India’s renewable energy sector is becoming a key focus area for policy and domestic/global investor initiatives. The renewable energy industry is not only capitalising on traditional solar and wind projects, but also increasingly diversifying into other emerging domains such as e-mobility, green hydrogen and green ammonia. It is now widely accepted that a robust and reliable funding model would go a long way in creating bankable projects while meeting India’s ambitious renewable energy targets. Industry leaders share their views on the emerging financing trends for renewables, the key risks and possible solutions, and emerging financing instruments…
Which factors do you consider crucial while analysing the financing of a potential renewable project/company?
For financing new renewable projects such as solar/wind power, some crucial factors are considered by banks. Developers’ capabilities is the most important factor as the developer should have expertise as well as access to capital to implement the project. Project configuration, which includes equipment supplier, site selection, land availability, wind/ insolation studies, expected performance and transmission arrangement, is also crucial. The type of power sale/offtake arrangement is also important – long-term contracts with aggregators (such as SECI and NTPC) or utilities/discoms, or direct arrangements with commercial and industrial (C&I) customers through the open access route. In the case of wind-solar hybrid and round-the-clock (RTC) projects, interlinkages among various power generating sources as well as storage systems also become a crucial factor.
For renewable power generation companies, the quality of the power offtaker is the most crucial input to determine the investment potential. Where power is sold to discoms, the payment track record is considered and where power is sold to C&I customers, their credit rating is a factor. Beyond this, the execution track record of the company in constructing projects, ability to arrange debt, obtaining permits for power evacuation, and progress on land acquisition are the main features assessed before investing.
Green projects often have high upfront costs with benefits available in the long run. Higher risk perception and governance issues, lack of universal green definition and concerns of greenwashing are crucial factors which create investor hesitancy. Factors related to ESG, currency fluctuations, tariffs and regulatory stability are also considered.
What are some of the key risks involved while investing in the renewable energy space in India currently?
There are various kinds of risks involved. First, technology risk as the solar panels or windmills selected for the project should be able to achieve estimated performance levels over the loan period. Counterparty risk is a very important risk. PPAs with aggregators like SECI or NTPC are perceived as lowest risk. Some utilities/ state discoms like Gujarat and Haryana are considered better due to their financial strength and payment track record. In the case of C&I projects, it is important to assess the financial strength of procurer(s) as well as the long-term electricity demand. There also exist payment risks. Several state discoms make payments with delays and these payments come in lumpsum amount. Further, electricity generation from these solar/wind projects is affected by seasonal factors. An adequate cushion may be kept in the form of working capital, DSRA, etc. Sometimes, projects also face delays due to non-completion of transmission infrastructure. It is important that the project site is easily connected to the transmission grid. In the case of C&I projects, open access approvals should be in place.
Renewable power projects face the risk of untimely payments by customers for the power sold. The projects also face changes in solar module prices at the time of placing the order versus initial assumptions. Projects have faced significant delays in land acquisition and curtailment in the grid during evacuation. For solar projects, the life of modules and their degradation remain uncertain and for wind projects, the actual plant load factor has been known to significantly underperform projections. Further, as C&I projects increase their scale, there is a risk of change in open access regulations governing the transmission and distribution of their power to customers.
The key risks and factors from an investor perspective include tariff stability, delays in execution and PPA cancellations, which create hurdles in financing. In terms of regulatory risk, changes in duty structures and open access rules at the discom level can alter return profiles from renewable projects. Moreover, to mobilise the global green capital available at low or concessionary rates, we need solutions for the inefficiencies and uncertainties of the forex market. Either we need to be able to raise long-term liabilities in rupees offshore, or we need a deep and predictable forward market to hedge the rupee risk. As an example, most renewable assets have a life of 25 plus years with local financing for 8-18 years. As against that there are no long-term and efficient measures to hedge forex costs. There also exist ESG risks. For evaluating investment opportunities, we need to understand the role played by ESG in terms of being value accretive, or reducing returns risk, or achieving a stated non-financial goal related to environmental impact/community development.
What policy and regulatory changes do you think will ease the financing of the renewable energy sector in India?
Substantial capital would be required for achieving the target of 500 GW of renewable capacity by 2030. The government will have to explore ways for alternative/innovative financing for this sector as conventional sources will prove to be inadequate. The Sovereign Green Bond Framework is a very good step in this direction. It needs to be operationalised at the earliest. The refinancing of operational assets with bonds helps in capital recycling. For greater participation of bond investors, credit enhancement products and dedicated agencies are required. Moreover, the renewable energy sector should not be counted as part of the power sector for exposure norms and it should be classified separately. The regulator may guide banks and NBFCs to mandatorily lend a certain percentage to renewable or green projects. There may also be incentive mechanisms to promote new loans in this sector.
Improving the financial health and payment track record of discoms will go a long way in enhancing the financing of renewable energy projects. Further, while renewable power evacuation is currently on a must-run basis, there is uncertainty on how long this can continue considering the infirm nature of renewable power generation. Hence, the discoms need to scale up active load management in the form of time-of-day tariffs (peak shaving) and enable customers to use their energy storage systems for demand management. This will make renewable energy scalable and easier to finance. Also, SEBI-regulated infrastructure investment trusts (InvITs) are expected to play a large role in helping project developers recycle capital as they sell their projects to InvITs. InvITs can be given a boost if leverage restrictions can be relaxed, at least, for private InvITs. Currently, regulations restrict leverage to 70 per cent of the value of InvIT assets and mandate a credit rating of AAA.
