The availability of adequate and affordable finance is likely to be one of the most crucial factors in India’s renewable energy transition quest over the coming years. The sector is becoming increasingly attractive for investors, given the global push towards climate neutrality. In a recent interview with Renewable Watch, Dr Pawan Singh, managing director, PTC Financial Services (PFS), discussed the company’s growth plans, the state of financing in the sector and the way forward for renewable energy development in the country. Edited excerpts…
What is the organisation’s current exposure to renewable energy? What are its major investments in this space?
PFS has, over the years, evolved and focused on entities in the energy value chain, especially sustainable infra and renewable projects, which align with the government’s vision of a clean and green society. PFS has been the first mover in established and emerging green infrastructure finance sectors such as renewable energy, wastewater treatment plants, e-mobility and e-vehicle manufacturing, which are sustainable in the long term. As of March 31, 2022, renewable sector lending accounts for Rs 29,110 million or 34 per cent of the PFS lending portfolio.
The company was a pioneer in funding the renewable sector when the industry was at a very nascent stage. Over the years, PFS has funded a total capacity of 14,858 MW of renewable projects with a total capital assistance of around Rs 302,330 million. This has resulted in carbon abatement of 25 million tonnes per annum and a total of 125 million tonnes of CO2, considering an average operational project life of five years. Our endeavour to be the most financially sustainable infrastructure finance company led us to mitigate our carbon footprint by setting up our own wind power project in the state of Karnataka, which has resulted in the abatement of 100,000 tonnes of CO2 in the environment. Our endeavour is to act towards becoming a net zero company and not only address the issue of greenhouse gas abatement at the source, but also create sinks.
We were able to foresee the credit risk of a sunshine sector 10-11 years back and accordingly take calculated risks to ensure that PFS walked the talk. Over the years the non-performing asset levels of PFS in the renewable portfolio have been negligible, which speaks volumes regarding its underwriting capabilities. The commercial and industrial (C&I) segment has driven the demand for renewables over the past few quarters, mainly rooftop solar and open access installations. PFS is also actively focusing on this segment.
As a financier, what are the key considerations in financing a renewable power project?
Some of the key considerations in financing renewable power projects are as follows:
Counterparty risk: Renewable power projects face risks related to delayed payments from a few discoms. Independent power producers (IPPs) usually have power purchase agreements (PPAs) with discoms or captive power consumers. However, while PPAs tend to reduce demand risks for operational renewable projects, they continue to face counterparty payment risks. Even if a special purpose vehicle (SPV) generates and supplies adequate power, a delay in payments on the part of the buyer can significantly impact an SPV’s credit quality. The C&I segment, however, has a better payment track record compared to discoms. Payment risks vary from buyer to buyer.
Project risk: While design and construction risks in renewable power projects are negligible and these projects have a proven track record of timely execution across several installations, land availability and power evacuation issues due to delays in commissioning transmission lines could pose a major challenge with respect to timely completion.
Management risk: The track record of management and the financial flexibility of an SPV and the project group is a key monitorable. The availability of funding – both debt and equity – is also critical for timely completion of projects.
Price and viability risk: The import of solar modules, especially from China, has been negatively impacted due to Covid, the India-China standoff, the Russia-Ukraine war, etc. The impact of these factors on dollar movement as well as government policies on import duties has in turn affected the volatility of raw material prices.
Seasonality: Typically, the peak wind season is three to five months, while the lean season is for the rest of the year. The peak season generates around two-thirds of the annual production. Most parts of the country experience solar radiation for 280-300 days, which is better than the global average radiation. However, particulate matter is comparatively higher, and therefore cleaning and maintenance of plants is required on a regular basis.
In the current scenario, which renewable energy segment is most favourable for financing and why?
Currently, solar and wind continue to be most favourable for financing. The industry is no longer at a nascent stage. It is at an inflection point and needs to ensure that the growth story, private equity funds, etc. continue in the sector. The focus is now on domestic production. IPPs have an established track record of execution. Measures to mitigate counterparty risk by bidding through the SECI and NTPC are also under way. However, mobilising debt in the renewable space will always remain a challenge, given the magnitude of the requirement. PFS believes that limited debt resources will always chase large, stable wind and solar projects.
Which are the most popular financial instruments in renewables?
Loan financing/Structured loan (cross-guarantee and cross-collaterisation of multiple SPVs of a group) through banks, non-banking financial institutions (NBFCs), infrastructure debt funds, etc. continue to be the most popular financial instruments in the renewables sector. With the sector recognised under priority sector lending, interest rate advantages have come to a few players in this sector. A few of the larger players in the segment have been able to borrow through green bonds, both domestically and internationally.
The government has recently decided to facilitate and enable the flow of low-cost long-term patient capital (primarily debt) from India or abroad into greenfield infrastructure projects by setting up a statutory institution – National Bank for Financing Infrastructure and Development – as the principal development finance institution (DFI) and development bank for infrastructure financing. The government expects the DFI to leverage this fund to raise up to Rs 3 billion in the next few years.
What measures need to be taken by the government to reduce the investment risks in the renewable energy segment?
India has set an ambitious renewable energy target of 500 GW by 2030. Meeting the target will require $600 billion in financing for new generation and grid infrastructure, including $200 billion for photovoltaic (PV) and wind capacity.
The largest source of financing at present, the Indian banking system simply doesn’t have more capital to lend. Renewable investments are fraught with complexity and risks. Long project delays are routine, and PPAs do not protect against inflation. Discoms are being delinquent with regard to making payments on time, and have spooked investors by cancelling signed 25-year PPAs worth billions of dollars in the past.Policy reforms for both the banking sector, to free up capital, and the renewable energy sector, to mitigate investment risks, are imperative.
While the government has taken initiatives to reduce investment risk in the sector, much needs to be done, especially for the health of discoms. The government, in September this year, also tabled the Electricity (Amendment) Bill, 2022 in the Lok Sabha. The bill comes at a time when there is a debate around freebies being offered by political parties that has also, among other things, led to various state power distribution companies not being able to raise enough resources to make timely payments to power generating companies. These are structural changes that the government is pushing to ensure that the infrastructure sector continues to be attractive as an investment opportunity.
What is the organisation’s short-term and long-term plan in this space?
India is likely to add an estimated 16 GW of renewable energy in financial year 2023, as the country has a strong pipeline of 55 GW of clean energy projects. Near-term challenges include execution headwinds and supply chain challenges in procuring modules and wind turbine generators. The average price of imported solar PV modules (mono-PERC) has increased by over 35 per cent over the past 12 months, putting upward pressure on capital costs for solar power projects. Besides this, there was also a hike in the goods and services tax rate for solar power equipment. The availability of adequate funding avenues at cost-competitive rates remains critical to achieve these capacity targets. This will be an opportunity for PFS as well in this sector, going forward.
The Government of India has allocated Rs 615,550 million in the financial year 2023 budget. Assuming 20 per cent of the disbursement is by the NBFC sector, PFS is targeting a market share of 14 per cent in financial year 2023. PFS will also continue to focus on growing its renewable energy book at a CAGR of over 20 per cent in the next five years.