Reinvigorating investment in solar energy

By Saurabh Bhasin and Avirup Nag, Trilegal
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India’s solar and wind energy industries have developed very differently, with the former lagging considerably behind the latter. While wind energy has grown tremendously over the last decade – the first quarter of 2011 alone saw investments of about US$586 million going into the sector – solar energy is still at a nascent stage.

Although technological advancements in wind energy have helped fuel the growth in the sector, the real impetus for investment has come from the various incentives and policies put in place by the central and state governments.

To facilitate the growth of the solar energy sector the government issued the Jawaharlal Nehru National Solar Mission (JNNSM) Guidelines in June 2010, but it has not had the desired impact.

Saurabh Bhasin Counsel Trilegal
Saurabh Bhasin
Counsel
Trilegal

Risky investment

One of the main reasons for this is that investment in renewable energy projects in emerging markets like India is widely perceived as high risk – particularly during the development and construction phases of projects. In addition, the long gestation periods of solar projects have been a cause for concern for the banks and financial institutions. This, coupled with the inherent technology risks, a lack of reliable data, and increasing capital costs has meant that solar project developers have not been able to procure adequate funding (either from equity or debt).

However, the JNNSM guidelines lack the flexibility to allow innovative structures that could help raise funds. For instance, they prohibit a change in the shareholding of the developer’s company and require promoters to hold a controlling shareholding (i.e. at least 26% of the voting rights) for at least one year after the commencement of power supply. This restriction not only locks up the developer’s equity but also, to an extent, restricts other strategic investors from investing.

Faced with similar limitations in attracting funds, other jurisdictions have encouraged the use of various innovative structures to facilitate effective risk sharing. An example is the “partnership with a flip” structure, where a developer or a consortium of developers (which could include an equipment manufacturer or engineering, procurement and construction/operations and maintenance contractors) develops a solar project, and sells it on to an investor (who could be an independent power producer).

This structure is already used in India in the wind sector, where developers (who are better positioned to take on development and construction risks) develop projects and transfer them to investors (who are usually generating companies and therefore are more comfortable taking on operational risks as opposed to construction risks).

Buy Indian

Another major impediment in the development of solar projects in India is the requirement under the JNNSM guidelines for project developers to source equipment from local manufacturers. The Indian solar panel industry is neither the technology leader nor does it have sufficient capacity to meet the targets proposed by the government for solar energy generation. In addition, the evolving nature of the technology inherent in the solar sector poses one of the main risks for the industry and while joint ventures and collaborations with foreign solar panel and equipment manufacturers may eventually help build manufacturing capabilities in India, this will take considerable time.

Avirup Nag Senior associate Trilegal
Avirup Nag
Senior associate
Trilegal

There is also an emerging global trend for solar panel manufacturers to acquire direct holdings in downstream solar energy projects to assure a long-term market for their products. The domestic content requirement under the JNNSM guidelines discourages such direct investment by foreign equipment manufacturers in downstream Indian projects.

While the government is perfectly justified in wanting to develop local industry, it is likely to restrict the pace of development of solar energy projects in India in the short term. One option to get around this may be to incentivize foreign solar panel and equipment manufacturers to set up industrial units in India to cater to the Indian market.

A second wind?

One of the primary reasons the wind energy sector has thrived is that the sector remains fairly unregulated. This allows innovative structures to be adopted and makes it easier for developers to procure funding and share risks.

In order to attract investment in the solar energy sector, the government may want to take a more liberal approach regarding transferability of solar projects as long as the minimum financial and technical requirements set by it are met. To trigger faster growth, the government could also, at least in the short to medium term, allow the import of technology and equipment, while incentivizing foreign solar panel and equipment manufacturers to invest in India.

Saurabh Bhasin is a counsel in the Delhi office of Trilegal, where Avirup Nag is a senior associate. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 140 lawyers, some of whom have experience with law firms in the United States, the UK and Japan.

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