Funds Uptick

Recent transactions point to growing equity investor interest

The past two years have witnessed a somewhat sluggish growth in renewable energy capacity addition. However, the industry has responded well to the government’s call for climate-compatible growth by ramping up capacity on a long-term basis. Growing at an average rate of 17.5 per cent every year between 2014 and 2019, the share of renewables in India’s total energy mix has increased from 6 per cent to 10 per cent. Today, with an installed base of 83 GW, plus 31 GW under development and a further 35 GW out in tenders, India is among the top five clean energy producers globally and is well on course to surpass its original target.

Not surprisingly, this growth has coincided with a sharp increase in investments in the sector from both domestic and foreign sources. The emergence of a competitive renewables IPP community has encouraged several global funds to invest in the sector. They have either entered the sector or are at advanced stages of discussion regarding investment. The list of foreign companies that have firmed up their India investment plans includes Singapore-based GIC Holdings, the Abu Dhabi Investment Authority, SoftBank, Brookfield,  the Canada Pension Plan Investment Board (CPPIB) and Caisse de dépôt et placement du Québec (CPDQ) from Canada, ORIX (Japan), and Sembcorp and APG from Holland. The private equity  (PE) arms of Goldman Sachs, JP Morgan and Morgan Stanley have also entered the sector and continue to show faith in this market after reaping reasonable returns. In fact, a look at recent transactions in the Indian renewable energy space reveals that the industry has evolved and is now characterised by its large size, lower risks, predictable yields and medium to high returns, which is exactly what foreign institutional investors and global strategic power sector players seek.

Renewable Watch presents the latest trends and transactions on the equity side of renewable energy financing and the way forward…

Mature market transactions

In a transaction that indicates the maturing of the renewables IPP market, the Edelweiss Infrastructure Yield Plus fund has bought a 74 per cent stake in the Indian solar business of France-based Engie SA. Under this deal, the asset holding will get shifted to long-term financial investors, while the developer will continue to add value in terms of new capacity development. Engie plans to set up 2 GW of renewable energy capacity in India. It has an 813 MW solar portfolio through Solairedirect, besides a wind power capacity of 280 MW.

“In India, as in many other countries, ENGIE uses all its engineering capabilities to design, finance and build renewable energy production capacity. Once this capacity is built, ENGIE partially disposes of its interest and retains the operations and maintenance of the asset. This transaction allows us to accelerate the implementation of our strategic develop-build-share-operate model in renewables, and to free up capital to keep investing in the very dynamic Indian solar market,” according to a press statement by the company.

Another recent transaction reflecting a similar trend is that of French energy giant Total SA acquiring a 50 per cent stake in the Adani Group’s solar assets for $510 million. After Malaysia-based Petronas, which had bought solar rooftop project developer Amplus Energy in 2019, this is the second instance of a major global oil firm investing in the Indian renewable energy sector. As per the ongoing deal, Total will own half of a joint venture (JV) company that will house the solar assets of Adani Green Energy Limited, which has a 2,148 MW solar project portfolio across 11 states.

The transaction, the second major proposed investment by the French energy major, comes amid a rough phase being experienced by the Indian clean energy sector. The renewable energy industry is facing a tight lending environment, mounting dues from utilities and record low tariffs. The low solar and wind power tariffs have made banks wary of lending to renewable energy developers as they are apprehensive about the viability of projects. However, despite the prevailing uncertainties, Total’s chief executive officer Patrick Pouyanne is confident of the growth potential of this market. In a press statement, Pouyanne stated, “This interest in over 2 GW of solar projects represents a real change in the scale of our presence in the renewable energy sector, which has a significant growth potential in the coming years. It will contribute to our ambition to deploy 25 GW of renewable energy by 2025.”

Increasing interest in the rooftop space

One segment that is attracting significant interest from investors despite facing on-ground challenges is rooftop solar. In a recent development, EverSource Capital, a JV between PE firm Everstone Capital and Lightsource BP, has acquired Origin Renewables – a company which is active in the commercial and industrial (C&I) domain of the solar rooftop space. Origin has implemented solar rooftop projects with a capacity of 515 kWp for C&I customers having a potential pipeline of over 50 MWp. This is the third investment by Ever Source Capital since the time it was formed in April 2018.

New renewables-focused funds

Following in the footsteps of global funds such as the Everstone Group, the CPPIB, Brookfield and CDPQ, European alternative asset manager EQT and Singapore-based state investment firm Temasek Holdings Pte have also announced plans to jointly set up O2 Power, a $500 million renewable energy platform in India. O2 Power will target more than 4 GW of installed capacity across the solar and wind segments, comprising greenfield projects as well as mergers and acquisitions. This would be EQT Infrastructure’s first investment in India. It is investing in the platform through its EQT Infrastructure IV Fund. With this transaction, the EQT Infrastructure IV Fund is expected to be 60-65 per cent invested.

Resonating Pouyanne’s views, Fabian Gröne, partner, EQT Partners, and investment adviser to EQT Infrastructure, said, “Being the second largest renewable energy market in the world, India presents significant investment opportunities.”

Lenders remain cautious

All these moves and transactions point towards equity investors’ strong belief in the country’s renewable energy commitments. These developments will definitely encourage many other global firms to relook at their India investment plans, given the massive potential that the country offers. But what might really matter for the renewable energy sector is a change in the mindset of the country’s domestic lenders, who still need to be assured that the sector offers promising returns. The rooftop solar segment, for instance, suffers from serious regulatory and funding issues. However, if these problems are addressed, it could help the segment boom. The utility-scale segment, meanwhile, is faced with  challenges pertaining to timely payments, on-ground project implementation, and inconsistent policies, etc.

Overall, India is seeking an additional clean energy investment of around $80 billion till 2022, an amount which will grow more than threefold to $250 billion during 2023-30. The government can do a lot more to counter potential dampeners, for example, by speeding up the implementation of renewable energy transmission infrastructure, easing land acquisition norms at the state level, and ensuring the sanctity of contracts and revisiting aggressive tariff caps on reverse auctions that can severely dent investor margins. It should also work to turn around discoms so that they can honour their renewable purchase obligations. A payment security mechanism should be introduced to counter the risks pertaining to discoms not fulfilling their contractual obligations. Meanwhile, a foreign exchange hedging facility might allay investor worries around currency volatility. If these issues are adequately and immediately addressed by policymakers, it will further lower the risks and boost investments on both debt and equity fronts.

By Dolly Khattar

GET ACCESS TO OUR ARTICLES

Enter your email address