The Investors Theorem: Your Rooftop PV Solar Project

Over the past two decades, there have been many attempts to reform the electric utility market. The costly and complex operations of transporting energy have made utilities natural monopolies, while regulatory barriers and the high fixed costs of building and maintaining regional electrical grid infrastructure have also kept much competition at verge. Now with vigorous technological advances and new business models nimble players are becoming instrumental on providing consumers with cost-saving alternatives. With the rise of distributed forms of energy, such as rooftop solar power, and batteries, it’s become much more feasible to match individual demand for electricity with on-site production.

Financial Approach for Consumers to Integrate Solar Power

To behold the distributed energy, variant financing options let consumers save in a number of ways. They are offered either solar leases (leasing the panel and its energy for a fixed periodic payment) from a solar company, power purchase agreements (they purchase each unit of electricity produced by the panel at an agreed upon rate), or solar loans (the consumer, rather than the service provider, owns the panel; effectively a solar panel mortgage). In each case,
the cost per unit of electricity is not only cheaper but more stable when compared to rates charged by utilities.

On the other hand, rooftop plants are also becoming frugal as they produce clean electricity from the solar energy at about Rs. 7.0 per kWh without any subsidy. The Government is providing a subsidy of 15% on these plants to the beneficiaries which makes it further attractive and viable. This massive target can be achieved with support from banks to provide loans for installation of Grid-Interactive Rooftop Solar PV Plants to the loan seekers as a part of home loan/ home improvement loan.

The Department of Financial Services, Ministry of Finance has issued following advisory to all Public Sector Banks cites, “All banks are advised to encourage the home loan/ home improvement loan seekers to install rooftop solar PVs and include the cost of such equipment in their home loan proposals just like non solar lighting, wiring and other such fittings” In compliance, so far, eight Public Sector Banks namely Bank of India, Syndicate Bank, State Bank of India, Dena Bank, Central Bank of India, Punjab National Bank, Allahabad Bank and Indian Overseas Bank havee taken actions and issued the necessary instructions for their branches. The person interested in installation of Grid-Interactive Rooftop Solar PV Plants and seeking loan may approach these nearest Public Sector Banks.

Under which Competitive Model you can gain most from solar power

The parity demand for solar power brings new opportunities for consumers as well as for the industry. As more and more individuals and companies rush in to meet this demand, they will innovate and create various business models. The consumers will benefit as the competition and options increase. The basic business models are available in India:

• Straight forward sales model

A consumer can purchase a solar power plant or just solar power via different models. In the most common model, the consumer purchases a system as he would purchase any other electronics item, by making 100% of the payment upfront or financing the system through a bank.

This is the most common business model for solar deployment in India, an Engineering, Procurement and Construction (EPC) company, or individual components manufacturing company (such as modules or inverters) installs the system. The plant owner pays the full cost of the PV system upfront. This model (sometimes referred to as the ‘CAPEX model’) is pursued by the majority of solar companies, including TATA Power Solar, EMMVEE Photovoltaics or Moserbaer.

The main drawback of the CAPEX model is that the plant owner needs to be able to finance the entire plant. Solar has a heavily ‘front loaded’ cost structure, with a high initial investment and very low operating costs. A consumer might not have the required liquidity to finance a system upfront or get the best debt terms. Nevertheless, one advantage of this model is that consumers are eligible to claim accelerated depreciation.

• Renewable Energy Service Company (RESCO) model

Under the RESCO model, the consumer can install a solar power plant and not pay anything upfront. A power purchase agreement is signed between the installer and the consumer at a mutual price (tariff). In another model, the consumer can get a solar system installed at his rooftop and also get rent for subletting the rooftop. The consumer need not pay anything and he has the choice whether or not to consume the electricity.

Under this model, a third party investor comes in to invest into a PV plant on a rooftop and sells solar power to a power consumer. The consumer does not make any investment. If the solar power is viable, the consumer can benefit from savings on the electricity bill right from the start. Under this model, the investor and the consumer agree on a tariff (per kWh of solar power) and timeline of a power purchase agreement. Moreover, the investors typically offer a lower tariff than the current grid tariff, simultaneously the upsurge of this model’s tariff is lower than the expected hike of the grid tariff.

The most significant advantage of this system, apart from the fact that it entails zero investment, is that the RESCO is responsible for the operations, repair and maintenance of the system. It is not the consumer’s responsibility to ensure proper functioning of the system. As the size of project increases, this model becomes more feasible due to economies of scale. The size of project can either grow individually, or as a collection of small projects bundled together.

