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Updated: May 16, 2013 10:59 IST

More power to solar energy

Sujay Mehdudia
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Driving force: A solar-powered car. Photo: K. Murali Kumar
The Hindu Driving force: A solar-powered car. Photo: K. Murali Kumar

The government has received a white paper from the industry suggesting steps to enhance solar energy projects

A demand for the creation of a separate window under the National Clean Energy Fund (NCEF) has been made by the industry. It may provide a boost to the country’s domestic solar energy projects by providing easy access to finance for such clean energy technology, the industry has stated in a FICCI white paper.

The paper on reducing the cost of finance for solar energy projects through NCEF has been submitted to the government for consideration.

The Fund was announced in the budget 2011-12 and is expected to be a step for funding research and innovative projects in clean energy technology. The white paper in essence, suggests innovative models for sharing and distribution of risk and cost of financing through NCEF as the cost of financing from the domestic Financial Institutions is high.

“Given the challenges faced by the solar industry in India due to the high cost of finance, the government’s decision to extend an interest subsidy from the NCEF for enabling lowering the cost of finance for renewable energy projects is a commendable step,” states the white paper.

The paper recommends that the interest subsidy be made available for eligible projects and routed through the lenders to such projects so that borrowers would get lower interest rates for the loans while the lenders directly receive the subsidy. The FICCI Solar Energy Task Force was launched in February 2010, with the launch of Jawaharlal Nehru National Solar Mission (JNNSM) to provide a platform for the solar energy sector to deliberate on policy and regulatory issues and advance interests of the sector at domestic and global platforms.

The document states that since solar energy projects are treated on par and as part of all power sector and categorised under power for categorisation and monitoring of sector exposure, it limits the availability of finance to the sector. Treating solar energy projects under a separate category (say, Renewable Power) or under a sub-limit, similar to RPO norms stipulated by Electricity Regulatory Commissions, will provide the much needed fillip to lending to solar energy projects. In view of the absence of a separate exposure limit to renewable energy, providing a thrust to the sector for creating additional funding mechanisms becomes an imperative.

An interest subsidy could be made available for eligible projects and routed through the lenders to such projects. Thus, borrowers would get lower interest rates for the loans (not a reimbursement) while the lenders directly receive the subsidy. Since number of projects seeking such interest subsidy will be relatively large, some selection mechanism will have to be implemented to select such projects.

One way to select such projects can be in line with the Ministry of New and Renewable Energy (MNRE) scheme for rooftop subsidy, where-in channel partners can directly seek subsidy on behalf of customers. In a similar way, the Concerned Nodal Agency (CNA) can have banks as channel partners where-in Banks would be able to seek interest subsidy directly on behalf of projects. Under such a mechanism, banks acting as Channel Partners would do their own due diligence on the projects before approaching MNRE or the CNA. This will ensure that only quality projects get such an interest subsidy.

Since there are no industry-wide benchmarked interest rates, domestic lenders typically lend on semi-fixed rate, that is, interest rate linked to a base rate which is reviewed from time to time. Such fluctuation in the rate of interest is borne by the borrowers. The lenders may be incentivised to provide fixed interest rate loan for three to five years by providing an additional interest subsidy (for instance, 1-2 per cent per annum higher than the regular interest subsidy). Cost of financing can also be brought down through a guarantee scheme that guarantees a certain percentage of exposure to banks.

Non-performance of this guarantee scheme can be funded through the NCEF. NCEF will need to create a corpus that will act as a backstop determined based on an assumed default rate. To prevent the issue of moral hazard, guarantee can be provided on 50 per cent of exposure to the bank.

The white paper is of the view that interest rates in India are high compared to other countries including developed and other emerging markets such as China. While loans from international organisations are available at a low interest rate, the hedging costs have impeded its utility. While multilateral agencies are willing to lend, they do not want to take the Rupee exposure. In case of floating rate, the hedging cost includes cost of hedging currency and cost of hedging interest rate. Both these costs lead to a much higher effective cost of debt. As a result, a fully hedged loan in foreign currency, for example the US Dollar, becomes expensive. It is suggested that while the fluctuation in the rate of interest in the case of international loans may be borne by the borrower, the currency should be hedged with government support.

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