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Renewable Energy Financing in India: Opportunities and Challenges, Shri Mukul Modi, Vice President, Project Advisory & Structured Finance, SBI Capital Markets Limited

The Indian Power sector has been adding capacity in the last 4-5 years in bigger quantum than earlier years, a fact evident by the increased number of projects which have achieved Financial Closure (FC). The focus of financiers till now has been majorly on large thermal projects and hydro projects, though some wind and mini hydro projects have also been financed. The progression of capacity addition from the end of the Xth Plan to September 30, 2010 and the projected addition till the end of the XIIth plan is depicted in Table 1.

Table 1: Capacity Addition Scenario (MW)

Sectors Xth Plan As on September 30,2010 Proposed by end of XIIth Plan
Thermal 86,014.80 106,518 187,700
Hydel 34,653.70 37,328 79,200
Renewable Energy
Wind 5,427.00 12,809 27,300
Small Hydro Power 538.00 2,823 5,000
Bio Power 795.00 2,505 5,065
Solar 1.00 18 4,000
Sub-Total 6,761.00 18,155 41,365
Nuclear 3,900.00 4,560 19,200
Total 131,329.50 166,561 327,465
Source: Ministry of Power and MNRE

As can be seen from Table 1, the renewable energy sector has received a major fillip in capacity addition, which is a result of policy interventions such as, RPO (renewable power obligations), fiscal incentives and concessions such as, feed-in tariff (for solar) and GBI/accelerated depreciation (in wind), besides capital subsidies.

The approximate renewable power to be installed during the XIIth five year plan (as per MNRE estimates) is approximately 18,700 MW, comprising 11,200 MW of wind, 1600 MW of small hydro, 5100 MW of cogeneration/biomass and 4000 MW of solar. This addition would need an approximate projected investment of Rs 145,000 crore and debt of about Rs 100,000 crore at a DER of 70:30.

Table 2: Debt requirement for RE projects

RE Source Capacity Addition (MW) Incremental Cost
(Rs. Cr./ MW)
Total Cost
(Rs. Cr)
Wind 11,200 6 67,200
Small Hydro 1,600 7 11,200
Biomass/ Cogen 2,200 6 13,200
Solar 4,000 12 48,000
Total 19,000 139,600
Debt Requirement 97,720

The immediate financing need is to fund solar projects which have been bid out under JNNSM, where the approximate debt required is Rs 9,000-10,000 crore and the FC is to be achieved in three months for Solar PV and six months for solar thermal projects.

Financing Models and Precedents

The financing for wind power and small hydro is relatively well established compared to biomass and solar. The financing for cogeneration plants has also been done in metal and sugar industries. Biomass as a model has been done selectively as raw material security has posed a challenge and continuous supply of assured raw material is the key issue. Projects which have a catchment area or their own captive source of captive raw material may find it easier to raise finance as compared to those who do not have such sources. The financing model would need to be established because of the recent bidding which has taken place in JNNSM. This article therefore proposes to look in greater depth into the financing constraints and associated risks which need to be addressed to finance solar projects. Table 3 below lists key parameters available for various sub sectors in RE.

Table 3: Comparative ease of financing RE Technologies

Solar Hydel Biomass Wind
Data Certainty - -
Raw Material Availability/Reliability - - -
Technology Maturity - -
Fiscal Concessions
Tariff Competitiveness -

Risks Assessment of Solar Projects

The key risks to be addressed in any solar project are as under:

  1. Choice of Technology
  2. Choice of Site
  3. Project Cost
  4. PPA
  5. O&M Requirements
  6. Tariff Bid
  7. Regulatory Issues

The choice of subset of PV technology and CSP technology and its adaptability to Indian conditions would be the critical decision point for developers. Based on site condition and DNI, the appropriate technology would need to be chosen carefully. Even within PV and CSP, there are a number of technologies such as tower, parabolic trough and dish in CSP and Crystalline, Thin Film and others in PV. Hence, within the main technology set, the correct subset has to be chosen.

The project cost and structure of project contracts would be the key for successful operations. The challenge is to get the right technology at a reasonable cost. If the solar tariffs, which have been bid at Rs 10.50-12.75 per unit, have to converge to grid parity towards the end of the XIIth Plan and the indigenous supply sources for panels, mirrors and other critical equipment have to be in place so that solar power tariffs reach closer to peaking tariffs from gas and hydro. To develop indigenous industry, a technology tie-up and manufacturing offset with equipment suppliers has to be achieved on the lines of technology transfer for supercritical equipment for thermal power.

Finally, the financing structure has to be in line with the project tariff, i.e., the debt service has to be structured in such a way so that the revenues accrued in a year and debt service are close to each other. This issue has assumed even greater importance in the light of the tariff discounts offered under JNNSM.

