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Foreign investors tapping into India’s solar market undeterred by lack of timely payments
Foreign investors are pairing up with local independent power producers to tap into India's booming solar market despite problems with timely payments, land acquisition, and grid access, analysts say.
Sovereign wealth funds from Singapore and Abu Dhabi, along with banks like Goldman Sachs, funds like Copenhagen Infrastructure Partners (CIP), and utilities such as Japan's JERA currently hold sizeable stakes in solar projects led by Indian developers, according to a 31 July IHS Markit analysis of India's solar market.
The same analysis found major banks like JP Morgan and Standard Chartered are prepared to underwrite many of the green bonds that Indian power producers are floating to add to their renewables portfolios.
India is eager to draw in foreign investment as it knows it cannot reach its target of 450 GW of installed renewable capacity through its own capital as the country seeks to decarbonize its economy.
At the G7 summit meeting in June, Indian Prime Minister Narendra Modi stressed that developing countries need better access to climate finance, calling for a holistic approach towards climate change that covers all aspects of the problem, including mitigation, adaptation, technology transfer, climate financing, equity, climate justice, and lifestyle change.
Investors eye full ownership, long-term PPAs
Energy analysts agree that foreign investors are drawn to India for a variety of reasons. These include an offer of up to 100% ownership in any renewable project in which they have a stake, something that China doesn't allow, plus a 25-year power purchase agreement (PPA), secured in some instances by sovereign guarantees via companies such as the Solar Energy Corporation of India Limited (SECI), which is under the administrative control of the Indian Ministry of New and Renewable Energy.
In this way, analysts say, foreign investors may be able to mitigate, but not eliminate entirely the risk of untimely payments from individual state agencies—the purchasers of much of the renewable capacity. It also appears that some of the more successful renewable project developers in India have portfolios that are spread across various states, thereby allowing them to decrease their risk by avoiding putting all their eggs in one basket.
For the local renewable energy developers, IHS Markit said, "the promise of lower cost of capital associated with backing from stable, foreign financial institutions allows them to bid more competitively into price-sensitive markets in India than competitors that rely primarily on domestic funding sources."
"Foreign investors see India's solar market as a high-growth area, and many are buying substantial stakes in local firms that know the market and operate successfully there," Conway Irwin, IHS Markit's climate and cleantech research director who analyzed the solar market data, told Net-Zero Business Daily 30 July.
According to Tim Buckley, energy finance director for the Institute of Energy Economics and Financial Analysis (IEEFA), foreign investors also are flocking to India because they need "a home" for the $88 trillion they have pledged to meet the Paris Agreement goals to limit global warming to 1.5 degrees Celsius above pre-industrial levels.
And as the International Energy Agency noted in a July report on global electricity markets, India today represents the third largest electricity consumer in the world. Demand is set to grow once it resumes economic activity that the COVID-19 pandemic brought to a crawl in the past two years, Buckley said.
The IEEFA estimates India will need a $500-billion investment in new renewable installations to reach its 2030 goal of 450 GW, of which roughly half will be in solar, 20% in wind, about 10% in grid-firming technologies such as battery storage, and the rest devoted to upgrading grid distribution and transmission services.
Sensible, risk-adjusted returns
Investors look for prospects that will provide opportunities on a sensible, risk-adjusted basis, Buckley said. "And what India is offering is a $500-billion prospect of new investment in already government-guaranteed infrastructure assets in the renewables space," Buckley told Net-Zero Business Daily 2 August.
In addition to the scale of capital deployment opportunities and strong, consistent energy policy framework offered, Indian renewable energy projects have historically provided "healthy project-level" equity returns in the range of 14-16% that are much higher than those available in say Germany or Japan, Buckley wrote in a February analysis of the global capital flows underpinning India's transition to a low-to-zero carbon economy.
IHS Markit analysts agree.
Independent power producers with strong foreign financial backing enjoy substantially lower capital costs because they can access lower-cost financing from overseas investors and avoid domestic borrowing costs that can run as high as 9-10%, said Irwin.