• Local micro utility model

Under this model, solar power developers could rent large, bundled roof spaces from building owners in a designated area, install PV systems and sell the power generated to the rooftop owners. The project developers would particularly target those consumers who might not have the resources or would be unwilling to invest in rooftop solar. Developers can offer building owners a lease income on their rooftop space.

This model allows project developers to bundle rooftop space in a community and thereby minimize the legal, commercial and technical transaction costs by increasing the size of individual plants. This makes the model especially useful for the deployment of solar for residential consumers.

The key USP of this model is that it unlocks a greater number of residential rooftops for PV systems. This is achieved by improving the economies of scale for the developer and providing an easy income opportunity to the rooftop owner.

All three models are already flourishing in the market, whereas with the alarm of new solar bonds several new models are also following the toes.

Component cost of rooftop PV systems
A rooftop solar PV system costs approximately Rs. 1,00,000 per kWp (kilowatt peak) including installation charges but without batteries and without considering incentives (which are discussed further down). The cost breakup for a 1 kWp system is given below:
Note 1: The above prices are for components from Tier 1 manufacturers with 5-year manufacturer’s warranty. In addition the PV modules have output warranty of 90% of rated capacity for the first 10 years and 80% of rated capacity for the next 15 years.

Note 2: We have not considered battery backup as that can alter the economics significantly depending on the extent of battery backup (autonomy) required. Not only do batteries add to the initial cost, recurring maintenance, and replacement expenditure, the energy loss on charging and drawing from the battery also adds to the cost of power. A battery backup would add about Rs. 25,000 to the cost of the above system.

Note 3: We have not considered Thin-Film modules as they require more installation area for the same capacity as Crystalline modules and are therefore not preferred for rooftop installations where space is usually a constraint.

MNRE Subsidy

The Ministry of New and Renewable Energy (MNRE) provides Central Financial Assistance through capital and/or interest subsidy (depending on the nature of the applicant). The summary of the subsidy scheme is provided in the table:

Note 1: The benchmark cost for setting up a solar PV plant is Rs. 170/ Wp (With battery providing 6 hours of autonomy) and Rs. 100 per Wp (without battery) i.e. if the actual project cost exceeds this amount then project cost will be deemed to be the benchmark cost for calculating the subsidy.

Note 2: Benchmark costs are for systems with 5-year warranty for all components (inverters, batteries, switchgear, etc.) other than PV modules which are warranted for 90% of output at end of year 10 and 80% at end of year 25. PV modules have to be made in India to avail subsidy.

Note 3: Capital subsidy is increased to 90% of benchmark cost for special category states (North Eastern states, Sikkim, Jammu & Kashmir, Himachal Pradesh, and Uttarakhand).

The subsidy calculation is illustrated in this table:

Variations in pricing

Prices of solar PV systems offered by various vendors can differ significantly. There can be several reasons for the variations in price, such as

• Overstatement of capacity – Some vendors advertise a rooftop system with 1 KW modules (solar panels) and a 5 kW inverter as a 5 KW system. As the electricity is generated by the modules this system only has a 1 kW capacity and the price offered by the vendor should be compared with other 1 KW systems and not 5 kW plants

• Brands – Products from Tier I manufacturers are typically more expensive but offer much better performance and reliability

• Certifications/Standards – Products that are certified and meet quality standards are more expensive

• Warranties – The price of the system can depend on the warranties offered.

o PV Panels – Industry standard warranty is

» 5-year manufacturer warranty

» 0-10 years for 90% of the rated output power

» 10-25 years for 80% of the rated output power

o Other systems – Inverters, mounting structures, cables, junction boxes, etc. typically come with a 1 year manufacturer warranty which can be extended to 5 years

Summarizing the total cost for 1 KW system in a table below:

*(The Average cost / watt is excluding taxes) Conclusion: The average cost of solar roof for Indian residences is Rs. 83/watt – Rs 91/ watt or $ 1.3 / watt – $ 1.5 / watt

*(The prices taken are the average prices, not the exact prices. The exact cost can vary and may lie in between the two prices)

Gross Vs Net Metering the Next Wave for Rooftop solar PV systems

One debate that continues to rage is the merits of net metering vs gross metering. The Net Metering adoption to play a long-term achievement goal for solar: i) net metering regulations are in place in most states; ii) net metering strongly supports viability which is important in a sector which is still yet to take off and iii) net metering is easy for consumers to understand. As viability strengthens, adjustments to net metering (eg. a medium term grid services charge) can ensure a fair deal for utilities as well as rooftop owners. Several states are experimenting with gross metering regulations. Provided these regulations also support viability to encourage adoption, these innovations are welcome.

