India has set ambitious targets to increase the share of renewable energy in its energy mix. The Government of India plans to install 175 GW of renewable energy projects by 2022 and 450 GW by 2030. To put that in perspective, total installed energy capacity in India at the end of 2020 was 379 GW, or which 93 GW (25 per cent) was renewable energy.

To date, the government’s primary focus of renewable energy expansion has been on large grid-scale solar. However, achieving India’s ambitious renewable energy targets will also require an increase in distributed renewable energy (DRE) projects. If a more favorable regulatory and policy environment is created, such DRE projects, though smaller in size, have greater scalability potential. They also avoid the long lead times and execution bottlenecks associated with public-sector off-take procurement projects.

In the report titled, “The Future of Distributed Renewable Energy in India” published by the Climate Policy Initiative in May 2021, the benefits and market potential of India’s DRE sector are outlined, the current policy and institutional landscape is examined, and recommendations are provided for different stakeholders. REGlobal provides an extract of the report related to financing of DRE projects in India…

The 2022 target of 175 GW of renewable energy includes 100 GW of solar capacity, out of which 40 GW is earmarked for rooftop solar and off-grid solar. There are multiple market opportunities for rooftop solar and off-grid solar. The government previously introduced policy frameworks for multiple downstream off-grid solar applications, such as agricultural pumps, cold storage, and home systems, and multiple other DRE downstream applications are emerging, such as energy storage, EV charging, and rural non-farm productive use appliances.

All of these opportunities mean that DRE can, and should, play a vital role in achieving India’s sustainable energy targets in the coming decade. However, to achieve these targets the report estimates that India will require a significant increase in annual investments, from $2 billion in 2019 to $18 billion by 2024. That level of investment increase will not be possible without significant changes to India’s existing DRE policy framework.

The potential of DRE in India is huge. Following sub-segments have the highest growth potential for meeting government targets for sustainable energy security in the coming years but have fallen short so far on this front, according to the report.

Rooftop Solar

Despite the potential for capacity installation, mitigation, and developmental impact, and the potential investment opportunities in emerging business models, the growth of rooftop solar in India is constrained due to lack of access to institutional finance – both debt and equity. According to the report, an estimated total investment of $25-30 billion is required to achieve the 40 GW rooftop solar target. Moreover, as the current installed capacity of rooftop solar is only 5.25 GW, India will require a compound annual growth rate of over 100 per cent (or more than double the addition to capacity every year) to reach this target.

Solar agri-pumps

Access to reliable water remains a challenge in Indian agriculture as only about 50 per cent of the agricultural land in India is currently under irrigation. This presents a unique market opportunity to provide solar-based irrigation solutions to around 80 million households in India. The Government of India, under its KUSUM scheme, has targeted a cumulative installed capacity of 1.75 million solar water pumps (around 6 per cent of the total agricultural pumps in the country) by 2024. At the current average price of agricultural pumps of around Rs 200,000 the estimated annual market size would be Rs 100 billion.

Solar cold storage

The cold chain industry in India was worth around $3.5 billion in 2017 and is expected to reach $9.5 billion by 2024. Access to grid-based electricity has been a challenge for the rural population in India. This presents an opportunity for solar-based cold-storage solutions. The government launched a nodal agency called National Center for Cold Chain Development, which promotes a number of subsidy schemes for setting up cold chain elements in India. With an average connected load of 20-25 kW, cold storage offers a significant unaddressed potential for use of decentralised solar energy.

On a conservative basis, the report estimates that over the next 7 years, the contribution of solar cold storage to the overall cold storage market will increase in a linear fashion from 1 per cent to 10 per cent. This would translate into a market opportunity of $3.3 billion.

Distributed energy storage

Energy storage is a crucial tool for enabling the effective integration of renewable energy and unlocking the benefits of local generation and a clean, resilient energy supply. The technology is valuable to grid operators around the world who must manage the variable generation of solar and wind energy. However, the development of advanced energy storage systems has been highly concentrated in select markets, primarily in developed economies.

In India, factors like operational inefficiencies in the state distribution system, cross-subsidisation of agricultural and residential customers, and infrastructure development costs to support government schemes (such as rural electrification) have created a huge revenue gap for discoms, leading to an increase in tariffs for commercial and industrial (C&I) customers. With energy storage costs continuing to fall, a combination of solar rooftop with energy storage is expected to become cost competitive to grid tariffs for C&I consumers in the near future, resulting in an increasing trend of grid disintermediation (going “behind-the-meter”).  This would also reduce the need for net metering from the distribution utilities and allow for DRE to operate unconstrained in the market without the need for subsidies.

Research carried out by CEEW shows that the energy storage market for off-grid renewable energy in India is expected to be worth $2.36 billion by 2024, with rooftop solar accounting for 80 per cent of the total.

