In May 2023, I took a trip to India for my yearly catch-up with friends and family. I'm originally from Surat, so that's where I was headed. As always, I landed in Mumbai and grabbed a one-way rental cab to Surat. This year, though, I noticed some pretty cool changes along the way! There were new bridge constructions on highways, work on the bullet train, and some massive hotels and properties popping up. But what caught my eye were all the solar panels on industrial buildings, farms, and even little houses.
It felt like everyone was trying to go solar at the same time and then I learned that the government is actively promoting the installation of solar panels (to meet their Net Zero targets) and even subsidizing people if they use solar panels for residential use. This made me look more into this and even motivated me to get my father's industrial yarn manufacturing unit to go solar saving ₹30-40 Lacs of electricity bill annually. But it was no easy task to convince my father and his partners due to the following reasons:
The business would have to post an upfront payment of 30% of the solar panel costs which was coming out to be ₹2.25 Crores. Doing this would reduce the working capital of the business which is crucial to have in the textile industry.
For the rest 70% you would have to take a new loan from the bank and sometimes banks are not willing to give more money when you already have maxed out your Overdraft accounts and have taken business loans.
The GST Input Tax Credit (ITC) for the installation of solar panels is in a grey area, a recent ruling in the Tamil Nadu high court confirmed there is no credit. So the business couldn't avail a 12% GST which translates to ₹26.4 Lakhs (not a small amount)
Headache of maintaining the solar plants every year which would be an added cost to them.
To be honest, the upfront cost and the GST input were the biggest issue, the loan for solar panels could have still been arranged as govt was even subsiding interest rates for loans against solar panels. So today let's talk about how you as a retail investor can help with financing such solar projects which is a win-win for you as business doesn't have to pay anything upfront and you can get a decent return on your investment.
How to Invest in India's Solar Journey?
There are primarily two simple ways you can invest in solar panels and get decent returns for the risk you take:
Solar Power Purchase Agreement (PPA)
Let's look at both items in detail:
A lease is just like owning any other fixed asset like a car/bike where the business would make a 20-30% downpayment on the asset or even 10-15% if it's a very credible business and the rest would be financed by a pool of investors like you and me.
In return, investors would get fixed monthly payments (like an EMI) to use the asset until the term of the lease which is generally 5-7 years. These fixed payments would depend on the size of the project and will act as cashflows to you but it can still put a financial strain on the business if their industry is cashflow intensive.
Also taking an example of housing societies who would want to put solar on their rooftops, it is not practical to ask their residents to contribute more to their annual maintenance fee to get solar panels, some households might not be able to afford it, so upfront costs act as a deterrent.
Solar Power Purchase Agreement (PPA)
This is a unique model developed in the market by some major solar players to enable big business/residential complexes to get solar at zero upfront cost.
In the case of my father's business, if we had gone down the PPA route, a company would come and installed the solar plant and connected it with my existing electrical unit. The business would consume electricity generated out of the solar panels and would only pay for what they consume at a pre-determined per unit rate which stays fixed for 15-20 years. Post this period, the asset generally gets transferred to the business at almost zero cost.
This is a win-win for business because:
No upfront payment and no dip into working capital, they just pay for electricity to LLP now instead of their utility company.
Their electricity rate gets fixed for the next 15 years having better certainty of costs.
An alternative source of energy in case normal electricity is not available and vice versa.
The asset is owned by the investors or the LLP which has pooled the investor's money who will take care of maintenance of the project.
They will own the asset post 15 years and can still use panels for another 10 years. (Solar panels degrade by 1% every year)
This is a win-win for you as an investor as well because:
You get a long-term asset for 15-20 years with monthly cashflows depending on how much energy is generated from the solar plant. The project returns are generally between 9-13% IRR.
You don't have to worry about maintaining the solar plant yourself as the designated partners of the LLP would handle it for you and charge you some fees.
It is backed by a physical asset in the event things go wrong, so not a lot of risk.
Sample PPA Agreement
Thanks to Sustvest, we have access to a recent PPA Agreement which they signed on this deal. You can also access this agreement in full by clicking here. This agreement is for a 250KW solar rooftop project for SUBROS Limited and is very detailed in my opinion. Here are some key points it covers:
How the bills will be calculated and paid by the customer (here customer = business)
Who handles the maintenance of the project?
How is the power utilized estimated if there is a fault in the meter?
If any tax credits or carbon credits are generated from the system, how will those be handled?
What happens if the customer defaults?
What is the per unit price customer pays for 15 years?
What is the price of the solar project if the customer decides to buy the plant before 15 years? At the end of 15 years, the project is transferred at a ₹1 cost.
Other Risks to Consider:
Default Risk: In the PPA Agreement, if the customer is unable to make payments, the provisions on what happens next are laid out in the contract, however, we all know if this goes to legal courts, recovery of funds or even solar projects can take some time. It is a small risk but it still exists.
Weather Risk: Your payouts are dependent on how much energy can be generated by the solar plant and consumed by customers. While the generation capacity is modeled keeping 90% accuracy in mind (called as P90 model), in case of extreme weather like what we saw in Mumbai this year, your output could go down and in turn your payouts would too.
- Damage to Assets Risk: Since till the time of the PPA, you own part of the physical asset, any damage to it is also borne by you as an investor. This can be mitigated with proper insurance for solar plants. Ensure the deal you invest in has insurance.
How can you invest in this growth?
There are a couple of players in this space and more are coming up as the solar capacity in India continues to grow.
- SustVest: One of the known platforms out there which regularly comes up with Solar PPA deals that offer between 10-12% IRR on projects.
- SundayGrids: One of the most unique models out there in this space, they essentially give you exposure to the PPA Agreement itself but via a Digital Solar framework. You reserve some solar space over the Internet. You get monthly returns in the form of a discount on your existing electricity bill. So all your returns are also tax-free. We will do a separate piece on their model if there is sufficient interest. So let us know in the comments!
Pyse: Another player offering investments into Solar PPA, Solar Leasing and also EV Assets Leasing.
Incept Green: Another new player in this space offering Solar Leasing via LLP model with their product DigiSolar.
If you know of any other companies operating in this area, please feel free to mention them in the comments below or contact me here, would be happy to add them.
Phew! Sorry if that was a long read, but this is an exciting evolving space and I as an investor is also quite passionate about fueling India's clean energy growth and this investment product checks pretty much all boxes on a risk adjusted return basis.
In my opinion, if you are looking to park your money in a long term product which generates decent monthly cashflows, this might be a good option for you. Just beware of the risks we have mentioned above in the agreement and reach out to the support of the startups we have mentioned if you need more help.
Please note that this is an opinion blog and not official research advice. I am not a registered RIA in India, and none of these views reflect those of my current employer. This blog aims to promote informed decision-making and does not discourage you from investing in any deals.
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