New Guidelines Spur India's Solar Mission Forward, But Financing Solutions Still Needed to Scale Up

India’s solar market heats up this month as the Ministry of New and Renewable Energy (MNRE) released its Phase 2 guidelines to govern the next batch of project bids for funding through the National Solar Mission (the Mission). The long anticipated guidelines will invite solar bids for the first time in two years, for a total of 750 megawatts (MW) of grid-connected photovoltaic (PV) solar plants. As the Mission moves into its critical second phase, these guidelines address some concerns raised during Phase 1, but the solar energy market still faces serious challenges to scaling up.

India’s solar energy market has picked up steam since its slow beginning a few short years ago. The National Solar Mission was kicked off in 2010, aiming to “build solar India,” with the goal to reach 20,000 MW of grid-connected solar by 2022. From 17.8 megawatts (MW) in early 2010, cumulative installed capacity reached 1.8 GW by August 2013. The solar market’s early success hit a speed bump during India’s recent economic downturn, however.

Given slumping solar sales of late, MNRE’s renewed effort to encourage solar growth in the country through these guidelines is more important than ever. With the current peak energy deficit hovering around 9%, it is clear that the status quo dependence solely on coal and nuclear is not sufficient nor sustainable. With prices being driven down, solar now costs less than the diesel back-up generators used so frequently in India during blackouts. As is true internationally, increasing India’s mix of energy sources to include homegrown clean resources like solar and wind reduces the strain on the infrastructure and increases energy security in a sustainable way.

Despite the Mission’s early progress, Phase 2 is the necessary scaling up phase for India’s solar market if it is going to meet its ambitious targets. Therefore, understanding barriers to technology growth and market expansion during the first phase are key to shifting the Mission successfully as it enters this significant period. NRDC and our partner, the Council on Energy, Environment and Water (CEEW), conducted extensive analysis and developed recommendations to improve the Mission and grow India’s solar ecosystem following the first phase. We laid out these recommendations in two reports, focusing on grid-connected photovoltaic (PV) in Laying the Foundation for a Bright Future (April 2012), and concentrated solar thermal technologies in Concentrated Solar Power: Heating Up India's Solar Thermal Market (October 2012).

Here are a few of the key guidelines that will shape the Mission’s Phase 2:

  • Size: Projects must be between 10 and 50 MW in size, with a maximum 100 MW allowed per company or bidder.
  • Timing: Bids are accepted through the end of November 2013. The power purchase agreements will be signed around February 2014. With thirteen month commissioning timeline, this batch of projects should be up and running by March 2015.
  • Viability Gap Funding (VGF):  VGF is a subsidy in the form of partial payment from the government to make the project financially viable. The VGF bids are limited to 30% of total project costs or a maximum of Rs 2.5 crores. The funding will be distributed in three tranches: 50% upon successful commissioning of project, and then 10% per year for 5 years following the date of commissioning.
  • Tariff: The tariff is set at Rs. 5.45 per kWh for 25 years or Rs. 4.95 per kWh (with an accelerated depreciation benefit). Although this tariff is lower than has been offered in the past, developers may still prefer this structure since the VGF is front-loaded to reduce the impact on the project’s viability.
  • Allocation: Bid allocation is still conducted through reverse bidding, a method that proved popular in Phase 1 due to the transparency it provided and how it drove down prices. This bidding is different however, as the developer will bid for lowest amount of VGF needed rather than the lowest tariff amount, which is set.
  • Domestic Content Requirement (DCR): A hot-button topic, the requirement that an applicable solar plant must use solar cells and modules manufactured in India, has been bifurcated. Solar developers may choose whether to apply for a project conforming with the DCR, with 50% of projects (375 MW) being awarded to those that are DCR-compliant. While this approach may not resolve WTO concerns raised by other countries, including the U.S., its technology-neutral wording will at least resolve the “thin film loophole" exposed during Phase 1.

While these parameters are a good foundation for Phase 2, addressing financing issues is key to spurring greater solar adoption across the country. Investments are expected to grow during Phase 2, and yet, the greatest challenge for solar energy is securing project financing. Even for smaller Phase 1 projects, developers struggled to raise capital from multiple domestic, international, and self-financing sources. Most domestic banks still perceive significant risks in solar investments. International and bilateral lending institutions that supported several Phase 1 projects remain interested in supporting additional projects but want more rigorous project selection requirements, such as balance sheets and vetted collateral.

Currently, NRDC and CEEW are organizing roundtables with experts and industry players across the solar market to identify and discuss the financial instruments available to address the barriers encountered by stakeholders within India’s solar market. Addressing both the cost of financing and the availability of financial instruments is key. With major information gaps and potential market failures, financial markets will not automatically warm up to the solar market without strategic interventions to create a financing ecosystem. We will report back with innovative financing possibilities for solar projects to enable the renewable energy market to reach its full potential across India.

Co-authored by Meredith Connolly, NRDC Energy Law and Policy Fellow