Challenges of financing solar projects in India


India generated about 200 MW of solar power in 2011 and aims to achieve an annual 1000 MW by 2013. With various solar power projects being commissioned across the country, the future of solar energy in India seems quite bright. Yet, despite the immense potential of this industry, one of the major challenges that the players face is in procuring finance for solar projects. Experts are of the opinion that despite solar being a lucrative market to invest in, financing solar projects is filled with challenges as it remains a complex process due to the lack of experience. It is still viewed as a risky and expensive option for power generation.

By Richa Chakravarty

Wednesday, May 09, 2012: Financing options

Due to the government’s support, solar projects are an attractive investment option. However, the banks are still not comfortable with the proposed solar power purchase agreement (PPA). Hence, solar players rely more on non-conventional sources of financing like support from the government. Here are some sources of finance for solar power projects:

Equity finances are usually given by investors in exchange for an ownership share in the business. The equity portion can be directly invested by the owner or financed through global venture capital and angel investors. The main advantage of equity financing is that the business is not obligated to repay the money. Instead, the investors hope to reclaim their investment out of future profits (from the project). The involvement of high profile investors may also help to increase the credibility of a new business.


Debt financing comes in the form of loans that must be repaid over time, usually with interest. This is a good option as it allows large industrial houses to get lower rates of finance using their existing relations with the banks. However, it puts the company’s balance sheets at risk and the entire burden of the project failing or under performing falls on the developers.

Project financing is a loan structure that relies primarily on the project’s cash flow for repayment, with the project’s assets, rights and interests held as security. Project finance is different from traditional forms of finance because the borrower primarily looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in project financing, the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project.

Apart from conventional means, businesses can also avail finance from:

Renewable energy (RE) funds: There are a number of loans tailored for RE projects. The Indian Renewable Energy Development Agency (IREDA) gives financial support to specific projects and schemes for generating electricity through new and renewable sources and for conserving energy through effective energy efficiency programmes.

EXIM financing: The United States Export Import Bank provides financing for projects which import a substantial part of the project components from the US. Also, equipment funding in the form of lines of credit is available for project developers that source machinery and other components. EXIM arms of many countries provide such sources of finance for equipment originating from them.

This option provides soft loans for a number of solar PV based power generation projects and products.

Government agencies and commercial banks: Government agencies like Power Finance Corporation, Rural Electrification Corporations (REC) and other interested commercial banks also offer loans to companies. Governments, bilateral and multilateral organisations offer grants at favourable rates to promote renewable energy.

Foreign funding: International banks also offer loans for viable projects. Hence, companies can approach and tap these international institutions for financing at lower rates of interest.

Criteria for obtaining finance

Though Indian commercial banks and lending institutions are still reluctant to fund solar projects, institutional investors and private equity have been more active in this sphere. According to a report by Mercom Capital, a clean energy consulting firm, India received US$ 95 million (Rs 5 billion) in venture capital funding and over US$ 1.1 billion in large scale funding for solar projects in 2011.

Like all traditional power projects, the two main parameters that are to be fulfilled by a company in order to successfully qualify to obtain finance are: establishing project feasibility backed by a detailed project report, and showcasing a good track record to execute the project. Feasibility of a project is determined by ensuring a favourable internal rate of return and a good debt service coverage ratio. Also, for solar energy developers to obtain finance, PPA must be signed for the energy generated. The developer’s credentials and the overall bankability of the project are also taken into consideration.

While companies availing financial assistance are assessed on the parameters mentioned above, the interest rate and tenure varies depending on the lender as well as the developer. These factors vary based on the strength of the project and the returns perception. Generally, the tenure of financial loan is between 5-15 years. Also, the interest rates from commercial banks and local financial institutions may vary from 11-13 per cent, whereas financing through foreign sources or soft loans may bring down the interest rate to the range of 8-10 per cent.

Challenges faced

The major challenge faced by the solar companies while trying to obtain finance is earning the bank’s confidence in the technology and the viability of the project in the absence of established track records/experience. In many instances, therefore, the lender prefers financing based on the strength of the developer’s balance sheet rather than on project financing models. However, the Ministry of New and Renewable Energy (MNRE), over the past year, has played a major role in educating lenders about the bankability of the PPAs for solar projects, the risks involved benchmarking solar companies, thereby providing technical confidence to the lenders.

Lending institutions have their own set of risks and challenges associated with funding these solar projects in India. Investors have consistently indicated that in the renewable energy sector, the policy design is a key factor in making actual investment decisions. Here are some of the reasons that make lenders hesitate while offering finance:

Technology: Financial institutions face difficulty in financing solar projects as the technology is not yet globally well established. This makes it difficult to correctly assess the risks and viability. For example, newer technologies like thin film and concentrated PV are still unproven technologies and, therefore, lenders hesitate to fund projects based on them.

Estimation of solar radiation: The returns on a solar project are highly sensitive to radiation levels. High quality solar radiation data is a pre-requisite for proper market assessment and project development. This assessment is an important activity and typically requires several months studying the ground measurement of solar radiations. Any error in assessing solar radiation can prove to be risky for future returns.

PPAs: A PPA is signed between the developer and the state electricity distribution companies (DISCOMs). Here, state DISCOMs have to make payments to the developer for generating power. Financial institutions have also expressed fears about issuing loans for solar projects based on concerns that the technology may not perform as expected and that developers may not get paid by financially troubled state electricity distributors.

Some viable solutions

Industry experts feel that responsible government agencies need to ensure bankable PPAs to enable high payment security. Also, banks should be encouraged with incentives to invest a certain percentage in renewable energy—similar to the renewable power purchasing obligation (RPPO) imposed on the utilities. This kind of support till a certain stage of implementing the solar mission will go a long way in securing finance for project developers. The government should strengthen the REC mechanism so that projects become bankable. Also, for new entrants, it is suggested that they work with renowned suppliers/EPC contractors so that the financial company is confident of the commitment from the EPC provider and offers finance to the developer on easier terms.

Why fund raising is difficult

The solar industry in India has been facing several challenges when raising finances. This has been primarily because of:

  • High capital costs
  • Low plant load factors
  • Intermittency or infirm nature of the power generated
  • Policy and regulatory issues
  • Knowledge barriers among financing institutions on renewable energy technologies

Some financing institutions

  • Asian Development Bank (ADB):
  • Deutsche Investitions-und Entwicklungsgesellschaft GmbH (DEG):
  • DBS:
  • ICICI Bank:
  • Infrastructure Development Finance Company (IDFC):
  • International Finance Corpoartion (IFC):
  • Infrastructure Leasing & Financial Services Ltd (IL&FS):
  • Indian Renewable Energy Development Agency (IREDA)
  • Power Finance Corporation Ltd (PFC):
  • Proparco:
  • Rabobank:
  • State Bank of India (SBI) :
  • SBI Capital Market Ltd (SBICaps):
  • Yes Bank:
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