The Indian Power sector has troddenconsiderablejourneyby installingrenewable energy capacity of more than 200 GWby end of 2024 despite various challenges faced by the industry.The country under the able leadership of our honorable Prime Minister has set up an ambitious target to achieve 500 GW RE capacity by 2030 and then ultimately achieving energy security, economic growth to the Nationand net zero emissionsby 2070.
Considering the ambitious target set by the Government, an investment of around INR 15-18 lakh crores isrequired to set up remaining RE capacity of 300 GW and additional investment of INR 10-12 lakh crores would be required in setting up theTransmission infrastructure and battery storage projects in next 6 years.This mean that onus to achieve this ambitious targetison all stakeholders, be itcentral government, state government, nodal agencies appointed by the center and state governments, state discoms&utilities, intermediaries involved in various stages of constructions and operational phase, OEMs and financial institutions etc.
India continues to be an attractive destination for investors in the renewable energy sector despite various challenges faced by the industry, i.e., high cost of debt compared to other developing and developed countries, which further deteriorates when financial institutions face sectoral limit & group exposure limit, continuous drop in long-term PPA tariffs, global warming effects on electricity production, especially on wind and solar energy projects, weakening of the rupee against major foreign currencies, etc.
India continues to be an attractive destination for investors in the renewable energy sector despite various challenges faced by the industry, i.e., high cost of debt compared to other developing and developed countries, which further gets deteriorated when financial institutions face sectoral limit & group exposure limit, continuous drop in long-term PPA tariffs, global warming effects on electricity production especially on wind and solar energy projects, weakening of the rupee against major foreign currencies, etc.
Revision in India’s renewable energy target has been well appreciated and welcomed by all stakeholders, including foreign investors, but the gap between actual and target capacity additions has been a key concern to everyone due to several challenges faced by the industry. These challenges can be listed in three phases for discussion in a wider forum, viz., starting from business development till construction, during construction, and lastly into the operational phase.
It is difficult to cover all points in detail in this article, so let’s discuss some key issues which are paramount in any renewable energy project.
First is the location of the project. The location decides the fate of all stakeholders due to its potential to generate revenues over the life of the project. Therefore, land acquisition based on micro-siting, support of intermediaries, the possibility of getting evacuation infrastructure on time, and means of transportation to access the project site become important points.
Second is the correct price/tariff for long-term PPAs. The government abolished the FIT regime in March 2017 and came up with an e-reverse auction, which is a tariff-based competitive bidding transparent mechanism. In this process, the PPA is signed by the off-taker at the price discovered in the e-reverse auction carried out by various nodal agencies appointed by the State and Central Government. This mechanism saw tremendous success in the initial phase as it brought down the price/tariff by around 40% – 60% compared to the FIT regime. However, the question remains whether price/tariff discovery through competitive bidding every month or quarter is right. This becomes more relevant when the turnaround time from tendering to signing the PPA (Power Purchase Agreement), PSA (Power Sale Agreement), and adoption of tariff by CERC or various SERCs is high. This delay, coupled with inflationary trends, raises concerns about the financial viability of the project and its commissioning, which can be tracked on the websites of various nodal agencies.
Third, the government’s plan to address counter-party risk by appointing intermediary agencies like SECI, NTPC, NHPC, etc., does not fully resolve this issue, as these agencies are eventually dependent on State discoms or other Government companies to sign the PSA for buying electricity and ensuring timely payment. Finding a creditworthy party to sign the PSA is not easy due to many reasons, one of them being that every PSA has a different fixed tariff, and every state discom or other utility wants a lower tariff.
Fourth is the accountability of government-appointed nodal agencies. Nodal agencies are not penalized if the delay is caused by them due to delayed signing of the PPA or PSA, or adoption of tariff by regulators, or not providing adequate evacuation infrastructure on time. However, stringent penalties are imposed on developers if there is a delay in commissioning the project due to inherent issues prevailing in India.
Fifth is the need for reliable and long-tenure quality wind or solar radiation data to forecast near-accurate generation numbers. It has been a very big issue in this sector due to which the industry is missing generation estimates.
