Watt does it take: Financing India’s clean energy transition post COVID-19
By: The Social Tree
Tags: Impact Investing, Indian Economy, Innovative Finance, Renewable Energy, Solar Energy

2020 has been quite a year. While COVID-19 adversely impacted a lot of lives and economies around the globe (an earlier piece I wrote, focused on impact of COVID-19 on emerging economies), COVID has had a positive, accelerant impact on a number of a businesses. Some of these include businesses focused on e-commerce, logistics, B2B platforms and more importantly, renewable energy.

Interestingly, the demand for renewable energy spiked after the COVID-19 lockdown, with solar energy holding a substantial share in that demand. During the lockdown, business activity in India and around the world came to a virtual standstill leading to a sharp drop in demand for energy in general. However, the solar energy sector in India benefited from what is called a ‘must run’ status which compels power distribution companies to use solar energy, whenever generated — which explains the demand of renewables during lockdown, since a solar farm cannot be shut down in the same way as a coal or gas-fired power plant, when demand falls.

Source: IEA, Renewable electricity capacity additions by technology, 2015–2019 with October 2019 forecast, 2019–2020, IEA, Paris https://www.iea.org/data-and-statistics/charts/renewable-electricity-capacity-additions-by-technology-2015-2019-with-october-2019-forecast-2019-2020

India set an ambitious goal of producing 175 GW of renewable energy by 2022 which comprised of 100 GW to be generated from solar. However, COVID-19 related supply chain disruptions coupled with macro-economic risks slowed the rate at which India was otherwise progressing to meet its targets. As such, the Indian solar sector had been plagued with many problems, which now became only more pronounced because of the pandemic.

Solar Power Challenges in India

The Bridge to India Report shines light on some of the most critical challenges that the global solar sector faces, which largely also apply to India:

· Deteriorating financial condition of distribution utilities: COVID-19 deteriorated the financial viability of many distribution utilities in India leading to delayed payments to power generators, risk of curtailment of power, renegotiation of power purchase agreements and low profitability of existing solar projects.

· Delayed construction activity: In India most annual construction activity takes place before the monsoon season. Due to the pandemic, the pace of constructing new solar power plants was significantly impacted by supply chain disruptions, equipment shortage, labour movement restrictions etc.

· Trade barriers: 88% of the total solar modules used by India come from China. Such increased dependency on China proves rather dangerous in the times of a pandemic enforced lockdown, for the growth of the Indian solar market.

· Lack of competitive financing solutions: Solar projects under construction face numerous challenges including high capital costs, high execution risks and low revenues. These challenges need to be addressed by adopting better ways to finance solar projects in India.

India’s solar energy market has been riddled with too many inefficiencies for far too long now. It is time that this status quo changed. It is true that COVID-19 negatively impacted supply chains and strategic capabilities that could hasten India’s clean energy transition; but perhaps the (not so) good news is that ALL countries in the world suffered the COVID-19 impact. While it is expected that developed countries would be able to cope and emerge from this crisis faster, developing countries have historically shown more resilience during a crisis and eventually emerged stronger than they were.

Instances of resilience have already been visible in the form of bold policy initiatives taken by the Indian government recently. The proposed reforms in the Electricity Act, 2003 (post the outbreak of COVID-19) are a welcome move to ensure speedy and efficient transition to clean energy. The amendment contemplates formulation of a National Renewable Energy Policy to promote renewable energy and proposes a minimum percentage of purchase of power from renewable sources. It also proposes establishment of an Electricity Contract Enforcement Authority (a body akin to civil courts in India) to adjudicate all matters relating to power purchase agreements. This is expected to encourage timely and efficient resolution of contractual disputes in this sector. Another important change is concerning the ability of grid operators to withhold power supply to utilities when payment security, as agreed under a power purchase agreement, is not provided. Such amendments if approved, would go a long way in addressing the off-take risks in the Indian solar industry.

Way Ahead

India’s policy commitment to strengthen and scale the solar market has been promising. Time and again, the Indian government has been rolling schemes and incentives for promoting the growth of renewables in the economy. However, such policy commitment alone will not help achieve the 2022 target of 175 GW of installed renewable energy. So, watt will it really take?

The long-term future of this sector is based on its ability to attract risk tolerant/ catalytic capital that will not only help solar scale but will also ensure wider access to clean energy. Thus, here are a few financing models that could help in my opinion:

1. Layering the risk: Solar energy developers and generators in emerging markets need working capital to finance their operations but commercial banks consider lending to them too risky, especially when banks are less familiar with the solar sector. Instead, if the same risk could be off-set by first loss capital, solar energy providers will not only be able to operate better but also be better positioned to create the positive impact they seek to make. Case Study: SunFunder raised first loss layers to loan to 37 solar companies.

2. Grants with a twist: Catalytic capital could be provided in the form of a grant which could be structured such that it is invested with a defined return. However, at a pre-agreed point in time, the principal as well as the return could be slated for further reinvestment which may then act as a risk mitigation instrument for new investments. Case Study: Facebook’s revolving grant to SunFunder.

3. Pool in and make an impact: Private investors, both small and big, could pool their investments into either a solar energy focused alternative investment fund (AIF) or solar investment infrastructure trusts (SEITS) to subscribe to solar bonds issued by solar companies. So far, there aren’t many renewable/solar energy focused funds in India. Not only could such pools of capital ensure participation of small investors, but will also allow high net worth investors access a nascent asset class and related returns. Needless to mention, catalytic use of philanthropic capital in servicing the solar bonds will only encourage more private participation in financing the solar industry.

Amidst the current uncertainty, one thing is quite clear. Resilience is the new ROI. Businesses and investors should embed resilience in their decisions to move forward. As jolting and disturbing as this year was, 2020 also has been a year where we saw investors step up and take action against climate change. Giants like Amazon and Microsoft committed $ 2 billion and $1 billion respectively to renewable energy. To be deploying funds of that size, speaks volumes about where the puck is going. Now, the only question is are you ready to skate with the puck?