The Indian PV market got off the ground largely thanks to cash injections from foreign funding organisations. But where can the industry turn to for money as that support starts to wane?
If you are in the PV business then right now India seems to offer it all… almost. It has got the need, in terms of a rapidly growing demand for grid-connected and off-grid power, and the regulatory framework, in the form of the Jawaharlal Nehru National Solar Mission (JNNSM) programme.
What it has not got, however, is ready cash. Even though the US$19bn JNNSM has been hailed as the most expensive solar energy plan on the globe, the fact remains that most projects also need other sources of finance.
And that is not necessarily easy to find, since the returns from individual projects are far from assured. “Everybody's looking to get something going, but the benefits are not very attractive,” says Dr Henning Wicht, senior director and principal analyst of photovoltaics at IHS iSuppli.
So far, funding has largely come from international organisations such as the Export-Import Bank of the United States (Ex-Im Bank), Overseas Private Investment Corporation, Asian Development Bank and World Bank.
These either have a stated mission to support PV as part of emerging market development programmes, or are keen to open up export channels into India.
The Ex-Im Bank has been spectacularly successful in the latter regard; its support for US manufacturers such as First Solar and Abound Solar are widely credited with helping thin film gain a competitive advantage over crystalline-silicon modules in the Indian market.
These sources of funding cannot be expected to go on forever, though. And in any case “the volume you can get out of them is not going to match the expectations of the Indian market,” says Shayle Kann, managing director of GTM Research’s solar practice.
“Ultimately, it needs to be self sustaining, and Indian banks have not jumped into the market yet. It'll start changing when the large infrastructure companies start getting into projects.”
There are signs that this is beginning to happen. There are signs this is beginning to happen.
The New Delhi construction-to-power conglomerate Lanco Infratech, for example, has been slammed by the Indian Centre for Science and Environment after allegedly breaching JNNSM one-project-per-bidder rules and cornering 40% of phase 1 capacity through shadow affiliates.
Such major players might not have too much difficulty in getting Indian banks to cough up project finance, but to date the country’s banking sector has been loathe to bet on renewable energy.
“The problem is not equity, the problem is debt,” states Bridge to India managing director Dr Tobias Engelmeier. “Equity there is plenty of. The challenge is how do you get the debt. You can go for a fully equity-financed project, which most people don’t want to do, of course.
“But the leverage for debt isn’t that high; our expectation would be 15%, say, or 20%, and the interest rate would be 30% or something.”
Nevertheless, he says, some companies have gone down this route, particularly on smaller projects. A second option is to fund a project using debt, but based on recourse finance. This can attract an interest rate of just 11% or 12%, Engelmeier says.
The final option is non-recourse financing, which is very difficult for two reasons. One is that Indian banks are wary of the value of power-purchase agreements because they know the state electricity boards are usually short of cash.
And the other is that a lack of good irradiation data in India means solar projects might not provide the yields originally envisaged by their owners. The upshot is that non-recourse financing probably only accounts for funding in 10% of projects, Engelmeier estimates.
This is about the same as the level financed through pure equity deals but way below the 30% level for development bank funding or the 50% level for recourse financing.
And if getting funding for a single project is complex, the challenges are multiplied in the case of companies looking to become established as part of the nascent Indian PV supply chain.
As a project developer and operator, Azure Power has been able to get off the ground with backing from the Indian fund Helion Venture Partners and Foundation Capital of Silicon Valley.
It is not clear whether would-be manufacturers would attract the same level of interest from potential backers, however.
Facing up to facts?
“It's very hard to justify any manufacturing in PV right now,” cautions Kann. “You are fighting an uphill battle in convincing any investor to set up a manufacturing facility anywhere in the world, because there is so much over-supply of PV.”
This does not bode well for the JNNSM’s stated aim to help India take a leading role in solar manufacturing, even given a local content requirement for crystalline-silicon modules.
The funding challenge is something the market will have to face up to, however, if it is to meet installation rates required by its green power policies. It is time for the industry to start talking about solutions.
Indian Renewable Energy Ministry Secretary, Tarun Kapoor, said in a Bloomberg report back in December 2011 that the government has ruled out the imposition of a customs duty on imported solar modules. He adds that the government would “find some [alternative] way” to protect the local manufacturers.