Interview with Gaurav Sood: “Regulatory uncertainties have to be removed for continued confidence in the sector”

“Regulatory uncertainties have to be removed for continued confidence in the sector”

Gaurav Sood, Chief Executive Officer, Sprng Energy

Set up in early 2017 by Actis, Sprng Energy has already built up a renewable power portfolio of 1.55 GW and continues to grow, supported by strong financial backing and the country’s competitive landscape. In an exclusive interview with Renewable Watch, Gaurav Sood, chief executive officer, Sprng Energy, talks about the evolution of India’s renewable energy sector, the various challenges and developments in this space, and the company’s growth plans against this backdrop. Excerpts…

How has India’s renewable energy sector evolved over the past 10 years?

India’s journey in the solar space started a decade ago with the launch of the National Solar Mission and the setting up of a solar target of 20 GW by 2022. It seemed to be a daunting task at the time, as installing projects with sizes of even 1-2 MW was considered quite an achievement then. But the way solar power has gained traction over the years, we have seen our target enhanced to 100 GW of solar capacity by 2022 – roughly five times the earlier target. This in itself shows the growth trajectory the solar segment has taken over the last decade.

The wind power segment’s evolution has not been as smooth. It has always been an original equipment manufacturer (OEM)-driven market rather than an independent power producer (IPP)-driven one, which has made it difficult for the segment to transition from a feed-in tariff regime to competitive bidding. The significant decline in tariffs, and thereby OEM margins, has caused many players to even go out of business. Now, with fewer players in the market, a hike in wind tariffs has also been witnessed. Further, there might be comparatively fewer wind power capacity additions in the near future till issues related to OEM pricing, availability of wind sites and execution challenges are sorted.

According to you, what have been the key hits?

In terms of hits, the first are the various initiatives – be it in the form of targets or policy support from the central and state governments – that have played an important role in the country’s energy transition. Second, the government agencies have together created an enabling ecosystem and competitive market conditions for the growth of the sector. Very few countries in the world have a clear political intent with respect to renewables like India does, regardless of whether these targets are met or not. This gives large players confidence and a long-term vision to invest capital in renewable energy projects. Auctions, particularly, have been hugely successful in providing a level playing field and transparency in capacity allocation, thereby attracting large foreign players. Further, bringing NTPC Limited and the Solar Energy Corporation of India into the picture as implementing agencies was a good move, as it has provided bankability for these power purchase agreements (PPAs). Thus, India has witnessed a host of international funds entering the arena, fuelling extensive growth plans. Along with this, the cost of renewables has declined significantly – from Rs 18 per unit a decade ago to sub-Rs 2.50 per unit currently in the case of solar power and sub-Rs 3 per unit for wind now. This has been the key attribute in making renewables a compelling investment opportunity, particularly in a price-sensitive market like India, which has largely been dominated by thermal power.

“Very few countries in the world have a clear political intent with respect to renewables like India does.”

What has Sprng Energy’s experience been over the past year, especially in light of Covid-19?

Sprng Energy has a contracted capacity of 1.55 GW (comprising 600 MW wind and 950 MW solar), of which 700 MW is operational. This should go up to 1.2 GW of operational capacity by March 2021. Further, we are targeting another 1 GW over the next three to six months, so as to have a total portfolio of 2.5 GW.

Covid-19 has been an unprecedented and unforeseen event that has definitely created some disruptions. In the initial lockdown period, construction work had to be completely stopped at project sites for almost three months due to supply chain issues and labour unavailability. Even now, when work has started, the health and safety of our manpower and that of our contractors is of paramount importance, because of which work has to be stopped temporarily in case of a Covid-19 positive case at the site.

Although the government has given a five-month extension for commissioning timelines, we as IPPs incur significant overruns due to fixed costs, indirect expenses and overheads, and there is no measure to compensate for these. These have a significant negative impact on our project returns. In addition, we have gone through a tough financing phase where lenders became very conservative. Regarding project operations, as electricity was classified as an essential service, we were able to operate our projects during the lockdown. However, key O&M activities such as manual cleaning of solar panels were not carried out properly due to labour and water unavailability, and we had to incur heavy soiling losses. Thus, we tried to move to robotic cleaning at many of our project sites to avoid such losses. Our advantage was that all our projects were remotely managed through our central monitoring systems even pre-Covid, which definitely worked in our favour during the pandemic.

What are the key challenges that IPPs face during project development and operation?

Much of the project capacity set up in the initial years is tied up in PPAs with state discoms, which are in a bad state financially. Governments have tried to bail out the utilities multiple times, but have not been as successful as expected. This is a huge concern for IPPs, as they often suffer from payment delays because of this. This needs to be addressed structurally in an urgent manner to ensure the viability of the entire value chain. Another issue is that the central government has not been able to wield power over state governments in resolving key issues such as those related to land allotment, signing of power sale agreements (PSAs), power procurement approvals, land handover, timeline extensions, tariff renegotiation and contractual issues. This makes investors uncomfortable, which is detrimental to the growth.

A key challenge that has somewhat derailed the sector in the last year and a half is that although bids have been issued, there is a lack of demand. Covid-19 has further exacerbated the issue, because of which PSAs are not being signed in time and there is no certainty of project completion timelines. It is quite challenging, as tariffs have been declining rapidly and any delay in signing PSAs and PPAs makes them seem more expensive when compared to the newer bids. The solar power segment has overall been heading in the right direction, with probably the only exception being the unplanned implementation of safeguard duties and confusion regarding change in law that resulted in many projects being stranded. While the government’s intention to promote domestic manufacturing is right, India does not have the required local supply chains in place to cater to the huge demand.

Do you expect hybrid and RTC tenders to become the norm going forward?

The state of our discoms today is such that they would like to source power at competitive prices. If the blending of wind power and solar power or the addition of energy storage to the mix increases the tariffs significantly, then power offtake could become an issue. RTC power has huge potential for uptake in the country, provided storage costs become more affordable.

How is the current investor sentiment regarding large utility-scale projects?

Investor sentiment to invest large capital in these projects is definitely there, which is evident from the competition in the sector. We began as an IPP just three years ago, and already have 1.5 GW-plus contracted capacity. This has been possible due to India’s competitive landscape, the increase in the scale and size of projects, the transparency in the sector, and a clear intent from the government, unlike many other countries where it is not possible to attain such a scale in such a short time.

What investors are concerned about is the regulatory uncertainty in the sector. For instance, we had to wait for close to two years for PSAs to be adopted and power procurement approvals to be done for some of our projects after bidding and PSA signing. We, as an IPP, cannot build a project till a PSA and power procurement is approved and market conditions and costs can change in the meantime, impacting our returns. Then IPPs will have to get stuck in regulatory and legal disputes over contracts, forgo bank guarantees, or even build a project after taking a hit in margins, which does not present a positive picture to the investors. Thus, these structural issues need to be addressed urgently. Further, apart from the State Bank of India, we largely have non-bank financial companies financing the entire sector. We need to have more participation from banks in terms of financing so as to have competitive cost of capital and different sources of funding. Thus, overall, we need to lower the cost of financing and also have more channels of raising money. Consolidation is definitely on the rise as implementing new projects from scratch is much more challenging than simply buying a built project that is free from regulatory uncertainties. These operational projects fetch good valuations in the market, and there is a fair competition for these assets.

In your view, what are the three urgent steps required to brighten the investment prospects in India’s renewable energy space?

Firsty, energy demand has to rise to create offtake opportunities for renewable energy. Second, regulatory uncertainties have to be removed for continued confidence in the sector. And finally, transmission and land constraints have to be addressed to lower project development risks.