Although India has made rapid strides in promoting renewable energy, more needs to be done in making financing available and utilizing them efficiently
In the last two and half years of policymaking in the Indian renewable energy (RE) sector, the country has leap-frogged from a modest level to an aggressive player in the world market. If the current plans of the government are realized, India shall be among the leading RE generating countries of the world.
However, various recent studies have shown that the major bottleneck for faster development of RE has been the financing of the projects. The high cost of financing is impeding the growth of the sector despite continuous efforts by the government. As pointed out by developers in the wind and solar sectors, the high cost of debt has a lot to do with the slow growth of RE.
It has been observed that around USD 34 billion has been mobilized till 2015 to attract private financing to the sector, but this is still small compared with the amount and scale required to meet 175 GW of RE capacity by 2022, and 350 GW by 2030. “Around USD 175 billion USD would be required, including private and public sources, to meet the targets for 175 GW by 2022,” says Nidhi Narang, former chief finance officer of Punj Llyod, an infrastructure firm.
This effectively means that every year India has to mobilise USD 25 billion from now till 2022. The budget of the Ministry of New and Renewable Energy (MNRE) for 2016-17 is USD 2.1 billion. A part of it, around USD 746 million, is going to come from the National Clean Environment Fund (NCEF) and the rest from a direct increase in outlays for the government.
Clearly, it shows that more than USD 20 billion will have to be mobilized from different sources for keeping the 2022 plan in place. In India, the performance of the private sector is not very energetic. Private financial institutions have mobilized just around USD 8.6 billion between from 1999 to 2014.
It has been observed that a multitude of private funding agencies are currently operating, which gives us a hope to generate the required amount, provided a favourable climate for investments are created. Innovative sources like green bonds, covering the risk of lending, segregating the risk of deploying RE projects would be some necessary actions to give confidence to the private players.
Out of the USD 175 billion requirement, USD 30 billion is going to be in the form of equity and the rest in the form of debt. The high cost of debt makes this financing uncertain, and thus innovative means are required to reduce the cost of debt. “Some challenges faced are clearly doable. Reducing the rate of lending from current 12-14% to 10% and increasing the term of loans would be a huge boost for developers,” says K.S. Popli, chairman and managing director of Indian Renewable Energy Development Agency (IREDA), which provides financing.
“Inclusion of RE sector as core infrastructure would relax the norms of external commercial borrowings,” says Daanish Verma, director, investment banking, Yes Bank. There are several other norms which can be introduced, but that requires a high degree of political will and determination.
Covering operating risk
It has been argued that the main reason for high rate of interest on loans is the inability of the lenders to segregate the risk developing the project and also collect the charges of operating expenses (opex) from the consumers. Thus, it is suggested that the developers would be charged with cost of developing the project and the other sources of funding should cover the risks of opex. This model is followed by some private financing agencies like Yes Bank and IDBI Bank.
Furthermore, government funds like the NCEF could be mobilized to guarantee the opex risks of lenders. Alternatively, the government can chip in to use its funds to reduce the rate of interest directly. The World Bank and Asian Development Bank have provided USD 1 billion for rooftop solar projects. MNRE should use this capital to reduce the cost of borrowing. IREDA should come forward and propose a rate of interest in the range of 10%, which will help the growth uptake of loans by the developers and also reduce the number of defaults.
Regulatory measures through the government’s UDAY scheme for grid-connected RE are the new source of hope for lowering the cost of debt. Under this there could be a debt recast scheme, in which states are taking 75% of the outstanding debt of distribution utilities with a moratorium of repayment and interest payment that would be calculated in the fiscal deficit. Since fiscal deficit is capped, the states have to use alternative pathways like selling renewable energy certificates in the market to raise funds for the reduction of debt of power distributors, and thereby making RE growth possible.
From October 2015 onwards, RE sector financing is included as priority sector lending by the Reserve Bank of India. It would be good to monitor closely the performances of the banks and provide incentives for those who are over-achievers in RE sector lending, and create a competitive environment among the lenders through appropriate incentives.
Getting private players on board
Currently the initiatives to reduce the cost of debt are mainly driven by the government and its subsidiary agencies. The time has come for the public players to get on board. Substantial amounts of green bonds raised during the previous financial years by the banks are lying idle. They need to roll in for RE sector financing. Very few banks and investment institutions are actively pursuing this route of direct investment to RE projects. The Reserve Bank of India and other relevant authorities can monitor the matter.
Lastly, an environment that will boost investment in the sector is required. There has to be a shift from regulation-based policy initiatives to one that will initiate more market competition. Setting ambitious target is the first step to generate momentum in the RE sector, but instilling investor confidence would make the sector sustainable and ensure its proper growth. Time has come to take some bold decisions to reduce the cost of lending and lead the world by example.