Financing India’s Solar Energy Infrastructure

Divya Taneja
Vol. 37 Business & Development Editor
Vol. 36 Associate Editor

India is aiming to become a renewable energy super power.  India’s current prime minister, Narendra Modi, has outlined grand plans for India to provide electricity to 300 million Indians living without power, and to prepare for negotiations ahead for a United Nations deal to address global warming concerns.[i] India’s Minister of State, Piyush Goyal, expects $100 billion to be invested in renewable energy in India in the next five years. To incentivize this massive growth in solar energy infrastructure, Goyal has doubled the tax on coal. Specifically, this new decision doubles taxes on every metric ton of coal mined or imported by India.  The revenue generated funds the National Clean Energy Fund and provides funding for clean energy while also introducing incentives to close dirty and inefficient coal plants that are older than 25 years.[ii] NCEF funds are earmarked for renewable energy projects, environmental projects and research and development.[iii]

The Launch of the National Solar Mission

On January 11th, 2010 the Prime Minister Modi formally launched the Jawaharlal Nehru National Solar Mission (NSM), under the brand name “Solar India.” The objective of the National Solar Mission is to establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible.

The Indian government has accorded very high importance to the solar mission, and in order to achieve its ambitious goals for renewable energy, the NSM aims:

  • to create an enabling policy framework for the deployment of 20,000 MW of solar power by 2022;
  • to ramp up capacity of grid-connected solar power generation to 1000 MW within three years – by 2013 and an additional 3000 MW by 2017 through the mandatory use of the renewable purchase obligation by utilities backed with a preferential tariff;
  • to create favorable conditions for solar manufacturing capability, particularly solar thermal for indigenous production and market leadership;
  • to promote programmes for off – grid applications, reaching 2000 MW by 2022 including 20 million solar lighting systems;
  • to achieve 20 million square meter solar thermal collector area by 2022.[iv]

India’s Investment Climate

Despite recent headwinds, India remains an attractive destination for foreign direct investment (FDI) on account of its solid domestic market, educated workforce and competitive labor costs. Although growth slowed down in 2011–12, this may be credited to the global downturn, in combination with the emergence of some domestic problems that are now being resolved. Going forward, India needs to enhance its business environment by improving the effectiveness of the rule of law and reducing corruption. A recent report indicated that recent corruption scams would harm FDI flows into India,[v] making it important to enhance administrative procedures and legislation to increase accountability. Such corporate governance maneuvers can increase transparency.  For example, the Government recently passed the long-due Companies Act 2012, which is expected to strengthen corporate governance and bring India in line with global best practices for corporate affairs.

In recent years, multinational companies have expressed concern about investment in India because of excessive regulatory bottlenecks. India must address the excessive burden of time and money caused by such regulatory compliance by reviewing which areas the Government can withdraw its regulatory oversight. Prime Minister Modi seems to be in favor of such changes, and it can be expected that drastic changes will be seen. Many have called for easing regulatory procedures governing land acquisition and licensing, and though some progress has been made, this remains an obstacle for FDI.

Intermittent supply is also problematic for renewable energy projects such as solar projects. Until technological advancements can stabilize the supply of energy by perfecting the means of storage, the predictability of revenue remains a challenge and is a concern for lenders.[vi] These risks may be mitigated in large part by subsidies from the government, though it has certainly been helpful that solar is becoming more competitive (in part due to the aforementioned tax breaks). Financing structures that give the host government a big role up front such as purchase obligations and viability gap funding are prime examples of how to address these risks.

 Green Banks and Green Bonds

Green banks offer low-cost capital for clean energy development at rates lower than what is available in private sector transactions, resulting in significant savings in delivering clean energy. These banks are public-private financing institutions that have the authority to raise capital through various means. These include issuing bonds, selling equity, legislative appropriations, dedication of utility regulatory funds, or foundation grants) for the purpose of supporting clean energy projects through financing tools such as loans and loan guarantees at below-commercial rates. Green banks obtain low-cost capital and then use that cheap money to support clean energy projects at rates lower than for purely private sector transactions, allowing for massive savings in the cost of delivered clean energy.[vii] Not only do green banks offer attractive interest rates, loan-loss reserves and other market supports, these innovative banks also draw on deep expertise from the public and private sectors to help demonstrate the profitability of clean energy investments.[viii]

Establishing a new institution of such scope is challenging. But adopting a green bond market would be a worthwhile initiative that would aid the NSM in reaching its goals. As explained by the World Bank, “green bonds are fixed income, liquid financial instruments that are easy to understand, and the funds they raise are dedicated exclusively to climate-mitigation and adaption projects, and other environmentally beneficial activities.”[ix] Green bonds provide investors an attractive investment proposition as well as an opportunity to support environmentally sound projects.