“Improving the financial health and payment track record of discoms will go a long way in enhancing the financing of renewable energy projects.” – Akshay Gupta
India is the second largest green bond market among developing countries (2020). However, it is one-tenth of China and green bonds constitute only around 0.7 per cent of the bonds issued in India since 2018. Most (60-70 per cent) bond issuances are for renewable energy, and bonds for other sectors need to scale up significantly. While 30 per cent of corporate bonds have more than 10 years of tenors, only 5 per cent of green bonds have such long tenors. The real cost of carbon needs to be priced into everything we do. Policy and regulations need to be tightened to squeeze out carbon emissions, drive up energy efficiency and encourage sustainable alternatives. Carbon taxes are one mechanism to achieve this. Carbon markets need to be developed to create an efficient, cost-effective, and flexible way to manage the unpriced costs of carbon. Europe has already led the way. For example, every tonne of steel sold in the EU has a “carbon tax” of around Euro 100 based on the traded price of carbon.
More fiscal outlays need to be provided to new technologies and business models with market uncertainties while they mature, scale and come down the learning curve in terms of cost. These include storage, second-life batteries, green hydrogen and green ammonia. Moreover, budgetary allocations will be required on a vastly greater scale in public goods and infrastructure such as a reliable smart grid and EV charging networks. To democratise climate financing to SMEs and ordinary consumers, the government can develop credit enhancement and risk mitigation schemes through guarantees and insurance.
What is your outlook for emerging opportunities like green hydrogen and offshore wind? What is your take on financing these projects?
In the quest for sustainable energy solutions and net zero emissions, we need to focus on emerging opportunities like green hydrogen and offshore wind. The central government has been very positive in these areas. In February 2022, the Ministry of Power (MoP) issued the Green Hydrogen Policy with many enablers in this area. The MNRE has recently issued a draft tender for sea bed leasing for offshore wind projects. The electricity generated from these projects will be for captive use or C&I customers under open access or for merchant sale. For the financing of green hydrogen projects, robust off take arrangements will be required with some certainty of the prices. Offshore wind projects will also need bankable power sale agreements. Clarity on project structure will emerge gradually for designing of financing solutions in these areas as they are still in the evolution stage in the country.
“In the quest for sustainable energy solutions and net zero emissions, we need to focus on emerging opportunities such as green hydrogen and offshore wind.” – Avinash Anurag
Unless green hydrogen and offshore wind achieve tariff parity with conventional hydrogen and onshore wind respectively, it will be challenging to avail of non-recourse project finance on a significant scale. Meanwhile, financing is expected to be restricted to specific projects that have firm offtake and procurement contracts with reputed counterparties. For green hydrogen to be viable, the cost of electrolysers and renewable power need to fall significantly from the current levels. Similarly, the higher capital cost of offshore wind projects currently is not offset by their higher plant load factors.
“We are at an inflection point where climate investing is good economics.” – Rishi Shukla
Across the climate investment landscape, there are several key sunrise sectors that we have on our radar. We are at an inflection point where climate investing is good economics. Rapidly scaling and evolving technologies are disrupting the entire decarbonisation value chain and creating massive opportunities for investment in new business models. Some of the sectors where we are seeing tailwinds and are expecting the risk-return profile for investors and financing to change rapidly in the coming years as business models get established are:
- Green hydrogen and green ammonia: Green hydrogen is expected to become competitive in the current decade with electrolyser technology advancement and large-scale production. Multiple pathways are emerging for hydrogen through electrolysis, cold fusion or pyrolysis of renewable natural gas derived from MSW/agri- or agro-industrial waste.
- E-waste and recycling: The lithium-ion battery recycling market is anticipated to grow at 53 per cent annually till 2027, largely driven by the EV segment. Technological advancements are also driving increasing efficiency of resource recovery of precious, non-ferrous and rare earth metals from electronics.
- Smart grid: To enable the large-scale integration of renewable energy into the grid, demand management will be critical. Smart grid solutions can enable demand management at the consumer level. Without demand management through a smart grid, it will be difficult to support the growing requirements of EV charging at individual household levels.
- Energy storage: There is a massive scale-up of demand anticipated given the growing requirements for EVs and firm renewable energy. To support the 500 GW target by 2030, the MoP estimates a storage requirement of 120 GWh by 2030.
- Resilient infrastructure: Between now and 2040, 270 million people are expected to be added to India’s urban population every year. Much of India that will house the increasing urban population is yet to be built. We need to create adequate infrastructure for the supply of clean energy and water while greening the grid and improving our waste management systems.
- Sustainable food and agriculture: Agriculture and livestock account for 18 per cent of India’s national greenhouse gas emissions. India has the world’s largest cattle population at 536 million livestock, which makes up 78 per cent of the 24 million tonnes of its total methane emissions.