New Game Plans: Renewable players devise strategies for consolidation  

Renewable players devise strategies for consolidation  

The Indian renewable energy deal space is becoming increasingly active with at least one new move or plan being announced every week on an average. The relatively mature wind power segment is witnessing consolidation while the solar market has started attracting significant global interest. For international players, acquiring operational projects could be a less risky way of entering the market than bidding in a hypercompetitive auction. Also, as solar goes mainstream, large Indian power conglomerates that were earlier sceptical about investing in renewables are now looking at acquisitions as an attractive, low-risk entry strategy.

One of the recently concluded deals in the wind power space is the merger of Gamesa’s operations with Siemens. Further, Germany-based Senvion SA has acquired wind turbine manufacturer Kenersys India. Senvion will acquire Kenersys’s production facilities as well as service operations to gain entry into the Indian wind space. Last year, Singapore’s Sembcorp Industries entered the Indian market by acquiring a majority stake in Green Infra, one of the largest wind independent power producers (IPPs). There is increased activity in the project sale space as well. Key examples include Axis Energy acquiring Orient Green Power Limited’s Theta Wind Energy.

A recent trend in the space is the exit of old captive wind power players. For instance, in May 2016, Tata Power acquired 30 MW of wind power capacity in Maharashtra from domestic polyester maker Indo Rama Synthetics India Limited. In line with this trend, Hindustan Zinc Limited is now exploring the sale of its wind power assets. The solar power space is also buzzing with merger and acquisition (M&A) activity as investor confidence in the segment has increased on the back of a strong policy push and favourable market conditions.

Investor perception of the solar and wind power segments has improved globally, which is reflected well in the Indian Energy Agency’s latest report on investment trends in the power sector in 2015. The report reveals a marked shift in spending towards cleaner energy.

In 2015, renewable energy investments of $313 billion were recorded, accounting for nearly a fifth of the total energy spend. This established renewables as the largest source of power investment. While spending on the renewable power capacity remained flat between 2011 and 2015, electricity generation from the new capacity rose by one-third, reflecting a steep cost decline in wind turbines and solar photovoltaic (PV) modules. The investment in the renewable power capacity in 2015 generates more than enough to cover the global electricity demand growth.

As the sector is witnessing increasing investments, it will be interesting to see how the market structure is shaping up from the ongoing deals. The following key trends today sum up the M&A scenario in the country’s renewable energy space…

Increasing international interest

One of the key deals involving an international company seeking entry into the Indian wind power space is German wind turbine maker Senvion’s acquisition of windmill maker Kenersys India Private Limited’s business in August 2016. The deal included Kenersys’s 250 MW production site in Baramati, Maharashtra, and its wind farm operations aggregating 220 MW. Senvion also gained the right to sell Kenersys’s core product series of 2 MW and 2.6 MW turbines worldwide. Adding Kenersys to its pool will shorten Senvion’s “time to market” for the sale of its products in India.

Earlier, in January 2016, EDF Energies Nouvelles, the renewable arm of French energy group EDF SA, bought a 59 per cent stake in SITAC RE Private Limited, the SITAC Group’s wind power subsidiary. The SITAC Group specialises in real estate and forayed into the wind space in 2007. The two companies have formed a joint venture, which plans to install 142 MW of capacity by March 2017.

This new partnership is aimed at strengthening EDF Energies Nouvelles’ position in the Indian market. It first established its presence in India in 2013 through ACME Solar, its 25 per cent-owned local subsidiary dedicated to solar PV, and has since commissioned 180 MWp of solar capacity. It is currently setting up 132 MW of projects in Uttar Pradesh and Telangana.

In March 2016, Ahana Renewables, a US-based renewable player, entered India’s renewable energy market by acquiring 100 per cent stake in Armstrong Energy Global’s solar power development business for an undisclosed amount. The Indian entity has been renamed Vibrant Energy Holdings. It already has around 50 MW of solar PV facilities in the pipeline ready for construction over the next six months, and is aiming to set up 250-350 MW of solar energy projects in the country by 2018.

These are just a few examples of foreign players entering the Indian market to tap the upcoming opportunities in the renewable energy space. The trend, it seems, is only likely to strengthen in the coming years.

Domestic power players venture into renewables

A number of large IPPs in the country have set ambitious goals to increase the share of renewables in their power portfolio in the coming years. Apart from setting up greenfield projects, these companies are looking at acquiring existing projects/players.

A case in point is Tata Power’s purchase of Welspun Enterprises’ renewable energy business, at an enterprise value of $1.4 billion, the biggest in the Indian renewable energy space. The acquisition was announced in June 2016, a time when solar tariffs had hit a record low. This, along with the mounting debt, had forced players to put their assets on the block in a highly competitive environment.

For Tata Power, which had a limited presence in the solar segment before this, it is a quantum leap. The deal, which is valued at Rs 77 million per MW, includes 990 MW of solar power projects and 150 MW of wind projects, and will expand Tata Power’s renewable energy portfolio to 2.3 GW. The deal also includes a 60 per cent debt component.

Another large conventional power player betting big on renewables is Adani Power. With a solar portfolio of 648 MW in Tamil Nadu and many upcoming projects in other states, the Adani Group aims to replace the Tata Group as the country’s top solar power generation firm in the next two years. As per a study by the Mercom Capital Group, 11 per cent of the total solar power projects in the country, including those in the pipeline, are with Adani. The company has projects in Tamil Nadu, Jharkhand, Odisha, Uttar Pradesh, Gujarat and Madhya Pradesh. The group may also look at acquiring existing solar projects or firms with a sizeable project pipeline in order to enhance its renewable portfolio.

