India has witnessed exponential growth in renewable energy installations in the past four years with cumulative installations rising from 3 GW to 25 GW during the period.
Over this period, bids have become increasingly aggressive and auctions highly competitive. Banks and financial institutions are wary of this development. Lending institutions are facing obstacles, such as the non-viability of solar projects, the sudden exit of the borrowers, among others.
This was the topic at hand during the 2nd Global RE-Invest India-ISA Partnership Renewable Energy Investors’ Meet & Expo (RE-Invest 2018). The session, titled ‘Bankers’ Perspective on Renewables,’ convened leading bankers and renewable energy financing experts from multi-lateral agencies to discuss solutions pertaining to the financing of renewable energy projects, and how access to financing could be improved to expand clean energy projects domestically and globally.
The panel discussion had representation from the World Bank, International Energy Agency, Germany’s KfW, Citigroup, and leading Indian companies Power Finance Corporation (PFC), Rural Electrification Corporation (REC), YES Bank and Indian Renewable Energy Development Agency (IREDA).
In the session, Shri Chinmoy Gangopadhyay, Director (Projects), at the Power Finance Corporation said that given the large number of project developers, they are now trying to look at solar energy projects from the angle of their long-term viability.
“Since the gestation period of these solar projects is small, there aren’t too many barriers to entry in this sector. This, in turn, has led to many players entering the Indian market,” Gangopadhyay said.
Gangopadhyay added, “Many project developers are looking to exit after a few years. This sometimes creates difficulty in assessing the viability of projects.”
Due to the influx of players and increased competition, it is only obvious that the quality of the components in these projects has been negatively affected.
Reiterating the same, Gangopadhyay added that the problem could have been prevented had there been an agreed upon benchmark to assess the quality of solar panels.
“Suppliers who are tier one today, fall out of that position later, thus there is difficulty in ascertaining the quality,” Gangopadhyay added.
Early exits aside, another problem are the sweepingly low tariffs established over the past couple of years. Of late, we have seen the solar tariffs stabilize at the ₹2.44 (~$0.0355)/kWh mark, which is considerably cheaper than thermal power. These low tariffs are quoted by the developers based mostly on market assumptions for the foreseeable future, however uncontrollable economic factors like the volatility of the currency, often play a spoilsport.
Experts in the panel discussion felt that such low prices would certainly affect the long-term viability of solar energy projects.
Michael Eckhart, MD and Global Head of Environmental Finance and Sustainability, Citigroup, offered a solution to this problem.
“To ensure the long-term viability of solar energy projects, in Argentina, in Mexico, and everywhere else, including in India, I am recommending that there be two parameters for procurement of solar energy – the lowest cost, and a debt service ratio, a measure of how financially viable a project is, at that price (of solar).”
This would enable the solar developer to quote a number that would not only offer the lowest tariff but could also potentially repay the loans from the earnings.
Sounding an alarm over the current trend of constantly dipping solar tariffs, he said, “What I fear is that with all these low-price bid procurements of solar, five to ten years from now we will have a wave of project refinances.”
Advocating for stable, long-term pricing, the panel suggested that the government’s primary focus should be supporting long-term, low-cost debt capital. While short term capital can be raised from banks, access to the bond market can take care of the long-term.
Talking about the need to refinance the distribution companies to take them out of their debt rut, Eckhart suggested that there needs to be a clean energy offtake guarantee.
He also recommended that India creates a payment guarantee mechanism, which would help in providing some assurance to banks and financial institutions that in case the project developer defaults on its payment, the guarantor would take care of it.
Eckhart congratulated India on the policy initiatives that the country has taken, and the nimbleness of policy shown here, ensuring the holistic development of the solar energy sector.
“India’s UDAY program for refinancing energy utilities is the perfect model for the world to follow. I really think India is becoming a model for the world in renewable energy. I have recommended to the ISA to prepare a case study on what India has done in renewable energy and educate the world,” Eckart said.
The panel also unanimously praised how the introduction of solar parks has helped attract foreign investors into the country’s solar sector over the past few years.
The discussion shed some light on the perspective of financiers when considering a solar project, and a number of great recommendations were made by the panelists. But if history is any indicator, implementation of these recommendations has not been our forte.
Image credit: Azure Power