India plans to build 175GW of renewables by 2022, requiring billions of dollars of capital. What are the opportunities for non-Indian investors, asks Peter Cripps
The renewables targets set by Indian Prime Minister Narendra Modi are on an epic scale.
The country has about 37GW of renewables currently, but is planning to catapult this to 175GW by 2022, in an explosion of development that would make it one of the hottest markets under the sun.
If its ambitious targets are met, there will be 100GW of solar (up from 3.3GW currently), 60GW of wind, 10GW of biomass, and 5GW of small hydro.
Such a build-out will require a massive injection of capital, a figure estimated by some at $300 billion.
It is clear that India cannot finance this revolution on its own, says Yes Bank, which is believed to be one of only a handful of Indian private banks to lend significantly to renewables projects.
Domestic renewable energy developers depend largely on banks and non-bank financial companies for debt, which has been constrained by limits on how much banks can lend to the power sector, and the high cost of borrowing, often between 12.5% and 14.5% for term loans. Equity, which is often provided by wealthy families or conglomerates, is in short supply.
"Large investors such as pension funds and insurance companies have stayed away from significant investments in renewable energy. The use of foreign sources of debt has also has been limited," says Namita Vikas, group president and country head of responsible banking at Yes Bank. "There is definitely the need for foreign investors to step in, as the funding may not be domestically available."
But is there demand from western investors to fill this gap? The Indian solar investment opportunity remains compelling, argues Andrew Newman, co-founder of Armstrong Energy, a UK-based developer with big plans for India.
India has a "unique" combination of high levels of sunshine, high power prices – meaning solar can compete in some areas without subsidies – and the size of the market is huge. For these reasons, he argues India is currently the most attractive solar market in the world.
Armstrong is already involved in two projects with a combined capacity of 6MW in the country, and has "an extensive pipeline". Its plans for a London IPO of an Indian-focussed solar 'growth-co' were postponed this summer, as emerging markets suffered a severe sell-off. But Armstrong continues to privately raise funds for its Indian enterprises and remains optimistic about the planned float.
The cost of solar in India continues to come down, says Inderpreet Wadhwa, founder and CEO of Azure Power, which built the country's first grid-connected solar plant in 2009.
A report from Vishal Shah at Deutsche Bank said power purchase agreements (PPAs) in the latest round of bidding under the national solar programme are expected to come in below INR5 ($0.075) per KW/h. Wadhwa says this is about a fifth of the cost in 2009.
There are signs that foreign investment is flowing. Wadhwa says his firm has attracted financing from the IFC and Silicon Valley-based venture capital firm Foundation Capital, as well as local banks.
He points out that there have been some 10GW of tenders this year, compared with 5GW for the past five years combined, and "global players such as EDF, Engie and First Solar" are now active in the market.
"In reality, the government has created a liberal environment for foreign investment in renewable energy projects," Namita Vikas, Yes Bank
US renewables juggernaut SunEdison has been developing at scale in the country, which is one of its four key markets, along with the US, China and Latin America. At a renewables conference hosted by Modi in February, the firm pledged to deliver 10GW of solar and 5GW of wind projects.
UK developer Lightsource Renewable Energy has made a £2 billion ($3 billion) commitment to the market. It announced a partnership with SREI Infrastructure Finance in November and will look to partner with other companies.
Other large corporates have also taken the plunge. Japanese telecoms firm SoftBank, Indian conglomerate Bharti and Taiwan-based electronics manufacturer Foxxconn are planning to invest $20 billion in Indian renewable energy through a joint venture. The new company, SBG Cleantech, plans to create 20GW of solar and wind energy in India over the next 10 years.
But, to-date, the flow of investment into the country has been limited, and has mainly been stumped up by developers bringing their own sources of financing. There are not thought to be any examples of institutional investors taking direct stakes in operational projects, nor are there any funds or other investment vehicles specialising in Indian renewables.
There are numerous barriers to overseas investors eyeing Indian renewables. India continues to be seen as a risky place to invest, despite the efforts of the Modi government.
Contested land rights issues continue to dog the country, and another problem for Western investors is the prohibitively expensive cost of hedging the rupee, which can cost between 6% and 8%, meaning that Western investors will probably have to live with currency risk, as PPAs tend to be denominated in rupees.
However, the Indian government has proposed the introduction of dollar-denominated contracts to solve this problem. Mani Vannan, investment director at Frontier Power, another UK developer eyeing the Indian market, believes this could be "a game changer".
This is just one of numerous policies in place or under consideration to try to encourage investment. For example, Modi helped drive the recently launched International Solar Alliance, which plans to attract $1 trillion to emerging markets.
Modi's targets are doable - Inderpreet Wadhwa of Azure Power
The government has allowed 100% foreign ownership of renewables projects, and renewables projects can receive special treatment in terms of calculating their contribution to the grid over longer periods, so they are not as heavily penalised for their intermittency.
Newman at Armstrong says: "In our view, Indian legislators have been very astute and have looked beyond saying 'let's give a subsidy'. They have looked to address the problem through technical support, which is really very helpful."
The government is looking to reform the distribution companies that provide PPAs at state-level, in an attempt to boost their credit ratings.
"In reality, the government has created a liberal environment for foreign investment in renewable energy projects," says Vikas at Yes Bank.
Outside the remit of the Indian government, there are several vehicles or initiatives that could boost foreign investment in Indian renewables.
Yieldcos allow institutions to gain exposure to operating renewables plants and to be paid healthy dividends from their regular pay-outs. Although there are no India-specific yieldcos, SunEdison's TerraForm Global is focussed on emerging markets, including India. However, TerraForm – like many US yieldcos – has suffered a dramatic sell-off of late.
The Green Climate Fund has the potential to inject some capital into India, points out Vikas at Yes Bank. The fund has been set up by the UN to play a key role in helping to channel $100 billion of 'climate finance' annually to developing countries by 2020. But it is still in its early stages and, at the time of writing, none of its first round of investments were in India.
Green bonds have the potential to steer capital into Indian renewables. There have been seven Indian green bonds so far in 2015, with more understood to be in the pipeline.
Yes Bank's initial 'green infrastructure bond', which helped fund renewables projects, was doubled in size to INR10 billion ($161.2 million) amid strong demand from both domestic and foreign investors.
One important initiative came from the IFC, which bought a second green bond from Yes Bank and simultaneously issued its own bond to pay for it. The IFC's bond, which benefited from its AAA credit rating, was listed on the London Stock Exchange to help develop an offshore Indian green bond market.
Some market players feel that the Indian state could do more to open up the bond market to foreign investors. Click here for more on Indian green bonds.
Vannan at Frontier says, for the immediate future, overseas investment in Indian renewables is likely to come from private equity and term finance through private banks.
However, he argues that as the market matures, institutional investors could start to invest in operating assets, as they do in Western markets, providing an exit for private equity investors who have borne the construction risk.
Wadhwa at Azure agrees: "We are moving in the right direction. A clear vision has been articulated – Modi's targets are doable."
Companies:London Stock ExchangeGreen Climate FundSunEdisonTerraForm GlobalFrontier PowerBhartiFoxxconnSoftBankYes BankArmstrong EnergyAzure PowerDeutsche BankIFCFoundation CapitalEDFEngieFirst SolarLightsource Renewable EnergySREI Infrastructure Finance