Report Finds Municipalities Could Boost Rooftop Solar Adoption Using Bonds

Climate Policy Initiative Proposes a solar municipal bond model that holds promise if regulations are changed and municipalities are willing and able to act as finance aggregators

February 26, 2018


Although India has so far installed nearly 1.6 GW of rooftop solar capacity, it needs to add another 38.4 GW more if it is going to achieve its targeted goal of about 40 GW of rooftop solar capacity by 2022.

A new report by the Climate Policy Initiative (CPI) proposes using municipal bonds to facilitate the achievement of this goal and details how such bonds could be designed and implemented to support the scaling up of rooftop solar across the country.

The proposed solar municipal bond model, CPI says, would remove three key barriers to the continued growth of the country’s rooftop solar sector, namely: the high upfront capital expenditures required for installation, perceived performance risk, and limited access to debt capital.

India’s plan to achieve 40 GW of rooftop solar its part of its broader goal of achieving 100 GW of solar capacity across the country by 2022.

A bottom-up analysis performed by Mercom in its 2017 Q4 Solar Market Update found that India’s rooftop installations grew by 56 percent year-over-year to reach a cumulative total of nearly 1.6 GW on December 31, 2017.

The report asserts that the solar municipal bond model could aid in achieving India’s solar installation goals by increasing the availability of debt for rooftop solar project developers and ultimately reducing the costs of rooftop solar project development by as much as 12 percent.

The CPI report was produced in collaboration with the Stockholm Environment Institute (SEI) and the Indian Council for Research on International Economic Relations (ICRIER).

The success of the proposed solar municipal bond model hinges on the ability and willingness of municipal bodies to play the role of finance aggregators for renewable energy projects.

Municipal bond funds would be disbursed to project developers using a Public Private Partnership approach that would make financing the responsibility of a municipal corporation or a Corporate Municipal Entity.

The model aims to facilitate greater access to debt capital markets for project developers.

The report says municipalities are strong candidates to play the role of finance aggregators because they have financial advantages in the form of superior credit profiles, access to public guarantees, and diverse revenue sources.

The report also suggests that the solar municipal bond model could mobilize significant untapped investment potential for the rooftop solar sector, for example, from domestic institutional investors. Issuing municipal bonds for solar could also help to build the capacity of municipalities to access the debt capital markets and use a similar innovative transaction structure for other projects as well.

Bond Issuer

Source: CPI

However, the proposed model comes does not come without hurdles and challenges. The report recognizes that there is no statutory mandate for using municipal corporations to promote electricity generation. “Though they would play limited roles as financiers in the proposed model, this may prove to be the most significant barrier,” the report stated.

In order to attract enough investors, the solar municipal bonds would need high credit ratings. Municipal bonds credit ratings are critical components to the success of the model, the study noted.

Moreover, municipalities would be required to provide a minimum equity contribution of 20 percent of the cost of each project, according to Section 12 (5) of regulations by the Securities Exchange Board of India (SEBI). Since most municipalities are already struggling to meet this investment requirement for basic infrastructure services, this regulation would again be hard to meet.

The absence of supporting regulations could also make it difficult for municipal corporations to act as financial companies, the CPI report observed. Under the proposed transaction structure, bond proceeds would be disbursed to projects through capital lease arrangements. Since capital leases are typically executed by financial entities, the absence of specific regulations could make municipalities reluctant to act as finance aggregators.

Another potential downside to the proposed model, the report noted, is that transaction costs could be higher than either self-ownership or third-party financing models, mainly due to the novelty of the approach. The sheer reluctance of municipal bodies to issue bonds could also curtail the success of the model unless current practices are revamped.

Despite all of its grey areas and potential pitfalls, the CPI report says the ‘radical and futuristic’ SMB model still has the potential to provide a boost to the country’s rooftop solar sector. 

The study concluded that if all potential barriers are addressed, the solar municipal bond model would “not only help rooftop solar to scale up its growth, but also help (enable) municipal corporations to use (a) similar structure for other priority infrastructure projects.”

The potential implementation of government regulations designed to support the rooftop solar sector is not impossible.

In December 2017, Mercom reported the Ministry of New and Renewable Energy (MNRE) released a proposal to overhaul the existing rooftop solar implementation mechanism by turning over responsibility for it to distribution companies (DISCOMs). Under the proposal, DISCOMs would be eligible to receive financial assistance to the tune of ₹234.5 billion (~$3.66 billion) based on their performance facilitating rooftop solar deployment.

Ankita Rajeshwari Ankita is an editor at where she writes and edits clean energy news stories and features. With years of experience in the news business, Ankita has a nose for news and an eye for detail. Prior to Mercom, Ankita was associated with The Times of India as a copy editor for the organization’s digital news desk. She holds a Bachelor’s degree in Psychology from Delhi University and a Postgraduate Diploma in journalism. More articles from Ankita Rajeshwari.