Solar projects in India still struggle to raise debt finance. So far, only a small percentage of projects have attained non-recourse financing. Most have worked with either limited recourse or full recourse finance. Banks that have in the past provided non-recourse financing are either Indian commercial banks or international lenders with a development mandate. There are several reasons why non-recourse finance is difficult to obtain. They relate to three layers of the market:
- On the macro level, lenders have concerns with debt recovery and the legal enforceability of claims in India in general. This is a concern that extends to any project-related finance in India. Even cross-defaulter clauses of converting debt into equity only have a limited appeal. The best way for a project promoter to reduce this concern is through a strong company reputation and banking relationship as well as through the actual track-record of debt repayment and future plans and debt requirements (the larger the risk to future business of being labeled a ‘defaulter’, the higher the incentive to repay the debt). Recovery of Debts Laws (Amendment) Bill, 2011 was passed in December 2012 in the Indian parliament. Recent modifications of debt-recovery rules will make it easier for banks to recover bad loans and thereby to make more non-recourse financing available in the future.
- On the intermediate level, with respect to the Indian solar market, banks have two main concerns: the first is the limited availability of irradiation data, which forms the basis for projecting future revenues. The second is the strength of public power purchasing agreements (PPAs) due to the weak financial health of India’s public utilities. On account of these risks, the market is slowly maturing: more on-ground measuring stations and actual generation data from existing plants provide a stronger set of data. With respect to the strength of PPAs, payments are sometimes backed by guarantee funds and sometimes passed on to the private sector (through Renewable or Solar Purchase Obligations. For Renewable Energy Certificates (RECs) the main questions hover around the enforcement of Solar Renewable Purchase Obligations (RPOs) and Solar Purchase Obligations (SPOs in Tamil Nadu), which create the demand. The project promoter will need to be conservative on yield assessments and evaluate the off-take and REC options very carefully.
- On the project level, there can be projects that are simply not well developed. A well- developed project usually starts from the perspective of the debt provider (bankability) by identifying and mitigating risks. The second step is proving viability to the lenders. Our report will primarily focus on steps for improving the bankability of the projects and arranging for project debt.
Currently, a dynamic, early stage, uncertain and regionally diverse regulatory environment also negatively impacts project bankability by keeping the transaction costs for lenders high and visibility low. The nature of solar power projects – with their high upfront capital requirements and low operational costs, typical of infrastructure projects – further emphasizes the bankability challenge. Another issue is that since many Indian banks currently have excess exposure to the conventional power sector, they have very limited funds left over for solar projects. Apart from that, interest rates in India have been at an all-time high. Solar projects financed by Indian banks, non-bank financial companies (NBFCs) and infrastructure funds end up paying an interest rate of over 13% per annum.
Unavailability of non-recourse financing is a critical hurdle in the expansion plans of developers as they cannot continue to accumulate recourse on their balance sheets. In addition, the high cost of financing significantly adds to the cost of solar power in India as compared to more mature solar markets.
Till the time non-recourse financing becomes more readily available in the Indian market, access to the right financing options will remain the key differentiator across different developers and their projects. This is exceptionally important in a competitive project allocation landscape that exists in India. International financing from export credit agencies (ECAs) such as the US EXIM bank and development finance institutions (DFIs) such as the IFC has helped some developers secure a lower cost of debt. Even after completely hedging for currency, a project is able to derive a rate differential of around 100 basis points. These financing sources are also more open than commercial banks to financing solar projects as they tap into funds allocated for climate initiatives and/or have a mandate to promote exports from the host country.
As a trend, project developers and other key stakeholders in the solar industry realize that conventional financing from banks is not the sole answer to scaling up of solar power in the country. Innovative mechanisms need to be worked out. Currently, this innovation is working at two levels: lack of liquidity is prompting project developers to look for instruments like suppliers’ credit and construction finance to get the projects up and running quickly (gaining speed) and at the same time, the high Indian interest rates are spurring efforts to acquire debt from outside the country without a full or partial financial hedge against currency fluctuations.
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