Praise for India solar mission, but banks face funding shortfall

April 27, 2012
An Indian solar farm

India's ambitious national solar program has catalyzed rapid growth in the solar market, driving down solar energy prices and demonstrating how government policy can stimulate clean energy markets, according to a new report. Further rapid progress, however, may be stymied as Indian banks reach the limits of their lending to the power sector, according to the country’s largest bank.

The new report, a joint effort by US-based Natural Resources Defence Council (NRDC) and India’s Council on Energy, Environment and Water (CEEW), points out that in only two years, competitive bidding under the Jawaharlal Nehru National Solar Mission has driven prices for grid-connected solar energy to nearly the price of electricity from fossil fuels. During that same period, cumulative installed solar capacity in India surged from 17.8-MW to over 500-MW.

"As the world's second-fastest growing economy, India has sparked a powerful solar market in only two years," said Anjali Jaiswal, senior attorney for the India Initiative of NRDC. "While the National Solar Mission still faces significant hurdles, India has already made important strides to attract new domestic and international players into the market, and lower the price of solar energy faster than most anticipated."

Access to sufficient funds for continuing the development of solar farms is certainly a significant hurdle.

The Indian central government’s stipulation that solar PV cells and modules deployed under the Mission be manufactured locally limits the amount of trade finance available. Now the chief executive officer of SBI Capital Markets, the investment-banking arm of the State Bank of India, has warned that lending to the funding for coal projects has pushed the Indian banking sector close to the limit of financing to the power industry.

SBI Capital Market’s S Vishvanathan told Bloomberg that most banks are reaching their 15 percent cap on domestic advances to the power industry and it’s unlikely they’ll seek to separate renewable energy into another category to allow more lending.

A shortfall in commercial project finance could stall the solar industry in India which, according to the Asian Development Bank (ADB), will need at least USD3.2 billion of debt finance in the next three years to complete already announced solar projects.

Government-backed development banks like the ADB, the International Finance and the US Overseas Private Investment have spearheaded financing of solar power projects in India and are training local banks on how to assess the risks involved.

“If solar is going to take off here, the commercial banks are going to have to do the heavy lifting,” Michael Barrow, director of infrastructure finance in the ADB’s private sector department told Bloomberg. “There’s not enough in our kitty or in the IFC’s or OPIC’s to finance this alone.”

The report from NRDC and CEEW, Laying the Foundation for a Bright Future: Assessing Progress Under Phase 1 of India's National Solar Mission, makes a number of recommendations to increase the bankability of solar projects but none address the short term problem with domestic landing caps.

The authors believe that to overcome obstacles in achieving the Mission's goal of 20-GW of installed solar capacity by 2022, the Indian government, private sector and other stakeholders will have to take measures to encourage financing, boosting domestic manufacturing, and creating a conducive environment.