How MSMEs can lead India’s pursuit for a greener future

The uptake of rooftop solar in the MSME sector has been considerably low despite the MSME sector contributing 38% of the GDP. Our recent study proposes solutions to unlock the inherent potential for rooftop solar adoption amongst MSMEs.

The Central Government has set up targets of setting up 100 GW solar installations, including 40 GW of rooftop solar by 2022. However, the pace of rooftop solar installations has been considerably low at 5,252 MW at the end of September 2019 as compared to target of 40,000 MW by end of 2022. Around 70% of the capacity has been achieved in the commercial and industrial (C&I) sector in India, but even in this sector the success has been limited to the medium and large-sized players. The uptake of rooftop solar in the MSME sector has been quite low despite the MSME sector contributing 38% of the GDP, comprising 46 million industrial units and generating employment for more than 100 million of the nation’s workforce. Our latest report estimates the potential for rooftop solar amongst MSMEs, studies the issues in the sector impeding the uptake of solar and comes up with a few mitigating solutions which aim to address the issues from the perspectives of both MSMEs as well as lenders.

The report “Identifying barriers for rooftop solar uptake in MSMEs and development of a mitigating financial framework” has selected two energy-intensive sectors namely the automobile components manufacturing MSMEs and the cold chain MSMEs for a deep-dive, after a scientific filtration process to arrive at these sectors.

Lack of awareness of economic benefits

Extensive stakeholder consultations with MSMEs in these sectors as well as bankers have thrown up a host of key insights. MSMEs are aware of rooftop solar as an upcoming technology. However, they are not wholly cognizant of its economic benefits, nor are they very aware of the Renewable Energy Service Company (RESCO) mode of operation, wherein MSMEs only have to rent out their roofs without any upfront capital expenditure outlay. MSMEs are also apprehensive about the quality of equipment available in the market. Lenders, on the other hand are not well equipped with assessment of rooftop solar projects and have concerns on the variability of returns from solar projects. Added to this is the inherent hesitation in lending to MSMEs because of their low credibility and concerns on their ability to repay loans.

Based on the insights gathered from the stakeholder consultations, the study identified a few salient actionable points or areas of concern. These steps have been modelled into a framework, which has been abbreviated as FURM (Framework for Uptake of Rooftop solar in MSMEs).

Standardization can help financial institutions in assessing projects in a more streamlined way. At the same time, it will help MSMEs make an informed choice from among the options available in the market.

Performance insurance can help financial institutions, developers and MSMEs (in case of CAPEX mode) to mitigate the impact of unpredictability of project yields due to variability of solar irradiance and system underperformance. While financial institutions and other stakeholders are receptive towards rooftop solar, risks related to payment delay and payment default in lending to MSMEs still remain. To help mitigate these risks, credit risk mitigation measures can be taken up which will provide the requisite cushion to financial institutions.

We have further deep dived into the credit guarantee (CG) offering and accordingly proposed four CG options.

Under the fixed coverage CG, a fixed CG cover to the participating financial institutions is envisaged. Under this, the evaluation of both the borrowers and final power off-takers will be the responsibility of the financial institutions.

Under the portfolio-based CG, the evaluation is done on the complete portfolio of loans, not on individual basis, but as a single loan. This method of loan evaluation will help in reducing the time taken to evaluate each loan in the portfolio. Under this approach, CG cover gets triggered only when the entire portfolio defaults instead of default by a single loan.

Under the variable coverage CG, CG coverage percentage for the borrower is decided on the basis of a matrix which is developed based on the credit rating of the individual MSMEs; higher the rating, the lower maybe the CG coverage percentage.

Under the ABS (Asset Based Securitization)-based CG, CG coverage can be extended to support asset securitization. It is a long-term market making model which can be implemented once the rooftop solar market reaches a certain scale.

Depending on different conditions, a US$200 million corpus has the potential to leverage up to 3 GW of rooftop solar installations.

While it is clear that MSMEs present a big opportunity for penetration of rooftop solar which can ultimately help in meeting the government’s ambitious solar targets, grey areas abound in this space. How can the multitude of MSMEs be involved? What kind of support will they require? How will lenders become more receptive towards lending to MSMEs, especially for rooftop solar? What is the quantum of investment required for a noticeable impact? These are important aspects to be considered and EY is here to help. Having extensive experience in this space and having worked with the entire spectrum of key stakeholders, we can support the government in its push for solar as well as to guide stakeholders in their journey for clean energy adoption.

Rooftop solar presents immense opportunities to MSMEs as much as to the government. EY's "Identifying barriers for rooftop solar uptake in MSMEs and development of a mitigating financial framework" proposes a framework for MSMEs and financial institutions to make rooftop solar a viable option for the years to come.