Fresh data, just off the oven, is smelling good. As much as 9,010 MW of new, ground-mounted solar power plants came into being on Indian soil in 2017-18, a record, and a shade higher than the target of 9,000 MW. Never mind the listlessness in the rooftop sub-segment (353 MW achieved against the target of 1,000 MW) — in solar, the bigger the plant, the cheaper the power from it. And indeed, the highlight of 2017-18, as far as the renewable energy industry is concerned, is the level to which market-determined solar tariff fell, which was ₹2.44 a kWhr.

Also, the government says that 14,230 MW of solar capacity was tendered out for grabs during the year, the larger part of which will come up in the current year. So, the news emanating from the solar sector, hmm, is not bad at all.

But if the spurt in activity is due to relentless fall in tariffs, the question is, how much lower could the tariffs go? And if they start rising instead of falling, how will that affect fresh capacity additions?

The inter-playing factors

In the long run, technology breakthroughs in terms of packing more bang into the modules (example: bi-facials) and finding semiconducting material far cheaper than silicon (such as perovskites) will provide the necessary tools to dig through the cost barriers. But in the short term, is the industry scraping the bottom?

Perhaps not. India may not have control over critical factors such as module and inverter prices — indeed, it was a propitious decline in the prices of these that enabled low tariffs. Module prices today are around 32 cents a watt (ah! five years back we thought they could go no lower than 60!). They could fall further, but one can’t count on it, for there are too many inter-playing factors. For example, Chinese domestic demand continues to be strong — 45 GW in calendar 2018, on top of 53 last year but China’s production capacity is rising too. Then you have the US anti-dumping duty on Chinese modules, which could dampen the demand there and consequently flood supply elsewhere. Counting in falling module prices may be a risky punt.

But perhaps there is still scope for tariff reduction and the lowest among the hanging fruits, though still pretty high, is cost of finance. Broadly, there are two elements to it — interest rates and cost of hedging foreign currency loans. Expert opinion is that the government can do something about both.

Take interest rates, where the dumb fact is that if you make more money available, the interest rates will fall. A classic example from within the solar sector itself is that of State Bank of India arming itself with a $625-million World Bank loan exclusively for the purpose of lending to the rooftop solar plants. The SBI-WB deal was struck last June and in the next six months, SBI gave loans for 575 MW of rooftop plants. Contrast this with the data point that in 2017-18, India saw 353 MW of rooftop solar plants set up and you’ll see how much difference SBI is likely to make.

Amplus Energy Solutions, a company that installs solar plants on hired roofs at its cost and sells power directly to customers (usually, the owner of the roof), was one of the earlier beneficiaries of the SBI loan programme. A World Bank blog quotes Amplus’ Managing Director, Sanjeev Aggarwal, saying that thanks to SBI, Amplus now borrows at 8.25 per cent compared with 12 per cent before. This, in turn, has helped it sell power to customers cheaper. One of them is Yamaha Motors on whose roof Amplus has put up its plant. Amplus sells power to Yamaha at ₹6; it used to buy power for ₹8.50 earlier.

The need of the hour is more of WB-SBI type of funding, but the problem is not the lack of it. There is plenty of money floating around. The Green Climate Fund approved, in February, a $100-million loan for Indian rooftop projects, but nothing has been drawn from it as yet, which points to the languid state of affairs here. The central problem is the risk of the buyer of electricity not paying his dues for large-scale projects and the absence of opportunity to sell surplus power for rooftop plants.

Sector risk in the way

A few months ago, a think-tank called Climate Policy Initiative studied the financing of renewable energy projects in India. It found that there is a pretty good fit between the needs of investors such as pension funds and insurance companies, and solar, particularly in terms of return expectations and investment period. These entities expect returns of 7.5-8.5 per cent, which solar projects can give. The investment period matches too, these entities want steady, stable returns over 15-20 years, and solar fits the bill perfectly.

But the problem is, pension funds and insurance companies can lend only when the borrower has a high rating — at least AA. Solar projects are still not there due to, according to CPI, “sector-specific risk”. “Sector-specific risk” is a euphemism for the financial weakness and the reputation of the ultimate buyer of solar power — the state-owned electricity distribution companies. (Direct sale of power, such as the Amplus-Yamaha deal, is still rare due to a whole host of other reasons.) And it doesn’t help pension funds and insurance companies that they can’t call their loans back if they urgently need cash — this can happen only if the bonds that solar energy companies issue are listed on the stock exchanges.

Both ‘sector-specific risk’ and liquidity are issues that governments can help solve. Arrangements where the federal government says, “I will pay you, if he doesn’t”, are not without precedents — we have seen them in the case of the famous ‘REWA bid’, where such guarantees helped bring winning tariffs as low as ₹2.97, first time under ₹3.

Experts have suggested similar credit guarantee schemes to comfort investors. There exists one, offered by the government-owned finance company IIFCL, but the ‘partial guarantee scheme’ covers not more than a fifth of the loan and the transactions costs are so high that there is precious little left on the table for the project developer. Not surprisingly, the scheme has been a failure.

Payment security needed

The risk that a project owner defaults because the big customer — the discom — didn’t pay him adds 1.07 per cent to the interest rates, says another research finding of CPI. With some sort of a payment security mechanism, the rating of the project company could be raised (the most) to BB, the authors of the report have said.

As for liquidity, the regulations should make it easier for even small-sized bond issues, so that project developers prefer issuing bonds to taking term loans from banks. Perhaps loan guarantee schemes and nudging developers to raise loans through bonds are work-in-progress, and will evolve over time. Further, Indian financiers are now increasingly accessing a relatively new source of funds — green bonds. In 2017, Indian entities issued green bonds worth $4.2 billion, and the country figured among the top 10 bond issuers (total green bonds issuance was a record $155 billion, expected to double this year.)

The other big element of finance is the cost of covering currency fluctuations. The World Bank has a simple suggestion: can’t the government set up a fund which will bear the cost if the currency depreciates beyond a certain point? The developer could perhaps pay the fund back when the currency swings back. This way, it becomes a “liquidity risk than a solvency risk,” says Joaquim Levy, Managing Director and Chief Financial Officer, World Bank group, in a blog.

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