Bridge India

Time for a big-bang financing solution

In view of the BJP government’s strong commitment to the solar sector and the much trumpeted 100 GW target, there was mighty anticipation about what the budget would bring by way of cheaper financing, tax incentives and other promotional measures to grow the sector. But the budget turned out to be bit of a damp squib and it is not clear how the government hopes to realise its solar vision with the current, incremental approach. Here is our proposal for a big-bang financing solution to achieve India’s goals.

  • Debt cost in India are too high and there is far too little of it available to meet the ambitious solar targets
  • The government should provide low cost and long tenure debt through new, dedicated renewables financial institutions
  • This initiative would cost less than USD 2 bn per year – a bargain, given the various political, social and environmental benefits of solar

There are many challenges ahead for the solar sector – offtake risk, land acquisition, transmission, grid stability and storage to name a few. But there seems to be a mistaken perception that financing will automatically fall in place, with leading Indian and international companies making “commitments” to develop 266 GW of renewable capacity.

There is ample liquidity in the global financial markets. With global macro-economic growth rates slowing down in many parts of the world (Europe, Russia, China, Japan) and interest rates coming down to all-time lows, fund managers are desperately chasing attractive avenues for investment and are increasingly willing to take more risk. So why not finance the Indian solar sector?

But of course it is not so simple. We need to break financing into two parts – equity and debt – and look at these separately. For the reasons discussed above, it seems fair to expect that international utilities, power sector companies and developers will be keen to come to India and invest in solar projects. We can see hard evidence of this on the ground.

The debt part, however, is a completely different story. Debt financing options in India are severely limited. By far the biggest source of debt in India for long-term project financing is Indian banks (floating rate, high cost of debt with an interest rate of typically 12.5 – 13% and debt tenor of < 15 years). But the banks are saturated with power sector debt and many of them are burdened with “non-performing” (i.e. distressed) loans to distribution companies and IPPs. To expect Indian banks to provide the bulk of the financing for 100 GW is not only overly optimistic but also sub-optimal for their own balance sheets and for the solar sector.

The other plausible options for debt financing today are also severely limited by their potential capacity and/or appetite – Indian institutions such as IREDA and PTC Financial (relatively small size but competitive cost), finance companies such as L&T Infra Finance and Tata Capital (low capacity, high cost), international institutions and export credit agencies such as IFC, KFW, DEG and US-Exim (very low appetite, low cost). International banks are not keen to commit long-tenor debt and the capital market route simply does not exist. There have been multiple suggestions on how to finance solar at more competitive terms – priority sector lending, hedging cost benefit, investment tax credits etc. In our view, these measures are either not practical in the Indian context or suffer other operational shortcomings.

So how can 100 GW of solar be debt financed in the next years? We need a radical approach, aiming to bring down the cost and extend the tenor of debt financing. The government needs to create dedicated renewables financing institutions funded with gilts, coal cess monies and tax free bonds. And given all the social, environmental and macro-economic (improved energy security, low currency risk, improved growth prospects, significant job creation) benefits of renewable energy, there is a rather strong case for the government to not only do this but also provide a flat 4% financing cost benefit to the sector. We believe that this could bring down the cost of solar by 18% to Rs 5.35 per kWh and go a very long way in making the 100 GW target achievable.

The cost of doing so is actually quite modest – it peaks at about USD 2 bn per annum (0.1% of GDP) and is estimated in aggregate at only about USD 26 bn. The beauty of this structure is that it is very easy to administer and if the government does go ahead with this, it can remove all other incentives such as accelerated depreciation, capital subsidies/ VGF etc and remove operating and financial distortions in the sector. That in turn means that the total cost of following this approach will be more like USD 15-20 bn, which in view of all the benefits is probably one of the best ways for government to spend the money.

Vinay Rustagi is the Managing Director at BRIDGE TO INDIA.


  • Hi,

    Thanks for a very interesting post on financing the solar sector in India. I was hoping to understand if your proposed solution for debt financing applies to the REC mechanism as well which will primarily see investors putting in their equity for the accelerated depreciation benefit.