Solar subsidy

India’s Cabinet Committee on Economic Affairs (CCEA) sanctioned INR 50 billion (USD 750 million) funding for 30% capital subsidy for rooftop solar installations (refer). The subsidy will be restricted to residential, government, social and institutional segments only and the government expects this subsidy to support total rooftop capacity of 4,200 MW until this budget is exhausted.

  • The fund unavailability issues with previous subsidy schemes are likely to get resolved;
  • Significant changes to allocation process mean that the funds will be better directed to needier customers and potential for abuse will be much lesser than before; and
  • We expect significant growth in the rooftop market particularly in the government and institutional segments but the entire rooftop market will benefit from growth through overall industry learning and skills enhancement.

Based on past experience in India with rooftop capital subsidy, the two key issues here are i) how will the new subsidy scheme work; and ii) and will the subsidy be effective in kick-starting the growth in rooftop solar in India?

An approval by CCEA is a strong assurance of availability of funds. However, we will need to see an appropriate increase in the budget for Ministry of New and Renewable Energy (MNRE) for FY 2016-17 (to be presented in March 2016). Earlier experience in this relation is mixed as in March 2015, when INR 6 billion was sanctioned for a similar subsidy scheme (refer), funding availability proved to be a problem. The difference this time is that the government is targeting a huge jump in rooftop solar capacity addition from 200 MW in FY 2015-16 to 4,800 MW in FY 2016-17 (refer).  And there is a palpably stronger commitment from the government to support the sector.

Moreover, the capital subsidy is being allocated to specific parts of the economy where funding availability is a big impediment to the growth of rooftop solar.  The subsidy is not being made available for commercial and industrial customers because these consumers pay the higher tariff and can also avail the accelerated depreciation benefit.

The biggest change in the subsidy scheme is that funds will no longer be disbursed through MNRE ‘channel partners’. There will now be three key modes of subsidy disbursement – Solar Energy Corporation of India (SECI), schemes run by state governments and subsidy disbursements through financial institutions. SECI is already believed to be in the process of allocating subsidy for 750 MW of rooftop capacity to systems aggregators and EPC contractors. The states are also likely to follow a similar aggregated capacity allocation route. Another important mode for subsidy disbursement is going to be through financial institutions. MNRE is likely to provide an in-principle approval to the State Bank of India to disburse subsidies. These disbursements will be clubbed with the rooftop solar loan schemes of the bank.

As the new scheme is not applicable to the industrial and commercial segments, these segments are expected to continue to grow at a decent pace. We expect a significant growth in the government and institutional segments as soon as the subsidy disbursement mechanisms get going. In its first leg, SECI may lead the charge on this. This growth is expected to start playing out over the next 6-12 months. As the subsidy disbursement mechanisms for the residential market would primarily be taken up by states and financial institutions, it may take up to a year for the mechanisms to become operational.

Overall, there are many improvements to the subsidy allocation process and together with the bigger allocation of funds, this is a very positive development for the sector. We believe that this subsidy scheme will result in the substantial growth of the rooftop sector in the short-term. In the long-term, this market needs a very strong concerted effort from the government on policy and regulatory front to achieve its growth potential in a sustainable manner.