India & Climate Change: Why Can’t Agencies Cooperate & Meet Solar Energy Goals?

If active measures aren't taken to reduce carbon footprint, India could miss its 2030 clean energy target by 20%

(Photo: iStock)

India is the third largest carbon emitter on earth with an outsized dependence on coal for meeting its energy needs. It also has an ambitious aim to achieve 50% of its installed power capacity from renewable energy resources by 2030.

However, investment in solar energy generation particularly, private investment— is under imminent risk of ceasing amidst a Mexican standoff involving the central government, state distribution companies (discoms), and financing risks faced by developers.

Recent analysis suggests India will likely miss its 2030 solar energy generation target by 20%, thus, emphasising the need for urgent action.

Risks and Challenges Ahead Of India's Solar Energy Market 

India’s solar energy generation is yet to reach its desired pace primarily because of land acquisition challenges and high financing costs. The underlying uncertainty increases because the state discoms (customers of solar energy generated) lack the financial wherewithal to enter into long-term arrangements.

This is not a peculiar challenge, however, and the template for a solution already exists in the framework developed by the National Highways Authority of India (NHAI) for road construction. With requisite political will, a similar solution can be found for solar generation markets.

To alleviate these challenges in road construction, NHAI completes land acquisition and obtains clearances (at its own cost) before even starting the bidding process for a project. These costs can then be recovered by making adjustments in the price at which the project is transferred to a private developer.

In doing so, NHAI (and in effect, the Central Government) guards against the most important risk in any road project ie, land acquisition. NHAI also guarantees creditors of the developer at least 80% of their dues in cases where the developer fails to complete the project and the concession is terminated (the quantum increases depending on reasons for default).

NHAI can then re-tender the project and recover these funds from a new developer. Practically, NHAI also works with creditors to locate new developers, easing financial constraints on its balance sheet should multiple projects fail at the same time.

Land Acquisition Cost: A Roadblock for Development Projects

The two factors combined have spurred the rapid development of road projects in India by justifiably shifting away land acquisition risk from developers, and construction risk from lenders. NHAI’s analogue in solar energy generation is the Solar Energy Corporation of India (SECI)—a PSU under the GoI’s Ministry of New and Renewable Energy.

However, SECI unlike NHAI does not have the mandate to manage land acquisition or temporarily backstop financing if the project goes south. As a result, private developers are constrained to take on the risk of land acquisition, delaying project timelines and increasing financing costs.

Clearly, this is an inefficient mechanism to distribute risks as it forces developers to price their bids (the price at which they would eventually sell power to state discoms) without a full understanding of land acquisition costs. The result is a winner’s curse where most optimistic bidders may win the project only to realise that they have priced themselves out of the market often backing out and creating an indefinite cycle of litigation and re-tendering.

SECI also does not guarantee creditors of the developer, unlike NHAI. For instance, if a developer fails on a road project, NHAI would terminate the contract repaying the project lenders and recovering the associated costs by tendering the project to another developer. For solar energy generation, this guarantee is provided by the state discoms instead.

This significantly dilutes the bite of the guarantee since state discoms are currently in a dilapidated financial state. The absence of substantive protection significantly increases the cost of financing for developers. Except for lack of political will, there appears to be no concrete reason why SECI cannot play a role analogous to NHAI in this case.

Can Centre Rise Up To Solve Financing Hurdles?

In this Mexican standoff, the Central government’s unwillingness to backstop land acquisition and financing risks erode India’s power generation capacity. The resulting increase in acquisition costs for power further denudes the financial standing of state discoms, making their guarantees less worthy.

As a result, financing costs and risks are significantly increased for developers. To end this standoff, one of the three parties needs to step up and backstop key risks of financing and land acquisition. Our argument is that the Central Government, given the force of its credit and a relatively stronger ability to push through land acquisition, is best placed to resolve this challenge. The following steps can be taken to this end:

Firstly, SECI like NHAI should acquire land for projects before initiating the tendering process. Secondly, SECI should guarantee creditors that if the project is stalled, it may then recover by transferring the project to a new developer. Pertinently, NHAI’s guarantee has succeeded in reducing costs to the extent that the guarantee has rarely been invoked, demonstrating that the very existence of a viable guarantee is sufficient to rationalise financing costs.

Over time, as the discoms’ financial situation improves, SECI can substitute its own credit guarantee for those of the discom. To ensure accountability, SECI may charge discoms a premium when selling power generated through solar energy plants.

In conclusion, therefore, if solar power generation in India is to succeed in the long run, the central government will need to provide an initial impetus. NHAI has shown an effective, commercially viable model for de-risking infrastructure construction enough to make it sustainable - it is time that SECI is permitted to adopt the same model for the health of our planet.

(Prashant is an attorney based in Delhi with experience of working on corporate transactions pertaining to infrastructure development and real estate. Abhay is a Masters’ (in Quantitative Economics) student at the Indian Statistical Institute, Delhi. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for his reported views.)