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How Softbank’s solar bets soured in India

SoftBank, under chairman and CEO Masayoshi Son, had originally planned to invest $1 trillion in India’s renewable energy capacity by 2030. (Photo: Getty Images)Premium
SoftBank, under chairman and CEO Masayoshi Son, had originally planned to invest $1 trillion in India’s renewable energy capacity by 2030. (Photo: Getty Images)

  • The investment giant made big bets to secure a foothold in the country’s green economy. What went wrong?
  • Experts blame it on a host of issues, including land acquisition hurdles, regulatory uncertainty, and delayed clearances and approvals, not to mention high cost structures at SB Energy

NEW DELHI : On the morning of 13 May, SB Energy’s chief executive officer (CEO) Raman Nanda was busy assuaging the many concerns of the firm’s employees. The company’s rank and file were a bit shaken. Just the previous day, after months of negotiations, the Canada Pension Plan Investment Board (CPPIB) had announced that it was dropping its plan to buy Japanese investment giant SoftBank Group Corp.’s 80% stake in SB Energy.

SoftBank executives were at hand to support Nanda, who asserted that SB Energy was in India for the long haul. Less than a week later, billionaire Gautam Adani’s Adani Green Energy Ltd (AGEL) would announce the acquisition plans for SB Energy India.

By then, SoftBank, under chairman and CEO Masayoshi Son, had been on a roller-coaster ride as it attempted to build a sizeable presence in India’s green economy. At one point, it held out a promise of free electricity after 25 years to members of the International Solar Alliance, which had been initiated by Prime Minister Narendra Modi. The company also planned to invest $1 trillion in India’s renewable energy capacity by 2030 and sought approvals to charge dollar-denominated tariffs. All those lofty dreams finally ended with a whimper—in the discounted sale of SB Energy India, which is currently in motion. In between, it was alleged in 2018 that SB Energy had tried to form a cartel to drive up solar power prices within India.

Indeed, it has been clear for quite some time that all wasn’t well with SoftBank’s foray into the Indian green energy market via SB Energy—a venture in which the Japanese investor held 80% and Bharti Global Ltd held the remaining 20%.

The firm’s troubled journey is also a reflection of broader trends in the Indian solar energy space—a period of heady growth, followed by consolidation and regulatory debacles. “As expected, the sector has consolidated at the hands of large firms that have (the) deep pockets of promoters and frugal and efficient management," said Debasish Mishra, a partner at Deloitte Touche Tohmatsu India LLP.

Mint had reported on 6 July 2020 about SoftBank’s plans to exit SB Energy, in a shift from an earlier plan to find a significant minority investor. As reported, it started separate sale talks with CPPIB, Canada’s Brookfield Asset Management Inc. and Abu Dhabi’s sovereign wealth fund Mubadala Investment Co.

Caught by surprise

Soon after the deal with CPPIB was dropped, AGEL began its due diligence on SB Energy in the backdrop of the rising global focus on Environmental, Social and Governance (ESG) investing, particularly in the energy sector.

The stake sale that had been on the table for around a year had its own fair share of ups and downs. There were several preconditions, also referred to as condition precedents (CPs), which had been placed by CPPIB.

CPIIB insisted on SB Energy meeting certain project commissioning deadlines, securing new business and raising new funds through a bond sale; it also demanded that SoftBank bear any future liability for liquidated damages in return for acquiring the stake, as reported by Mint earlier. Each CP had a monetary component attached to it.

But what really caught many CEOs, analysts and experts by surprise was the equity value of the eventual all-cash deal with AGEL—around $625 million—compared to an investment of over $800 million made by SoftBank in the business in the past five years. Around $500 million is expected to be SoftBank Group’s share and the balance of around $125 million is expected to go to Bharti Global.

“Solar is a pension fund kind of business, wherein, patience and long-term capital comes in expecting fixed returns. In comparison, SoftBank’s is (usually) opportunistic capital which leverages scale to capture the market and then monetizes it after reaching the tipping point," said the CEO of a global green energy firm, requesting anonymity.

Interestingly, of SB Energy’s 4.95 GW portfolio in India (spread across four states) which is now being acquired by AGEL, at least 1.3 GW is facing challenges. This includes 250 MW at Kadapa in Andhra Pradesh and 300 MW at Bhadla solar park in Rajasthan.

It also consists of 600 MW awarded through the eighth tranche of Solar Energy Corporation of India Ltd’s (SECI’s) inter-state transmission system-connected projects and 150 MW through the fifth tranche.

“The projects are challenging. While 1.4 GW capacity is operational, another 300 MW will be commissioned shortly," said a top SB Energy executive aware of the issues associated with the projects. The executive requested anonymity.

Icarus and cost structures

So, what led to the distress sale? Was SB Energy flying too close to the sun? Several people Mint spoke to blamed it on a host of issues, including difficulties with land acquisition, regulatory uncertainty, and delayed clearances and approvals which have been ailing India’ clean energy sector. And then there were the high-cost structures at SB Energy.

“The cost structures at SB Energy are high, including project costs, salaries, among other components. They also bid very aggressively," said the head of a large firm that was initially interested in buying SoftBank’s stake in SB Energy.

Also, Chinese module manufacturers started an upwardly revision of prices and began reneging on their Indian contracts to supply equipment that had already been contracted for, even at the risk of their bank guarantees getting encashed. The government also decided to impose a 40% basic customs duty (BCD) on solar modules and 25% on solar cells from 1 April 2022—a move that would make imports costlier but encourage local manufacturing.

