India Focus: Financing the renewables dream

India has surprised many with the speed and government commitment of its renewable energy programme. But what are the financial challenges behind taking the country’s clean energy ambitions to the next stage. 

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There are few countries in the world – and arguably none in the so-called developing world – that have renewable energy targets as ambitious as those of India.

When the country announced in 2015 that it was planning to have an installed renewable energy capacity of 175 GW by 2022, many industry observers believed this was simply undeliverable.

And yet the country is on track to beat that target by a couple of years, thanks to a raft of policy initiatives and financial backing, not least from domestic investors.

“India is absolutely committed to renewable energy targets and clean energy growth and nothing will stop that,” said Piyush Goyal, minister of state for Power, Coal New and Renewable Energy and Mines at the World Future Energy Summit in Abu Dhabi in January.

He said that today, “renewable energy stands on its own feet”.

“Gone are the days when governments need to provide support. It makes good economic sense to invest in clean energy and energy efficiency.”

Kishor Nair, chief operating officer of Welspun Energy, says that when Goyal took charge, “particularly in the first six months, he was having a lot of discussions with industry to understand the problems of developers in executing projects. The tariffs have come down because of a lot of enabling policies. A lot of initiatives were taken in cutting down the project costs, optimizing the projects earlier.”

Vikram Kailas is managing director of Mytrah Energy, which was formed in 2010, when it raised $80 million from institutional investors such as Capital Group, Blackrock and Henderson.

“So we have seen the transformation of the industry,” said Kailas at the World Future Energy Summit. “When we started the company, a seven-year loan was standard and interest rates were about 13 per cent. Today, 18-20 year loans are standard in India and interest rates have down to about 10 per cent.”

Mytrah Energy presently has a total wind portfolio capacity of 1000 MW across 15 wind farms in eight states – Rajasthan, Gujarat, Madhya Pradesh, Maharashtra, Andhra Pradesh, Telangana, Karnataka and Tamil Nadu.

Kailas says “India is going through a transformation” with, for the first time, 1000 MW of wind having been tendered. “It’s a good move for two reasons. One, it opens up the boundaries beyond state level and increases the demand, and I believe that it leads to transparent pricing. It’ll lead to a better price realization both for the state and for the industry.”

Vinjay Rustagi is managing director of Bridge to India, a renewables consulting and research company working with “everybody across the whole value chain”.

He said: “When you talk to major international investors about the Indian renewables sector, the fundamentals for the sector are compelling.”

“When you look at the imperative to reduce carbon emissions, the growing power demand, the desire to reduce energy costs, as well to provide power to people 24/7 across India, the fundamentals are so strong that we see a strongly growing renewable power sector for one or two or more decades in the future.”

Rustagi says that the key in India is that the renewables market “provides visibility, growth and strong government support which are huge positives for financiers in the sector”.

To deliver India’s big renewables ambitions is going to take big money. “We think that the total financing requirement for the sector is about $120 billion based on today’s cost of installing and setting up these systems,” says Rustagi. “That is spread between equity and debt in the ratio of 25 and 75 per cent. Most of that investment is geared towards power generation, which is being dominated by the private sector. And of course there needs to be a lot of ancillary investment in transmission and distribution and upgrading of the grid, which is currently led by the public sector.”

The scale and pace of India’s renewables rollout is vast and fast. “The key thing is, historically, the sector has been about 5 GW a year – going forward we want to scale that up to 10-15 GW a year,” explains Rustagi. “Is India and investors ready to make this sustainable on a long-term basis? Is there enough appetite in the financing market to support this growth?”

He said “the biggest risk for any entity that is setting up a renewable project is the ability of the grid to absorb and sell the power to consumers. A huge amount of work needs to go into making the grid strong and resilient enough to cope with the growing renewables capacity in the country.”

“If the Indian government wants to attract enough private investments, it needs to make sure that developers don’t have to take risks and that the transmission grid is capable of coping with the extra supply of renewables.”

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Minister Piyush Goyal: “It makes good economic sense to invest in clean energy.”

Credit: IRENA

Another risk which international investors are worried about in India is the country’s distribution companies. “There are companies which still by and large are government-owned and they have various pressures – political and regulatory – to keep tariffs low,” says Rustagi. “Their balance sheets are not very strong, so the question really is: can distribution companies make sure that they can absorb all this growing capacity in the country.”

A further concern – though perhaps less so now than in past years – is the Rupee risk. He said PPAs were all structured in Rupees and “when you’re coming from outside, there’s a genuine concern over what happens when the Rupee depreciates. The Rupee has been volatile over the last six-to-seven years. But I think over a period of time, driven by the attractiveness of the market, many international investors have got comfortable with the Rupee depreciation risk. This is something that you can build into your financial model – you can quantify it.”

The financial players

So who is playing in the Indian market? There is huge interest from both the international and the Indian community to finance projects: international developers, private equity and Indian corporates.

“The interesting thing,” says Rustagi, “is that it is the Indian corporates and private equity funds who have dominated the market. International investors bring big balance sheets, and cheaper cost of money, but we see that the India players have been the most aggressive in the market.”

However, he poses the question: “What happens to these investors over a period of time. Most Indian investors don’t arguably have a long-term view – they want to churn their assets, recycle their funding – so is there enough debt in the market to be able to absorb their funding on a long-term basis?”

Rustagi says debt for the sector is “mainly coming from Indian lenders who seem to have a huge appetite”.

“The India renewables market is very attractive. It offers multiple-decade growth and strong policies from the government. On the equity side, the key issue if scale of capital.”

Daanish Varma, director of Sustainable Investment Banking at Yes Bank, says “lenders have become much more comfortable with the solar story – they understand the technology”.

But he adds that once other capital-intensive infrastructure projects in India start picking up, renewables will have to compete for capital, “so we will have to watch out for that”.

He too says India is a bank-driven debt market. So how does the sector bring in the big bucks of the bond and pension markets. “Once we address the risk portion of it,” says Varma. “Once we are able to say that operating renewable assets in India is as secure as you can get, then you get the bond market and the pension investors coming into the process. You need to move from a private-equity play to a pension play for renewable assets.”

But Anand Rohtagi, managing director of Synergy Consulting, warns: “I don’t think India is ready for the equity capital needed for the quantum of solar technology you are looking at. If you see where India stands today, we have had domestic developers look at the market, international investors are standing behind the domestic developers – there is not a single international developer looking at the market. That’s where the issue lies.

“India today does not have access to long-term equity capital. Most of the capital you see is short term. For the sector to grow it needs long-term capital – it needs players who can hold equity for 15-to-20 years. So India is a long way from the equity-funding cycle.”

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