Financing Options Must be Scaled up to Boost Rooftop Solar Adoption in India: Report

The Micro, Small and Medium-sized Enterprises (MSMEs) could be the key to accelerating the adoption of rooftop solar in India – but financial institutions are often reluctant to lend to MSMEs because they prefer borrowers with strong financial track records and good corporate credit ratings, said the new report by the Institute for Energy Economics and Financial Analysis (IEEFA) and JMK Research.
 
A new report titled ‘Financing Trends in the Rooftop Solar Commercial and Industrial (C&I) Segment in India’, noted that much of the growth in installations so far has been driven by a few large creditworthy customers.
 
“MSMEs are as yet an untapped segment and could be the next drivers of growth in the market, especially considering the significant electricity cost savings offered by the adoption of rooftop solar,” commented Jyoti Gulia, Founder of JMK Research and lead author of the report.
 
“Textiles, food and packaging are among the industries with lots of potential,” she added.
 
The report stated that rooftop solar installations are financed through equity investments, debt capital, mergers and acquisitions, and loans or concessional financing such as the US$625 million World Bank-State Bank of India (SBI) and the Green Climate Fund (GCF)-Tata Cleantech credit lines.
 
Since 2015 rooftop solar project developers have raised more than US$2 billion, 48% (US$985 million) of which came from equity funding and 29% (US$599 million) from debt. Around 45% of these investments were raised in the first eight months of 2021 alone.
 
“The C&I rooftop solar segment has seen a sudden surge despite COVID-induced disruptions,” says Gulia. “This indicates a significant growth trend ahead.”
 
Almost all (99%) of the equity investments in rooftop solar came from foreign entities looking to tap the Indian market, given the high growth potential and healthy return on equity (ROE). 
 
Reduced demand among this limited customer base has led major developers to look to foreign markets for potential growth opportunities, and also to build offsite open-access private solar parks that cater to the C&I segment.
 
Although an untapped segment, MSMEs face many barriers when it comes to obtaining financing for rooftop solar installations including insufficient credit history, lack of collateral, and long-term uncertainties in their businesses. These factors also mean renewable energy service companies (RESCOs), which own and operate solar plants for the consumer, can be unwilling to work with MSMEs.
 
Credit enhancement schemes like the World Bank’s upcoming first-loss guarantee fund and a US$41 million line of credit from the U.S. Agency for International Development (USAID) and DFC are examples of steps being taken to make financing for rooftop solar more accessible, says co-author Vibhuti Garg, Energy Economist and Lead India at IEEFA.
 
“Schemes like these allow lenders to absorb risks and increase access to collateral-free loans. 
 
“As well as loans available from national and regional banks and non-banking financial companies (NBFCs) we are also seeing engineering, procurement and construction (EPC) contractors such as Tata Power Solar and Orb Energy starting to offer one-stop financing options bundled with their rooftop solar products.”
 
The report noted this type of financing is likely to scale up, particularly as most big lenders and concessional credit lines are largely focused on the major rooftop solar developers.