In the middle of a possible recession and a collapse in power demand, renewables are shining bright. Will it last?
With long-term renewables contracts being seen as safe bets, especially during a pandemic, foreign capital that has few places to go to has begun chasing these assets
In April, a week into the national lockdown—when factories and offices had shut, shops had closed and India’s 1.2 billion people stayed indoors—the country’s electricity demand crashed by 22%. Power generators scrambled to scale down operations and state-owned electricity utilities turned down expensive purchases. Punjab, for instance, told some of its solar power suppliers that they need not feed into the grid anymore, violating the “must-run" status bestowed on renewable power in the country’s energy mix.
Within days of Punjab’s decree, the Ministry of New and Renewable Energy stepped in to clarify that all utilities were obliged to continue procuring renewable energy at the same rate, despite falling demand. If distribution companies needed to reduce power supply, they could stop buying from coal power plants instead.
“Must run status" means that utilities cannot curtail power procurement from solar or wind power plants except for reasons that threaten the stability of the grid or grid equipment. The data shows that utilities did indeed toe the government line during the lockdown. Although the aggregate demand for power fell in April and May, renewables gained a larger share of the overall pie. Electricity procurement from coal-fired power in India’s energy mix fell from 75% in early March to 63% in May, while the contribution of clean energy sources—solar, wind and hydroelectric power—rose from 16% to a never-before-seen 28%, according to data from the national load despatch centre.
Given this experience, India’s target of clean energy (renewables, small hydro and nuclear) accounting for 40% of the energy mix by 2030 appears within striking reach. To be sure, much of this sudden, unexpected change is unfolding in an uncertain world wrought by a pandemic.
India’s solar and renewable push has been riddled with contradictions and paradoxes. An aspirational shot at global leadership even as the country imports nearly 80% of solar equipment from China; regular inflows from foreign private equity funds into solar even as the sector was beginning to show signs of stress; and, now, hopes of a revival in a year when overall power demand is expected to fall.
Last November, Mint had explored the many reasons behind the dark clouds plaguing Indian solar. In an effort to push falling clean energy tariffs even lower, developers, already operating on razor-thin margins, were cutting corners on the quality of power plants they were setting up. Bills piled up at state utilities; some like Andhra Pradesh even refused to pay. National electricity demand growth had begun to crawl due to an economic slowdown and developers had stopped bidding for new projects. The sector was on the verge of implosion. That implosion did not come because of one key reason—the Indian renewables industry is now awash in foreign capital that has few other places to go. And the quest for safe havens may only heighten during a pandemic, turning India’s renewable energy farms into a terrain for great games.
Prateek Jhawar, director and head of Infrastructure and Real Assets at Avendus Capital, is an investment banker who has over a dozen deals ongoing in the renewable energy space. “There’s foreign capital of about $10 billion so far committed towards India’s infrastructure assets that will be deployed over the next few years. This is mostly from foreign pension funds, sovereign wealth funds and private equity," he told Mint.
If you exclude the current year, an outlier because of covid-19, Jhawar says the investment community views India’s future economic growth favourably to that of the global north. In India, a rupee into renewables can give an investor a standard return on equity of 12-15%; that’s 7-10% on the dollar, Jhawar says. “That’s far above anything that global capital can earn in OECD countries."
“Within the infrastructure space in India, renewable energy projects, transmission lines and operating toll roads are the only sectors that have matured significantly in terms of returns profile and stable government policies, compared to thermal energy, waste management, water management, power distribution or urban infrastructure. The other segments haven’t scaled up enough to absorb these massive investments, or in the case of thermal energy, are no longer kosher for overseas capital with sustainability goals," he added.
The pool of foreign investors willing to take a bet on India is also deepening. Till a few years back, the large foreign investments were mostly from pension funds and sovereign wealth funds from Canada, the Middle East and Singapore or energy firms in Europe with green commitments. “Now, every few months, there are 2-3 new names making direct investments in India from across Europe, the Middle East, Asia and South Asia" he says, listing ib vogt GmbH from Germany, FRV from Spain, Phelan Energy Group in South Africa, CNIC from China, and Mubadala from the UAE as new entrants into the space.
Global private equity firm KKR, which has long been invested in India, dipped its toes into the sector in April buying out 317 MW of solar power plants from the Shapoorji Pallonji group for $204 million, marking its first energy investment and its second in infrastructure in India.
This influx of capital is already changing the ownership structure of Indian renewable energy assets, with foreign investors creating platforms that buy out portfolios belonging to different developers for long-term returns, or bringing in equity stake that turbocharge a developer’s ability to bid for more greenfield projects. The largest home-grown developers from a few years ago have sold either controlling or significant equity stake to overseas investors, injecting the latter with the cash necessary to place bids at lower and lower tariffs.
