Debt for Development

Financing scenario for renewables in India

Over the past decade, renewable en­ergy development has gained ra­pid momentum across the world. Drive­rs for this growth include increasing the climate commitments of governments and businesses, increasing awareness and political will, technological advancements, access to finance, and the increa­sing overall profitability of renewable energy projects. The Indian renewable energy sector has also witnessed tremendous capacity additions over the last few years. Moreover, India has seen the highest gro­wth in renewable energy capacity addition among all global economies over the last seven to eight years, with its overall ca­pa­city (including large hydro) increasing 1.97 times, and solar energy in particular in­c­re­asing nearly 18 times.

As in any infrastructure sector, access to capital has played a significant role in determining the growth of the renewable sector in India. The sector has been att­ra­cting increasing investments in the form of both debt and equity. A significant share of these investments come in the form of debt through various channels. Private non-banking financial companies (NBFCs) were the first entrants in the rene­wables debt market, as conventional financiers such as banks were reluctant to enter the new, evolving market. The large debt size and the long duration of renewable energy projects also acted as deterrents, initially, in gaining access to financial support from both public and private banks. However, as the sector progress­ed, the financing dynamics tra­­­ns­formed significantly. A di­ve­r­se set of funding so­ur­ces are now inc­reasingly playing an ac­tive role in the sector. These include ba­nks, bond markets (do­mestic and global), international len­ders and development finance institutions, that are contending to become active participants in the growing renewable energy sector due to its widespread socio-economic impact. Private NBFCs have now been overshadowed by large ba­nks, while domestic and international bond markets are also proactively contri­buting to the sector’s funding landscape.

India has set ambitious targets for the deployment of renewable energy over the next decade. In contrast to the initial dearth of investments in the sector, it is now re­ceiving government and global support. It is further supported by the ease of installation of projects, land availability, new refinancing opportunities and replicability. Access to debt capital for a capital-intensi­ve sector like renewables can potentially be the biggest growth factor at this time.

Domestic and international debt market

Domestic debt financing for renewable energy projects was primarily led by private NBFCs over the first five years of the development of the sector. Private NBFCs were quick to identify the strengths of so­lar and wind projects, which had lower de­velopmental risks and shorter construction periods. Public sector NBFCs were the second biggest contributors. Financial entities such as the Power Finance Corp­oration and Rural Electrifica­tion Corpo­ra­tion later entered the lending market, providing the required impetus to the growing sector. Soon after, private banks such as IndusInd Bank and Yes Ba­nk also entered the market, with Yes Bank becoming a strategic and financial adviser to Greenko Energies in the acquisition of SunEdison’s solar portfolio in India. The bank also issu­ed India’s first green infrastructure bonds in 2015. Domestic bonds entered the ma­r­ket soon after the demonetisation undertaken by the Government of India in 2016. Other instruments of debt, such as mutual funds, have also become a part of the funding landscape in the sector.

However, the flow of debt was hit by the IL&FS and DHFL crisis, when these two NBFCs delayed and defaulted on their debt repayments to their lenders. This setback was further exacerbated by the unprecedented Covid-19 crisis. Yet, in the last two years, larger banks have rapidly increased lending to renewable energy projects, providing a fresh impetus to the sector. HDFC more than doubled its fin­ancing book in financial year 2020-21. As of September 2021, the State Bank of India is leading in terms of the cumulative amount deployed in renewables at roughly Rs 330 billion. It has also altered its credit matrix to allow for more competitive funding of mo­re renewable projects. Lar­ge banks have overtaken NBFCs due to their price competitiveness, proving the importance of sustained banking interest in providing co­mpetitive debt financing to Indian renewable developers.

The international debt environment has largely adopted a cautious approach to in­vesting in renewable projects. Lending pa­tterns have evolved on the basis of the identified risks, existing political motivation and overall sectoral growth over the past decade. With the emergence of grea­ter political emphasis on the sector and an in­dustrial push, large banks such as Stan­da­rd Chartered Bank (SCB) and Rabo Bank are now big contributors to the sector. In 2021, for instance, SCB was one of the largest renewable lenders, with ne­ar­ly a $1 billion in underwriting pin­ned for the Adani Group. Other lenders are also likely to expand their portfolio towards re­ne­w­ables, given that financiers such as So­cie­te Generale are also increasing their debt contributions to the sector.