Incumbents look to scale up

While a large number of players are engaging in M&A activity to gain a foothold in the Indian renewable energy space, the existing players are also upping the ante to strengthen their position and leverage their project development experience to scale up further.

Over the past year, Suzlon Energy acquired many small companies such as Gale, Tornado, Abha and Shreyas for an undisclosed amount. In addition, Surana Telecom and Power acquired a 51 per cent stake in both Tejas India Solar and Arhyama Energy Private Limited. In June 2016, Amplus, one of India’s largest solar developers and a portfolio company of I Squared Capital, acquired SunEdison’s Indian industrial and commercial portfolio. Meanwhile, Greenko Energy Holdings is in talks to buy SunEdison’s Indian assets for a projected amount of $100 million.

Evolving market dynamics encourage consolidation

One of the main drivers for M&A is the inability of firms to recycle capital, which leads to stagnation. As the solar segment expands and matures, it will attract a new set of market participants that would be keen to invest in assets that are either operational or under development, thus avoiding the initial risks of development, construction, financing and technology. Sembcorp’s recent hiking of stake in Green Infra and Welspun’s acquisition by a utility company and a long-term asset owner shows that this is just the beginning.

In June 2016, CLP India, a wholly owned subsidiary of Hong Kong-based CLP Holdings Limited, announced the acquisition of a 49 per cent stake in Suzlon’s SE Solar for a cash consideration of Rs 735 million with an option to acquire the balance 51 per cent within one year of the commercial operation date. This entails the joint development of 100 MW of solar power projects at Veltoor in Telangana.

In March 2016, Piramal Enterprises and APG Asset Management acquired an undisclosed equity stake in Essel Green Energy, the solar business arm of the Essel Group, for $132 million. Yet another player considering such a deal is Surana Solar. It is planning a strategic or part divestment of some of its developed projects to focus on setting up new ones.

To some extent, the existing companies’ inability to recycle funds can be attributed to the way the market dynamics have panned out. While India’s ambitious renewable targets have attracted a lot of attention from foreign and domestic investors, the shortage of projects, limited land availability, aggressive tariffs, inexperienced promoters entering the sector, and the lack of established and professional operations and maintenance players have undermined investor interest in the sector.

International companies such as SunEdison, the SoftBank Group, SkyPower Global and Fortum Oyj adopted aggressive bidding strategies to gain a foothold in India’s lucrative renewable industry. This led tariffs to fall below Rs 5 per kWh, thus making investors more risk averse, especially when non-performing assets and the quality of bank loan books are on the radar more often.

Bidding aggressively low tariffs can be justified if the market risks are mitigated by a government-supported framework to lead the industry to a mature phase. However, bidding aggressively on the expectation that interest rates will continue to remain low, generation levels will be high and payment cycles will be short has forced investors to undertake due diligence before committing funds.

Lenders who are still keen to invest in the sector may decide to tweak their parameters and reduce their loans to mitigate the higher risks associated with the investment. Such developments have put financial constraints on developers to fund ongoing projects, thus leaving them to rely heavily on infusing equity.

The wind power deal space is equally active. The latest to join is Wind World (India) Limited (WWIL), which is reportedly exploring the sale of 202.4 MW of wind power projects. WWIL, formerly known as Enercon (India) Limited, has appointed IDFC to carry out the sale mandate for these projects spread across Andhra Pradesh, Rajasthan, Tamil Nadu and Gujarat. The projects on sale include 50.4 MW of wind projects in Kurnool (Andhra Pradesh), Sipla (Rajasthan) and Vagaikulam (Tamil Nadu), as well as a 51.2 MW project at Samana (Gujarat). The tariffs for the projects range from Rs 3.50 per unit to Rs 4.46 per unit.

PE players increase exposure, but cautiously

In the past couple of years, the sector has seen a modest degree of private equity (PE) investments. In fact, PE/venture capital investments grew at a compound annual growth rate of 37 per cent during 2012-15. The PE players in the market include US-based I Squared Capital, India’s IDFC Alternatives, JP Morgan Asset Management Holdings, Inc., GE Energy Financial Services, Morgan Stanley Infrastructure Partners, the Goldman Sachs Group, Inc., Actis Capital, the Abraaj Group, Bessemer Ventures, Omnivore Partners, Aloe PE, the International Finance Corporation, and FE Clean Energy.

In February 2015, Actis Advisors committed $230 million to Ostro Energy, an Indian renewable energy platform. Orient Green

Power Limited also raised $153 million from Forefront Capital Management Limited. In August 2015, GIC Pte Limited acquired a 100 per cent stake in Greenco Mauritius Limited for $255 million. In October 2015, ReNew Power raised $265 million of equity from the Abu Dhabi Investment Authority, Goldman Sachs as well as the Global Environment Fund.

In 2015, international PE investors poured in $1.5 billion of investments in the renewable energy space. However, the absolute value of these investments in the sector remains subdued as compared to other key sectors.

The way forward

Going forward, established players who have ample resources will acquire financially viable projects that provide good returns. Further, there will be an increasing number of players who have built capacities and would want to monetise them.

In sum, M&A activity in the solar and wind power segments will be largely aimed at churning projects, divesting completed ones, and freeing up debt and equity for redeployment in other projects.