Indian Solar Energy has received wide acclaim in national and international media for being a great success. However compared to other countries, the claims seem quite empty. Note India’s total solar power capacity is around 1 GW, in comparison one of the poorest provinces in China – Qinghai installed 1 GW in 2011 alone. Also JNNSM, India’s federal subsidy program has been plagued by numerous  problems.

India’s Solar Policy

India’s JNNSM Phase 1 which is targeting 1000 MW of Solar Power Capacity by 2013 is in jeopardy due to irrational bidding, financing and small size. The 150 MW Solar PV and ~500 MW of Solar Thermal Capacity which has been put to bidding is seeing massive discounts to the base price which would allow normal return. This will eventually lead to project winners abandoning these projects or delaying it inordinately, leading to a failure of the first phase. India Solar Thermal Bidding has already seen Massive Discounts from the base prices of Rs 15.31 set by CERC and the Solar PV project bidding for 150 MW is going to see equally ferocious discounts. Tata Power, which is India’s largest private utility is staying away from these auctions due to the above problems. Renewable Energy in India has a huge growth potential with Solar Energy the brightest Green Energy Sector. This has attracted companies in droves leading to hyper competition for the first phase of India’s Jawaharlal Nehru National Solar Mission. However huge competition in this subsidy driven sector is not necessarily good for the growth of Renewable Energy as irrational bidding by small players would lead to project failures.

State Banks in India  have already cast doubts on lending finance to these solar projects which depend on debt for 70% of the capital requirements. The convoluted nature of payments which involve the financially weak Electricity Distribution Companies, the trading arm of NTPC and  Developers has made the Banks wary of lending to the new solar sector. Also in case of Solar PV, the restriction of 5 MW per Business Group has made it unattractive for some of the  multi billion large utilities from taking part in the process. Note the involvement of large utilities is necessary for the development of the nascent solar sector. They bring in the required financial heft ,project management skills and power expertise. Winning of these projects by fly by night operators out to make a quick buck by flipping won’t do the government any good.

Indian Banks Reluctant to Lend to Solar Projects

Indian Banks have raised concerns over lending money to Solar Projects in India. The main problem arises from the fact that State Electricity Boards (SEBs) are counter-parties to the P0wer Purchase Agreements (PPAs) signed by the developers. Most of the State Electricity Distributors are in poor financial shape and have been known to frequently default on their financial obligations. This means that the cash flows of the Solar Project will depend on entities with poor financial reputation. Note the debt financing of the projects is non-recourse which means that Banks have only the Financed Project as collateral. With the Solar Energy still being almost 3-4 times more expensive than normal Electricity Prices, it means the banks will  suffer a big loss. With almost 70-75% of the estimated $2.2 Billion in the first phase of the PV projects to be financed by debt, this represents a big hurdle for the success of Solar Energy. The government needs to come out with some sort of arrangement of guarantees for the smooth functioning of the Solar Mission and instill confidence amongst investors and Banks.

Delays are quite endemic to Indian solar projects with almost 65% of the projects  awarded in the desert state of Rajasthan getting delayed and being fined. According to Bloomberg, India’s state owned giant oil and gas IOCL too was fined. India’s electricity companies broadly are missing their deadlines as well with most of the larger thermal power plants being put in cold storage. The reasons for India’s project malaise are many including:

i) bad governance and regulation

ii) endemic corruption which involve both the government and the private sector

iii) lack of quality

iv) high interest rates etc.

Solar power projects developers due to the lack of experience were bound to miss targets given the broader economic problems. One of the major repercussions of this increased riskiness is that financiers will stay away from solar projects which are capital intensive. This will be disastrous as the biggest hurdle in solar energy development is lack of capital. With banks seeing their portfolios turning risky they will shun solar debt financing, just as they are reducing their exposure to India’s power sector.