Mercom India hosted a webinar on key trends shaping the Indian solar market based on its recently released India Solar Market Update report for the first quarter of 2020. The session focused on the current situation of the industry, especially in the light of the ongoing pandemic and the unprecedented challenges faced by the stakeholders.

The presenters and participants discussed the current financing issues in the Indian solar rooftop market, the government’s plans to implement direct benefit transfer (DBT), liquidity issues for lenders, and other hot topics in the Indian renewable energy sector.

Anshuman Gupta, Deputy Manager, Indian Renewable Energy Development Agency Limited (IREDA), and Prashant Sinha, Chief Risk Officer, L&T Infrastructure Finance Limited, participated as guest speakers in the webinar.

Key takeaways from the session:

Renewable Funding Issues:

Speaking about lending to renewable projects, Gupta said that IREDA has plans to lend around ₹100 billion (~$1.3 billion) to the solar and wind sectors. He added that these funds were mainly meant for power generators. Of this amount, the IREDA said it had disbursed only about ₹12 billion ($159 million), citing challenges due to the ongoing coronavirus crisis.

“Things have considerably slowed down both for assets and liabilities after COVID-19. The liquidity is completely dried up on the non-banking financial companies (NBFCs) side. On the one hand, you have the moratorium because there are genuine cash flow problems on the project level, and on the other, NBFCs have to continue servicing their labilities,” said Sinha.

“This has made things extremely difficult for NBFCs. Banks are flushed with liquidity, but not NBFCs. So, funding post-COVID will be restrained, and it will depend on how the liquidity scenario eases out going forward,” he added.

Project development:

Renewable project development has also been hit hard by the ongoing crisis. The nationwide lockdown to curb the spread of the Coronavirus has disrupted supply chains, operations, and construction activity. Projects are being delayed, and there is no end in sight.

As a result, indirect costs are building up, and there are no mechanisms where developers can get them reimbursed aside from filing a petition with the Central Electricity Regulatory Commission (CERC), said Sinha.

He noted that the government could help by making a provision to adjust tariffs which would help lenders to continue supporting these projects. If projects are delayed for too long, they become unviable, and lenders will also block the flow of funds, further delaying them, he explained.

The moratorium may have given developers some breathing room, but if lenders start demanding unpaid dues as soon as it ends, the project may not survive.

“With infrastructure projects, the cash flow is matched with lending repayments. So, you have to amortize it over the period of the loan cycle. You can’t just get back unpaid dues within a month or a quarter,” Sinha explained.

Rooftop Solar Market:

On the Indian rooftop solar sector, both speakers agreed that it is currently not a very attractive market for lenders and financial institutions because of the smaller scale of the projects.

Banks and NBFCs do not find these projects feasible because they would cost as much as larger capacity ground-mounted projects to service the loans and are not as economically feasible.

L&T’s Sinha explained that rooftop financing is not an NBFC’s or banker’s product. Because of the scale, these don’t fit into the cost structure of NBFCs. They have to carry out the same assessments for ground-mounted and rooftop projects, and the scale of rooftop projects just can’t sustain the costs involved.

IREDA’s Gupta suggested that a viable model that developers could adopt would be to pool smaller rooftops projects together to increase the overall cumulative capacity of the projects. Lenders would be much more confident funding larger projects with higher guaranteed returns. Alternatively, they could open up a medium-term line of credit and get costs reimbursed after project completion.

Sinha also noted that another major challenge finance agencies face while funding rooftop projects is the lack of long-term weather data and monitoring solutions for these projects throughout the duration of the loan tenure.

Gupta agreed that the industry needs more weather monitoring and resource assessment stations. The available data currently is not as accurate as it could be. By focusing on setting up more data assessment stations, lenders would also be able to gauge the generation potential of projects, making them more open to disburse funds.

DISCOM Bailout: 

Both guest speakers agreed that the ₹900 billion (~$11.98 billion) stimulus package the government recently provided to DISCOMs was not a feasible long-term solution, especially given that these funds will be directed to the DISCOMs and not to the power generators. Mercom recently published a report analyzing why it isn’t the best way to help the DISCOMs.

The government’s plans to introduce the Direct Benefit Transfer (DBT) facility would be a game-changer as this would allow generators to directly receive subsidies, reimbursements, and other benefits directly from the government without having to interface with DISCOMs.

The implementation of DBT would eliminate counterparty risk. It would be the best long-term solution as bailouts have not worked in the past, and we will only see the same issues again unless there is a structural change in the power sector, underlined Sinha.

“The bailout would ease the situation a bit. It would have been better to give the payment directly to generators instead of the DISCOM. The biggest risk for lenders is with commissioned projects are PPA renegotiating risks. Ultimately, we run a risk of adding more non-performing assets to the books,” said Gupta.

Gupta also underlined that there’s no clarity on which DISCOMs would get these funds, on what basis will they get it, how they plan to pay generators, and at what tariffs.

Making Solar more Attractive: 

Sinha and Gupta both talked about how land allotment delays have held back project development considerably in the past. These delays lead to lapses on project commissioning and financial closure deadlines. This also makes projects unattractive to lenders, resulting in them cutting off funding.

In this regard, it would be best to separate the land allotments from project development. For example, with solar and wind parks, it would be a good idea to get companies who are good at managing land and have them develop the park, the land, the infrastructure. These companies can get paid by the developers who are going to set up a project in these parks, Sinha explained. This would allow developers to reduce the gestation period for projects and for capital to be used more efficiently, he said.

Other good moves would include the implementation of direct benefit transfer (DBT) by the government to remove counterparty risks, increasing the participation from the financial services sector, increasing investments in renewable energy storage, and increased cooperation between the different ministries spearheaded by the Ministry of New and Renewable Energy (MNRE).

To listen to a recorded version of the full webinar, click here.