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SO L A R ENERGY

PV Project
Finance In India:
Working The
System
Ragna Schmidt-Haupt- Senior Investment and Strategy Advisor - Asia
GL Garrad Hassan

Although impressive, the deployment of utility scale photovoltaic (PV) in India has been hampered
by industry-specific and economy-wide factors not least the difficulty in accessing non-recourse
finance.Acceleration of Indias PV market depends on improved access to finance both from domestic
and international sources. Ragna Schmidt-Haupt from GL Garrad Hassan global renewable energy
consultancy provides examples and practical insights into how players can overcome the hurdles and
seize attractive opportunities in the idiosyncratic Indian solar market.

or all energy projects, access to capital


at reasonable cost is essential. This
is especially true for PV projects,
for which capital expenditure accounts
for the vast majority of the lifetime cost.
In India,banks are particularly reluctant
to finance PV projects on a non-recourse
basis. This reticence to lend is leading to
debt charges as high as 14% and many
projects left on the wrong side of the viability
threshold.
The reasons behind conventional banks
discomfort with PV in India are various.
Some factors are common to all sectors of
the Indian economy such as problematic debt
recovery and enforcement of non-recourse
claims. Other factors are specific to the power
generation sector such as a perception that
PPA contracts are worth less than their face
value because the public utilities signing them
lack the financial substance to back them up.
At the same time, Indias energy regulatory
environment is notoriously capricious.
Other challenges facing PV in India
are specific to the technology - such as the
availability of reliable irradiation data,
local content rules, quality concerns and a
punishingly competitive market.
Indias potential in solar is vast. The
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EQ INTERNATIONAL - June 2013

installed capacity of PV in India is now over


1,700 MW and the value of the market
has doubled in a year. The ongoing rise
in Indias solar sector demonstrates that
projects are being financed albeit nearly
entirely with balance sheet commitment
from developers.
As the market matures, if and it is a big
if - the debt-recovery difficulties are resolved,
readily available debt finance would allow
the Indian solar sector to really shine. But, in
its absence, innovative approaches to getting
projects off the ground are emerging which
show that with imagination, perseverance
and an open-minded attitude, the solar sector
in India is finding new ways to finance the
development and construction of projects.
Accessing many of Indias myriad policy
mechanisms involves the entry into a PPA
with a public entity. The financial credibility
of public and other corporations in India is
patchy, and developers seeking to reduce
(payment) risk are well advised to do their
research and choose an off-taker carefully.
This kind of prudence is behind the weak
demand for PPA allocation rounds in States
where the PPA counterparty is seen as a
credit risk. If possible, having a fall back
off-taker can also help to reduce off-take
risk for grid connected plants.

Regulatory challenges, such as the


lack of clarity on how Renewable Energy
Certificate (REC)prices will be set after
2017 and murky, variable permitting
processes have affected the growth of PV
in India. Meanwhile, local content rules
on crystalline silicon (c-Si) products, have
led to many projects importing thin film
modules with typically lower efficiency than
c-Si products.
But the regulatory situation is not all bad
for PV. Although some changes are a drag
on the rate ofsolar deployment, factors such
as the stability of thelevel of Accelerated
Depreciation for solar - despite hefty cuts
for wind farms are positive and has seen
experienced renewable energy investors
gravitating towards the solar space.
Mirroring a trend seen in other Asian
markets, the supply chain is becoming more
involved in project finance than it has been
historically. Equipment manufacturers and
EPC contractors are both well placed to
provide short-term finance to developers
during the critical construction phase of a
project. This type of bridging can speed up
the process of completion compared to the
delays that may occur when developers are
sourcing capital from Indias often illiquid
capital markets.

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The terms of finance taken during the


construction phase are often relatively unfavourable to the project promoter. For this
reason projects may often be refinanced
in pursuit of better terms or sold to an
independent power producer (IPP) once
the project is operational and the risk profile
has improved.
Finance is also being sourced from other
non-banking institutions.Companies, such
as L&T Infrastructure Finance Company or
IL&FS are becoming more open to the idea
of solar finance,and offer similar terms to
domestic banks but over potentially longer
periods ofup to 15 years. Furthermore
infrastructure fund IDFC (who holds an
equity stake in prominent developer Green
Infra) has assisted several Indian developers
includingAzure Power, Kiran Energy and
Videocon Solar. State-owned investment
outfits such as SBI Capital Markets bundle
debt from domestic and international lenders
and make the funds available to individual
solar projects.
Preferential terms are often offered
by lenders with ulterior motives. Credit
export agencies, such as US EXIM bank,
are providing finance to solar projects
that commit to sourcing equipment from
a particular country to promote imports to
India. Similarly, development institutions
such as ADB, IFC, Germanys KfW and
Indiasown IREDA can fulfil their social or
environmental mandate by lending to solar
projects.According to a recent report on
bankability and debt financing by Bridge to
India, capital is available to solar projects for
as little as 11% but access is dependenton a
longer and more complex application process
and other qualification requirements.
The high cost of capital in India has
seen developers looking outside the country
for finance. US dollar denominated debt has
been taken by a number of developers from
commercial lenders, export agencies and
development banks- although this approach
exposes the developer to currency fluctuation
and makes it a risky strategy. Hedging the
currency exposure is important if the cost
advantage is not to be offset by a change
in the value of the Indian Rupee.Volatile
currency fluctuations and an depreciation
of the Rupee by more than 60% against the
USD since 2008 are not that comforting.

potential of Indias
solar sector demands
Picture: solar radiation
a shift in the
resource assessment
station at Sadodar, Gujarat
approach to tackling
(GIZ India)
technical challenges.
Irradiationdata for
much of India is
poorand is mainly
based on satellite
data with limited
ground-based
measurement
-although this
situation is showing
signs of improvement
risk for an investor and may be the key to
with 51 stations
having already been installed by C-WET, project viability.
under an initiative of the MNRE. An additional
At the same time, an analysis of
60 monitoring stations are envisaged for
operational projects shows that assets are
2013 which will enable the monitoring on
currently under performing when compared
a larger scale and in a more precise manner
to international norms. Whether the culprit is
of direct normal irradiance, global horizontal
poor EPC completion or project operations
irradiation, diffuse horizontal irradiation and
is unclear but with operational services
direct normal irradiation, says IndradipMitra
from technical consultants readily available
from GIZs SolMap project.
to owners, there is no reason why assets
Most available satellite records extend should not be well managed.
back only 10 years which compares
In spite of the difficulties, project finance
unfavourably with the 20+years of data
is slowlymaking its way into the Indian solar
available for some more mature markets.
sector. Developers, who have successfully
Also, thelow resolutionof the data and quality
achieved non-recourse project finance
issues with installed measurement equipment
for solar projects include Sun edison and
add to the difficulty of producing bankable
Astonfields, both of whom have strong local
energy resource assessments.
and international experience in their project
This lack of understanding of the resource finance teams and banking networks.
knocks investor confidence infuture power
India is an idiosyncratic but potentially
production and is a major contributor to the
enormous market for solar PV. Only those
high cost of debt finance.Typically, lenders
developers who can be dynamic, innovative
build-in this uncertainty by using P90 values
and really understand the regulatory and
(the value which the out-turn production has
financial options as well as the resource
a 90% probability of exceeding) as their
potential of their project - can thrive. Some
performance input to their financial models.
will succeed in the market long enough to
The availability of bankable, site-specific
see a true PV debt market emerge.
resource estimates can seriously reduce the

Along with innovative approaches


to financing solar projects, realising the

www.EQMagLive.com

EQ INTERNATIONAL - June 2013

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