Internationally, numerous city and state governments have utilized green bonds. In April 2014, Paris issued a bond worth $829 million for 12 years for renewable energy and energy efficiency.[x] In the United States, Massachusetts issued a $100 million green bond (20-year bonds with interest rates between 3.20 and 3.85 percent) in June 2013, for projects to improve water and air quality and energy efficiency.[xi] The green bond market has seen tremendous growth, with over $16.6 billion worth of green bonds having been issued as of June 2014,[xii] and some institutions predicting that the green bond market could reach $20 billion by the end of 2014, or even $40 billion as compared with $10.1 billion in 2013.[xiii]

With respect to India’s NSM, green bonds could be beneficial by creating access to domestic and foreign capital along with lower interest rates.[xiv] The Indian Renewable Energy Development Agency (IREDA) may be a good agency to issue green bonds, based on its experience in this market.[xv] A recent study indicates that India could reduce its clean energy cost by as much as 25 percent by issuing green bonds.[xvi] With green bonds, the government could offer funds that are one-third cheaper than commercial bank loans with double the tenure, given the government’s higher domestic credit rating.


[i] Government aiming at 24×7 power supply: Narendra Modi, DNA India,  Aug.16, 2015, http://www.dnaindia.com/india/report-government-aiming-at-24×7-power-supply-narendra-modi-2011280.

[ii] Smiti Mittal, India Doubles Tax on Coal To Fund Clean Energy, Environmental Projects, Clean Technica, July 20, 2014, http://cleantechnica.com/2014/07/20/india-doubles-tax-coal-fund-clean-energy-environmental-projects/; Rajesh Kumar Singh and Abhishek Shanker, India Will Increase Taxes on Power-Station Coal, Bauxite, Bloomberg, Feb, 28, 2013, http://www.bloomberg.com/news/2013-02-28/india-will-increase-taxes-on-power-station-coal-bauxite.html.

[iii] David Russell Schilling, India Investing $100 Billion in Renewable Energy to Meet 35% Target by 2050, Industry Tap, Oct. 20, 2014, http://www.industrytap.com/india-investing-100-billion-renewable-energy-meet-35-target-2050/23504.

[iv] Dipankar Dey, Major Challenges before India’s Solar Energy Mission: A Political Economic Analysis, IUJ J. Mgmt., Sep. 23, 2013, available at http://ssrn.com/abstract=2329577.

[v] EY’s Bribery and corruption: ground reality in India, EY, July, 2013 at 12.

[vi] Id. at 173.

[vii] Ken Berlin et al., State Clean Energy Finance Banks, Brookings-Rockefeller, September 2012, available at http://www.brookings.edu/~/media/research/files/papers/2012/9/12%20state%20energy%20investment%20muro/12%20state%20energy%20investment%20muro.

[viii] Brad Copithorne, The spread of green banking paves the way for clean energy investments, Environmental Defense Fund (May 13, 2014), http://www.edf.org/blog/2014/05/13/spread-green-banking-paves-way-clean-energy-investments.

[ix] Green Bonds Attract Private Sector Climate Finance, The World Bank, Jan. 5, 2014, http://www.worldbank.org/en/topic/climatechange/brief/green-bonds-climate-finance.

[x] Sean Kidney, Île-de-France issues EUR600m ($830m), 12yr,

AA+ Green Muni, Climate Bonds Initiative, April 15, 2014, http://www.

climatebonds.net/2014/05/%C3%AEle-de-france-issues-eur600m-830m-

12yr-aa-green-muni-they-had-so-many-orders-one-hour.

[xi] Mike Cherney, Massachusetts Goes ‘Green’, Wall St.

J., June 4, 2013, http://online.wsj.com/news/articles/SB1000142

4127887324563004578525762271478512.

[xii] Ehren Goossens, Green Bonds Seen Tripling to $40 Billion on New Entrants, Bloomberg, June 3, 2014, http://www.bloomberg.com/news/2014-06-03/green-bonds-seen-tripling-to-40-billion-on-newentrants.html.

[xiii] Marc Roca, Green Bonds from Companies Seen Doubling to

20 Billion, Bloomberg, May 20, 2014, http://www.bloomberg.com/news/2014-05-20/green-bonds-from-companies-seen-doubling-to-20-billion.html.

[xiv] USAID India, Renewable Energy Finance in India.

[xv] The Indian Renewable Energy Development Agency Ltd., Solar Energy, Mar. 11, 2014, http://www.ireda.gov.in/forms/contentpage.aspx?lid=833.

[xvi]  Natalie Obiko Pearson, Green Bonds Could Cut India Clean Energy

Costs 25%, Bloomberg, April 23, 2014, http://www.bloomberg.

com/news/2014-04-24/green-bonds-could-cut-india-clean-energy-cost-25-report.html.