India’s rapidly growing renewable energy sector is likely to gain from the availability of easier finance following the upgrade of the country’s sovereign rating by Moody’s. But the good news may be overshadowed by certain policy and regulatory issues impeding sector growth. In a recent interview, K.S. Popli, chairman and managing director, Indian Renewable Energy Development Agency (IREDA), spoke about the evolving renewable energy financing climate, the key risks and benefits for lenders, and IREDA’s future plans…
How has the financing climate changed for the renewable energy sector in the past one year?
The total investment in renewable energy in the past few years has been around $9 billion per year. With regard to financing, banks and financial institutions are providing finer pricing, and the industry has been able to extract better terms and conditions from banks and financial institutions along with longer loan tenors. The international bond market has also grown exponentially and quite a few companies have been able to raise funds through the international bond market in rupee as well as dollar denominations.
As a lender, how would you rate the renewable energy sector’s performance in the past one year? What were the key highs and lows for investors?
The renewable energy sector performed reasonably well in 2016-17, with record capacity additions of 5.5 GW each in the wind and solar segments. Further, owing to the success of competitive bidding, wind and solar power have become more economical than conventional power generation, leading to grid parity being achieved earlier than envisaged. Mitigation of offtaker risk and payment security to some extent have also helped in bringing tariffs down.
The Ministry of New and Renewable Energy (MNRE) has also taken up the issue of unilateral termination of power purchase agreements (PPAs) by states and has issued tariff-based competitive bidding guidelines for power procurement for solar grid-connected projects. Under the new guidelines, several issues such as the unilateral termination or amendment of PPAs, land acquisition challenges, connectivity problems and clearance difficulties have been streamlined. We are confident that the sector will continue to grow at a rapid pace, which will obviate the possibility of renegotiation of PPAs at a later date.
There has been a paradigm shift in the wind segment, from feed-in tariffs (FiTs) to competitive bidding. The segment also saw the end of generation-based incentives and a reduction in the accelerated depreciation benefit for wind. The sustainability of low tariffs for solar will depend on the stability of cell prices and lower cost of financing.
What is your opinion on the growing bond market in India, and green masala bonds in particular?
Green masala bonds have become a successful financial instrument for investors to raise funds. Several companies have raised large amounts of money from the primary market by issuing green bonds. IREDA is the latest entrant in the green masala bond market after having successfully raised $300 million through masala bonds listed on the London and Singapore Stock Exchanges, at competitive prices. The issue of green masala bonds is testimony to investor confidence in renewable energy projects. The growth of the green bond market is not limited to India as the global green bond market issuance more than doubled to $92 billion in 2016 from $42 billion in 2015. According to Moody’s analysis, the global green bond market is expected to touch $120 billion in 2017 and India is expected to be a major player as it has ranked eighth in total green bonds outstanding, as per the latest update by the Climate Bonds Initiative. Established renewable energy players have also been able to attract capital from their promoters and we are seeing some consolidation happening in the sector.
Could you comment on IREDA’s bond issue on the Singapore exchange?
IREDA has successfully raised Rs 19.5 billion ($300 million) through a five-year rupee-denominated green bond at an annualised coupon rate of 7.125 per cent, which has been the lowest among all the green masala bonds issuances so far by Indian companies. This is a major milestone for IREDA as it continues to enhance its position in financing renewable energy projects in the country. The overwhelming response to IREDA’s masala bond indicates strong investor confidence in the Indian economy and in the renewable energy sector.
As companies grow in size, they will require an infusion of equity for expansion. With an established track record of GW-size companies, they will be in a much better position to raise money in the capital market. We will see more issuances from renewable energy players in the future, which will increase the visibility of the sector amongst investors and raising money through IPOs would become easier for renewable energy players.
What is the likely trend in market shares going forward? Can we expect major consolidation in 2018?
Both the wind and solar segments have matured in India and have established revenue streams. As both segments are now growing through the competitive bidding/auction route, it is expected that serious players with a liberal flow of equity would stay in the sector. The shift towards consolidation is inevitable with increasing competition in the sector.
What are the issues that directly impact the health of renewable energy financing in India?
In the past, renewable energy projects have faced issues such as the weak credit quality of offtakers, land and evacuation constraints, clearance issues and an evolving regulatory framework, which exposed the sector to financing risks and higher cost of financing. However, the introduction of the Ujwal Discom Assurance Yojana for the operational and financial turnaround of discoms, green corridors for dedicated evacuation of renewable power, and the plug-and-play model with a three-tier payment security mechanism for projects in solar parks have helped obtain attractive terms for financing.
Further, low implementation risks, a short generation period and robust performance of projects have helped in obtaining better terms for financing of renewable energy projects. However, the reluctance of utilities to sign PPAs for wind and solar projects has dampened the enthusiasm slightly.
What is the likely impact of falling tariffs, and the resultant diminishing margins, on the renewable energy financing market?
The fall in tariffs has sharply reduced the return on investment for solar and wind power businesses, and triggered consolidation in the sector. The intense competition amongst bidders is also a testimony to their confidence in the sector and in obtaining finance. This has led to more innovation in the financial sector and made the financing market very competitive.
What are some of IREDA’s plans for the coming years?
IREDA is committed to maintaining its strong position in renewable energy financing. It is also exploring different ways to lower its cost of capital to enable it to lend on more competitive terms. Further, IREDA has recently introduced several new financial instruments such as a credit guarantee enhancement scheme for the issuance of bonds, and the issuance of a long-term letter of comfort as part of buyers’ credit of three years, etc. It is also keen on exploring future business avenues such as funding of electric vehicles (EVs) and green energy corridors.
What are your thoughts on the encouragement of off-grid renewable projects that do not find much financier interest?
It is true that off-grid renewable projects are difficult to finance compared to grid-connected projects due to the relative absence of proven business models. IREDA is open to funding off-grid solar power projects and has introduced the Access to Energy Scheme with First Loss Mechanism under the KfW line of credit. Under the scheme, KfW has agreed to refinance up to Euro 20 million to IREDA to promote off-grid energy services in rural areas.
Also, an additional grant of Euro 4 million has been provided to IREDA to mitigate credit risks and offer incentives to encourage borrowers to ensure timely repayment and timely project implementation. Further, technological advancements enabling remote access to off-grid installations will improve monitoring, leading to better financing and revenue collection in the future.
What will be the key trends in renewable energy financing in the coming years?
Market consolidation driven by large players has already begun. As companies consolidate, the initial investor will have the option to exit in the near future. In addition, large financial institutions and banks will increase their exposure to the renewable energy sector manyfold. More and more companies will also start raising resources through the bond and capital markets. Finally, the sector will see EVs, energy storage and offshore wind emerging as new sectors, which may attract significant investor interest.