Originally published in Businessworld India here

Co-written by Sourajit Aiyer and Sandeep Bhattacharya, India Projects Manager, Climate Bonds Initiative

With the cost to produce solar power turning south due to the general dip in the price of panels, renewables are on course to give fossil fuels a run for their money in energy-starved nations. However, India’s target 100 GW of solar capacity by 2022 is still far off by the current run-rate due to challenges related to land acquisition, panel import, state distribution companies (discoms), etc. The coronavirus lockdown has accentuated the challenges by stalling the supply of panels imported from China and reducing the discoms’ motivation towards the rooftop solar segment and its net metering arrangements owing to the drop in demand from their staple industrial clients.
Nevertheless, efforts to emerge from this pandemic-induced slowdown can be a positive for utility-scale solar, most of which are ground-mounted solar parks in India. Moreover, it can boost an upcoming solar segment that bypasses the issues of land ground-mounted solar faces, i.e. archaic acquisition rules, increasing prices, issues of displacement of erstwhile population and the competition from industry and housing for that land. This model is of large-scale solar installations on water surface, or floating solar.

The floating solar model also offers the scale that can make domestic manufacturing of equipment viable in the long-term. Add to this an innovative financing solution that has been tested in a recent project and holds ample scope for replicability, and the recipe to lift the solar energy capacity in a post-Covid India may fall into place.

This concept, initially successful in land-scarce Japan, has been picking up globally. Holland and China have already seen mega-scale floating solar projects, like the 73,000 panel Andijk reservoir installation and the 850 MW Longyangxia dam project.

The economics are in favour. Installing floating solar may be costlier than ground-mounted solar, owing to floats, moorings, submerged cables, sub-sea technical specialists, etc. But the water’s cooling effect improves the system’s efficiency and generation, which more than offsets the higher costs leading to a net advantage. The shade provided by the solar system also conserves water by reducing evaporation, invaluable in water-starved nations. It reduces water treatment costs by curtailing algae development. At the same time, it is vital to select the correct location in terms of the water’s currents and natural calamities, and ensure the moorings remain resilient to such shifts. A country like India with an extended coastline coupled with several river, lake and reservoir bodies augurs well to scale this model.

Moving to the financing of such projects, the Indore Municipal Corporation’s (IMC) plans to issue green masala bonds to fund a floating solar project offers a viable option to take floating solar to scale. Part of India’s Smart Cities mission, Indore, a city in the central Indian province of Madhya Pradesh, became the only third Indian municipal body in 2018 to tap the capital market by issuing bonds to implement the Swatchh Bharat (Clean India) mission.

In 2019, IMC announced its plan to issue rupee-denominated masala bonds of ~Rs 450 crore to install a floating solar project, in either Yeshwant Sagar or Jalood. The project would save electricity costs for IMC as it would transmit the  electricity generated from the panels to the grid. These savings would more than compensate for the interest and principal payments, thus making it attractive to raise the bond. Moreover, being a masala bond, the currency risk would be held by the investor, not the issuer. Otherwise this had been an impediment in issuing dollar-denominated bonds as it raised the hedging costs for Indian issuers. A masala bond would also imply overseas listing. London, popular with Indian listings, hosts many dedicated funds which invest only in green assets, which is expected to create the right supply-demand tension to offer a competitive price for these bonds.

Take another announcement. The Uttar Pradesh government proposed to set up India’s largest floating solar plant at the Rihand dam. This 150 MW project involves purchasing the power at a pre-decided rate for 25 years. It would also lead to substantial savings to the government’s electricity costs. Given this advantage of a tangible cash flow, this project could also be funded, if needed, by a similar green masala bond issue to raise part of its Rs 750 crore outlay.

At the same time, a need would be the timely delivery of the financial statements and due diligence documents by the urban local bodies, as well as their credit rating and project management capacity. The challenge is many urban local bodies may not have the capacity to deliver updated status reports at this point of time.

A study by TERI estimates India’s water reservoirs hold the potential to meet 280 GW of floating solar generation capacity, with Madhya Pradesh, Maharashtra and Karnataka provinces offering the maximum potential.

To meet this opportunity, the IMC green bond to fund a floating solar project offers a first-of-its-kind model template in India to scale up solar capacity addition and domestic manufacturing of solar equipment once the Covid-19 pandemic normalises in India. It would also reduce the dependency on central/state transfers, thus spurring proactiveness from other government bodies across India to create a project pipeline. The headroom for growth appears unlimited!

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