Rooftop solar PV provides access to green power for large numbers of people, using structures that already exist—a must for crowded urban sites where space is at a premium. Public-private partnerships have made these “rent-a-roofs” successful throughout India. The State of Gujarat’s in-depth experience with rooftop solar PPPs, tailored specifically to overcome complex constraints, is a model that is being replicated widely throughout the country and has implications for other emerging economies.

A visitor to Gandhinagar, capital of the Indian state of Gujarat, is likely to notice the glint of the sun reflecting off solar panels on the city’s rooftops. Some of these solar panels sit atop schools, others on hospitals. Many are perched on residential buildings. Altogether, the panels generate about 5 megawatts (MW) of electricity, providing better access to power for an estimated 10,000 people.

The groundbreaking project to enhance access to energy for urban households, a pilot public-private partnership (PPP), attracted approximately $12 million in private financing and helped advance the Government of India’s plan to make Gandhinagar a solar city.

But the greatest success of Gujarat’s solar rooftop program, informally referred to as the “rent-a-roof project,” lies in its replicability. Launched in 2010, the project paved the way for a wider rollout of solar rooftop initiatives by working through technical, legislative, and financial issues. Two private firms, Azure Power and SunEdison, each won 25-year concessions to install solar photovoltaic (PV) panels on the rooftops of public buildings and private residences and connect them to the grid.

Harnessing the sun

Gujarat, a state of 80 million in western India, enjoys about 300 sunny days a year. To harness this energy, private solar companies selected through a competitive bidding process lease rooftop space from government buildings and private residents, who receive Rs 3 ($0.05) per unit produced. The operators are responsible for installing the panels and connecting them to the grid. They in turn receive a feed-in-tariff of Rs 11.21 ($0.18) under a 25-year concession.

The concept sounds simple. But to make it work, numerous technical issues had to be addressed, including connectivity issues, selecting the solar panel system and other components, and resolving connectivity issues. The optimal terms of the lease and power purchase agreements also had to be determined in light of existing regulations and business conditions.

But most important was the unambiguous vision for solar power articulated by the state government of Gujarat. As early as 2009, it became the first state in India to announce a solar policy, which included ambitious solar power generation goals and plans to develop its capital as a “solar city.” Gujarat has made significant progress toward its goals. In June 2014, The Times of India reported that Gujarat was already producing 891 MW of solar power and had plans to increase solar capacity by an additional 500 MW in the next three years.

Replication throughout India

Vadodara, a city of 2 million people, became the second municipality in Gujarat to adopt the solar rooftop concept. In June 2014, Madhav Solar Private Limited won a 25-year concession for a 5 MW solar rooftop PPP based on a model similar to the one in Gandhinagar. It is expected to attract $8 million in private investment, provide 9,000 people with better access to power, and reduce greenhouse gas emissions by 6,000 metric tons.

The Vadodara project clearly benefited from the lessons of Gandhinagar’s solar rooftop PPP experience. Many of the obstacles faced in the pilot project had already been addressed and resolved. The results were proven. Consequently, the Vadodara PPP took less time to implement.

Buoyed by two important successes, Gujarat is considering replicating this project in all of its cities. These projects aim to draw on recent experience to implement such projects, address challenges faced therein, and tweak existing business models to facilitate replication of the concept.

The solar rooftop concept has excellent prospects for becoming established throughout India. Cities outside of Gujarat have taken notice; even Delhi is eyeing the model. And Gujarat itself is providing a helping hand to other Indian states: the Gujarat Energy Research and Management Institute (GERMI) will support the Government of Odisha with its own rooftop solar initiatives.

Market transformation

The experience in Gujarat demonstrates that PPPs can be an effective means of market transformation in rooftop solar PV, particularly in emerging markets where developers and intermediaries are not fully active across the value chain of rooftop solar development. Effectively designed PPP projects—those that are bankable and sustainable, with adequate preparatory activities and technical due diligence, provision of scale, and equitable risk-sharing arrangements—can generate developer interest in the segment. PPPs can also help design and streamline policy, regulations, and technical standards that can make investments feasible and sustainable.

