, but they’re not as sophisticated in India as in the United States. Solar is a relatively new industry in India.

Less than 15 percent of the Indian rooftop solar market has been driven by power-purchase agreements (PPAs), which is how the United States solar market took off a decade ago. The Indian market, in general, is very similar to the United States market – as compared to other mature solar markets such as Germany or Japan.

Net metering has worked with some success in the United States. It’s highly unlikely that India will ever have a feed-in-tariff.

The commercial and industrial sector for solar has a much stronger business case. Solar is financially viable even today, given the high tariffs for commercial electricity in India. The growth of the industry has been slow because people are just starting to see the value and perceive that there is a real business case here.

CEFF: Your key policy recommendations tackle the challenges of limited access to debt finance, consumer credit risk, and net metering. How would you prioritize your recommendations? Would you place a greater relative importance on impact or feasibility?

Shrimali:  We defined the impact of our recommendations by playing out the scenario of our recommendations being implemented. Would the problem be completely solved?

For feasibility, we defined the likelihood of getting these recommendations implemented within the financial and regulatory framework that India has today. We then added up the scores associated with both the categories – low, medium and high corresponding to 1, 2 and 3.

Some of the problems that we found to be common across jurisdictions were that both developers and third-party financiers have limited access to debt finance as capital as well as issues with the implementation of net metering.

We only included recommendations that we thought could be implemented in the short-to-medium term or within the next couple of years. For example, one of our recommendations included training bank officials to better assess loan applications for rooftop solar power – which can easily be implemented within a short time frame.

Some of our other recommendations, such as including DISCOMs in the PPAs and creating localized special courts to resolve customer payment disputes, might take longer to be implemented. But they would certainly help speed the uptake of rooftop solar. 

The next few years are going to be crucial for the India solar industry. Once these hiccups have been overcome, the industry can start truly scaling up.

CEFF: What do you hope the impact of this paper will be? Have you had any preliminary discussions with government officials on your recommendations? What are the next steps?

Shrimali:  Our next step is to reach out to the government and related ministers, such as Santosh Vaidya, the joint secretary at the Ministry of New and Renewable Energy. We’re going to discuss this paper in detail with him next week and see where we can take it.

The India Innovation Lab for Green Finance is also working on a rooftop solar financing facility in collaboration with the IFC as well. The program for loans for small and medium enterprises (SMEs) has been launched as the first pilot scheme.

Another mechanism that’s in the works is a peer-to-peer lending platform by which consumers can get relatively easy access to finance for energy efficiency and small-scale renewables. At a larger scale, the Indian government will take steps as it sees fit, but it values and incorporates input from think tanks as well.

CEFF: Do you consider India’s targets of 40 GW of rooftop solar power by 2022 to be realistic? Why or why not? Does India need new institutions to achieve these goals?

Shrimali:  People are asking the wrong questions. The focus shouldn’t be on questioning whether India can achieve this target or not, but on how they can help India make it happen.

The Solar Energy Corporation of India, for example, is doing its job well – as is the specialized bank known as IREDA, Indian Renewable Energy Development Agency – which was the first of its kind around the world.

There are enough institutions that exist to ensure that India will reach its goal. They just need additional capacity to make them more effective. CPI wants to be that additional capacity for these institutions.

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