"The negatives posed by the lack of timely payments by state agencies, which are the largest purchasers of renewable energy, is more than offset by all the reasons for going into India in the first place," Buckley said 2 August.
At the end of June, solar energy accounted for about 42.3 GW of the overall 384.1 GW of installed capacity in India, or about 11% of total power capacity; wind stood at 39.5 GW or about 10%; while the combined installed capacity for coal and gas totaled 61% of the power mix.
The International Energy Agency (IEA), in its 2021 India outlook, agreed with IHS Markit's observation that solar power is poised for "explosive growth" in India.
IHS Markit projections show that India's 10 largest renewable companies, which held 13.5 GW of solar capacity at the end of 2020, plan to substantially increase their renewables portfolios (see chart below) in the next 10 years to help meet the country's 450-GW goal.
Keeping up momentum behind investments in renewables, however, means tackling risks relating to delayed payments to generators, land acquisition, and regulatory and contract uncertainty, the IEA observed in its report.
Delayed payments not an exception
The problem with delayed payments arises when developers sign PPAs with states. "Payment delays of at least several months, and sometimes as much as a year, are the rule rather than the exception, with some states more reliable than others," Irwin said.
Both Irwin and Buckley said SECI has a much better track record with regard to the timeliness of its payments.
However, Irwin noted that renewable policy changes at the state level, such as the decision by the state of Andhra Pradesh's current government to reconsider PPAs issued prior to 2019, have forced the renegotiation of existing PPAs, "upending the outlook for project economics and the viability of loan facilities." The case is before the state's high court now.
Meanwhile, Japan's SoftBank ended up selling SB Energy India, owner of a 4.9-GW wind and solar portfolio, to Adani Group for $3.5 billion in May. Among the reasons for pulling out, SoftBank cited problems faced in acquiring land and grid access. Buckley said SoftBank could have avoided such difficulties had it teamed up with a local power producer.
Yet persistent policy and payment risk along with problems with acquiring land and grid access haven't been enough to deter foreign investment in India's solar market, as IHS Markit data show:
- Government of Singapore Investment Corporation (GIC) holds a 56% stake in Greenko, an Indian firm that holds the second-largest solar portfolio at 4.5 GW.
- Masdar, a renewables and sustainability-focused subsidiary of state-owned Emirati holding company Mubadala, is a major shareholder in Hero Future Energies—ranked ninth with 1.9 GW of capacity.
- Emirati sovereign wealth fund Abu Dhabi Investment Authority (ADIA), which has been explicit about plans to intensify its focus on renewables as an attractive asset class, holds significant stakes in Greenko and ReNew Power, which, with 5.5 GW of solar capacity, is the top Indian developer.
Among financial institutions, Goldman Sachs is a major shareholder with a 49% stake in ReNew while Canada Pension Plan Investment Board has a 16% share. JERA holds a 9% share. Quebec's Caisse de dépôt et placement holds a 51% majority stake in Azure Power, which is ranked fifth in the capacity table with 2 GW.
The World Bank Group's International Finance Corporation also holds significant stakes in Azure Power and Hero Future Energies.
Don't forget resiliency
However, India, in its rush to decarbonize and install renewables at a record pace, is overlooking a key factor, and that is whether the location is resilient to extreme climate conditions.
According to Namrata Ginoya, who is resilience and energy access manager for the nonprofit World Resources Institute India, developers, both foreign and local, should incorporate climate resiliency into their plans for siting renewable projects, be they wind or solar.
In an April 2021 insight, Ginoya said it is not enough to decentralize solar systems to make them accessible in remote areas, but to consider the impacts of climate change and the ability of equipment to withstand these impacts.
And in a 30 July tweet, Ginoya asked, "how much of the clean energy finance is going in building climate RESILIENT clean energy infrastructure. Are the homes and hospitals we are solarising resilient? Roof top solar is only as resilient as the building it sits on."
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