Interview with K.S. Popli

“Financing will not be a bottleneck for renewable projects”

The Indian Renewable Energy Development Agency (IREDA) is one of the oldest financial institutions supporting renewable energy development in the country. In an interview with K.S. Popli, chairman and managing director, IREDA, talks about the financing trends in the sector, the role of IREDA and the future outlook…

How has the investor sentiment changed in the past one year in terms of ease of doing business in India?

In the past one year, the government has taken several steps towards creating a business-friendly and governance-oriented financial and economic environment in India. Several flagship schemes have been launched, including “Make in India”. Foreign direct investment (FDI) grew by over 30 per cent to $21.62 billion during the first half of 2016-17, mainly due to the ease of doing business and relaxation in FDI policies.

The government has taken several policy measures, including amendments to the Electricity Act, 2003 and the Tariff Policy for strong enforcement of renewable purchase obligations (RPOs) and the introduction of renewable generation obligations (RGOs). Other measures include setting up exclusive solar parks, implementing the Green Energy Corridors project, identifying large government buildings for rooftop projects, mandating rooftop solar and 10 per cent renewable energy under the guidelines for smart cities development, granting infrastructure status to solar projects, allowing housing loans from banks/the National Housing Bank for rooftop solar installations, launching the Integrated Power Development Scheme, making net metering compulsory, and raising funds from bilateral and international donors such as the Green Climate Fund.

As a lender, how would you assess the renewable energy sector’s performance over the past year? What were the key highs and lows for investors?

The Indian renewable energy sector is growing rapidly and presents an opportunity for strong financial returns. The total annual investments in utility-scale projects crossed the $10-billion mark in 2015. In 2015-16, the sector witnessed an unprecedented capacity addition of 6,938 MW due to record solar power installations of 3,019 MW. During 2015-16, a wind power capacity addition of 3.42 GW was achieved, which, incidentally, is the highest-ever wind power capacity addition in the country during a single year. The government is working in mission mode and has taken several policy and other initiatives to increase the renewable energy capacity in the country.

What are your views on the growing interest among international institutions to finance renewable energy development in India?

India’s initiatives to build a sustainable economy through renewable energy sources has been acknowledged by bilateral and multilateral agencies like AfD, KfW, JICA, ADB, IFC and the World Bank, and they are increasing their exposure in the country’s renewable sector either directly by taking up exposure in projects or through banks and NBFCs. This shows their confidence in India’s renewable energy policies, regulatory framework and conducive environment. Therefore, financing for renewable projects will not be a bottleneck. This will encourage competition and decrease the risk premium for renewable energy projects.

What is your opinion on the emerging bond market in India?

The global green bonds market is racing towards a record year with $35 billion of such bonds being issued in the first half of 2016, according to the Climate Bonds Initiative. This compares to a total issuance of $41.8 billion during 2015. India has emerged as a preferred destination for investors wanting to put their money into projects with a low-carbon footprint. Last year, India had raised green bonds of $1.1 billion. The country now ranks seventh internationally for cumulative green bond issuances, amounting to $2.7 billion as of October 2016, most of which has been launched in 2016. Some of the recent green bonds issues have been launched by PNB Housing, Axis Bank, ReNew Power, NTPC, Greenko, YES Bank and Hero Future Energies.

In the absence of support mechanisms such as accelerated depreciation (AD), how do you see lender interest evolving in the segment?

Incentive programmes like AD have been effective in building India’s wind generating capacity. The present scheme of generation-based incentives (GBIs) for IPPs is applicable till end-March 2017 only, while AD benefits are proposed to be reduced to 40 per cent from the current 80 per cent level. The government is also looking to move to a new system of reverse bidding for certain wind energy projects versus the current feed-in tariff mechanism. The AD incentive is not necessarily valued in the same way by every developer. In fact, some developers may not opt to take advantage of AD at all (and may claim GBI instead), for various reasons. Lenders, while extending loans, evaluate the viability of the projects taking into account the applicability of tariffs, incentives, etc. I do not foresee any difficulties for lenders in this regard.

What are the key issues in renewable energy financing?

The most important challenge is the poor financial health of power offtakers, mainly state discoms, and delays in payments by them. This adversely impacts the cash flows for repayment to the lenders. There are other challenges relating to non-compliance with RPOs, inter-state sale of power, transmission charges, transmission corridor congestion, clearances and evacuation infrastructure.

The government has launched the Ujwal Discom Assurance Yojana (UDAY) for debt recasting for discoms, which is expected to yield good results. The regulators are also closely monitoring the renewable energy certificate (REC) market and are doing their best to ensure that RECs become an important instrument for renewable power market development.

Some industry players feel that the 0.25 per cent interest rate rebate offered by IREDA for repowering of wind projects is not satisfactory. What is your view on this?

For repowering projects, IREDA has agreed to provide an additional interest rate rebate of 0.25 per cent, which is over and above the rebates available to new wind projects being financed by IREDA. Our current lending rates for wind projects are very competitive.

What are your thoughts on encouraging off-grid renewable projects that often lack financier interest?

The government is committed to providing “Power for All”. Decentralised renewable energy-based rural electrification would play a key role in this. Investors, developers and technology providers are showing keen interest in this segment and are trying to understand the business model, the commercial viability, and risks and opportunities that it presents. IREDA has recently signed a sixth line of credit with KfW, specifically for supporting off-grid solutions in areas that have no or very limited access to modern energy services. This line of credit will play a crucial role in kick-starting the off-grid market and funding the requirements of bankable project proposals. For utilising these funds, IREDA has launched the “Access to Energy” scheme to finance off-grid projects with a first-loss mechanism to cater to this emerging market.

There is a proposal to convert IREDA into a green bank. How will this help the agency and the renewable energy sector?

Converting IREDA into a green bank shall be without any alteration in its basic structure. As a green bank, IREDA may offer new innovative financing products for emerging clean energy and energy-efficiency technologies, and other deserving market segments. The green bank status could help in accessing/attracting private, institutional and international investment to India’s clean energy markets.

As the officially recognised green bank, IREDA will develop and deploy innovative green energy-focused products, especially for markets such as biofuels, small-scale wind power, energy efficiency and other clean technologies by attracting (or “crowding in”) and then leveraging private capital from domestic and foreign sources.

Could you list the five trends that will mark the renewable energy financing scenario in the coming years?

Renewable energy projects are now being looked at favourably by capital market players. New investment vehicles for renewable, such as green bonds, masala bonds and yieldcos, have attracted new classes of capital providers. The key trends in the coming years would be as follows:

  • Initial closure by banks and financial institutions and companies subsequently raising low-cost funds through the bond market and reducing the cost of capital, and enhancing their equity returns.
  • Companies raising funds through the rupee off-shore bond market (masala/ green bonds), thereby lowering the cost of capital.
  • Deferred payment from banks and suppliers’ credit will help reduce the cost of capital and enhance project viability.
  • Developing and selling projects while retaining less than 49 per cent equity, which would help in redeploying capital for setting up new projects.
  • Funds/Larger companies/MNCs taking over the assets of Indian companies.

K.S. Popli is Chairman and Managing Director, IREDA.

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