The Drivers and Challenges of Third Party Financing for Rooftop Solar Power in India

This report examines the third party financing model as a means to achieve India's 40 GW rooftop solar target by 2022. It identifies high upfront costs, limited debt access, and performance risks as primary barriers. While the model is viable in most states for industrial and commercial users, it is hindered by consumer credit risk and poor net metering implementation. The authors propose policy reforms (e.g., banker training, DISCOM involvement) and new financial instruments (e.g., P2P lending, green bonds, and investment trusts) to scale the industry.

• The Government of India has set a target of 40 GW of rooftop solar power by 2022, a significant increase from the 0.7 GW installed as of March 2016. To meet this, the industry needs to add approximately 6.5 GW of capacity annually.
• Three primary barriers hinder rooftop solar growth in India: high upfront installation costs, limited access to debt finance, and perceived performance risk. For commercial and industrial customers, a typical installation of 150-200 KW can cost over INR 10 million.
• The third party financing model, where a developer installs and owns the system and sells power to the consumer via a long-term agreement (15-25 years), currently supports 102 MW (13%) of installations. The industry believes this model could potentially achieve over 20 GW by 2022.
• Third party financing is financially viable for commercial and industrial segments in most Indian states with current fiscal incentives. It is already viable without incentives in states that have achieved grid parity (14 states for commercial and 11 for industrial as of 2015).
• Limited access to debt finance is a critical challenge; the model's viability depends heavily on the debt-to-equity ratio. For the industrial segment, the model is only financially viable if the proportion of debt is around 70%.
• Net metering is essential for financial viability, particularly for the industrial segment. Without net metering, the average IRR for the industrial segment is 12%, which is below the required 14% threshold, whereas it rises to 17.2% with net metering.
• Consumer credit risk is a major specific challenge for third party financing due to long contract terms (15-25 years) and India's poor record on contract enforcement, ranking 178 out of 189 countries in the World Bank’s 2016 Ease of Doing Business rankings.
• The report recommends several policy changes: training bank officials to assess solar loans, involving DISCOMs in power purchase agreements to reduce credit risk, and providing higher Renewable Purchase Obligation (RPO) credits to incentivize DISCOMs to implement net metering.
• Three financial instruments are proposed to increase capital flow: Loans4SME (a peer-to-peer lending platform), a Rooftop Solar Private Sector Financing Facility (using warehouse lines of credit and green bonds), and a Rooftop Solar Investment Trust (RSIT) to bundle projects into 1-5 MW sizes for equity investors.

APA

Gupta, S., Sharda, J., & Shrimali, G. (2016). The Drivers and Challenges of Third Party Financing for Rooftop Solar Power in India. Climate Policy Initiative. https://climatepolicyinitiative.org/wp-content/uploads/2016/09/The-Drivers-and-Challenges-of-Third-Party-Financing-for-Rooftop-Solar-Power-in-India.pdf

Chicago

Gupta, Sandeep, Jai Sharda, and Gireesh Shrimali. The Drivers and Challenges of Third Party Financing for Rooftop Solar Power in India. Climate Policy Initiative, 2016. https://climatepolicyinitiative.org/wp-content/uploads/2016/09/The-Drivers-and-Challenges-of-Third-Party-Financing-for-Rooftop-Solar-Power-in-India.pdf.

Wikipedia

{{cite report |last1=Gupta |first1=Sandeep |last2=Sharda |first2=Jai |last3=Shrimali |first3=Gireesh |title=The Drivers and Challenges of Third Party Financing for Rooftop Solar Power in India |publisher=Climate Policy Initiative |date=September 2016 |url=https://climatepolicyinitiative.org/wp-content/uploads/2016/09/The-Drivers-and-Challenges-of-Third-Party-Financing-for-Rooftop-Solar-Power-in-India.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{gupta2016drivers, author = {Gupta, Sandeep and Sharda, Jai and Shrimali, Gireesh}, title = {{The Drivers and Challenges of Third Party Financing for Rooftop Solar Power in India}}, institution = {Climate Policy Initiative}, year = {2016}, month = sep, url = {https://climatepolicyinitiative.org/wp-content/uploads/2016/09/The-Drivers-and-Challenges-of-Third-Party-Financing-for-Rooftop-Solar-Power-in-India.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }