Hedging Solar Project risk with Insurance

Posted on Posted in Knowledge Center

With Solar Power projects being largely backed with Non-Banking Financial Companies (NBFCs) and Private Equity Firms (PEs), Solar PV Projects were never considered something anyone would easily invest in. While the project return expectations were high, the risks were considered equally high (refer, despite dropping costs, it’s still around 14%).

icici
‘Solar Project Investment’ had a futuristic aura linked to it making it ‘non-mainstream’ financial instrument. Even though banks have been directed in the budgets of 2015, 2016 and 2017 to start disbursing loans for solar, little action has been seen on ground.

However, what we see today can be classified as a step towards Solar Investments becoming more mainstream. ICICI Lombard has now come forward to hedge risks for financiers of solar projects by offering insurance for projects (refer). Now, this may have seemed like an obvious move a few years back, there weren’t very many credible banks or agencies offering such a service. This move also, implies a certain confidence level in the technology and payback period linked with Solar Projects. Now, banks seem to be have moved beyond just viewing Solar Project returns as ‘too good to be true’ or ‘very high risk’. We feel there maybe the following few reasons for this move by ICICI:

Increased awareness about the Solar PV market, Equipment suppliers, payback time etc

  • Demonstrations of successful Solar Power projects
  • Decreasing costs in Solar making it a lower risk game
  • First step to gain entry into the Solar Industry
  • Increasing their portfolio of services
  • Gaining the first mover advantage in solar

We hope to see this product in action and understand, if this insurance applies to Chinese Solar Panels as well (tier 1, of course), which make a lot of financial sense for solar projects. Further, the price of the insurance would be a major determinant of the uptake of the product by ICICI.

However, the scale at which this insurance operates is quite large (for solar parks), as mentioned in their public declaration (refer). We are still a while away to see a company like ICICI Lombard to enter the smaller- ‘Rooftop Solar segment’ where all the volume of projects lie.

Ezysolare, as a representative of the Solar Industry in India, seeks to understand more from respected Alok Agarwal, at ICICI Lombard, on all the above points. We also, would like to congratulate ICICI in gaining a strategic advantage at launching this product, and the Solar Industry and Investors on finding another instrument to hedge Solar Project risks.

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