From a regulatory perspective, the continuity and clarity of policy is of paramount importance for sustained financing in the sector. The real take-off in the solar power sector can, however, happen only when a few projects are implemented successfully both in Solar PV and Solar Thermal as well as operated successfully. This would give a lot of confidence to all the providers of capital, be it equity or debt.

Constraints in Financing Renewable Energy

Renewable Energy projects, by definition, are classified as Power projects by Scheduled Commercial Banks (SCBs) and Financial Institutions (FIs). SCBs (i.e., excluding FIs like PFC, REC, IIFCL and IREDA) are governed by RBI norms as well as their board policies on advances to various sectors as they have to lend to multiple sectors. The limits by banks are available to a small extent to fund power sector as power sector advances are a large proportion of total advances and are close to breaching the requisite internal ceilings in many SCBs. Further, there is an ALM issue as majority of advances are required for 10-15 years against a 2-3 years deposit profile. Thus, unlike power sector institutions like IREDA, PFC, REC, the SCBs have a constraint in what they can allocate to power sector, in general and RE, in particular.

Financing Approach for RE Projects

To get over the constraints in financing RE projects, in general and solar projects, in specific and the following approach is suggested below:

Bank/Institution Debt:

  1. This approach involves plain vanilla debt structure with 10-12 years of tenure (around 1-2 years of reconstruction and moratorium followed by 9 to 10 years of repayments).
  2. To mitigate the issue of power sector exposure and ALM, one possible solution is takeout finance, wherein an institution or a green bank setup by GoI takes out the loan of SCBs 2-3 years post CoD of the project when the project track record and the repayment track record would be established. As most projects would be operational within 2-3 years, this would essentially mean a takeout finance, 5 years from the start of the project.
  3. Given the nation-wide policy level push for financing Solar Projects, the loans to this sub-sector could be structured as Priority Sector Lending. Such a move will prevent crowding out of solar projects, viz-a-viz, thermal and other RE projects within the power sector domain.
  4. Keeping in mind the levelised tariff stream adopted under JNNSM, a project alternative to (1) could be an equated annual installment (EAI). This is required as the tariff stream is constant and an amortising loan schedule will adversely impact the debt service in initial years.

Project Bonds:

  1. This approach involves sale of Project Bonds to Institutional investors with appetite for long term debt.
  2. This would generally involve larger amount in one issuance and is cheaper source of fund with limited recourse to Sponsors.
  3. However, a rating process for solar projects would be required and securing an Investment grade rating would be necessary to tap a larger pool of investors.
  4. The possible implication is that long term Project Bonds with tenure of 10-15 years in one or multiple tranches could be used in conjunction with Bank Debt having tenure of 5-7 years. Such a move will improve project DSCRs without tying down bank funds for long periods.

Dedicated Green Fund:

  1. This approach involves setting up of a dedicated Green Fund to finance and additionally, monitor the physical progress and operations of Solar Projects.
  2. The Green Fund could be setup as a Joint Venture (JV) between Banks / FIs and technology providers. Such a move will increase the comfort of lender community towards the new technology and also provide a captive market to the technology providers. A classic example of this kind is a JV between Banco Santander (Spain) and BP Solar to build and finance 278 plants with an investment of Euro 160 million and an aggregate installed capacity of 25 MW.
  3. Further, the funds collected from levying clean coal cess of Rs 50 per tonne could be used to build part of the corpus to capitalise the Green Fund.
  4. The Green fund can also be used to fund Project equity. The equity funding could be done in tranches in the form of Construction equity - with an exit at the end of the construction period, Medium term equity - with an exit 1-2 years after the commencement of operations and Long term equity with an exit 5-6 years after the commencement of operations.
  5. Another possible solution could be to pool green energy receivables and issue bonds in the form of PTCs guaranteed by green bank/multilateral institutions to retail and institutional investors so that the bond is credit enhanced. The objective, post CoD, could be to channelise household saving and institutional investment and preserve bank and institutional finance.

While the initial financing could be done by Bank/FI debt, the project bonds could be a viable alternative once the project has shown a track record for debt service for 2 to 3 years. The Green Fund is a medium to long term enabler to give boost to development of RE financing in India. Once a credible takeout mechanism is in place, the sector can also attract 5-6 years ECBs, which could be blended with Rupee Debt to be taken out later. This would increase the sources of finance.


The recent initiatives by Central and State Government have led to addition of substantial capacity in RE in the XIth five year plan and the trend is seen to be continuing further due to environmental and other strategic reasons. We need the significant stakeholders such as suppliers and developers to demonstrate that new technical and operating capabilities can be developed, which would enable RE projects to compete with peaking power in the next five to seven years. The closer we reach to grid parity, the more viable the sector would be, which would then automatically lead to access to capital. Along with reduction of tariff, the financial markets and instruments also need to be broadened to meet the aspiration of funding RE projects in the residual XIth and the entire XIIth Plans.

(The views and observations expressed in the above article represents the personal and independent views of the authors and should not be construed as representative of the views of the firm)