In a shared statement, Upendra Tripathy Secretary Govt of India, MNRE said, “It is the speed of cost reduction in solar that gives us cause for optimism. In just 2010, solar power costs were around Rs 17/kWh. Whereas, on 4th November, 2015 it was confirmed that the lowest bid under the latest round of solar mission bidding for installations in Andhra Pradesh was just Rs 4.63/kWh. These cost reductions are also bringing the solar revolution home to rooftops of businesses, residences and other buildings. Solar rooftops are already growing fast with installed capacity set to be over 500 MW by the end of the year. 26 states have net metering regulations in place and a number of utilities are taking proactive steps to support rooftop solar. Net metered solar rooftop is now economic for commercial and industrial customers, without subsidy, in many states with more crossing this threshold every year. And the Government of India is leading by example by installing solar roof tops widely on government buildings, airports, railways network, educational institutions, residential sector and all types of buildings. This initiative will not only support the solar rooftop sector, but will also save energy and reduce costs for government. The Government is providing Central Financial Assistance upto 30% for selected categories and upto 70% for special category states including islands. The solar revolution is well underway and solar rooftop is poised for exciting growth. This growth will not just bring energy benefits and reduce carbon emissions, but will create jobs, skills and – by ‘bringing solar home’ can contribute to a change in the way people think about energy.”

Government squint into Investors risk for more customer value 

The biggest discouragement to investors is the problem of contract enforcement. Government at earliest needs to fetch these third party business models work. Tax incentives need to provide a level playing field for all investors to avoid deterring important sources for investment.

• Empower a local level quasi-judicial authority to resolve disputes related to denial of access to roof by the roof owner to the project developer.
• Government should offer a package of incentives to utilities to secure their active participation in rooftop solar
• Government should undertake or commission consultations on a credit default mechanism to boost investment.
• Provide waiver of stamp duty charges for registration of roof lease agreements (as the rooftop value is otherwise nil, this will not result in loss of significant revenues for the exchequer).
• Utilities to act as buyer of last resort (at discounted price) in case of disputed private power-purchase agreements.
• Devise all rooftop policies including any financial support measures so as to create a level playing field between different classes of investors including consumer owners of rooftop systems.
• Phase out accelerated depreciation or make the benefit available to all investors, and generation-based, when the current provision ends in 2017.

Trenching to decipher the crux, Indian Renewable Energy Development Agency Limited (IREDA) got alongside to vividly pronounce on the basic structures of financing available for today’s rooftop solar projects. On the financing structures of funding rooftop solars (i.e Home Rooftop solars, commercial rooftop solars etc), IREDA said that, Presently IREDA has a scheme for rooftop solar PV power projects with competitive interest rates for Industrial, Institutional and commercial sectors, supplementing the RBI notification dated 23rd April 2015 regarding categorization of renewable energy under priority sector lending up to Rs. 15 Cr. All applicants meeting standard eligibility norms of IREDA as well as scheme guidelines may opt for eligible project ownership models and revenue models. Applicants can opt for following revenue models for the project

I. Captive power generation by roof owners

II. Sale to grid under Net metering / Power Purchase Agreement

III. Sale to grid under gross metering Power Purchase Agreement

IV. Distribution Licensee / Govt. / Semi Government bodies / Institutions Applicants / aggregators after finalization of the revenue model shall ensure that project broadly follows ownership model where rooftop is owned either by single party or multiple parties. Further quantum of the loan from IREDA shall be 70% of the total project cost with minimum promoter’s contribution of 30% of the project cost. However, IREDA may extend loan up to 75% of the project cost on the basis of the creditworthiness of the promoter, track record, project parameters etc. as per the financing norms and operational guidelines of the rooftop scheme. Also the loan repayment period for rooftop loans shall be up to 9 years, with moratorium period of 6 to 12 months from the date of COD of the projects.

To the basic interest rates and benefits given to the people added to any disparity tax slabs for RESCO compared to single participant; IREDA’s asserts that as per IREDA’s rooftop scheme, the applicable interest rates for loans shall be in the range of 10.05% to 10.90% which may be further discounted up to 25 base points based on the credit rating of the applications. These interest rates are applicable for all rooftop projects either owned by single party or by multiple parties.

