Despite the ongoing energy crisis and subsequent commodity price inflation, the past year has proven to be favourable for the renewable energy sector. According to the International Renewable Energy Agency, the global weighted average cost of power generation has significantly declined across solar photovoltaic, concentrated solar power, onshore wind, geothermal and bioenergy technologies. For instance, in 2010, the global weighted average levellised cost of energy (LCoE) of onshore wind was 95 per cent higher than the cheapest fossil-fuel-fired solution in 2022. Similarly, in 2022, the global weighted average LCoE of new onshore wind projects was 52 per cent lower than that of the cheapest fossil-fuel-fired solutions. Solar PV, which was 710 per cent more expensive than the cheapest fossil-fuel-fired solution in 2010, cost 29 per cent less than the cheapest fossil fuel-fired solution in 2022. The falling prices of renewables, aided by supportive government policies, have attracted significant funds to India’s renewable energy sector.
Despite the impressive opportunities in place for global and domestic investors, several hurdles related to land acquisition, power evacuation and policy flip-flops are limiting fund flows within India. The low availability of green funds compared to the need to meet climate targets globally is a significant concern. As per Allen & Overy and Climate Policy Initiative (CPI) estimates, $6.2 trillion will be required annually until 2030 and $7.3 trillion by 2050, totalling $200 trillion, to achieve the net zero goals outlined in the Paris Agreement. In 2022, the total spending on climate action was about $1 trillion, highlighting a major gap between the desired climate action and the actual commitments globally. According to CPI’s estimates, the global climate finance flows in 2021 reached about $850 billion, a 28 per cent year-on-year increase from 2020. The investment continued to rise, reaching $1 trillion in 2022. Leading financiers in India discuss the current status of renewable energy financing, their approach to risk management, expectations on project returns and the future outlook. Edited excerpts…
How has renewable energy financing evolved over the years? Which are the key financial instruments suitable for renewable energy projects?
Prasanna Desai
The market for renewable energy financing in India has expanded over the past decade to include several different players vying for a piece of the growing sector. Banks, NBFCs, bond markets (domestic and global), international lenders and development finance institutions provide finance at different stages of the projects. Innovative financing structures include “revolver” style construction financing, which reduces the use of equity during the construction period and functions as a bridge to project finance.
Rishi Shukla
Over the past decade, there has been multifold growth in renewable energy capacities, leading to increased demand and interest rates in renewables financing. With renewables serving as the backbone of the world’s energy transition journey, there are manifold opportunities for equity, debt and mezzanine capital investors. Domestic debt remains the primary source of project financing for renewable projects, with a few projects receiving partial funding from external commercial borrowings (ECBs). The shorter tenure of ECBs (seven to eight years) remains a significant impediment in funding such projects, which require over 20 years of debt funding. For equity, global infrastructure funds are the main contributors, led by sovereign and semi-sovereign funding agencies. Progressive structures such as InvITs have helped in unlocking domestic capital with global investments. Going forward, there is an opportunity to channellise domestic savings into such projects by encouraging “green deposits” through favourable taxation.
What is your approach to risk management in renewable energy investments?
Prasanna Desai
A structured and dedicated approach to risk management is implemented across all functions of the platform. Dedicated personnel and policies are in place to enhance the organisation’s risk management capabilities. Robust processes and standard operating procedures are established across key functions for approval processes, vendor onboarding, procurement strategies, etc. Stringent quality checks and efficient hedging strategies are implemented, resulting in improved cost control and effective risk management.
Rishi Shukla
At the construction stage, challenges such as securing land, obtaining permissions, ensuring timely supplies within budget, securing long-term offtake and on-ground execution pose significant risks. These risks can be mitigated by tying up with credible partners. At the operational stage, asset management is the major challenge, which can be mitigated by having an experienced management team in place.
What are your expectations regarding project returns, and how do these expectations vary for different types of renewable energy projects or geographic locations?
Prasanna Desai
Project returns are a function of module/ turbine pricing and efficiency, forex rates and location, which impact costs, output, available leverage, financing rates, power purchase agreement tenures, tariffs, development costs, etc. A typical project has a return of 11-12 per cent with equity returns of 14-16 per cent.
Rishi Shukla
With predictable policies, growing demand and continued regulatory support, the Indian renewable sector has evolved into one of the most attractive globally. The sector continues to offer attractive risk adjusted returns for both equity and debt investors.
What are your long-term goals and vision for your involvement in the renewable energy sector? How do you see the industry evolving, and how do you plan to adapt to these changes?
Prasanna Desai
EverSource Capital, through its portfolio companies, plays a leading role in energy transition. Our portfolio investments in Radiance Renewables and Ayana have resulted in substantial emissions savings, having achieved one of the fastest ramp-ups of capacity to over 5.5 GW and continuing to grow. We see the industry evolving to provide round-the-clock renewable energy solutions through wind-solar hybrids and energy storage offerings. The need of the hour is to implement demand-oriented approaches for integrating variable renewable energy such as wind and solar energy into the electricity grid. Our companies are well poised to deliver round-the-clock renewable energy solutions at an affordable cost, emerging as significant players in solar-wind hybrid and technology-led solutions.
Rishi Shukla
Renewable energy has become a necessity and will continue to attract the bulk of climate investments. To achieve the 2070 net zero target, India is estimated to require investments of over $10 trillion in the climate sectors. The majority of these investments will be directed towards the decarbonisation of the economy, with renewables serving as the backbone. Newer areas of climate action, such as green hydrogen and green ammonia, will provide an impetus to the demand for renewables. The sector will continue to attract FDI as well as domestic savings through banks and alternative asset managers.
(The views of Rishi Shukla are personal and do not represent those of his organisation.)