Electric vehicle charging infrastructure

India has over 200 million registered vehicles – with the number of vehicles increasing by over 20 per cent in just the last five years. This number is expected to go up significantly in the coming years as private motor vehicle penetration in India is only 4 per cent as compared to about 80 per cent in the US and about 55 per cent in the EU. By 2030, it is estimated that India will have 600 million vehicles. In 2017, electric vehicles (EVs) accounted for less than 0.1 per cent of the total automotive sales in India. With technology development and favorable government policies leading to a fall in total cost of ownership, it is estimated that EVs have the potential to account for up to 30 per cent of the total automotive sales in India by 2030.

The government is developing several incentives and policies for increasing the adoption of EVs.  The National Electric Mobility Mission Plan (NEMMP) 2020 was launched by the central government in 2013 to boost the manufacturing of hybrid and EVs in India. It aims to achieve the production of seven million EVs by 2020. In addition, with the government deciding to fund up to 60 per cent of Research & Development (R&D) costs for the development of indigenous low-cost electric technology, global automobile players are investing heavily in R&D of EV technologies in India. These initiatives have been complemented by the government providing demand-side incentives through its Faster Adoption & Manufacturing of Hybrid and EVs in India (FAME) scheme. These factors are expected to present multiple opportunities in the EV value chain: charging infrastructure, design and engineering, manufacturing, fleet management, last mile connectivity, mobility service providers, and software/digital technologies.

Bilateral and multilateral support in financing

With the Indian government creating a favorable environment for growth, the rooftop solar sector in India is receiving strong support from bilateral and multilateral institutions.

  • World Bank has committed $625 million in loans for solar rooftop projects that is being on-lent by State Bank of India.
  • Asian Development Bank has announced a $500 million for financing rooftop solar systems through Punjab National Bank.
  • KfW has tied up with the Bank of Baroda to extend funding of $110 million to re-finance solar projects under the over-arching Indo-German Solar Energy Partnership.
  • KfW also has a parallel agreement with the Indian Renewable Energy Development Agency (IREDA) to finance up to $220 million of renewable energy projects.
  • European Investment Bank has signed a loan agreement with IREDA for financing up to $200 million of renewable energy projects.

While some of these lines remain under-utilised due to a lack of investment-ready high-impact projects, other lines of credit have been disbursed mostly to larger players with strong corporate backing.

In May 2020, CPI conducted a survey of rooftop solar developers who are beneficiaries of the US-India Clean Energy Finance Program. This was done to assess the fallout from the Covid-19 lockdown and the possible repercussions over the coming year. The survey consisted of 20 questions – 18 objective/ multiple choice and two subjective questions. The objective questions were designed to allow participants to report their qualitative opinions on a quantitative scale.

In this survey, the lack of availability of working capital was a concern for those respondents that required capital. Respondents were also concerned that an increase in due diligence timelines of lenders due to fallouts from the pandemic could become a significant bottleneck to access loans. Respondents indicated that positive lender actions such as faster due-diligence and reduced interest rates would have a maximum positive benefit in mitigating financing challenges from Covid-19.


The rooftop solar industry is largely fragmented, with only a few players reaching a pan-India scale – these are mostly early entrants that were either backed by Indian corporate or foreign private capital. The remaining players are largely local installers, executing work orders for the larger players. The off-grid solar market also remains small and fragmented, with limited interest from private capital and largely reliant on philanthropy or subsidised private funding.

However, over the last few years, the smaller rooftop solar and off-grid companies have been able to better develop their business models and are now in need of growth-stage funding. Information asymmetry, due to lack of project preparation and targeted transaction advisory, has been the primary cause of lack of access to capital.

Though impact investors have scaled up their operations over the last decade, participation among private capital owners such as family offices, high net-worth individuals, and corporates remains limited. With competing demands for capital from mainstream business models, such investors view DRE as less financially attractive. Blended finance instruments can potentially help to bridge this gap.

The nature of impact investors in India is quite close to that of commercial financial investors, with a focus on generating both market returns and development impact through investing in mature stage companies/projects. An opportunity exists to finance smaller and emerging companies in niche segments that have the potential to scale over the next few years.

Companies, after the startup and technology development stage, require further support in the form of seed capital and technical assistance/strategic advisory to move towards commercialisation and to attract growth equity. Smaller rooftop solar and off-grid developers lack the required capabilities to navigate the entire credit appraisal process of lenders. This lack of expertise also reduces the probability of reaching financial close for small-sized firms.

In these circumstances, philanthropies have an important role in stimulating the DRE sector. The sector needs a combination of policy advocacy, knowledge dissemination, and catalytic finance.

DRE and its downstream applications offer an opportunity to not only meet India’s climate and energy access targets, but also provide attractive returns to financial investors. It also provides pathways for India to reduce import-dependence on crude oil as well as create economic growth and jobs in the long run. In addition, addressing existing policy and financing gaps would not only allow for better targeting and risk-hedging of government spending programs, but would also allow capital to be recycled efficiently, thereby enhancing both the duration and magnitude of the impact.

The full report can be read here