The international bond market, on the other hand, has performed differently. The bond market adopted a proactive approa­ch from earlier on, presenting high-yield offerings to bond buyers. The market not only provides attractive deals for borrowers but also security to lenders using in­vestments and investment ratings. Key international and domestic players have been participating in the international bo­nd market since as early as 2014, with multiple large international bond issuan­ces and refinances. These players include Adani, Hero Futures, Morgan Stanley-ba­c­ked Continuum, Greenko, ReNew Power, and the International Finance Corpo­ration- and Caisse de dépôt et placement du Qué­bec-backed Azure. The latest players to join the international bond market are development financial institutions such as Asian Development Bank, the Asian Infra­str­uc­ture Investment Bank and their consortiums. These institutions provide long-te­rm money with negligible interest rate fluctuation risks. While, at present, these ins­tru­ments are only utilised for commissi­oned projects, development financial ins­titutions can shift the focus towards refinancing of operational projects using bonds. The international bond market can play a significant role in renewable financing, with greater innovation in financing tools and lending structures.

Challenges and opportunities for the future

Despite tremendous growth in the sector, there exist several challenges that need to be addressed to further streamline financing of renewable energy projects. Due to the risk-averse nature of investors, de-ris­k­ed operational projects continue to re­ceive the majority of new investments. As a re­sult, greenfield projects are lagging behi­nd in receiving the desired investme­nts from large lenders. Furthermore, a hef­ty proportion of time-bound renewable energy projects under development recei­ve debt from relatively costlier lenders. This is especially true for non-central government projects, such as state projects and private party offtake projects. Project siz­es have also increased tremendously and are likely to continue on this growth tra­jectory in the coming years, with a rise in hybrid, storage and round-the-clock pro­jects. With the rise in project sizes, debt requirements are also expected to rise. While large projects should ideally re­ceive funding from large, established banks, they are reluctant to invest in these newer technologies and structures.

However, given India’s ambitious targets of achieving net zero emissions by 2070 and establishing 500 GW of non-fossil fuel sources of energy, rapid advancements in technology and falling prices are continuously improving the competitiveness of the renewable energy industry relative to its counterparts. This has been seen in In­dia’s rooftop solar market, which has es­tablished itself as highly cost effective. Financial institutions and lenders can, th­us, come together to form a consortium to provide effective opportunities for lending. In line with the National Bank for Fin­an­cing Infrastructure and Develop­ment, which was announced in the Budget 2021, a dedicated bank for infrastructure pro­ject financing oriented towards renewable energy can also be created. Such a bank may play a central role in aiding and leading policy advocacy, deal structuring, setting the groundwork for sustained gro­wth, providing guarantees, removing financial bottlenecks, etc. Collaborations can generate greater opportunities for in­no­­vation, thereby boosting the overall competitiveness of the sector.

An essential element of future debt financing for renewable energy would also be carrying out in-depth research on the evolving renewable energy market to better understand the risk-return dynamics of various debt structures. Multiple models of renewable energy are now operational or under development, including hybrid, sto­­rage, green hydrogen and battery en­er­gy storage system technologies. It is crucial to analyse the expected risks and returns of these different project combinations to ascertain the most cost-effective financing through debt.

The adoption of global environmental, social and governance (ESG) frameworks and principles has also initiated a new, rising investment boom in the renewable energy sector. ESG commitments are an­ti­cipated to bring in greater investments in the sector over the coming years. Accor­ding to Bloomberg, ESG assets may hit $53 trillion by 2025, a third of global ass­ets under management.

To conclude, rising momentum, constant innovations, and greater global and do­me­s­tic investor interest together provide a great opportunity for the Indian re­ne­wable energy sector to grow over the next deca­de. India’s renewable energy po­tential has been evaluated to be over 1 terawatt, led by solar, wind, bioenergy and small hydro.

Additional improvements in terms of battery storage green hydrogen solutions, hybrid models and peak power at utility scale may create the opportunity to meet almost all of India’s energy demand us­ing renewable sources. Therefore, a stra­tegic emphasis on renewable financing and debt model structuring would go a long way in ensuring that India is able to meet its renewable energy potential eff­ec­tively and efficiently.

This article is an extract from a report titled “Renewable Energy Financing Landscape in India: The Journey So Far and the Need of the Hour”, published by the Institute for Energy Economics and Financial Analysis (IEEFA) in February 2022.


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