Growing Confidence

Multilateral institutions scale up funding for renewable energy projects

In a major financial boost to India’s commitment to achieve 175 GW of installed renewable energy capacity by 2022 and reduce the carbon intensity of its GDP by 30-35 per cent by 2030, two of the country’s largest renewable energy companies – ReNew Power Ventures and Hero Future Energies – have secured large-scale investments from multilateral funding institutions. ReNew Power Ventures has raised $390 million from the Asian Development Bank (ADB) and Leading Asia’s Private Sector Infrastructure Fund (LEAP). LEAP is a funding arrangement provided by the Japan International Cooperation Agency and administered by ADB.

Meanwhile, Hero Future Energies has raised $125 million from the International Finance Corporation (IFC) and the IFC Global Infrastructure Fund, a private equity fund managed by IFC Asset Management Company.

ADB’s investment in ReNew Power

ReNew Power, backed by the Goldman Sachs Group, the Abu Dhabi Investment Authority (ADIA) and the Global Environment Fund, will use the proceeds from ADB’s investment to develop and expand projects aggregating 709 MW across Andhra Pradesh, Gujarat, Jharkhand, Karnataka, Madhya Pradesh and Telangana.

At present, ReNew Power has over 3 GW of commissioned and under-construction clean energy capacity across Delhi, Gujarat, Haryana, Punjab, Madhya Pradesh, Rajasthan, Maharashtra, Karnataka, Telangana, Jharkhand, Uttar Pradesh, West Bengal, Tamil Nadu, Himachal Pradesh and Andhra Pradesh. The company also emerged as the largest winner in the recent auction conducted by the Solar Energy Corporation of India, securing 10 MW of the total rooftop capacity of 500 MW. The company also won a project to install 5 MW of renewable energy capacity for Indian Railways.

ReNew Power has set a target to install over 11 GW of combined wind and solar capacity in the next four years. In March 2016, the company received $250 million in debt financing as part of an agreement with the US government’s development finance institution, the Overseas Private Investment Corporation. In October 2015, it raised $265 million in fresh equity from investors including ADIA.

Meanwhile, ADB has announced that it will 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 renewable energy portfolio comprising 476 MW of wind and 100 MW of solar projects.

IFC’s investment in Hero Future Energies

As per the terms of the transaction, IFC and the IFC Global Infrastructure Fund will acquire an undisclosed equity stake in Hero Future Energies. The latter is likely to use the proceeds to set up 1 GW of greenfield solar and wind plants across the country over the next 12 months. The company has set a target of reaching 2.7 GW of installed renewable energy capacity by 2020. It currently has 300 MW of operational wind and solar power capacity across 12 states.

During 2016, Hero Future Energies raised around $44 million through non-convertible debentures to finance the development of wind energy projects. The debentures were issued with certification from the Climate Bonds Initiative. These were India’s first bonds certified by the Climate Bonds Initiative. The proceeds from these bonds will be used for setting up 521.5 MW of wind energy projects across Madhya Pradesh, Telangana and Andhra Pradesh.

IFC is one of the early investors in India’s renewable energy sector, with its first investment made as early as in 2009. The institution’s portfolio companies have set up over 3 GW of different forms of renewable power capacity in the country. IFC is also currently helping the Madhya Pradesh government in setting up a 750 MW solar power project in Rewa, which will be the largest single-site solar plant once it is completed.

IFC’s total committed portfolio in India stood at $5 billion as of end-June 2016. During 2015-16, it committed $1.1 billion in new investments. In addition to strengthening the local capital markets in India, it focuses on boosting financing in infrastructure and logistics, promoting financial inclusion, facilitating private capital and helping structure public-private partnerships.

Implications for the renewable energy investment landscape

The large-scale investments in Hero Future Energies and ReNew Power Ventures reflect the growing investor confidence in the Indian renewable energy space, particularly among multilateral institutions. Investments in renewable energy have increased significantly since the government announced the installed renewable capacity target of 175 GW 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.

In order to achieve the renewable energy target and fulfil India’s commitment to reducing the carbon emission intensity of its GDP by 30-35 per cent by 2030, there is a need to enhance funding for the sector. As per industry estimates, around $100 billion of asset finance is required during 2016-22, including $30 billion in equity capital.

Securing investments of this scale 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 contribute 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 short debt tenors 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 needed.

In this context, multilateral institutions present a viable option for financing renewable energy projects as they offer loans at low interest rates and for longer tenors. India has been leveraging its position as a frontrunner in the clean energy space to persuade multilateral institutions to earmark a significant portion of their lending corpus for its renewable energy sector.

However, there are certain issues involved in securing funding from multilateral development institutions. These institutions fund infrastructure projects predominantly through hard currency loans. However, due to the nature of the international floating exchange rate regime, such loans pose currency risks, which result in uncertainty and potential additional liabilities for the receiving countries. For instance, a solar power plant in India may be financed in dollars, but since the electricity tariffs are in rupees, an asset-liability currency mismatch occurs. In case the rupee depreciates against the dollar by 10 per cent, revenues remain unchanged but the liabilities increase by 10 per cent. Hence, one of the key challenges with regard to receiving international financial support is to determine who should assume this currency risk.

One way to avoid such risks is to use only local currency financing. However, given the limited capacity of local currency financing markets, this approach may not be feasible.

Moreover, many of the multilateral financing groups that played a major role in the Jawaharlal Nehru Solar Mission Phase I have started reaching country exposure limits. They are now exploring clean energy financing opportunities in other developing economies and may play a lesser role in future projects.

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 encourage lenders to invest in this sector. Moreover, stronger power purchase agreements that can provide protection against curtailment risks and guarantee payments will be required to increase the creditworthiness of renewable investments in the country.

By Puneet Kumar Arora

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