“To avail for a dictated sanction of loan, IREDA says that Applications for the projects under the rooftop scheme shall come through Rooftop Solar Aggregators. The aggregator can be system integrators, manufacturers, and large companies, ESCOs / RESCOs. Aggregators will aggregate the solar rooftop projects to be installed at single / different location. The minimum total size of the project should be 1000 kWp and each system capacity not less than 20 kWp. These aggregators shall be required to provide the credit rating from one of the empanelled credit rating agencies as notified from time to time. The aggregator shall be responsible for execution and operational performance commitments.“

Trusts, Societies, Individuals, Proprietary concerns and Partnership firms (other than Limited Liability Partnerships, LLPs) have been kept on other financing structures. Asserting on the procedures to take them under financial consideration, IREDA mentions that Trusts, Societies, Individuals, Proprietary concerns and Partnership firms can be considered for financing only if they provide Bank Guarantee / Pledge of FDR issued by Scheduled Commercial Banks as described in RBI Act for the entire loan. Analyzing the applicant on its probable loan eligibility become crucial, IREDA says that the application submitted by the applicants are analyzed for Techno-commercial viability of the project, external credit rating for the project, creditworthiness of the promoter(s), past track record and project parameters.

″With government’s aggressive commitment, Renewable in a whole has brought the future with tussling-hopes; a unified financial roadmap shall also be a catalyst to embolden the potential, IREDA being a registered Non-Banking Financial Company vigorously engages to promote, develop and extend financial assistance for setting up projects relating to new and renewable sources of energy for generating electricity and / or energy.  It also extends to maintain its position as a leading organization to provide innovative financing in Renewable Energy & Energy Efficiency/ Conservation and Environmental Technologies through efficient systems & processes for providing total satisfaction and transparency to its customers.“

All the projects in Renewable Energy (RE), Energy Efficiency/ Conservation and other environmental sustainable technologies, including Power Generation, Transmission, Renovation & Modernization, which are techno-commercially viable, are eligible to obtain finance from IREDA. The eligible sectors are as under –

♦ ŠWind Energy

♦ ŠHydro Power

Š♦ Solar Energy

Š♦ ŠBiomass including Bagasse & Industrial Cogeneration

ŠŠ♦ Biomass Power Generation

ŠŠ♦ Waste to Energy Š

Š♦ Energy Efficiency & Energy Conservation

ŠŠ♦ Bio-fuel / Alternate Fuel Including Ethanol & Bio -Diesel Š

Š♦ Hybrid Projects with RE Technologies

ŠŠ♦ New & Emerging Renewable Energy Technologies.

To not just notch on Rooftop Solar projects, IREDA has been actively participating to finance large or sub-large scale projects with key financial models (schemes) which comprises:

I. Project Financing

II. Equipment Financing

III. Loans for Manufacturing

IV. Financial Intermediaries

V. Financing of commissioned projects including takeover of Loans from other Banks / FIs.

VI. Additional / Bridge Loan against SDF Loan

VII. Loan against Securitization

The public financial institution says to also have new fund and non-fund based financing schemes which includes:

I. Line of Credit to Non-Banking Financial Companies (NBFCs) for on- lending to RE/ EEC Projects.

II. Short term loan assistance to RE Developers/Suppliers/ Contractors.

III. Bridge loan assistance to RE Developers against Capital Subsidies/VGF/GBI available under various State/Central Govt. Schemes.

IV. Policy on Underwriting of Debt/Loan Syndication.

V. Guarantee Assistance Scheme to RE Suppliers/ Manufacturers/EPC Contractors

VI. IREDA to take up the role of lead FI under Consortium/ Syndicated Loans/ Multi banking arrangements by charging Lead Fee

VII. Direct Discounting of GBI Claims Payable to Renewable Energy Developers under MNRE Scheme for Generation Based Incentive (GBI) for grid interactive Wind and Solar power projects

VIII. Direct Discounting of MNRE Capital Subsidy payable to Accredited Channel Partners and State Nodal Agencies (SNA) for installation of Solar Water Heating Systems

  Amid all the approaches for comprehensive solar initiatives, rooftop solar PV might get into the glance of paddling the solar fortune. The National Democratic Alliance government, which has made enhancing power generation a key policy priority, is looking to supply adequate power at affordable prices. The aim is to double electricity generation to two trillion units by 2019. India’s per capita power consumption, about 940 kilowatt-hours (kWh), is among the lowest in the world. When 280 million people in the country do not have access to electricity, the rural electrification program of the government has turned heads. In comparison, China has a per capita consumption of 4,000kWh. Developed nations average around 15,000kWh. Hence, individual understanding, viable policy and mass solar driven campaigns can get the roofs of India tact with solar PV modules.