Renewable Energy InvITs: Experience in the Indian market

Asia is one of the fastest growing re­gi­ons in the world, projected to re­quire $6.35 trillion worth of in­fra­str­uc­ture investments through 2030. Such rapid economic development will mean a significant increase in energy consumption, which will result in significant new ca­pacity additions. South Asia needs to tra­n­sition to modern and clean energy sour­ces, given the forecast of burgeoning en­ergy demand in the near future and the region’s vulnerability to climate change.

India, which is one of the major South As­ian countries, has pledged to install 500 GW of non-fossil fuel electricity ca­pacity, sourcing half of all its energy requireme­nts from non-thermal sour­ces, by 2030. Reaching these important targets will require capital investments of over $500 billion in the renewable en­ergy sector over the next eight years. Fu­rther, the go­vern­ment, in its quest to make the co­untry a $5 trillion economy by 2025, has ann­ounced the Gati Shakti Plan, which envisages an investment of $1.5 trillion in infrastructure by 2024-25.

Besides a conducive policy and regulatory framework, a combination of conv­entional and new financing instruments is required to mobilise capital for India’s ambitious cle­an energy and infrastructure targets. Infra­structure investment tr­usts (InvITs) are one such financing in­strument, which could contribute signi­ficantly to the investment needs of the renewable energy sector.

Renewable energy financing needs

As of 2020, India was ranked fourth globally in wind power, fifth in solar power, and fourth in renewable energy installed capa­city. This was achieved through multiple fis­cal/policy incentives launch­ed by the Government of India over the past deca­de, including accelerated dep­reciation, generation-based incentives, tax holidays, viability gap funding and soft loans from the In­dian Rene­wable Energy Develop­me­nt Ag­ency. However, as the sector matur­ed, these incentives were gradually re­placed by commercial lending in various forms of debt, equity and mezzanine fin­ance. Investments grew almost five-fold in the period 2015-21.

Even though the renewable energy sector has grown exponentially since 2010, solar and wind capacity additions slow­ed down towards the end of the decade. Several internal and external factors im­pacted the growth, such as rupee depreciation and lo­wer tariffs, affecting inves­tor sentiment and leading to sluggish growth in the re­ne­wable energy sector. Coupled with the nature of India’s financial markets, ch­a­racterised by high capital costs and lack of adequate debt fin­ancing, this poses fin­ancing chall­en­ges for the sector. In the past, India’s re­ne­wable energy sector has rai­sed funds from mul­tiple sources, inclu­ding strategic eq­uity investors, commercial banks, non-banking financial companies (NBFCs), development financial institutions and private equity (PE) investors. The outstanding debt exposure to the po­­wer sector by Indian banks and NBFCs totalled approximately $168 billion in March 2020.

While the current policy framework has allowed India to reach the 100 GW re­ne­wable energy capacity mark, the new targets for 2030 necessitate further reinfor­ce­ment of that support, especially in terms of capital deployment. Refi­ning pu­­blic-private partnership policies, buil­­ding in­stitutional capacity, lowering costs of ca­pital, encouraging novel fin­a­ncing instruments and frameworks, and developing new business models can help create the investment climate re­q­uired to achieve India’s green goals.

Out of the 500 GW capacity announced at COP26, it is estimated that 425-450 GW will be contributed by renewable en­ergy, with another 70-80 GW coming from large hydro. This will entail the ad­dition of nearly 28 GW of solar and 12 GW of wind ca­pa­city annually, which will re­q­uire a cumulative investment of $163 billion, entailing debt financing in the range of $121 billion, and $41 billion of equity. Indian banks ha­ve limited ability to ramp up lending to the renewable energy sector, considering the current high levels of debt exposure to the power sector ($168 billion).

Benefits of InvITs

The Securities and Exchange Board of In­dia (SEBI) rolled out the InvIT regime in 2014. Since then, InvITs have been re­gis­tered across infrastructure assets su­ch as roads, power transmission faciliti­es, telecom towers and gas pipelines. InvITs are likely to gain significant traction over the next few years, and have the potential to channel significant long-term capital (su­ch as pension and in­surance funds) into the Indian infrastructure sector.

An InvIT is a pooled investment vehicle, like a mutual fund, in which an individual and/or institution buys units. It is a way of pooling funds to invest in an asset. InvITs are designed to offer a more stable and liquid financial instrument for investment in infrastructure.

InvITs facilitate the recycling of capital ov­er short intervals and enable subsequent reinvestment in new/greenfield projects, thus accelerating the transition to clean en­ergy. Renewable energy projects requi­re high amounts of capital ex­penditure, with returns on these projects generated over long periods of time (15-20 years). For this reason, investments ma­de by re­ne­wable energy developers are tied up, limiting cash reserves for in­ve­stment in new projects. To un­dertake fresh capital expenditure and build new assets, renewable energy de­velopers may need to re­sort to external borrowing or as­set mone­tisation. InvITs unlock the true value of ex­is­ting operational assets and help remove funding limits and inc­rease equity for renewable energy developers, which can then be reinvested.