“Every gigawatt of capacity requires close to $600-700 million of investment across debt and equity," Bruce Hogg, Managing Director, Head of Power and Renewables, CPP Investments, told Mint in an email interview. CPP Investments is the investment manager for Canada Pension Plan. “The early stage of the life cycle for renewables and the opportunity to help build India’s power capacity are among the reasons why we are attracted to the sector."
The developer’s ability to access cheap capital is meanwhile driving down tariffs, a key determinant in a utility’s decision to buy or forgo power from a new project. In the most recent reverse auction by the Solar Energy Corporation of India (Seci) to build 2 GW of greenfield solar power plants, Spain’s Solarpack Corporación Tecnológica bid ₹2.36 per kilowatt-hour (kWh, or unit), marking its Indian debut with a new tariff record and winning 300 MW in the process.
“Overseas, there is a strong move in favour of reducing the carbon footprint of private enterprise," Dhanpal Jhaveri, vice-chairman, Everstone Capital, said. When he spoke to Mint, Jhaveri had just closed an investment of $70 million by oil and gas major BP into the Green Growth Equity Fund, a joint venture between Lightsource BP and Everstone Capital, which invests in low carbon energy solutions.
“This change is coinciding with the existing build-and-flip model, which the first set of renewable energy developers in India used, running its course. There’s a migration of new assets towards long-term investors who intend to stay invested for the lifetime of the project, lasting over 2 decades sometimes."
Jhaveri explains that money is coming into renewable power because it’s the only viable alternative to coal in India. “Globally, natural gas, hydro and nuclear play a larger role in a nation’s energy mix than they do in India. When electricity generation was first privatised in India 15 years ago, companies were free to set up power plants, but access to fuel (coal) was controlled. With renewables, the resource is free and you’re investing in a country where consumption rates can only go up in the long-term."
Despite the momentary euphoria, developers who have longer experience with India still sound a note of caution. Sanjiv Aggarwal, partner (energy) at Actis Llp, although bullish on India isn’t blind to the inherent difficulties that persist. “None of the basic problems in states—like land acquisition, or issues in right of way while setting up new plants—have gone away, but the central government has shown its strong support," he told Mint.
These structural issues extend to power utilities whose combined outstanding dues crossed ₹1 trillion in June, igniting calls once again for a government bailout. The Andhra Pradesh government is locked in litigation with its renewable suppliers, wanting to renegotiate older power purchase agreements (PPAs) at higher tariffs for lower ones that match prevailing market rates. Recently, Mint reported that Punjab is following Andhra Pradesh’s lead, indicating it wants to replace older contracts as well.
“How low you can go with your tariff is essentially a function of your capital cost, since equipment prices are falling for everybody," Aggarwal said. That is one of the reasons for the mad dash behind foreign funds since equity is a better hedge than taking on debt.
India is also pursuing an agenda of self-reliance in the energy sector, which, rather counter-intuitively, raises the immediate project cost. Prime Minister Narendra Modi is keen to reduce imports of solar photovoltaic cells from China and encourage domestic manufacturing instead by levying a 20% customs duty on modules, cells and inverters from August, replacing an existing safeguard duty of 15%. However, with installed module manufacturing capacity today meeting only about a fifth of annual demand, the prices of imported equipment will simply rise.
Ultimately, the question that remains, as with all power supply, is what price India would be willing to pay for clean power. The answer depends on who you’re asking. Foreign capital investors with generous bank balances brought prices down to an all-time low of ₹2.36 a unit last month; until then, solar and wind energy prices that domestic developers had bid for had corrected to ₹2.7 a unit last year in central and state government auctions.
“India’s renewable programme must succeed if we are to achieve cleaner energy and self-reliance but we need to recognize that the true cost of renewable energy is over ₹5 a unit," said Vipul Tuli, MD, Sembcorp Energy India. “Today. interstate transmission is free for renewables because distribution companies bear the cost. In addition, since renewable energy plants run at only 20-40% load factors, utilities must also pay fixed charges to conventional power plants to supply the remaining load, which makes the full cost of this power far higher than what the reverse auctions reveal."
Jhawar of Avendus believes that developers start losing money at tariffs below the ₹2.70 benchmark or when the cost of debt is over 10% a year. Essentially, India has two classes of developers pulling tariffs in opposite directions.
Despite the brief window of optimism within the sector these days, India’s immediate renewable energy targets are still out of reach. The government wants to build a total capacity of 100 GW of solar power, 60 GW of wind, 10 GW of biomass and 5 GW of small hydroelectric projects by 2022 while aggregate installed capacity today is just 87 GW. The destination may take a while yet to reach, but the journey is bound to be interesting.