The utility-scale renewable energy sector in India witnessed contrasting growth patterns between 2020 and 2021. Despite the macroeconomic disruptions caused by the Covid-19 pandemic, the solar PV and hybrid solar-wind capacity awarded rose by 35 per cent year on year to 21 GW in 2020. However, the progress slowed down in the first half of 2021, with only 2.6 GW of capacity awarded. The wind energy segment remained sluggish, with no new projects awarded in 2020.
Owing to the greater focus on clean energy targets, both by the government and the industry, the sector has witnessed rapid technological and regulatory advancements over the past two years. Innovations in tender design, improved storage capacity, development of new green fuels, and integration of renewable energy have opened up new avenues for investment in the sector. An analysis on the returns associated with these developments is crucial.
The Council on Energy, Environment and Water’s Centre for Energy Finance and the International Energy Agency recently released the fourth edition of their Clean Energy Investment Trends series. The series highlights the progress on key parameters associated with green energy investments in India. It provides insights into the opportunities and potential risks for investment, and examines the future implications for policy action and industry decisions.
Renewable Watch presents the key findings of the report regarding investment trends, industry landscape, terms of debt and future outlook for clean energy investments in India…
Using a market concentration metric, the Clean Energy Investment Trends report assessed the degree of competition in the renewable energy sector. Market concentration typically depicts the share of top developers in the total project capacity auctioned in a particular year. Market concentration in the Indian solar PV segment increased tremendously in 2020 as well as in the first half of 2021. This can be attributed to an 8 GW manufacturing-linked tender awarded to two developers in 2020, low capacity tendered as well as fewer players bidding in auctions in 2021. New Indian developers such as O2 Power and HES Infra entered the market in 2021. Indian CPSUs also showed increased participation in auctions, with access to cheaper debt due to their quasi-sovereign status. The continued participation of CPSUs is likely to keep market concentration at elevated levels in the short to medium term. Due to no significant developments or auctions in the wind markets in India, market concentration for 2020-21 could not be determined.
A noteworthy characteristic of the renewable energy industry landscape in India is that while the capacity awarded each year is concentrated among a few developers, these developers change every year. The Investment Trends series defines the churn rate as the extent of change in the top 10 developers with respect to the previous year. With new domestic and international entrants in the market in 2020 and 2021, the churn rate is higher in the solar PV markets. However, the rising targets of CPSUs to expand their renewable energy portfolios can be expected to reduce churn rates in the coming years as they are likely to hold their positions in the market. No churn rate has been indicated for the wind sector due to limited activity and award of projects.
In the year 2020, the Covid-19 pandemic significantly disrupted renewable energy investments in India, with a capital expenditure of less than $10 billion. That said, in 2021, there has been a rapid recovery of investments, which grew by more than 50 per cent over the year. The solar PV and wind energy sectors represent the of capital spending, constituting over 70 per cent of the total green energy investment over the past five years. The report indicates that 21.2 GW of solar PV capacity was awarded in 2020, including 4 GW of solar-wind hybrid capacity, as compared to 15.7 GW awarded in 2019. However, the first half of 2021 saw a considerable decline in the awarded capacity, with only 2.6 GW allocated in this period.
By the end of 2020, the Solar Energy Corporation of India Limited (SECI) had signed power sale agreements totalling 20 GW. As a result, new solar PV projects were not tendered. While new wind hybrid projects were allocated in 2020, no new vanilla wind capacity was awarded. The first half of 2021 saw a greater share of capacity awarded by state tenders vis-à-vis central government tenders. Roughly 1.2 GW of wind energy capacity was awarded by SECI during this period. Impediments to wind project development include limitations in securing suitable sites, greater investment shift towards solar projects due to the possibility of lower tariffs, and sluggish tendering by the state and central government authorities.
Land concerns and project investments
There are several land-related constraints in the development of renewable energy parks and projects. The Ministry of New and Renewable Energy has put a greater focus on the development of solar parks to enhance the ease of doing business. In November 2020, proposals for developing wind and wind–solar hybrid parks were also extended by the ministry. However, there are several constraints in setting up solar parks and wind and hybrid parks, especially in acquiring land from local communities. Disputes and litigations often create impediments in the progress of solar park development. Limitations for developing projects in parks may further be exacerbated due to more stringent regulations, difficult terrain and uncertainties around timely construction of the evacuation infrastructure.
Ideally, a project should be located close to the delivery point to minimise costs and transmission losses. However, the ecological conditions of a region play a crucial role in determining the overall cost of developing a renewable energy project. As per a recent order by the Supreme Court of India, existing or upcoming power projects in certain regions of Gujarat and Rajasthan are required to be installed with underground transmission lines. The order is a response to the declining population of the endangered Great Indian Bustard due to electrocution from power lines. However, shifting of existing low voltage transmission lines and the construction of new ones underground entails additional costs for project developers. This can negatively impact the viability of renewable energy projects in these regions. Furthermore, the construction of underground transmission lines may create issues related to right of way. Thus, it may be anticipated that new solar, wind and hybrid projects may become more economically feasible for developers in states other than Gujarat and Rajasthan.
Project-level terms of debt
Greenfield renewable energy projects in India are primarily funded by sources of debt from banks and non-banking financial companies. A relatively accommodative monetary policy and greater participation of CPSUs in tenders brought about marginal improvements in the pricing of project-level debt in 2020. Project-level cash flow risks are assessed by financial institutions to determine the terms of debt offered to green project developers. In addition to credit scores, guarantees and collateral can be made available to modulate the risk perception of debt providers. The potential overall risk associated with a project primarily determines the terms of debt.
In the aftermath of the economic and social disruptions caused by the Covid-19 pandemic, the Reserve Bank of India (RBI) undertook an accommodative monetary policy stance to support the revival and recovery of the domestic economy. A similar monetary policy stance has been implemented by central banks globally. The provision of liquidity facilities to financial institutions and relaxation of prudential norms for stressed asset recognition were key steps taken by RBI to improve economic recovery. The moderating impact of these measures could be felt in the benchmark rates of financial institutions. Internal benchmarks are determined using composite scores provided to loan proposals. Factors such as type of site, availability of infrastructure and creditworthiness of offtakers play a key role in determining these scores. Projects built at solar park sites have an edge in terms of timely availability of land and grid evacuation infrastructure.
While a major share of debt capital comes from domestic sources of finance, some international and domestic IPPs also raise capital for greenfield projects from international markets. Debt in foreign currency is often cheaper although the cost of hedging narrows this gap. The greater participation of CPSUs in bidding and tenders for projects is also being witnessed. The cost of borrowing for these state-owned units is typically in line with the cost of the Indian government’s sovereign borrowings as they borrow from bond markets. However, the high cost of debt is factored into borrowing assumptions due to the longer tenure of renewable energy projects compared to that of bond market borrowings.
Equity returns and outlook
The analysis of return expectations for solar-wind hybrid projects suggests a higher initial equity internal rate of return (EIRR) than those for plain vanilla tenders. Innovative tender designs have led to a reduction in output variability and facilitated greater grid integration of renewables. The realised returns may be negatively impacted by volatility in capital costs, especially solar PV module prices. Higher raw material and transportation costs for solar PVs could significantly lower realised returns. The levy of basic customs duty on cell and module imports in 2022 is also likely to increase the module prices. Addressing challenges related to land availability, reliability of power purchase and transmission capacity can significantly lower EIRR expectations in India.