Investment Landscape

Financing India’s 175 GW renewables target

Investments in the Indian renewable energy sector have increased significantly since the government announced the target of achieving 175 GW of installed renewable capacity by 2022. According to a recent report by Bloomberg New Energy Finance, asset finance grew from $6.6 billion in 2013-14 to $10.5 billion in 2015-16, with the solar power segment receiving the maximum investments.

Despite this, there is a need to further enhance funding for the sector to keep it on track to achieve the ambitious target and fulfil India’s commitment to reduce the carbon emission intensity of the GDP by 30-35 per cent by 2030. As per industry estimates, around $100 billion of asset finance is required during the period 2016-22, including $30 billion in equity capital.

Securing investments of this magnitude is a formidable task. Commercial banks, in both the public and private sectors, are a major source of financing for infrastructure projects, including renewables. However, banks in India have the highest cost of capital in the Asia-Pacific region. The State Bank of India and other national banks provide debt at interest rates of 11-13 per cent. High inflation, a rapidly growing economy, intense competition to get investments and the inherent risks of a developing nation are all factors contributing to the high interest rates in India. In addition, project developers are concerned about the short debt tenors offered by Indian banks. According to a Climate Policy Initiative report, higher costs and inferior terms of debt in India raise the cost of renewable energy projects by 24-32 per cent as compared to similar projects financed in the US and Europe. Thus, both high capital flows and lower financing costs are critical for meeting the renewable energy capacity addition targets.

On the policy front, the allocation to the Ministry of New and Renewable Energy has been increased significantly in the Union Budget 2016-17. From about Rs 62 billion for 2015-16, the allocation has gone up to Rs 101.92 billion for 2016-17. The government has also proposed an increased investment of Rs 1.73 billion for the Solar Energy Corporation of India (SECI), up from Rs 1.2 billion (revised) in 2015-16.

In the Union Budget 2016-17, the government, moreover, announced a sharp reduction in the accelerated depreciation (AD) benefit available to the wind industry – from 80 per cent to 40 per cent – with effect from April 2017. This reduction in AD is expected to spur wind capacity addition in the short term as developers rush to avail of the benefit before the April 2017 deadline.

Growing interest among domestic lenders

Domestic lenders, which were earlier wary of making large-scale investments in the sector, are now enhancing their support to it, given the experience gained over the years and the continued government focus on the sector. Most lenders have transitioned from a conservative to a highly optimistic outlook for the sector in recent times. They have so far had a good experience in financing solar power projects and do not have any non-performing assets in the segment.

The country’s only non-banking finance company dedicated to clean energy funding, the Indian Renewable Energy Development Agency (IREDA), disbursed loans of Rs 46 billion to clean energy players in 2015-16. It plans to disburse Rs 63 billion in 2016-17, against loan sanctions of Rs 100 billion. It aims to raise its annual sanctions to Rs 400 billion by 2022. Significantly, IREDA is working towards converting itself into a commercial bank, proposed to be called the Green Bank of India. The move will enable it to access public funds directly in the form of deposits and consequently lower its lending rates. The agency is also planning to launch its initial public offering by March 2017. Meanwhile, lenders such as PTC Financial Services, YES Bank, and L&T Infrastructure Finance have increased the share of renewables in their lending portfolios.

While the sector has become increasingly lucrative for lenders, there are still various risks and challenges associated with it. On the macro level, lenders have concerns with debt recovery and the legal enforceability of claims in India. The best way for a project promoter to reduce this concern is by building a strong company reputation and banking relationship, as well as through the actual track record of debt repayment, future plans and debt requirements. Recent modifications in the debt recovery rules will make it easier for banks to recover bad loans and thereby make more non-recourse financing available in the future.

At the intermediate level, with respect to the Indian solar market, banks have two main concerns. The first is the limited availability of irradiation data, which forms the basis for projecting future revenues, and the second is the viability of power purchase agreements due to the weak financial health of discoms. The first concern is being addressed through more on-the-ground measuring stations and actual generation data from existing plants, while the Ujwal Discom Assurance Yojana is working towards reducing discom losses.

Private equity on the rise

There have been limited attempts to tap the capital market for financing. This can be attributed to the fact that renewable energy companies are typically small in size and therefore do not find it attractive to raise funds through the capital markets due to the high associated costs and compliance requirements. Moreover, the experience of listed renewable energy companies has so far been disappointing, thus discouraging developers from opting for this route.

However, private equity (PE) firms, which were initially sceptical about investing in renewable power due to technology risks and other reasons, have started providing considerable support to the segment. PE investments in India’s renewable energy space surged from around $350 million in 2013 to over $1 billion in 2015. One of the major PE investment deals in India in 2015 was a capital infusion in Welspun Renewables by GE Energy Financial Services. The latter reportedly invested $570 million in the company. Meanwhile, ReNew Power Ventures, another private renewable energy developer, raised $265 million from various investors. This included $200 million from the Abu Dhabi Investment Authority (ADIA). The remaining was invested by Goldman Sachs and the Global Environment Fund. As a result, the total PE capital in ReNew Power increased to $655 million. In June 2016, Greenko Energy Holdings raised $230 million in fresh funding from ADIA.

The central government is planning to set up an equity fund of up to $2 billion for renewable energy companies. This clean energy equity fund (CEEF) will be jointly set up by three state-run firms – NTPC, IREDA and the Rural Electrification Corporation. Private and public companies will be able to invest an initial amount of more than $1 billion in the CEEF from April 2017. Around $600 million of the initial pool will come from the National Investment and Infrastructure Fund under the finance ministry, and the rest from the three state-run entities.

