Original posted on Switch Board (Natural Resources Defense Council Staff Blog)
The renewed sense of optimism within India’s solar market sparked by the announcement of the Phase II guidelines of the National Solar Mission (NSM) last month was palpable at the recent Intersolar conference in Mumbai as companies announced plans for mega solar power plants.
Along with the NRDC-CEEW roundtable on solar financing held in New Delhi last month, the Intersolar conference was instrumental to giving industry stakeholders an opportunity to discuss challenges impacting India’s burgeoning solar market. Despite the evident optimism, the general consensus from both stakeholder gatherings is that obtaining financing for solar projects and reducing the cost of capital pose major obstacles to scaling solar in India.
Based on their experiences during the Mission’s first phase, developers have provided many insights into the financial barriers to grid-connected large-scale solar projects and how to overcome them. The following themes emerged from our roundtable discussion about Phase II of the Mission and the way forward to reduce the cost of capital and scale solar in India.
Viability Gap Funding vs. Generation Based Incentive
Viability Gap Funding (VGF) under Phase II of the NSM aims to provide a capital grant that meets the funding gap to make solar projects economically viable. The VGF mechanism allows developers to seek financing for their projects up front and allows the government to provide one-time support instead of spreading it over 25 years (as in Phase I). Since the VGF covers only a small part of the financing required for a project, developers theoretically need to generate power efficiently and consistently in order to achieve a decent return on investment (RoI) from the project over its projected 25 years. Due to the uncertainty surrounding its impact, however, the upfront VGF does not appear to reduce the cost of capital required for projects under NSM Phase II.
The Generation Based Incentive (GBI) pays per kilowatt produced, which decreases over time. The GBI, unlike the VGF, directly incentivizes improving the efficiency or output for a project. Additionally, the minimum project size (10MW) under the Mission’s second phase – intended to ensure that relatively serious and experienced developers would bid under the project – contributes to reducing the skepticism attached to generation of solar power under NSM Phase II’s VGF.
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