From pv magazine India
Micro, small and medium-sized enterprises (MSMEs) could drive large-scale rooftop solar adoption in India if accessible financing options become more readily available, according to a new report by the Institute for Energy Economics and Financial Analysis (IEEFA) and JMK Research.
The “Financing Trends in the Rooftop Solar Commercial and Industrial (C&I) Segment in India” report notes that much of the growth in installations has been driven by a few large, creditworthy entities. However, financial institutions are often reluctant to lend to MSMEs because they prefer borrowers with strong financial track records and good corporate credit ratings.
“MSMEs are as yet an untapped segment and could be the next drivers of growth in the market, especially considering the significant electricity cost savings offered by the adoption of rooftop solar,” said lead author Jyoti Gulia, the founder of JMK Research. “Textiles, food, and packaging are among the industries with lots of potential.”
The report notes that rooftop solar installations are financed through equity investments, debt capital, mergers and acquisitions, and loans or concessional financing such as the $625 million World Bank-State Bank of India (SBI) and the Green Climate Fund (GCF) and Tata Cleantech credit lines.
Since 2015, rooftop solar project developers have raised more than $2 billion, 48% ($985 million) of which came from equity funding and 29% ($599 million) from debt. Around 45% of these investments was raised in the first eight months of 2021 alone.
“The C&I rooftop solar segment has seen a sudden surge despite Covid-induced disruptions,” says Gulia. “This indicates a significant growth trend ahead.”
Almost all of the equity investments in rooftop solar came from foreign entities looking to tap the Indian market, given the high growth potential and healthy return on equity.
The report notes that over the last five years, most of the funds raised through the equity and debt routes have been concentrated among four active players in the segment: Amplus, Fourth Partner, CleanMax, and CleanTech.
“While these four players have been successful in raising funds for their projects and sustaining their business, the sector has seen many major players including Statkraft India, Sterling & Wilson, and Azure Power exit the market due to shrinking margins and regulatory setbacks by distribution companies (discoms),” says Gulia.
With a limited number of good, creditworthy customers having ratings above BBB+, this segment is becoming saturated, resulting in reduced demand that has led major developers to look at foreign markets with potential growth opportunities and also to build offsite open-access private solar parks that cater to the C&I segment.
On the other hand, MSMEs remain largely untapped. These face many barriers in obtaining financing for rooftop solar installations, including insufficient credit history, lack of collateral, and long-term uncertainties in their businesses. Renewable energy service companies (RESCOs), which own and operate solar plants for the consumer, are unwilling to work with MSMEs due to these uncertainties.
Credit enhancement schemes like the World Bank’s upcoming first-loss guarantee fund and a $41 million line of credit from the U.S. Agency for International Development (USAID) and DFC are examples of steps being taken to make financing for rooftop solar more accessible [to MSMEs], says co-author Vibhuti Garg, an energy economist at IEEFA.
“Schemes like these allow lenders to absorb risks and increase access to collateral-free loans. As well as loans available from national and regional banks and non-banking financial companies (NBFCs) we are also seeing engineering, procurement and construction (EPC) contractors such as Tata Power Solar and Orb Energy starting to offer one-stop financing options bundled with their rooftop solar products,” said Garg.
The report notes this type of financing is likely to scale up, particularly as most big lenders and concessional credit lines are largely focused on the major rooftop solar developers. It also highlights positive developments such as Tata Power-SIDBI and Encourage Capital-Electronica Finance Limited tie-ups that specifically cater to MSMEs.