The past year has been a mixed bag of developments for the Indian wind power segment, with bids becoming increasingly aggressive and tariffs continuing to head south. Lenders, investors and financiers are increasingly facing the heat as developer margins continue to diminish. Meanwhile, access to competitive low-cost, long-term finance continues to be a challenge. New sources of finance are also facing some resistance considering the country’s traditional dependence on debt financing instruments. Key financiers came together at Renewable Watch’s eighth annual conference on wind power to discuss the financial challenges in the segment, the role of bonds, the prevailing low-tariff environment and the segment outlook. Excerpts…
What is your perspective on the current risks and challenges in the wind power segment?
The support required by the developers who bid aggressively in the competitive bidding process is becoming a challenge for us. With low tariffs, bidders are unable to match the expected internal rate of return (IRR) at the prevailing cost of debt. Some of the other recent events in the segment are disturbing as well. The efforts of discoms to terminate power purchase agreements (PPAs) in the past year came as a jolt to the segment. Such incidents create uncertainty and keep lenders at bay. While it is a step in the right direction for a segment that has matured, it will still impact the equity investors adversely. The backing-down of renewable power plants by discoms is another challenge. As lenders, it is commercially not feasible to underwrite back-downs as we are not aware when the discom would change its stance and start evacuating power from these plants again.
Meanwhile, we are excited about new developments such as wind-solar hybrid projects and pumped-hydro storage, and will continue with our commitments towards this segment.
The Indian wind power market has seen an interesting change in the last couple of years. Initially, we had the feed-in-tariff (FiT) regime wherein tariffs were based on the revenue generated by a wind farm.
Moreover, in many states, the maximum plant load factor (PLF) was capped and hence, developers had no incentive to purchase expensive wind turbines that could generate higher PLFs. As a result, during this period, wind power plants at sites with good wind speeds used less efficient turbines. Therefore, higher capacity turbines that were available in the international market did not make it to India. Now with the move towards competitive bidding, there is a clear incentive to purchase high quality turbines which can generate a higher PLF. Our biggest risk assessment is to validate this PLF calculation. The turbines have performed in the European countries but do not have a proven track record in India. There is lack of evacuation infrastructure even at good wind sites that can generate higher PLFs. The decision of the Andhra Pradesh government to remove GBI is against the rules set earlier with respect to PPAs. Such developments create uncertainties regarding cashflows from a wind power plant.
During the initial phase of development in the segment, several discussions revolved around introducing tax credits to incentivise wind-based investments. In 2006-07, the industry witnessed the development of wind projects through the independent power producer (IPP) mode for the first time. This required incentives such as accelerated depreciation (AD) to be provided by the government. Moreover, apart from the capital subsidies, a generation-based incentive was also provided, which, together with AD, helped the IPP mode gain traction. Also, initially, the total wind power potential was estimated to be around only 45,000 MW. Whereas now with the availability of turbines of larger capacities, higher hub heights and longer blades, these estimates have changed drastically.
What is your exposure in this segment?
Piramal Capital has an exposure of Rs 14 billion to Rs 21 billion. This includes both structured and project finance. As a non-banking financial company (NBFC) we raise money from the banks and lend it to the developers.
We have financed renewable energy projects of about 8 GW. Of this, 2 to 3 GW are wind projects.
In the last five years our investments in the solar and wind segments have increased tremendously. We have stopped financing biomass projects because of some issues. However, we are continuing to finance biomass consortiums as these are less risky. Last year, we sanctioned Rs 120 billion, out of which 70 per cent was earmarked for wind and solar projects.
Are the low tariff bids by developers justified?
Developers are smarter than lenders. In 2016, when the tariffs ranged between Rs 5.50 to Rs 6, Sun Edison bid at Rs 4.60 and won the project. In the case of solar power, the excess capacity from China is being imported into this country, which results in the plummeting prices of modules. Therefore, the low tariffs seem to be justified. We have financed one wind power project in the competitive bidding regime and are looking to finance a couple more. The IRRs have fallen and, as financiers, we are now looking at the debt service coverage ratios (DSCR) instead of IRRs.
Capital expenditure and PLFs are the two important aspects to determine tariffs. In the wind power segment, the capex costs have reduced. Moreover, the use of new technology like higher hub heights and longer blades will increase the PLFs. Therefore, the low tariffs in the wind power generation segment are justified.
For solar and wind projects, the return on investment ranges from 9.55 to 10.75 per cent, which depends on the rating of the project. We look at DSCR for wind and solar projects. In any given year, at any tariff, the DSCR should not go below 1.
What role does bond financing play to meet the investment needs in the renewable energy sector? What is the role of InVITs in the sector?
An InViT is a greater risk-mitigated financial product. The end-takers for InViTs are investors participating in safe infrastructure projects that have a yield of 11 to 12 per cent. These trusts can be leveraged only up to 49 per cent and the remaining capital formation needs to come from InViT unit holders. Hence, these trusts have a combination of equity and debt. The benefit is that the investor can get to participate in the largest transmission asset or the largest road asset in India and make an annuity like return on it. Now, some developers are exploring this in the renewable space as well. Renewable energy assets are self-generating in nature. Hence, InViT becomes a natural parking vehicle for developers that can transfer the asset to a permanent capital holder after its commissioning.
Long-term capital finance is inevitable in the renewable energy sector as developers need capital for 20 to 25 years. Initially, there was traction in the long-term debt financing market. However, the overseas bond market has now dried up. This has happened because of two primary reasons – tightening of rules by the Reserve Bank of India regarding the issuance of masala bonds and increase in the yields of the currently listed bonds. In India, the bond market can gain traction if these are structured well. It would be easier for bonds to raise money if the centre and state projects are pooled together. InViTs are a natural mode of finance for assets with stable yields that require long-term financing. InViTs would gain traction when some renewable players get listed. Hence, there is a need for innovative financing sources.
Bonds remain the only source of finance for renewable energy projects with low tariffs. The cost of borrowing is quite high at 8.5 to 9 per cent. Last year, we raised a masala bond of Rs 21 billion at 7.2 per cent per annum. The consolidation in the developer’s market helps raise money through the bond market as they now work with bigger assets.
What is the future outlook according to you?
My reading of the future for the wind power segment will be cautiously optimistic. The evacuation infrastructure in the country is being upgraded. Also, with the downward movement of tariffs, the risk of commercial curtailment will reduce, thereby decreasing the overall risk profile of the asset. However, the PLFs of Europe-made turbines need to be proven in the Indian context. Therefore, initially lenders will move cautiously and look for a higher coverage. However, when the technology gets proven after thorough assessments, lenders can go ahead aggressively.
Going forward, we believe that the focus should be on the development of offshore wind plants as these will have higher PLFs, and the refurbishment of old plants that use less efficient machines.
Developers in our country have been using debt financing for long. Hence, there seems to be some resistance to new sources of finance. The use of pension and gratuity funds to finance renewable energy projects should increase in our country. Our internal target for the disbursement of loans for the next year is 150 billion. Of this, 80 per cent would be for solar and wind projects.