First Loss Protection Can Open up Third-Party Rooftop Solar Market

The rooftop solar market slowed down significantly in 2019 along with regulatory hurdles and the overall downturn in the economy – it has yet to recover.

Because of the liquidity crunch and weak economic conditions, commercial & industrial (C&I) companies do not have the ability to finance rooftop projects. Instead, they are looking for OPEX opportunities that do not require an upfront investment. Banks and financial institutions are not funding at the same levels as they were earlier. Financial institutions are only looking to lend to companies with good ratings.

Total solar installations in India have crossed the 35 GW mark, according to Mercom’s India Solar Project Tracker. Out of the 35.6 GW, ~31.3 GW of large-scale solar projects were in operation as of December 2019, while 4.3 GW of rooftop solar installations were recorded against the government’s target to install 40 GW of rooftop solar by 2022.

Earlier this year, Mercom reported how a serious policy push is needed to get India’s rooftop solar market back on track.


The penetration of operational expenditure (OPEX) or third-party-owned rooftop solar projects in India has been low as only large corporates with healthy balance sheets have been able to garner financing. However, there lies an untapped market for OPEX-based rooftop solar projects in the country, particularly for micro, small, and medium enterprises (MSMEs).

Typically, an investor checks the credit rating of consumers from the industrial, commercial, or retail segments who want to install a rooftop solar system. However, there are millions of MSMEs in India which remain underserved by financiers due to the lack of required grade of credit rating. This lack of creditworthiness or the lack of information about credit ratings also limit the capability of rooftop solar developers to offer their services to these companies.

According to rooftop solar developers, this opens a window for products that can enhance a project’s creditworthiness. One such instrument is the ‘First Loss Protection Program.’

A first-loss protection mechanism refers to any product designed to insure the amount of capital that has been invested in the case of a financial loss on security, including equity, debt, and derivatives instruments. First-loss protection instruments protect investors from a pre-defined amount of financial losses, enhancing creditworthiness, and improving the financial profile of the investment. Essentially the product is a type of insurance that can help mitigate an estimated amount of losses for the lenders funding these projects.

Mercom reached out to financiers and rooftop project developers to discuss how these instruments would be able to boost rooftop solar penetration in India. However, according to stakeholders, currently, there aren’t many options of a first loss protection program available in the country.

Mercom also discussed the scope of first loss protection with rooftop solar developers such as CleanMax Solar about how a first loss protection program would increase their universe of serviceable clients.

Nikunj Ghodawat, Chief Financial Officer, CleanMax Solar, said, “The early adopters of rooftop solar have been large C&I customers with healthy credit ratings, rendering easy financial availability from banks. Rooftop solar developers like CleanMax Solar make the complete capital investment in an OPEX Model to set up the solar system, which is paid over 20-25 years. We essentially target the top 5-10% of the corporate universe with good credit ratings, but with the deployment of the ‘first loss protection’ program, it can effectively enhance and broaden our market.”

To fast-track the growth and adoption of rooftop solar, the country needs to create avenues to tap into a newer segment of customers. A more addressable segment would be MSMEs. However, a low to non-existent credit rating makes it daunting for a developer to raise debt from financial institutions to invest in a project with such a long-term payback.

To promote the MSME segment, what is needed is not a subsidy, but someone to take on some of the credit risks of these projects. A first loss protection program, promoted by the government or perhaps a multilateral agency for MSMEs with a credit rating below ‘A,’ would open up the rooftop solar market to a multitude of small businesses. This would allow them to enter into long-term, zero CAPEX rooftop solar contracts.

So, a stable first loss protection policy would be a strong enabler to encourage the adoption of rooftop solar, creating a potentially large market. In addition to benefiting the environment, it would also bring down electricity costs for these companies, which is a significant impediment in India to accelerate industrial growth and the associated employment.

Speaking to Mercom, an official at State Bank of India (SBI), the public sector bank with the largest portfolio of solar sector lending, both utility-scale and rooftop solar, commented, saying that there is a sizable amount of funds that are unclaimed by the rooftop solar sector currently. “SBI is the implementing agency for the funds provided by the World Bank to promote rooftop solar in the country. There are various reasons for this, chief of which is a lack of knowledge of such funds and how they operate. Rooftop installers also need to educate and convince MSMEs of the benefits of rooftop solar, and later take the time and effort to lead them through the long process of securing the loans,” he said.

He further added, “Banks are not too rigid about the credit rating qualifications, but there are other technical glitches. For example, if an MSME has taken a loan from another bank for its primary business, they need to get a “no objection certificate” from that bank, if another bank has to approve the loan for the rooftop solar system. The MSMEs also need to convince the banks that the rooftop solar systems would reduce the cost of power of the company which in turn would positively affect the cash flow of the company. These procedures take time; in the process, both the MSME and the developer lose interest. Before asking for other financial assistance programs by the government, the companies should find a way to utilize the existing corpus of funds.”

In the past, the SBI and the World Bank announced ₹23.2 billion ($357 million) in credit facilities for seven Indian solar companies to develop grid-connected solar rooftop projects with an aggregate capacity of 575 MW. The companies receiving credit facilities include Adani Group, Hinduja Renewables, JSW Energy, Tata Renewable, Azure Power, Cleantech Solar, and Hero Solar Energy.

Ramesh Shivanna, president of Karnataka Renewable Energy Systems Manufacturers Association (KRESMA), said, “We have a sizeable MSME segment who are major power consumers but with small industrial roof space available. Unfortunately, these MSME are not eligible for third-party investments because of the credit rating merits prescribed by the large funds. Private banks do not offer non-recourse debt funding for rooftop solar. Banks should be mandated to offer debt similar to automobile debt funding for rooftop solar to scale up.”

Another executive from a rooftop solar company told Mercom that “The MSME sector is lying untapped due to the credit rating demand by the banks. Investors and banks are willing to lend to MSMEs with the credit rating of ‘A’ and above, which only opens doors to 800-1,000 MSMEs. There are over 8,000-10,000 MSMEs with a credit rating of ‘B,’ which is a huge opportunity for rooftop solar developers.”

A first loss protection program for solar energy projects can also help match investors’ risk-adjusted returns and give a step up for funds to be deployed for the adoption of clean energy sources.

Over the last year and a half, debt financing has dried up as banks have scaled back on lending to corporates in India. This cut back has been more pronounced in the NBFC sector ever since the collapse of IL&FS. Further, the companies suffering the most due to the lack of borrowing capability belong to the MSME segment. The growth of MSMEs is crucial for the growth of the Indian economy. For these companies to grow, the government also needs to put in place a mechanism that helps certify their creditworthiness. Not only will this enhance their ability to borrow from lenders for their operations, but it will also help them adopt clean energy sources, which will reduce their carbon footprint and help procure power at lower costs.

“A program like first-loss has multiple benefits. It can open up the dormant SME and MSME markets to rooftop solar; SME’s will reduce their power bills, carbon footprint and increase cash flows at a time liquidity is most needed; it will help kick start the rooftop sector, and all of this will help with the steady march to reach the Modi government’s 100 GW/2022 goal,” said Raj Prabhu, CEO of Mercom Capital Group.