Brookfield Asset Management

Building its portfolio through the owner-operator route

A large number of domestic and global players in the clean energy space are entering the Indian renewable energy sector. Large undeveloped capacities, falling capital costs and tariffs, and the improving regulatory scenario are some of the factors that have contributed to the exponential growth of the sector. As a result, international investors are seeing it as an attractive investment opportunity with significant returns in the long run. Brookfield Asset Management is one such organisation that has recently expanded its footprint into the Indian renewable energy space. A Canadian alternative asset management fund, Brookfield has an overall portfolio of $285 billion across the globe.

Established in 1899, the company has a presence across more than 30 countries with assets in the real estate and infrastructure sectors, including renewable energy. It has been an active participant in the Indian asset management space since 2009, acquiring prime real estate in the country along with toll road assets. It has a large presence in the global renewable energy market as well, with over 17 GW of installed capacity across 840 generation facilities in the hydro, wind and solar power segments.

Current portfolio

Brookfield entered the Indian renewables market with a portfolio of about 300 MW, which it acquired as part of its takeover of SunEdison’s yieldco, TerraForm Global, in December 2017. The latter had assets worth 952 MW in Brazil, China and India, among other countries. The 300 MW of renewable energy capacity was set up by SunEdison and later sold to TerraForm Global. According to Vinay Kumar, managing director, renewables, Brookfield Asset Management, the company’s initial growth in the country will be through inorganic means, and later a growth team will undertake organic project development.

Brookfield is for now focusing on growing through mergers and acquisitions in the Indian renewable energy space. It is mainly targeting operational assets owned by large companies as well as smaller ones, including independent power producers (IPPs), existing funds and Indian corporates. Brookfield’s key differentiating factor, according to Kumar, is that it is looking to acquire a controlling stake in the asset or buy it out entirely, and not own only a part of it. The aim is to operate the asset on its own instead of giving it to a third-party operator. As such, Brookfield belongs to a separate class of investors known as owner-operators.

Brookfield’s Indian team consists of around 40 people, maintaining 200 MW of solar assets and 100 MW of wind power plants across the states of Madhya Pradesh, Gujarat, Rajasthan and Tamil Nadu.

Development opportunities

In a market where the entry barriers are low and exit barriers even lower, sustainability becomes a significant question for a project developer or investor. On the flip side though, this provides an opportunity for large investment funds such as Brookfield to absorb the projects of outgoing entities to build its own portfolio. The choice of asset depends on the project profile and the investment horizon of the exiting investment funds, according to Kumar. There are close-ended funds, wherein the investor exits from the project after a specific tenor, and there are pension funds that tend to stay on for longer durations. So, inherently, given the model the sector has for recycling capital, assets will continue to be bought and sold, providing opportunities to new players like Brookfield, with deep pockets and vast sector experience, to carve a niche for themselves in the market.

The Indian renewable energy market has also transformed to welcome newer business models. Earlier, funds focused only on project development, whereas now project acquisition and development have emerged as key trends. So far, funds have been largely active in the project development space, mostly as passive investors, while project-level operations are carried out by the promoters and IPPs. According to Kumar, Brookfield is working towards an alternative business model that combines the acquisition end with the operation end of market development. While the company will not enter the competitive bidding space right away, it will purchase and operate existing assets. Moving forward, it is likely to enter the project development space by bidding for utility-scale, open access and rooftop projects as well.

Sector perspective

The solar and wind power segments have achieved parity in terms of tariffs, both falling to levels as low as Rs 2.44 and Rs 2.43 per unit, respectively. However, Kumar is of the opinion that the tariff parity may be theoretical. The wind power financial model is significantly different from the solar power model. While solar tariffs are extremely sensitive to engineering, procurement and construction costs, wind power tariffs are sensitive to the plant load factor (PLF). Wind capacity has so far been concentrated in high-wind areas, where high PLFs have led to lower tariffs for the same returns. At present, wind tenders are being released for project development in high-PLF states such as Maharashtra, Gujarat and Rajasthan, much to the disappointment of other states such as Telangana and Andhra Pradesh. The high-PLF states will be the focus areas for Brookfield as well.

According to Kumar, solar tariffs are expected to fall further on account of the lowered Chinese target. This will lead to an oversupply in the market. It is expected that panel costs will fall by 35 per cent by 2019 and 15 per cent annually from 2020 onwards. Tariffs will fall from Rs 2.90 per unit at present to Rs 2.40 per unit. Wind power tariffs, on the other hand, are likely to remain steady as the high-PLF sites that were bid in the initial tenders will no longer be available.

The challenges in the Indian renewable energy market exist in the form of policy ambiguity and differences between states and the centre as well as among states. Moreover, the implementation of policies varies across states, making it difficult to standarise the business across the country. Further, interest rates are increasing, and account for the largest share in the total renewable generation cost, ultimately impacting tariffs.

Future plans

With the acquisition of TerraForm Global, Brookfield acquired assets in multiple countries including India and China. At present, the company is focusing on building capabilities only in these two countries, which, according to Kumar, are its growth engines. Considering the immense potential for asset growth in these countries, Brookfield has not restricted itself to a target. It is also in the process of selling the TerraForm Global assets in other countries such as Malaysia, Thailand, South Africa and Uruguay.

China provides significant opportunity for fund management companies. Brookfield has plans to expand its presence in the Chinese market as a project developer and operational asset owner. According to Kumar, the country has been installing 50-55 GW of renewable energy capacity every year and is a huge market for reselling of assets, and Brookfield is expected to leverage this opportunity. The company has entered into a joint venture partnership with one of China’s largest warehouse owners to set up rooftop solar plants on all its warehouses across the country, presenting an opportunity of about 1.5 GW, an indication of the business scale available in China.

In India, given that about 80 GW of solar and 30 GW of wind power are yet to be developed to reach the 175 GW target by 2022, the opportunities for a large asset management fund are numerous. Even beyond 2022, Kumar says, the domestic renewable energy market will continue to grow at a steady pace as the low cost of energy will sustain capacity development.

By Ashay Abbhi

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