India's Solar Market Booms As Financing Options Expand

India boasts a phenomenal market for solar power, offering a remarkably quick payback period of just three years for commercial and industrial (C&I) buyers of rooftop solar systems. This rapid, non-subsidised return on investment is unmatched globally. Recent incentives from the Prime Minister have further reduced the payback period for residential users to a mere four to five years. The true beauty of solar lies in its longevity; with a 25-year warranty on panels, users essentially enjoy free electricity for the remaining 20-22 years, depending on whether it's a C&I or residential installation. However, the upfront cost remains the biggest hurdle to wider adoption. While solar offers significant long-term savings, financing is crucial to making the initial investment easier to manage. 

Traditionally, solar financing in India has relied on two main models: Power Purchase Agreements (PPAs) and loans (a lease can also be operated as loan, but for simplicity, let’s call it a loan). Under a PPA, a third-party investor funds the installation and maintenance of a solar power system on a customer's property. The customer then agrees to purchase the generated electricity at a predetermined rate, usually lower than the local utility rate.

Essentially, a solar vendor owns the rooftop system and charges the customer only for the power generated (even though it’s on the customer's roof). This model eliminates the need for upfront investment from the customer and transfers maintenance responsibilities to the investor.

Loans, on the other hand, usually involves paying a down payment followed by EMIs (equal monthly instalments) until the customer owns the system outright, typically within three to five years. Loans offer ownership relatively quickly, whereas PPAs are usually structured for 15-25 years with optional ownership at the end. The virtue of a loan in India is that the customer gets to benefit from the government incentive of accelerated depreciation. In the case of a PPA model, the PPA provider typically keeps this incentive for themselves.

Historically, the rooftop solar market in India grew quickly through the PPA model.

However, this approach leaves many SMEs and residential customers unserved. Investor funding for PPAs is typically tied to customers with BBB+ credit ratings or higher, automatically excluding most SMEs from rooftop solar financing and certainly not catering to residential customers. Furthermore, with declining panel costs (30-40% reduction in FY 23-24), PPAs can be up to three times more expensive than loans over a system's lifetime.

As the attractiveness of the PPA model has declined, so too have customers, who are more and more choosing to opt for a solar loan. When it comes to a loan, the banks were initially hesitant to get involved. Around 2012-2013, when net metering was first introduced in states such as Karnataka (which was a pioneer under the then National Solar Mission) and rooftop solar first emerged as a viable business proposition, the banks were hesitant to lend. At that time, rooftop solar was too new for the banks to embrace wholeheartedly.

Without active bank involvement at the time, solar companies have stepped in with their own kind of zero collateral, low down payment solar finance targeting SMEs. Furthermore, independent NBFCs started to lend for rooftop solar as well.

Now, ten years later, the solar finance market continues to evolve. Major banks such as SBI and SIDBI now have dedicated solar financing schemes, helping to propel the rooftop solar market forward. And with the emergence of multiple avenues for solar loans, SMEs and homes now have much easier access to solar loans.

With solar finance now easily available and with government incentives in place for businesses (accelerated depreciation) and homes (capital subsidy), the stage is set for the rapid adoption of rooftop solar in India.

(Damian Miller is the Co-founder & CEO of Orb Energy.)