“The solar module prices started going up since the Chinese suppliers increased prices. Any price increase will impact the internal rate of return (IRR) from those projects that have already inked power purchase agreements," said the CEO of a green energy company which, too, had been eyeing SB Energy’s assets earlier.

In what created a perfect storm for developers, as part of an attempt to discourage Chinese imports in India’ growing green economy, the ministry of new and renewable energy also issued an order enforcing a list of approved solar photovoltaic models and module manufacturers for government-supported schemes.

The approved list of module manufacturers serves as a non-tariff barrier. Also, an increase in the frequency of extreme weather events, such as cyclones in western India, may increase the cost of building solar projects in the region. With SB Energy and its rivals placing aggressive bids to win tenders in the recent past, it resulted in a low tariff scenario, which in turn led to tariff shopping by state electricity distribution companies, or discoms, at a time when solar energy prices had already touched a record low.

Already awarded clean energy capacity has been stranded because fund-starved discoms are unwilling to sign contracts at comparatively higher tariffs. Given the risks associated with state discoms, developers such as SB Energy were focusing instead on state-run SECI. Even some of these projects hit the skids though, given that an intermediary procurer such as SECI and state-run NTPC Ltd signs power purchase agreements (PPAs) with the project developer only after signing back-to-back power supply agreements (PSAs) with discoms. The inordinate delay in finalizing the PSAs, in turn, delayed the signing of PPAs.

“Regulatory headwinds are the Achilles’ heel of renewables. Renewables need a stable regulatory environment as they are priced to perfection and any uncertainty on that account creates asymmetrical consequences," said Sanjay Aggarwal, managing director, Fortum India Pvt. Ltd, and global head for solar at Fortum Oyj.

Power supply agreements for auctioned renewable energy projects running to 7 GW have been delayed and will have an impact on India’s green energy targets, according to Crisil Research. The clean energy sector is also in the midst of a logjam over contracts with Punjab, Gujarat and Andhra Pradesh, and inordinate payment delays by states such as Telangana.

These risks were summed up by CARE Ratings, which said in an earlier report: “There are concerns like increased difficulties in land acquisition, inadequate grid connectivity on account of poor evacuation infrastructure, relatively lower track record of technology in Indian conditions, lack of stricter RPO enforcement by the state regulators, very high dependence on imported solar cells and modules, regulatory haze in terms of renegotiation of tariff in concluded PPAs and cancellation of concluded auctions, weak financial risk profile of discoms with significant delays in payment by a few state discoms, and increased difficulties in debt tie-up."

All of this assumes significance given that India is running one of the world’s largest clean energy programmes, which aims to achieve 175 GW of renewable capacity, including 100 GW of solar power, by 2022. According to the Central Electricity Authority, solar energy will account for 280 GW of India’s 817 GW of power requirement by 2030.

“Leading global and Indian investors have poured into the sector attracted by promises of government support, huge growth prospects and long-term, fixed-price contracts with quasi-sovereign entities," said Vinay Rustagi, managing director at consulting firm Bridge to India. “But the reality has been marred by delayed payments, the reluctance of discoms to sign PPAs, tender cancellations, tariff renegotiation, weak growth and low returns due to aggressive bidding in the sector. We have also seen growing risks emanating from import duties on equipment as well as delays in land acquisition and transmission network expansion," he added.

Spokespersons for SoftBank Group and CPPIB declined to comment. Queries emailed to the spokespersons for Bharti Enterprises and Adani Group remained unanswered. Queries emailed to a spokesperson for the ministry of new and renewable energy also remained unanswered.

Of SB Energy India’ total portfolio, 84% or 4.18 GW is solar capacity, with the balance of 9% and 7% being wind-solar hybrid capacity and wind capacity, respectively. SB Energy posted revenues of 1,015 crore in the last financial year, up from 687 crore and 440 crore in 2019-20 and 2018-19, respectively.

On a Wing and a prayer

As if all the troubles confronting green energy developers weren’t enough, wildlife activists have also expressed concern about the impact caused by the electricity transmission lines that are being laid for green energy projects, including SB Energy’s, which happen to bypass the habitat of the endangered Great Indian Bustard.

With the Supreme Court mandating that overhead power transmission links be brought underground to protect the bird (by ensuring they do not hit the overhead cables during flight), developers in Rajasthan and Gujarat have flagged concerns about the impact on the financial viability of their projects.

“A total of 2.1 GW of SB Energy’s solar projects is in the Great Indian Bustard area. This includes 600 MW capacity awarded by state-run NHPC Ltd, SECI’s 450 MW hybrid, 300 MW at Bhadla, 600 MW awarded through SECI’s eighth tranche, and 150 MW that was awarded through SECI’s fifth tranche," the SB Energy executive cited above added.

The developers are now planning to approach the apex court along with the central government.

To be sure, interest in India’s green economy remains high despite the many problems faced by the sector and the pandemic-led turmoil. India has been ranked third in the EY renewable energy country attractiveness index, after the US and China. An investment of 4.7 trillion has been made in India’s renewable energy space over the last six years, with an expected 1 trillion investment opportunity forecast annually until 2030.

Meanwhile, at SB Energy’s India office, which has around 170 employees on the rolls apart from another 100 who are off the rolls, resumes are flying around in an already tough job market.

“There is panic all around, given the apprehensions about how many will be retained and how many will be retrenched," said the SB Energy employee cited above. “Most had joined this place for the SoftBank brand. That will no longer be the case."

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