India’s financing industry has finally learned to ‘speak solar.’ Based on a cumulative 12 GW of solar projects installed so far in India, market participants have become good at addressing the key risks in the sector. Policy makers, banks and investors, and developers have together made solar a mature asset class in India. You can download the full report here.

New policies have lowered off-taker risk

The availability of financing for solar PV projects, especially on a non-recourse basis, was a challenge in India until 2015. The risk that financially weak utility off-takers could default on payments was a major concern. As a cumulative 12 GW of PV has been installed, the government has begun tackling this risk through new policies.

The federal government’s electricity reform policy Ujwal DISCOM Assurance Yojana (UDAY), launched in November 2015 aims to improve the financial health of state-level public utilities. The goal is to improve their cash flows, investment attractiveness and service quality. This will improve their payment capacity, reducing the risk that they will delay or default on payments to power projects, including solar.

Another initiative that has reduced off-taker risk is the Madhya Pradesh government’s policy used for a tender in the state’s Rewa district in January 2017 for three solar projects of 250 MW each. The policy offers a multi-tiered, sovereign payment guarantee, providing credible protection against payment defaults by the off-taker.

In the short-term, thanks to such policies banks will continue to finance projects despite the payment risk, albeit largely with recourse to developer collateral. In the next 2-3 years, however, banks will likely shift to more non-recourse financing as the financial health of utilities continues to improve.

Improved due diligence capabilities of banks have increased non-recourse financing

With over INR 210 billion (Euro 3 billion) of debt financing lent by Indian banks to solar projects just in 2016 and over INR 650 billion (Euro 9.3 billion) lent in the past five years largely on a recourse basis,[1] solar has evolved from a fringe infrastructure asset class to a mainstream option for both domestic public and private sector banks. Banks now have a greater understanding of solar technology, relative quality of components of different suppliers, project execution capabilities of EPCs and developers and viable tariffs. Technical assistance that international agenda banks like the World Bank, Germany’s KfW and the Asian Development Bank have provided, especially to some Indian public sector banks, has also helped in this learning process.

Better project execution has lowered project risk

Over the past two years, the market has consolidated around very large, Indian corporate backed project developers, some with experience in the conventional power sector. Other key players are international developers with diversified power sector experience. Most of the developers have installed at least 300-500 MW of PV projects each. This project development experience has taught them how to optimize costs without compromising on quality. It is now common to optimize financing costs by leveraging suppliers’ credit and refinancing through cheaper, more risk averse debt financing options upon completing construction. Developers have also improved project design, data analytics and project monitoring resulting in greater energy generation. Our market interviews suggest that the more experienced developers are now acutely aware of execution quality issues, protecting their reputation with lenders to ensure attractive lending conditions.

You can download the full report here.