In the past, banks and public funds we­re the major sources of finance for rene­w­able energy projects. However, with gr­e­en­field renewable energy projects, de­ve­lopers are faced with multiple de­ma­­nds from financial institutions, such as upfront security creation, stringent lending terms, corporate guarantees and negative liens on shares, in addition to the issues posed by asset-liability mismatches. This is where InvITs provide true ease of funding and can beco­me a game changer for the rene­wable energy sector in India. The major benefits of using InvITs as a financing in­strument for renewable energy developers include access to a larger pool and constant flow of capital, higher valuation, the ability to raise mo­ney without the need to list, and debt financing. It is also helpful for in­vestors as it provides a glo­bal platform for in­vestment in renewable energy projects and securing assets with low volatility, off­ers attractive long-term in­vestment and a tax efficient str­ucture, and allows greater control over assets.

Market potential of InvITs

InvITs have been more actively used in India over the last three to four years. As per CRISIL estimates, InvITs can raise mo­re than $100 billion over the next five to six years. However, investors in India must be encouraged to exercise the InvIT option, as evidenced by the fact that Indian InvITs constitute only 0.7 per cent of the market-cap-to-GDP ratio, compared to 20 per cent in Singapore and 7 per cent in Hong Kong.

In the past, India has seen many large in­vestors, including pension funds, insurance funds, sovereign funds, developme­nt finance institutions and PE firms in­vest he­a­vily in the renewable en­ergy mar­ket. Key investors active in the Indian re­new­able en­ergy space include KKR, Caisse de dépôt et placement du Québec, the Canada Pension Plan Invest­­­me­nt Bo­ard, Temasek Holdings, the World Bank’s International Finance Corp, Gold­man Sachs, Brookfield, SoftBank, JERA Co., Inc., GIC Holdings Pte Ltd, Gl­obal Infra­structure Partners, C­o­m­­m­on­wealth De­ve­lop­ment Corpo­ration Gro­up Plc, Ever­Source Capital, Reliance Ni­ppon Life In­surance Com­pany, and Cop­thall Mauri­tius Invest­ment.

With their current portfolios and future in­vestment plans, it is estimated that these global investors have the appetite to in­ve­st anywhere between $100 million and $500 million in a single transaction, and act as anchor investors, provided other requirements such as taxation and transaction structure are aligned with their in­ve­stment policies. Assuming a conservative investment of $100 million by a single in­vestor, which may act as the anchor investor, the total equity capital base for an InvIT works out to be $400 million. With a leverage of around 50 per cent, the minimum scale of investment for a renewable energy InvIT is expected to be around $800 million at the time of issuance. If the anchor investor is large, the asset portfolio investments can easily double in one to two years post of issuance.


As per regulations, InvITs must be AAA rated. However, in renewable energy, ma­ny PPA counterparties are discoms whose financial and operational performance is not up to the mark, and so they do not have good credit ratings. Second, althou­gh long-term PPAs/off­take agreements have been signed for renewable energy projects, providing clear visibility on tariffs over the next 20 years, there have been instances of govern­ments/regulators trying to renegotiate or revise the terms of PPAs. This could have a detrimental im­p­act on revenues, thereby affecting the sta­­bility and predictability of cash flow, which forms the basis of the InvIT structure. Third, only operational assets can be tra­n­s­fer­red to InvITs with stable and predictable cash flows, and the growth potential of such assets is limited.

The policy and regulatory framework for InvITs has been evolving over the past three to four years. The financial instrument is relatively intricate and needs grea­ter understanding and acceptance am­ong investors. The multifaceted na­ture of InvITs limits participation from all investor classes, and requires a grea­ter understanding of underlying renewable energy assets. Moreover, the size of an InvIT iss­ue is also critical for attracting large pension funds and other inves­tors, as they operate with minimum in­vestment thresholds. Therefore, smaller InvITs may not attract investor interest. Further, considering the smaller size of renewable energy assets, a lot of ass­ets need to be bundled together to ac­hieve such critical mass.

The way forward

Despite their many advantages and vast potential, InvITs have not taken off in the Indian renewable energy sector. Vi­rescent is the only renewable energy InvIT, and IndiGrid holds only a small re­newable energy asset as part of its po­rtf­olio. To date, the proportion of renewable energy in InvIT investments is a mi­nuscule 1 per cent.

For a renewable energy InvIT to succeed in the Indian market, it needs to be AAA rated. Assured yields are imperative to att­ract sufficient investor interest. The renewable energy projects chosen for InvITs should have strong counterparties such as SECI or discoms that are fi­nancially viable, as well as a proven track record of timely payments to private developers. Further, at least 80 per cent of the projects under renewable en­ergy InvITs must be operational; how­ever, there is currently a limited amount of such projects in renewable en­ergy, although a large number of op­er­a­tio­nal renewable energy ass­ets will become available over the next 12-18 mo­nths. The revenues from operational rene­wable energy projects are fairly constant, so continuous acquisition of assets is the only way to enhance inves­tor yields over longer time frames. Futu­re cash flow gro­wth will help to ensure the smooth en­try and exit of InvIT investors. Further, the choice bet­ween public listed, private listed or private unlisted InvITs should dep­e­nd on capital requirements, cost of capital, leverage ratios, etc.

Net, net, improving the deployment of re­­­newable energy in South Asia will re­quire alternative funding sources, especially at a time when public finan­ces are stretched in many South Asian countries. The experiences and lessons from InvITs in the Indian market could help the South Asian region act as a magnet for institutional investors.

(Based on the handbook, “An InvIT(e) to Renewables Growth in India”, developed by USAID’s South Asia Regional Energy Partnership in collaboration with India’s Ministry of New and Renewable Energy)