The Indian renewable energy industry was, till not so long ago, a largely fragmented market. Of late, however, it has been witnessing significant consolidation, with a series of mergers and acquisitions taking place. Moreover, with every successive transaction, company valuations, asset portfolios and deal sizes are growing. And there is keen competition to acquire the largest portfolios in order to achieve economies of scale.
Two of the largest-ever renewable energy sector acquisitions, together valued at $2.1 billion, took place in the first three months of 2018, the latest being the acquisition of Ostro Energy by ReNew Power. This is also the biggest transaction so far in terms of deal and asset size. Valued at Rs 100 billion ($1.54 billion), ReNew will acquire 1,100 MW of Ostro’s assets — 850 MW of operational capacity and 250 MW of under-development capacity. With this deal, ReNew Power’s total capacity stands at over 5,600 MW, the largest renewable energy portfolio in the country. Ostro Energy’s assets are spread across Andhra Pradesh, Karnataka, Telangana, Rajasthan, Madhya Pradesh and Gujarat, and involve a host of offtakers, which reduces the risks associated with power offtake for renewable power plants.
The Canada Pension Plan Investment Board (CPPIB) has invested $247 million in ReNew Power to support the capital required for this deal. This is CPPIB’s second investment in the company in a short span of four months. In January 2018, it had infused $144 million. For ReNew Power, this is its second acquisition in six months. In November 2017, it had acquired KCT Renewable Energy’s three fully operational plants, with a cumulative capacity of 103 MW, in a deal worth Rs 10 billion.
The two back-to-back acquisitions by ReNew Power – a company that has so far grown largely through the organic route – points to a rapidly growing sentiment around inorganic expansion in the Indian renewable energy market. Multiple market and regulatory developments took place in 2017-18, such as the steep fall in wind and solar power tariffs on the back of competitive bidding, the removal of generation-based incentives and reduction in accelerated depreciation benefits, which will shape the renewable energy ecosystem to help achieve the 2022 renewable energy targets. These developments have streamlined project allocation, leaving developers with a handful of projects, which are available only through competitive auctions. The liberal project development process enjoyed by the early movers in the market has been cut short and the organic growth of developers somewhat restricted. Under these circumstances, inorganic expansion by acquiring operational and/or under-development assets is gaining traction.
An analysis by Renewable Watch Research of the asset size and deal values of some of the key recent acquisitions exhibits an interesting trend in the Indian renewable energy market. There has been a sharp decrease in capital and financial costs over the past two years. This, coupled with falling tariffs as discovered in successive auctions, has resulted in a significantly improved risk profile of renewable energy projects in the country. Despite these developments, the asset value per MW in recent acquisitions has remained nearly consistent. Actis LLP’s acquisition of Bhoruka Power’s 321 MW of assets in February 2018 for Rs 27 billion ($414 million) suggests a value of $1.3 million per MW. Further, the Greenko-Orange Renewables deal, involving the acquisition of 1,000 MW for $1 billion, indicates a value of $1 million per MW, while the ReNew-Ostro deal gives a value of $1.4 million per MW. Another landmark deal, Tata Power’s acquisition of Welspun Renewables’ 1,140 MW portfolio for Rs 92.4 billion ($1.4 billion) in June 2016 provides a value of $1.2 million per MW. This suggests there has been little variation in the value assigned to assets over the past two years despite the aforementioned developments in the sector. While on the one hand, this implies considerable stability in asset valuations in an otherwise volatile market, on the other, it suggests that the value may not appreciate over a period of time.
It must be noted that the asset per MW analysis has been undertaken purely for representational and analytical purposes and does not reflect the actual company valuation process. Moreover, the valuation of under-development and operational assets would be different, as it would be for solar and wind power capacity too.
Moving forward, consolidation is expected to increase with bigger deal sizes and asset portfolios. The ReNew Power-Ostro Energy deal, however, promises to fuel the discussion around inorganic expansion, which is now becoming the preferred option even for companies with traditionally organic growth models, owing to its low-risk factor.