Addressing Two Key Financial Challenges to Spur Uptake of Residential Rooftop Solar

India’s target of 100 GW installed capacity for solar energy could remain unfulfilled if it fails to meet the sub-target of installing 40GW installed capacity in the rooftop solar Photo Voltaic (PV) segment. With only 2.8 GW of rooftop solar capacity installed so far, adding capacity at an average of more than 9 GW per year to meet the 2022 target seems a tall task. Despite recent efforts by the government and favourable price movements, the adoption of residential rooftop solar PV remains low. Why is this so?

 One issue is the high costs of residential rooftop solar PV system. Despite the sharp decline in solar PV costs, the per unit generation of electricity from residential rooftop solar installations (3.6 rupees/kWh) remains costlier than the larger utility-scale (2.84 rupees/kWh) solar projects. These utility-scale projects generate solar energy, which is purchased by the distribution utility. In comparison to residential-scale solar projects, utility-scale projects enjoy more favorable land prices, economies of scale due to the large project size, and access to low cost financing. 

In a recent analysis of consumers’ perspective in five cities in India and covering 1808 households, we found that financing rooftop solar for the residential customers is a major concern.  Only 5 percent of the households in our study applied for loans from banks and financial organizations.

Initiatives by the Central government and the Reserve Bank of India (RBI) have sought to promote solar financing – particularly through central financial assistance in the form of capital subsidy, and identifying solar loans as a priority sector for lending.  Yet, this has not resulted in large-scale adoption of solar rooftop among the residential consumers. In February 2019, the Central Government developed a Rooftop Solar Phase II scheme which continues to provide capital subsidy, and in addition, incentives to the distribution utility based on the added capacity of rooftop solar PV.

Our study of 1808 households finds that consumers face two key challenges with existing financial options.  One, existing financial options are not customized to address the local contexts in different cities. Factors like varying electricity tariffs, net-metering rates, and financial settlement mechanisms differ for each city. Due to these differences, there is significant variation across states in the time taken to recover the costs of the rooftop solar system.  However, banks and financial organizations offer loans at a uniform rate of interest for customers across all states, without taking into account these variations.  

Two, the available financial options are not designed to address the needs of a residential consumer. For example, while granting loans for residential rooftop solar projects, banks typically demand that the house be provided as a collateral for the loan. Since the solar PV panels have no resale market, solar loans are seen as a high risk for the banks, in case of default by the consumers, or if the solar PV systems fail. This high collateral is a significant disincentive, given that a 2kW rooftop system can cost anything between Rs.1.5 lakh and Rs.2.5 lakh, and homes costs several times more.

Innovative models have been suggested in recent years, which have the potential to address these challenges. One such model is where rooftop solar vendors partner with financial organizations for consumer debt financing.  This model helps address the problem of default due to non-performance, by making the vendors responsible to service the consumers till the end of the repayment period of the loan, and providing flexibility in the rate of interest for the consumers. Another model suggested in the context of Delhi is on-bill financing of rooftop solar systems. Under this model, the consumers receive a loan to cover the cost of capital associated with installing the rooftop solar systems. The consumers repay the loans as Easy Monthly Installments (EMIs), by monetizing the savings that accrue from the reduced electricity consumption through installing rooftop solar systems. This mechanism addresses banks’ concerns with the risk associated with payment defaults, as also the issues arising from the specific rates of tariffs and regulations that govern Delhi.  This is because the EMI payments are linked to the savings from the specific tariffs applicable within that state.

The consumer debt financing model discussed above does not adequately address the issue of the risk undertaken by the bank, since it simply passes the risk on to the developers. The second model is still to be proven as a viable model, even though it addresses the local context-specific issues that need to be addressed while designing an alternative model. The main challenge is to bring distribution utilities to be part of such arrangements.  Since the rooftop solar systems are not comparable to other consumer goods, customized loan offers aligned with the specific goals of the extant policies and regulations could improve the uptake. 

In this regard, regulatory mechanisms should address the unique barriers to the uptake of residential rooftop solar and create an enabling environment for that appropriately signals the policymakers’ intent to investors in the sector. Further, it should be ensured that these mechanisms are simple and accessible to consumers. Measures such as customized offerings, competitive rates, and convenient processing of rooftop loans requests could facilitate faster deployment of systems. This process could require re-assessing many different aspects of the existing regulatory framework for rooftop solar. It will also require creating greater awareness among the members of the financial community. Our study finds that improving consumers’ experience in accessing finance will greatly improve the uptake of residential rooftop solar, which can be achieved by addressing the issues we have highlighted. 

This article includes inputs from Amala Devi, Senior Project Associate, WRI India

| Article published on 22/05/2019 by Moulin

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