The securitization phase includes refinancing the warehouse line of credit by issuing asset-backed security bonds to domestic institutional investors, domestic lenders, or international investors (if currency risk can be managed by the implementing agency). The asset-backed security bond will be securitized against the loan pool. The proceeds from the securitization can be used to pay back the outstanding loans.
Meeting the Indian government’s target of 40 GW of rooftop solar power by 2022 will require significant financial resources, estimated at USD $34 billion. Even with a more realistic deployment target of 14GW by 2022, the solar rooftop sector would still need approximately $12 billion, of which $8.3 billion would be debt capital.
Low availability and low quality of debt capital are key barriers to the growth of the sector. These barriers arise because investors lack confidence in the credit quality of rooftop solar system project deals and lack interest in the small deal sizes on offer. In addition, delays in both lending decisions and disbursal of loans are also slowing growth.
The Rooftop Solar Private Sector Financing Facility addresses these barriers by bundling a large number of small projects together into one structured investment so that the aggregate deal size is large enough and of sufficient credit quality to attract more attention from investors, especially institutional investors. In addition, the Facility could demonstrate the commercial viability of the sector, which will reduce the perception risk of the sector. This securitization will help reduce the cost of capital compared to conventional financing and increase capital flows by expanding the investor base.
The Facility would add around 168 MW of capacity in the pilot phase over 2017-2019 and around 500 MW by 2022. It could bring an additional USD $500 million of capital to the rooftop solar sector, reduce the cost of debt by 0.5-3%, and create an additional 20,000 jobs over 2017-2022. Beyond 2022, the Facility has the potential to raise more capital by demonstrating the commercial viability of the sector and the attractiveness of rooftop solar asset-backed securities, and by supporting solar developers to reach a scale that enables them to attract commercial investment at attractive terms.
The proponents of the Facility are in discussions with potential investors and donors to take it forward. Once investors commit capital to the Facility, further work will be done on standardizing the power purchase agreement and loan documents, developing term sheets and prospectus, and selecting developers, customers, and projects. This Facility needs around $100 million of capital during the pilot stage from different classes of investors, including banks, development finance institutions (DFIs), and multilateral development banks (MDBs). This includes ~$30 million in concessional loans to reduce the cost of funding for rooftop solar projects. In addition, the Facility may need an external credit guarantee from donors.
The Facility has two phases: the aggregation phase and the securitization phase.
The aggregation phase involves building a warehouse line of credit that provides loans to creditworthy rooftop solar projects. The credit line will be available for 24 months and during this time, approved developers and aggregators submit projects. The developer then builds the projects, and signs power purchase agreements (PPAs) with the customers and operations and maintenance agreements with service providers. PPA payments would be used to pay back the investors in the warehouse line of credit. Project developers can draw dividends or redeploy returns as long as they meet certain debt covenants.