Last June, the Pune Municipal Corporation made history of sorts by raising ₹200 crore through a bond issue — the first municipal bond issue in 14 years. The issue was subscribed six times, even though the coupon rate was only 7.59 per cent. The proceeds were meant to finance a water supply project.

A recent study of Indian Council for Research on International Economic Relations (ICRIER), the Climate Policy Initiative and the Stockholm Environment Institute, both think-tanks, has suggested that similar municipal bond issue be explored to finance rooftop solar projects in India.

Civic advantage

The study notes that over half of the 94 municipal corporations enjoy investment grade rating (BBB- or above), whereas most solar rooftop developers are below investment grade. Based on this, the study says that municipal corporations, which typically have bigger balance sheets than private solar rooftop developers, are in a better position to raise capital through bond issues.

The study suggests that a municipal corporation sets up a special purpose vehicle, which it calls ‘corporate municipal entity (CME)’, for issuing bonds. Once the issue is complete, the CME could issue a ‘request for proposal (RFP)’ seeking solar developers to build, operate and own rooftop solar projects or a portfolio of projects on municipal buildings.

The authors stress that the projects can only be re-financed by the municipal corporations and the origination of debt would have to be from commercial banks. Banks would finance the projects on the assurance that the short-term debt would be refinanced by the municipal corporations in a year or two. “Once the projects get stabilised and start generating regular revenues, the initial debt would be refinanced through the municipal bond.”

They also emphasise that at least the first projects to be financed through bonds would be rooftop solar plants where the power is sold to non-residential consumers, such as factories, where there is little risk of the electricity not being bought.

Case studies

The study examines the ‘solar municipal bond (SMB)’ model of financing for two cities, New Delhi and Surat. It says these two cities, with rooftop potential of 1,100 MW and 418 MW (for projects that could be implemented by 2022), would need ₹3,850 crore and ₹600 crore, respectively for the potential to be achieved. It estimates the price at which the electricity would be sold to customers at ₹5.79 a kWhr, which could fall to ₹5.12 if re-financed by municipal bonds. “Municipal bonds can make rooftop solar tariff less expensive than commercial and industrial tariffs in Surat,” it says.

India’s achievement in rooftop solar has been less than respectable. The government targets 40,000 MW to be set up by 2022, but the installed capacity at the beginning of 2018 was around 1,700 MW. However, the potential is huge – the 40,000 MW may be the target, but the potential, according to a blogpost of the solar module manufacturer, Vikram Solar, is 1,24,000 MW.

The problems have been high upfront cost of installation and lack of helpful policies by state governments for selling surplus power from rooftop plants.

Financial costs

Bringing down the cost of finance certainly helps. Of the 1,700 MW of capacity installed, 575 MW was set up with funding from State Bank of India. The bank could achieve this as it was armed by $625 million World Bank loan it got in June 2017, meant exclusively for financing rooftop projects.

According to Amplus, a company that sets up rooftop solar plants at its cost and sells the power, the World Bank-backed SBI funding resulted in interest cost coming down to 8.25 per cent, from 12 per cent otherwise.

The ICRIER-Climate Initiative-Stockholm Institute study points to a possible way of reducing financing costs for rooftop solar.

 

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