The wind energy segment has undergone a number of significant changes in the recent past, such as a move from the feed-in tariff (FiT) regime to competitive bidding for project allocation. As such, the segment is faced with uncertainty, which could slow down the pace of growth following a record year. Caught in the crosshairs of these regime and policy changes are financiers, who have adopted a cautious approach to future lending as well as to their past investments. At the “Wind Power in India” conference organised by Renewable Watch recently, leading financiers discussed the current lending environment, key challenges in the industry and ways to overcome them. Excerpts…
The wind energy sector has seen a lot of activity recently. We surpassed the 2016 estimates by adding capacity worth Rs 54 billion as compared to the target of Rs 40 billion. While 2,300 MW was added in 2015, 3,500 MW was commissioned in 2016, the highest in terms of incremental capacity addition so far. India Infrastructure Finance Company Limited (IIFCL) has undertaken 33 projects so far, aggregating sanctions of Rs 39 billion, of which our disbursements are Rs 29 billion covering 2,800 MW. Out of the 33 projects, 32 have already achieved commercial operation date (COD). However, compared to last year, there are fewer projects in the pipeline.
The shift to competitive bidding is an indicator of the proactive stance of the government towards the wind segment. An element of aggression is expected in the initial stages, which will be balanced over a period of time as people gain experience.
The renegotiation of power purchase agreements (PPAs) has created some scepticism regarding the industry. It has also introduced an element of uncertainty, which reduces the viability of projects. We feel that contracts have to be binding under all circumstances. Some degree of specificity and certainty will have to prevail; otherwise all industry assumptions will go haywire.
The renewable energy sector has been asking for financial innovation and IIFCL has come up with a series of new instruments to finance the sector. We undertake direct lending of up to 20 per cent of the project cost. In addition, we are open to a “takeout finance scheme”, which refers to the refinancing of a project a year after it has achieved COD. In fact, one can charge a lower rate of interest through back-ending so that the developer can have the benefit of having completed the project. Moreover, we have reduced our base rate to 8.95 per cent along with the spread, which is now at 20-25 paise, down from 40 paise. Both of these amounts to a benefit of almost 50 paise.
Quasi-equity instruments are also on the table, by way of which we fund 10 per cent of the project cost. When the borrower is unable to raise equity, we provide debt on which interest is charged but not recovered for the first five years. Meanwhile, credit enhancement is also available to wind project developers. Through this instrument, we help them in tapping the bond market for more capital. Further, IIFCL provides a guarantee by which the developer’s rating automatically becomes “AA” or “AAA”, which makes it investible, enabling it to borrow from the bond market.
It is my belief that five years down the line, there will be ample power, reasonable tariffs and reasonable prices if we move in the right direction.
The wind industry is undergoing a paradigm shift from the FiT model to a competitive bidding model, as a result of which we are witnessing less activity this year as compared to last year. Attempts to renegotiate PPAs and the issue of grid curtailment have made us cautious about the sector at the moment. As of now, Axis Bank has an exposure of Rs 50 billion. Recently, we also conducted a green bond infusion of $500 million, which has been fully deployed.
The wind segment is currently weighed down by a number of issues. One of the challenges is the big data problem. In our financial models, the most sensitive variable is the plant load factor (PLF). There is empirical evidence of a wide divergence between the findings of wind assessment studies and real-time PLFs. Further, there are issues regarding land acquisition and right of way. There is also a growing concern that capacity addition is running ahead of evacuation infrastructure. While new capacity addition takes 10-12 months, installing evacuation infrastructure takes nearly two to three years. Therefore, evacuation planning has to be in place before adding capacity.
Based on the credit rating of the developer, we offer rates ranging from 9.5 per cent to 11 per cent and repayment tenors of 15-18 years. We have the standard financial products by way of which we support the project in the operational phase, with a top-up available in the construction phase. Apart from this, we have another product by way of which we open a line of credit backed with a counter-guarantee by non-banking financial companies (NBFCs) and institutions such as IREDA.
Although there is a sense of caution in the wind energy segment that can be attributed to a number of factors such as renegotiation of PPAs, delays in payments and inconsistency of power generation, we remain positive that the segment will become stronger. We are committed to increasing our presence and are selectively looking at opportunities to enable the segment to grow.
PTC India’s portfolio currently comprises 3,000 MW of sanctioned wind capacity. Since 2012, Rs 40 billion has been disbursed, while current outstanding disbursements stand at Rs 35 billion. At present, there are fewer greenfield wind projects compared to last year. However, a trend analysis of wind installations in the past couple of years shows that more than 50 per cent of the installations have taken place in the last two quarters of the year, owing to certain commercial benefits. Therefore, new capacity additions are still expected to happen by the last two quarters of 2017-18.
As an NBFC, our rates are slightly higher than those of commercial banks. We charge more than 10 per cent for projects under construction. Meanwhile, we also offer a discount after COD, typically of 25-50 paise. However, being an NBFC enables us to offer a longer repayment tenor of up to 20 years.
Apart from the basic financial tools, we offer mezzanine financing at a holding company level, wherein our institution funds temporary liquidity till the project achieves financial closure. In addition, an instrument for working capital is being designed and is expected to be launched soon. This instrument is primarily for any company facing liquidity issues post-COD. We also try to be a part of long-term lending so that the prospects of achieving financial closure are visible to us. Further, the declining financial health of original equipment manufacturers affects us significantly. As a result, project implementation gets delayed, which impacts the tariff, in turn affecting the viability of the project. We are trying to decouple such projects in order to make them viable.
As a lender, before the introduction of bidding, wind was considered a more secure segment than solar, not only in terms of generation but also in terms of construction and operation. However, with the tariff decline and the resultant PPA renegotiation issues in the market, the longevity of these issues has become our biggest concern. The central and state governments must work towards settling these issues for the wind industry to get back on track.
In 2016, IREDA sanctioned and disbursed funds of about Rs 25 billion. This year, the company has approved sanctions of about Rs 14.85 billion, of which Rs 8 billion has been disbursed to the wind segment. Capacity addition in 2016 was the highest ever. However, in comparison, 2017 does not look as promising even as there are projects happening on the ground. From the perspective of bankers, there is still activity in the segment by way of refinancing of projects. From a greenfield perspective, there are fewer projects compared to the past two to three years.
Regarding the renegotiation of PPAs, an interesting point is that while there have been discussions, no such renegotiation has actually taken place. The banking and investment community is waiting and watching at the moment.
IREDA charges between 9.7 per cent and 11 per cent for wind projects, based on the credit rating of the developer, while allowing a repayment period of 15 years. We provide securitisation (loan against future receivable surpluses) for all renewable energy projects. We have had a good number of small-hydro projects taking advantage of this instrument along with multiple wind and solar developers. Apart from this, we have short-term loans for equipment manufacturing and other associated services.
What we have observed is that the price is mostly decided by equipment suppliers because in addition to providing equipment, they are providing engineering, procurement and construction services as well. Perhaps with the ongoing aggression in bidding, the suppliers will have to rework their approach. This could result in some compromise on the part of the suppliers. Overall, I am still positive about the Indian wind energy industry.