Other issues include delayed payments from discoms, or deductions due to high rebate rates even if payments are made on time, right of way (RoW) issues, increasing Deviation Settlement Mechanism (DSM) penalties, and rising annual insurance costs across all technologies due to an increase in Acts of God (AOG) events. Additionally, in recent years, global warming has brought uncertainty in achieving estimated long-term generation, prompting private banks and NBFCs to introduce additional conditions during the construction phase. Parametric insurance covers are available to mitigate generation risks, but high premium costs currently make them unviable.
Recently, it has been witnessed that some of the quality wind turbine suppliers are exiting the Indian market due to sectoral challenges. Some have completely stopped supplying wind turbines to India due to thin margins and have shifted focus to the US and European markets.
Initially, renewable energy financing was primarily from non-banking financial companies (NBFCs). These private NBFCs recognized the sector’s potential and started to build the initial frameworks for funding these projects. As the market has evolved in the last 10 years, public and private sector banks (both domestic and multinational) have also joined the party.
On the equity side, Indian conglomerates along with their international partners have played a pivotal role in supporting this sector due to its risk and returns matrix. From 2015 onwards, international investors such as sovereign wealth funds, global pension funds, private equity funds, major oil and gas companies, and utilities have scaled up this sector to a stage where the mammoth target of 500 GW set by the Central Government seems achievable. According to publicly available data, many sovereign wealth and pension funds have taken direct equity stakes in Indian renewable energy companies, and some of these companies have also gone for public listing in domestic and foreign markets.
The key development in the last 5-7 years is that Indian renewable energy companies have attracted funds from both domestic and international bond markets. Indian green bond issuances reached a total value of US$21 billion in February 2023, of which the private sector was responsible for 84 percent. India also made its first foray into Sovereign Green Bonds, raising more than INR 80 billion on 25th January 2023, followed by another issuance on 9th February. This marks a significant turning point in the country’s commitment to expanding renewable energy production and reducing its carbon intensity (source: orfonline.org).
India continues to be a hub for investments in renewable energy due to its size, scale, demand for electricity, demographic advantages, and the risk/returns it offers to investors. To promote such high investments into this sector, renewable energy financing structures need reforms and a boost from regulators and the government to ensure smooth capital flow into the sector to achieve ambitious targets. Some measures could include improving the financial health of discoms, removing blockages in land acquisition (such as obtaining NA process, clarity in compensation to farmers, MoD approval, etc.), providing timely and robust transmission infrastructure, synchronizing policies at Central and State levels, offering single-window clearances to avoid unnecessary delays, relaxing norms for DSM penalties, and incentivizing developers by reducing tax rates for this sector.
Over-dependence on international funds to achieve this target could be detrimental. Therefore, the government should also bring clear guidelines to channel funds from India’s corporate bond market, debt-oriented mutual fund schemes, insurance, and pension funds. Developing long-term debt funding opportunities will help boost domestic investor sentiment in renewable energy. Additionally, sectoral limits of banks to fund this sector should be revisited, and financing products should be developed to provide low-cost funding along with long-term fixed interest rates and tenure.
Overall, India has made notable progress in renewable energy in the last decade, but achieving the ambitious 2030 targets requires a clear strategy, plan, and schemes for yearly capacity additions from the central government with the support of state nodal agencies. The e-reverse auction strategy can also be re-evaluated to roll back to the FIT regime, where price/tariff discovery should be done annually instead of at every bid. This annual discovered tariff should be declared for 1-2 years to sign PPAs, which would reduce costs and time for both sides, help corporates plan long-term, and guide evacuation agencies in meeting their construction targets on time.
The government’s focus should be on achieving the target with a reasonable tariff rather than reducing the tariff in every bid. Long-term energy generation estimates are mathematical calculations based on historical data. Any downside in actual generation due to environmental or other local issues will put pressure on the financial ecosystem, eventually creating a vicious financial cycle that could impact investments in this sector.
Anoop Jain
General Manager – Finance
