With significant growth in India’s renewable energy sector in recent years, the renewable financing landscape has seen a gradual transformation. Back in 2010-11, there was scepticism towards the sector, and this was not conducive to growth. As technologies were new, the risk component was high, and this prevented banks and financial institutions from funding such projects. The internal rate of return offered by renewable energy projects was as low as 5-6 per cent. The environment today has changed with various financial sponsors showing a willingness to place bets on the rapidly growing clean energy segment.
Borrowing capital for renewable energy projects has evolved beyond the purview of domestic banks with multilateral banks and non-banking financial institutions (NBFCs) looking to invest in the Indian market. Over the past year, there have been 24 deals between commercial lenders and companies. Prime among these lenders are the Asian Development Bank (ADB) and the World Bank Group. ADB gave a $390 million loan to ReNew Power in January 2017 and another $175 million loan to Mytrah Energy Limited (on a project finance basis) in April 2016. The World Bank Group has provided $1.02 billion worth of loans to the Indian government in addition to $625 million given to the State Bank of India as a long-term loan exclusively for the development of the renewable energy sector.
With the growth in the renewable energy sector, private NBFCs have emerged as a significant funding option, increasing the competitiveness of debt capital and thereby improving the terms of borrowing capital from these entities. Some of the new NBFCs are Tata Cleantech Capital (a joint venture between Tata Capital and the International Finance Corporation) and SREI Infrastructure Finance Limited.
An emerging debt-based financial instrument is the credit guarantee scheme. It involves a third-party credit guarantee agency assuming post-construction project performance risks and insulates the lender from payment delays and defaults, thereby guaranteeing the return on investment. This is helpful in the Indian context as the poor financial health of discoms is resulting in reduced investor interest in the renewable energy sector.
Despite having entered the market fairly recently, India has become one of the largest green bond markets in the world, driven by favourable policies and an evolving business environment. In the first seven months of 2017, the country’s green bond issuance reached $2.1 billion, enough to fund the debt of over 3.5 GW of renewable energy projects. In just two weeks of July 2017, Greenko and Azure Power together raised $1.5 billion from the sale of green bonds.
Since the first green infrastructure bond issue – YES Bank’s $3.3 billion bond with a term of seven years – several public and private companies have issued bonds. Primary among these are the masala bonds (rupee-denominated bonds) worth Rs 200 billion issued by NTPC Limited in October 2016.
In the renewable energy sector so far, private equity (PE) players have dominated equity financing. From 2012-13 to 2017-18 (till August 2017), PE investment in the sector stood at around Rs 302 billion. Most of this was in unlisted firms as the sector primarily consists of small and unlisted players. PE firms are, however, still cautious in their approach, especially due to falling solar tariffs (a result of aggressive bidding). Besides PE, a notable trend has been the emergence of project equity as a considerable source of funds in the solar segment. During the first eight months of 2017, three deals worth Rs 64 billion were witnessed involving stake acquisitions by PE players in solar projects.
As the sector achieves scale and gains maturity, equity or quasi-equity investments are primarily being led by pension funds, sovereign wealth funds (SWFs), large-scale utilities and mezzanine funds, on the back of existing operating cash flows of companies. In March 2017, two SWFs – Singapore’s GIC and the Abu Dhabi Investment Authority – committed an investment of $155 million in Greenko Energy Holdings. Bullish on the renewable energy sector’s growth, Canada-based pension fund Caisse de Dépôt et Placement du Québec also made a commitment of $150 million till 2019 to the country’s renewables sector.
In the capital market, clean energy players have tapped the initial public offering and qualified institutional placement (QIP) routes far less. High costs, compliance requirements and the disappointing performance of listed players so far have discouraged developers from opting for these routes. From 2012-13 to 2017-18 (till August 2017), only two companies – Inox Wind Limited and K.P. Energy Limited – have raised IPOs, worth a total of Rs 7.06 billion. The sector has not witnessed any QIP issuance in the past five fiscal years.
Consolidation on the rise
Merger and acquisition (M&A) activity in the renewable energy sector has picked up since 2013. Interest shown by strategic players in acquiring renewable energy assets is definitely on the rise, as can be seen from the recent Tata Power-Welspun deal, one of the biggest M&A deals in the country’s renewable energy sector till date. The deal has put the spotlight back on consolidation in this space. Some of the other prominent deals include Greenko Energy buying SunEdison’s Indian assets for about $392 million, a 10 per cent stake acquisition by JERA Co., Inc. in ReNew Power Ventures for $200 million, and the agreement between Leap Green Energy and Inox Renewables under which the former will acquire the entire operational wind power capacity of the latter.
Small solar companies are increasingly feeling the heat due to constantly decreasing returns. Falling solar tariffs have diminished returns for companies, leaving them with no option but to install projects at lower returns or consolidate with other firms. Over the past two years, the wind energy segment has witnessed a significant number of acquisitions. This is led by players that had invested in wind power projects primarily to avail of the accelerated depreciation benefit, and who now have sold these assets to bring down their debt, in an environment of weak cash flows in their core business and high interest costs.
While the financing sentiment in the renewable energy sector has improved, there is still a long way to go to ensure the availability of low-cost and long-term debt. Well-performing projects and a stable policy environment are imperative for boosting investor confidence and bringing down interest rates.
Although 75 per cent of the financing needs of the clean energy sector are met through debt, equity financing is being ramped up to widen investment avenues. In this regard, infrastructure investment trusts (InvITs) are slowly gaining traction as an alternative financing vehicle for the sector. This is because operational projects have predictable cash flows, which match the investor’s risk-return profile. Recently, Infrastructure Leasing & Financial Services Limited and Mytrah Energy floated wind energy-specific InvITs, which are awaiting approval from the Securities and Exchange Board of India.
The government’s £240 million fund, the Green Growth Equity Fund, in partnership with the UK government, to finance clean energy projects is expected to leverage private investment into the space. The fund will be a sub-fund of the National Infrastructure Investment Fund, the country’s first quasi-equity SWF, launched in December 2015.
The government’s renewable energy target of 175 GW by 2022 is likely to make India one of the biggest clean energy markets in the world. Large global investors and utilities have taken the inorganic route of entering and developing a presence in the Indian market, driving large M&As in the sector. Future M&A activity in the sector is expected to remain buoyant, with consolidation being the driving force. Within subsectors, the solar segment will witness the bulk of M&A activity on the back of a strong policy push by the government and lower profit margins of smaller companies (due to falling tariffs). Deal activity in the segment is expected to gain momentum as several large operational portfolios come up for sale. The maturing policy framework and technological advancements have led to equity, debt and M&As growing strongly in the renewable energy sector in general and the solar energy segment in particular. But with renewable energy being driven by innovations, the industry needs innovative financing as well. The outlook of the sector seems to be bullish which is why the sector is garnering interest from various financial sponsors who are routing investments into the sector through various financing modes and instruments.