Gujarat-solar_WBG

In India and around the world, PPPs can play the following roles in policy initiatives and institutional processes:

Clarify institutional roles and responsibilites

Given the state of the market and the limited experience in executing rooftop solar projects, appropriate policy actions can catalyze the market and move it to a mature replication phase. One area of focus is project facilitation. Projects should be promoted by clearly specifying roles and responsibilities of various stakeholders. This will facilitate monitoring and evaluation, and help make the segment efficient, competitive, and sustainable over the long term.

Provide for clear and predictable fiscal support

Three major solar rooftop markets (Germany, Japan, and the U.S.) have developed because of fiscal support from the government. This support is varied and includes regulatory incentives through preferential tariffs, subsidies for research and development, investment subsidies, and loans. Among the three countries, Germany has spent the most public money to develop the rooftop market. In Germany, public spending has helped the market grow substantially.

Emerging markets need to plan financial commitments well in advance. Fiscal incentives go hand in hand with the choice of an implementation model. Incentive structures will vary depending on the model adopted. While Germany continues to have a feed-in tariff mechanism to incentivize the solar rooftop market, it introduced a new subsidy scheme in 2012 in which the feed-in tariff for small rooftop systems up to 10 kilowatt was higher (approximately €0.20 per kilowatt hour) than the feed-in tariff for those up to 40 kilowatt (approximately €0.19 per kilowatt hour).

PPP transactions help determining the price and the level of incentives that the private sector is considering. The outcome of such transactions should help policymakers and regulators frame the fiscal incentives. Policy, legal, and market conditions are generally responsible for determining which incentives are good for which economy. In the U.S., for example, the legal framework has largely influenced incentive structures in solar. The country followed the Public Utility Regulatory Policies (PURPA) Act to initially implement net metering mechanisms. Subsequently, the Energy Policy Act 2005 created an environment to provide tax incentives to private owners of distributed renewable resources. Japan’s movement from a system of capital subsidies to a feed-in tariff mechanism reflects the Japanese government’s desire to rapidly expand the renewable energy sector, especially in light of current uncertainty over the future of nuclear power in the country.

Emerging economies need to formulate an incentive structure that takes market conditions into account, is consistent with the legal framework, and addresses the desired maturity that must be achieved. Moreover, economies that are moving from demonstration or early development stage to a replication stage, will have to adapt to market conditions and be open to making changes in incentives and/or legal and regulatory structures.

Encourage participation from rooftop owners

A critical issue for third-party developers is siting and access rights to public and private rooftops. Developers must negotiate and enter into separate lease agreements with public and private building owners. The role of building owners is restricted to leasing out rooftops; the owners may or may not take part in development or operations of the projects.

Rooftop rents are therefore prime drivers for successful rooftop projects over their 25-year life. Policies should provide for sustainable rentals in the overall revenue structure to promote rooftop projects. This can be in the form of fixed or variable incentives linked to electricity generated so that rooftop owners ensure maximum generation from the panels through regular cleaning and avoiding unnecessary shadows.

Establish a conducive regulatory regime

Establishing appropriate regulatory frameworks is critical and is often greatly facilitated by pilot PPP projects, which benefit from the active participation of informed large investors. Regulations could cover feed-in-tariffs (for gross metered systems), non-financial incentives such as mandatory purchase obligations, appropriate standards for metering and energy accounting, grid connectivity guidelines, and model commercial agreements for exchange of power with the distribution grid.

The right regulatory regime is critical to the sustainability of the PPP, and sustainability is a primary goal. The success of PPP projects can open the door for replication with innovative business models and increased participation of third parties and intermediaries. Lessons gained from the Gadhinagar rooftop program, as well as Vadodara’s, have universal application across most emerging markets.

This article is adapted from Partnerships IQ: Rooftop Solar Public-Private Partnerships in India.