Foreign development banks (ADB, KFW, EXIM) to fund India’s massive solar plans with billion dollar loans

India’s government recently increased its plans to install 100 GW of solar energy by 2022, up from around 3 GW now. This would mean an investment of around $150 billion, if we take an average price of $1.5/watt for solar installation. However, India is a capital starved country and getting in this huge amount of funding won’t be an easy task. The demand is definitely there, there is also commitment from the government, but the funding remains the biggest hurdle.

Indian banks are already saddled with massive non-performing accounts (NPA) due to slippages in the power sector, where many plants are idling due to lack of fuel. Foreign investment is extremely important for funding this requirement. US EXIM Bank has already committed a billion dollars. Even before the visit of Mr. Modi to the USA, US EXIM Bank had been extremely active in the Indian solar sector given that First Solar had won large deals to supply solar power during Phase 1 of the JNNSM. Even now, SunEdision and First Solar are two of the largest players in the Indian solar market and even without Mr. Modi’s prodding, I think US EXIM Bank would have continued pouring money into India’solar sector.

Other development banks such as Germany’s KFW and ADB are also said to have agreed to lend a billion dollars each, to support the debt component of the Indian solar power plants. These banks already have a presence in the country in supporting various energy efficiency and renewable energy projects. But these $3 billion will not be enough to support even one year’s target of solar energy installation. Large western pension funds will be required to invest in India, since it will require around $20 billion a year for the solar target to be met.

Solar energy is a capital intensive business and lack of funding has been a major issue for solar energy development in India. The banks have been reluctant to invest for long tenors and lack of PPAs is another hurdle. High interest rates of around 12% increase the cost of solar energy. There is need for more funding by institutions such as IREDA who can refinance these loans by taking debt from international institutions like KFW, World Bank, ADB and others. There is also need to provide loans for 15-20 years, since the solar installations have a life of 25-30 years and generate cash from electricity sales during the entire period.