New instruments gain traction

Green bonds have emerged as a key means of mobilising debt for climate-focused investment solutions and helped reduce the overall cost of funds. These bonds have opened up investment avenues for institutions such as the Green Climate Fund, Green Investment Bank and IREDA, which are mandated to promote and invest only in clean energy. Considering the significant potential of green bonds, in January 2016, the Securities and Exchange Board of India (SEBI) approved new norms for the issue and listing of green bonds on the stock market. As per these norms, companies issuing green bonds will have to make additional disclosures related to the end-use of proceeds, project evaluation and selection, management of proceeds, and report the use of the proceeds on an annual basis.

Private sector lender Axis Bank raised $500 million from global investors by selling green bonds in February 2016. The issue received an overwhelming response, with the bonds being oversubscribed by 2.2 times. This prompted the bank to bring down the bond price. In the same month, Hero Future Energies issued green bonds in the form of non-convertible debentures for Rs 3 billion to expand the company’s wind energy portfolio in India. In January 2016, IREDA issued tax-free green bonds worth Rs 10 billion to reach a broad base of investors. In the past, YES Bank, IDBI Bank and the Exim bank have also raised funds with such issues. Industry experts are of the view that green bonds are likely to become the principal source of financing in the next six to eight years.

Green masala bonds also made their debut in 2016. Masala bonds are rupee-denominated bonds that are issued to overseas buyers. In August 2016, NTPC Limited raised Rs 20 billion through the issue of these bonds in the overseas market. The company had initially targeted raising Rs 10 billion. However, following strong investor support from the Asian market, it upsized the issue to Rs 20 billion. IREDA is also planning a masala bond issue of $100 million to $200 million.

On the equity side, progress is slowly being made on infrastructure investment trusts (InvITs), which are a regulated version of the yieldcos prevalent in the US market. InvITs, like other publicly traded and yield-providing vehicles, are used to free up/recycle developers’ capital stuck in operational projects by securitising the revenue streams and offering the units on the public market. The cash flow of these projects is paid to investors in the form of dividends against the units they have purchased in the trust. InvITs are expected to help the inflow of foreign capital and reduce the exposure of domestic banks in the infrastructure sector. Investors will be able to own, indirectly, part of the portfolio of the projects that are rolled out in the InvIT. Given that an InvIT consists largely of completed assets, it is expected that the returns required by investors will be lower than the financing costs of the developer, including development and construction risks. InvITs have started attracting increased interest after a series of regulatory amendments by SEBI and could be crucial for the estimated $30 billion equity that utility-scale projects need for meeting the 2022 targets.

In May 2016, IL&FS initiated the process of listing its wind energy assets as an InvIT in a bid to raise nearly Rs 20 billion. Further, Mytrah Energy Limited, in July 2016, expressed its intention to list a renewable energy InvIT to develop its wind energy assets. With the InvIT, the company will seek $400 million to expand its current portfolio of 920 MW of installed capacity and 90 MW of under-construction capacity.

Surge in multilateral funding

India has been leveraging its position as a front-runner in the clean energy space to persuade multilateral institutions to earmark a significant portion of their lending corpus for the Indian renewable energy sector. Multilateral institutions offer loans at low interest rates and with longer tenors, and thus present a viable option for financing renewable energy projects.

The past year saw several multilateral agencies committing greater financial support to the Indian renewable energy sector. The Asian Development Bank (ADB) announced that it would increase its assistance to renewable energy projects in India to $6 billion per year by 2020, up from $2 billion per year till 2013. ADB also approved a direct loan facility of up to $175 million for Mytrah Energy Limited for developing a portfolio of 476 MW of wind and 100 MW of solar projects. Meanwhile, the International Finance Corporation (IFC) partnered with the Madhya Pradesh government to implement a 750 MW solar ultra mega power project being developed at Rewa. IFC will help the state government mobilise around $750 million for the project and extend its global expertise to structure and implement the transaction. The Indian government has also applied for a $500 million loan facility from the newly created Asian Infrastructure Investment Bank for financing solar power projects in the country. India is one of the founding members of the bank and is also on its board of directors.

Going forward, it is essential to maintain policy stability across all renewable energy segments to ensure the availability of low-cost, long-term debt from multilateral agencies. Regular project allotment and tariff revisions, and timely funds and subsidy disbursement will enable lenders to commit to investing in this sector. Moreover, stronger power purchase agreements that can provide protection against curtailment risks and guarantee payments will be required to improve the creditworthiness of renewable investments.

The way forward

While the financing sentiment has improved in the renewable energy segment, there is still a long way to go to ensure the availability of low-cost, long-term debt. Innovative financing instruments will take centre stage in tackling this issue, but successfully performing projects and a stable policy environment are imperative for boosting investor confidence and bringing down interest rates.

Till the time financing becomes more readily available in the Indian market, the government needs to shift up gears with a clutch of various financial incentives. Options such as AD may be continued with improvements in the design of the mechanism such that operational performance gets incentivised. In addition, specific tools through which tax credits can be passed on to investors will help broad-base the class of beneficiary investors, resulting in enhanced investments. Further, till the time that the utilities’ pay-out for renewable energy is greater than the marginal cost of conventional power, generation-based incentives could act as a bridge instrument. The government could also consider interest subvention for renewable energy projects, wherein it could directly pay a part of the interest costs to banks. Alternatively, central government entities such as IREDA could pool various sources of low-cost funds from domestic as well as international sources. This pool of funds can be administered and managed to refinance banks and financial institutions at a low rate.

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