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Tue, Oct

Financial Aggregation in Rooftop Solar – The Most Attractive Renewable Energy Financing Opportunity in India for the Next 10 Years

Industry Insights
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Electricity is quickly becoming the most important energy source of this century, not just due to growing demand for electricity from industrial, commercial, residential and institutional consumers but also due to rapid electrification of other sectors such as public, personal and commercial transport.

Companies worldwide – from large multinationals to local Small and Medium Enterprises – are making commitments to buy electricity from clean energy sources such as solar and wind power, driven by falling costs of generating electricity from clean energy sources and an intent to reduce the carbon footprint of their operations. In April 2018, Google announced  that it holds Power Purchase Agreements to purchase 3,000 MW of renewable energy-based electricity, enabling it to reach its 100% renewables target. and within a few days, Apple announced  that it has also achieved its 100% renewable energy goal. Corporate buyers such as these are beginning to drive the Renewable Energy market worldwide, including India, and this perhaps will present significant tailwinds to the Rooftop Solar industry in India, particularly in the Commercial and Industrial consumer segment.

Though the the currently installed rooftop solar capacity considerably lags behind the Government of India’s 40 GW rooftop solar installation target by 2022, there is significant traction and interest building up. In CY 2017 alone, the rooftop solar segment added ~950 MW of new capacity, recording an 80% jump in installed capacity from ~1,200 MW in 2016 to ~2,100 MW by the end of 2017 . Increasingly, Rooftop Solar has achieved grid parity in all the major states in the C&I segment and the policy/regulatory environment is becoming favorable with either the introduction of net-metering norms or easy processing, approval, and relaxation in net-metering terms in most states. 

The benefits from these technology and policy shifts are leading to Rooftop Solar consumers preferring the opex models of contracting such as PPAs or leasing, to the traditionally dominant capex model of upfront payment of entire installation cost by the consumer. From just 5% share of the total Rooftop Solar market in 2013, the opex model today contributes to as much as 30% of incremental rooftop solar installations and this is also driving a significant increase in average installation size of Rooftop Solar systems. All of these clearly point to a significant growth opportunity for Rooftop Solar, particularly in the C&I segment over the next 10 years.

From our primary analysis with ~14 developers in the rooftop solar market and with inputs from credible 3rd party market research firms such as BNEF, we estimate that India will add 13,000 MW of rooftop solar capacity in the next 5 years, of which at least 5,000 MW will be installed through the opex model. This represents a “direct” financing opportunity of at least US$ 3 billion. But it leaves us with one key question – where would this financing come from? Unlike utility-scale solar, Rooftop Solar is decentralized, spread across different industries and geographies, and is very granular from a transaction cost perspective. Barring the top 5 Rooftop Solar developers, the others have limited asset-ownership track record and corporate creditworthiness.

The answer lies in financial aggregation, which we think holds the largest and the most attractive RE financing opportunity for the next 10 years in India. In simpler terms, financial aggregation is a mechanism that bundles together assets of granular sizes to build a sizeable portfolio in an entity / vehicle that achieves reduced transaction costs, lower cost of financing and risk diversification. Some of the financing structures that enable financial aggregation are Warehouse Line of Credit, Asset-backed Securities (ABS), and Covered Bonds. 

Among these mechanisms, warehouse line of credit will play a pivotal role since it enables primary financing instead of secondary financing / re-financing, is cost-effective and is more feasible given the current size of the market. A warehouse credit facility is a Special Purpose Vehicle (SPV) based project financing mechanism where funds are advanced to the SPV to facilitate the completion over time of a series of “qualifying” projects that together aggregate into a sizable portfolio. A sample structure of warehouse line of credit is shown below: 

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An illustrative example could be named “MESH SPV”, setup by a Rooftop Solar developer with investments from one or more debt providers, that will, over a 10-month period build 10 MW of assets through 50 different installations of average 200 kWp capacity each, spread across Manufacturing, Educational Institutions, Shopping malls and Hospitals segments, making up a portfolio worth ~INR 50 crore. 


In the “MESH SPV”, the developer retains the equity portion to demonstrate skin-in-the-game and to provide senior debt investors with “First Loss” guarantee. The “MESH SPV” also provides an opportunity for blended financing by attracting philanthropic / concessional / other public capital that will serve as the “Second Loss” guarantee and/or credit enhancement to the senior debt and help crowd in private capital. The SPV will fill over time as and when it signs the PPAs leaving the developer with Operations and Maintenance obligations and compensating the developer with a one-time cash compensation that will help acquire further assets.

Such a MESH SPV has limited / nil recourse to the parent’s corporate balance sheet while at the same time providing significant credit enhancement to the investors. Since the contours of the Rooftop Solar assets that the SPV can house is pre-defined, this also turns out to be a quickly scalable model. In addition, the advantages include lower cost of financing and investor diversification for the developers while investors will be able to better price the assets that can generate significant non-market linked, highly diversified, high yields. 

Financial aggregation mechanisms such as warehouse facilities have the potential to bridge the financing gap for Rooftop Solar in India, and while bringing efficiency and cost-effectiveness to these financing transactions. We call upon both Rooftop Solar developers and financial institutions to explore aggregated financing models to enable India achieve its target of installing 40 GW of Rooftop Solar installations by 2022.

- By Arun Gopalan and Sagar Gubbi,

Ecoforge Advisors Pvt Ltd, Bangalore, India

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