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The Viewpoint – Is Indias Solar Policy Framework Investment Grade

The Viewpoint – Is Indias Solar Policy Framework Investment Grade

Bar & Bench

By Avirup Nag and Amit Maheshwari

The Government of India (GoI) has set some ambitious targets for development of solar energy projects in India.  In this regard, the GoI has formulated the Jawaharlal Nehru National Solar Mission (National Solar Mission) and also issued the Jawaharlal Nehru National Solar Mission Guidelines (the JNNSM Guidelines) which sets out the implementation strategy for the National Solar Mission. Apart from the National Solar Mission and the JNNSM Guidelines there are various other legislations that governs solar energy sector, such as Electricity Act, 2003, National Electricity Policy, 2005, National Tariff Policy, 2006 and various regulations issued by Central Electricity Regulatory Commission (CERC). Various states have also announced their respective solar policies, providing for feed-in tariff and other support (like development of infrastructure and provision of waste-land for development) for solar power projects. 

Financing woes for Indian solar power sector

Private equity and institutional investors have been more active in financing solar energy projects, while commercial banks and other lending institutions have been generally more reluctant to fund such projects due to the perceived risks associated with technology and regulatory structure governing the solar power sector. In the past 5 years, the Indian solar energy sector has attracted PE and VC investment of about Rs. 11.8 million – this translates to about 30% of the total investment made in the renewable energy sector.   

Investors have consistently indicated that in the renewable energy sector the policy design is a key factor in making actual investment decisions. Therefore, an investment grade solar policy framework is a critical factor for unlocking significantly scaled up capital flows into the solar power sector. To be investment grade, a solar policy needs to tackle all the relevant factors that the investors/project developers assess while considering an investment.

This article aims to analyse India’s solar policy framework to see if it satisfies the conditions which, in our experience, most investors consider key attributes of an investment grade solar policy.

What constitutes an ‘Investment Grade’ solar policy?

In our understanding, to be investment grade the policy framework needs to:

  • provide incentives that makes a difference to the bottom line and improves return, making the investment commercially attractive;
  • provide incentives which are sustained for a period which is long enough to reflect the financing horizons of the project or the investment; and
  • set-out a clear regulatory framework, based on binding targets or implementation mechanisms, and build confidence that the regime is stable and can provide the basis for long term capital-intensive investment.

Apart from the features mentioned above, there are various other important features of the policy framework which also influence investment decisions – some of the key ones are discussed below. 

Does the policy framework establish clear objectives/targets and enforce them?

Till such time solar power achieves grid parity, an investment grade policy framework should provide a mandatory renewable energy targets/purchase obligations to create a market. Further, while mandatory renewable energy targets/renewable purchase obligation boosts investor confidence by creating the market demand, a clear enforcement regime setting out the penalties or consequences of non-compliance is also required.

Policy coverage: Does the policy framework cover all elements/risks

Before taking any investment decision, investors usually review all aspects of project development (such as from the planning and approval process to the final sale of power to the end-user) to assess the overall project risks. Risk assessment will include the structure and regulation of the solar power sector, laws and regula­tions governing planning and approval processes, and regulation around infrastructure (grid and distribu­tion), etc. Therefore, policies, rules and regulations that govern the development and operation of a solar power project as a whole must be in place and stream­lined.

Incentive or support mechanism

Within the overall solar policy framework, government support or incentive mechanism is the key factor in attracting investments. While debates may rage around the best system, and indeed there may be no perfect system, till such time solar power achieves grid parity existence of incentives is important to attract investments.

Stability and duration

As with most infrastructure projects, solar power projects too require high upfront capital investment and have a long payback period. Therefore, confidence that the policy terms will be stable during the life of the investment and clarity regarding circumstances that will lead to policy change are important.

Keeping things simple

Investors and project developers have consistently emphasised the need for straightforward policies, support mechanism and regulations. The greater the complexity and number of policy variables and implementing agencies, greater are the risks that need to be managed. Most investors have to explain to their credit committees how a support mechanism or regulatory environment works, particularly as this may be a crucial factor in attractive project economics. If this is complex, it is likely to make things more difficult for the investors.

Is Indian solar policy framework ‘Investment Grade’? 

The recent euphoria over the National Solar Mission is not necessarily echoed by all project developers, investors and lenders. This mismatch clearly indicates that there is further scope of improvement in India’s solar policy framework. 

The existing policy framework has fared well in establishing clear targets and creating a market for solar power. The National Electricity Policy requires state electricity regulatory commissions (SERC) to fix the minimum percentage of energy from renewable sources that must be purchased by distribution licensees (RPO). The Government amended its policy, requiring SERCs to determine RPO for distribution licensees to be met specifically by purchasing solar power. Further, the Government has provided that the RPO specified by SERCs for solar power should go up to 0.25% by the end of 2012-13 and further up to 3% by 2022. However, although the Government has set out specific solar power purchase obligations for the distribution companies, lack of effective enforcement mechanism for the RPO or question marks over the willingness of the relevant SERCs to actually enforce the RPO has raised serious concerns for the investors and project developers.

In respect to providing a simple and holistic policy framework governing solar power sector, there is great scope for improvement. While the JNNSM Guidelines and various state solar policies have aimed at creating a single window clearance for setting up a solar power project, however, in practice, the developers end up visiting ‘multiple windows’ for obtaining various clearances for their project. Since large scale solar projects are still new in India, government agencies are yet not completely familiar with the technology, timelines and processes involved in development of these projects. Often, relevant government departments are unsure about the permits and clearances that need to be obtained by solar projects. The issue is aggravated in the case of projects under the National Solar Mission as these are centrally funded projects that need to be implemented at the state level. Moreover, issues like land acquisition, acquiring right of way, ensuring reliable transmission and power evacuation infrastructure, are significant problems not completely addressed by the existing solar policy framework.

As part of the overall policy framework, the GoI has taken substantial steps to incentivise the developers and to attract private investors. The Ministry of New and Renewable Energy (MNRE) has launched various incentive schemes to attract investment to the solar power sector. The major incentive schemes launched by the MNRE are generation based incentive (GBI) schemes and the renewable energy certificate (REC).  However, the relatively higher price band fixed for solar REC has deterred many solar power developers from treading this path. The GBI scheme allows the investors, apart from getting the tariff determined by the relevant electricity regulatory commissions, to get an additional incentive for per unit of electricity generated for a period of 10 years, provided they do not claim the benefit of accelerated depreciation. However, the GBI scheme has now ceased to apply to new solar power projects. Till such time solar power achieves grid parity, the Government should consider extending the GBI to increase commercial viability of such projects, especially in absence of readily available project financing.  Even with respect to RECs, the Government should iron out certain issues like high price of solar RECs and short validity of only 5 years in light of the long operational life of these projects that range from 5 years to 25 years. 


‘Investment grade’ solar policy framework is critical in sustaining the excitement brought by the National Solar Mission and various state solar polices. GoI and various state governments has certainly shown its commitment and seriousness towards building solar energy as an effective mode of meeting country’s energy deficit – however, the existing framework does have some areas which can be improved upon. The policy makers need to find pragmatic solutions to deal with issues which are impeding the existing solar policy framework from being truly ‘investment grade’. This can ideally be met by a mix of policy reforms and positive government action to make economics of solar power attractive for investors.

Avirup Nag is a senior associate and Amit Maheshwari is an associate with the Delhi office of Trilegal. 

Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. The firm has over 120 lawyers, some of whom have experience with law firms in the US, the UK and Japan.