There’s a breathless enthusiasm for renewable energy in India. And why not? The case is unimpeachable – both from India’s promises when it signed the COP21 Paris agreement on climate change two years ago and its need to reduce a gaping energy deficit.
Some 300 million Indians live without a stable source of electricity and if that can be provided in sustainable form, so much the better. It’s unsurprising therefore, that over the past few years, startups in the wind and solar energy production sector have mushroomed.
The big two are Greenko and ReNew Power, the former having received a thumbs-up in the form of an equity investment from Singapore’s sovereign wealth fund GIC and the Abu Dhabi Investment Authority.
But all is not quite what it seems. Despite the Narendra Modi government’s pledge to more than treble the country’s renewable energy capacity to 175GW from the current 57GW, with an expected 12-15GW inked to be added next year, mainly in solar, the achievement of that ambition seems destined to remain a pipe dream unless something changes in the current status quo.
THE PROBLEM IS that confusion reigns in the actual logistics of renewable power in India. The tariffs at which the distribution companies sell the power are falling, just as production costs look set to rise.
The former case arises from an auction process initiated last year, which sent the price of renewable energy crashing through the floor. But at the same time, the possibility of anti-dumping duties on solar panels – the bulk of which are imported from China, Malaysia and Taiwan – threatens to send tariffs on solar power in India through the roof.
Unless India can dramatically reduce the cost of producing solar panels locally, the concept of a new solar power plant will become somewhat unviable. Tariff prices for solar power are expected to balloon as a result.
Low tariffs have already seen wind turbine production in India collapse. Unlike solar panels, 90% of which are imported, nearly all of the wind turbines in use in Indian wind power plants are manufactured domestically. The fear is that the collapse in wind power tariffs will endanger existing off-take agreements, which were established when tariffs were much higher.
A senior staffer at an Indian renewable energy company last week assured me that fears in the wind power sector were overdone, citing a Supreme Court ruling that no renegotiation of off-take agreements was allowed for wind power supply contracted at higher tariffs. From the point of view of investors with skin in the game, one can only hope that that’s alright then.
IN THE MEANTIME, there’s no doubting that investors are rather keen to get a slice of the Indian renewables story. Greenko issued a US$1bn Green bond over the summer which was lapped up by international investors, and even though the Indian financial authorities have placed a ceiling on offshore issuance by local corporates the new rules haven’t managed to stymie ongoing fundraising efforts.
Both Greenko and ReNew have successfully tapped onshore institutional capital recently, at competitive rates, too: ReNew has just finished a few handy private placements to mutual funds on a bilateral basis to the tune of US$70m-equivalent.
Local money is a sensible way forward for renewable power fundraisings in India, as indeed it is elsewhere. And the fact that the money has come from the bond market, rather than exclusively through domestic bank loans, is significant.
Despite a recent US$32bn-equivalent recapitalisation of India’s state-owned banks in the face of mounting non-performing loans, the need for disintermediation away from bank lending and towards institutional capital is essential.
Even after the recapitalisation, Indian banks are wary of lending to infrastructure projects, having been severely burned in the past. So the possibility of mutual funds, pension funds and insurers stepping in to plug the gap in demand is quite something.
Credit wraps offer an intriguing modus operandi for funds raised onshore, facilitating a bump-up in ratings and allowing paper to clear with the notoriously credit-sensitive Indian domestic investor base.
If the Modi government is to actualise its commitment to renewable energy, it will need to take full advantage of this dynamic.
But if it wants to ensure that the promised targets of megawatt capacity are reached, it will have to find a way of taming local governments and the chaotic process of establishing fair tariff rates for power. Without that, all the recent bond market fundraisings will have a big question mark hanging over them.
