Municipal bonds for solar financing

 

According to a report titled Scaling up Rooftop Solar Power in India: The Potential of Solar Municipal Bonds, third-party financing models can address two of three barriers that hinder the adoption of rooftop solar in India i.e. high upfront capital expenditure and perceived performance risk. However, they have limited success vis-à-vis access to debt capital for project developers. The inadequate availability can be attributed to limited avenues for raising debt capital, stressed commercial banks, credit quality concerns, limited long-term capital opportunities for Indian financial institutions and small ticket size of investments leading to high transaction costs.
In such a context, municipal financing, via issuance of municipal bonds, can potentially increase debt availability for rooftop solar project developers, while reducing costs up to 12%. Here, a municipal entity becomes a finance aggregator for the renewable energy project developers. The municipal bond funds are disbursed via a Public Private Partnership (PPP) approach. The aggregation of projects allows for the developers to access the debt capital markets.
There are several market advantages of municipalities as potential rooftop solar finance aggregators.

• Institutional goals and mandates: their target-based responsibilities to increase the deployment of renewable energy provides a built-incentive for rooftop solar
• Access to debt capital markets: their larger balance sheets put them in a better position than rooftop solar developers
• Superior credit profiles: most municipalities are rated investment-grade, allowing them to raise debt capital at lower costs
• Access to public guarantees: as public entities, municipalities have relatively better access to public guarantees, as compared to private project developers. These are typically needed to achieve the necessary risk-reduction for attracting institutional investment
• Diverse revenue sources: the multiple sources of revenues (property taxes etc.) available to municipalities can provide additional security to investors
• Good consumer engagement: their relatively closer proximity to consumers can help the government facilitate the aggregation of rooftop solar projects faster
Apart from the reduction in financing costs, solar municipal bonds can potentially mobilize significant untapped investments (from domestic institutional investors etc.) into the rooftop solar sector as well as build their capacity to access debt capital markets. They need to utilize innovative transaction structures.
Despite the promising role of municipalities as financial aggregators, there exist multiple implementation barriers:
• There is no statutory/constitutional mandate for municipal corporations to promote electricity or power generation
• Solar municipal bonds need to achieve high credit ratings: since the Indian debt capital market is relatively shallow, it fails to attract enough investors if the credit rating of the bond is below AA or A+. Hence, high credit ratings of the municipal bonds is critical for the success of this financing model
• The novelty of the approach implies that the transaction costs are higher than in case of self-ownership or third-party financing models

Despite being a radical and futuristic model, municipal financing for rooftop solar can be crucial for India to achieve its rooftop solar target by 2022, provided the barriers are eliminated. This will not only contribute to the scaling up of rooftop solar, but will also enable the municipal corporations to utilize a similar financing structure for other infrastructure projects.
India Outbound
November 2, 2018

source https://indiaoutbound.org/municipal-bonds-for-solar-financing/