The sun shone and the wind breezed past. The mood was upbeat with talk of capacity expansions and increases in installations. At Renewable Energy India 2016, the country’s largest such fair, solar and wind companies appeared to be one happy family.
While solar stole the show, wind power companies were also optimistic, anticipating another record-level of installations (4,000 MW) this year.
There was just one melancholy strain in this music of joy — debt finance. A total of ₹5-lakh crore is required to fund the targets of the next six years – 92 GW of solar and 35 GW of wind. Where would these funds come from?
How bankable
The renewable energy industry believes the Indian financial system has not girded up to the challenge of providing these funds. The country’s lending landscape is dominated by public sector banks, and of these, only SBI and IDBI Bank seem to be alive to the industry’s needs. The other large banks, such as Bank of India, Bank of Baroda, Union Bank, Punjab National Bank, are simply unavailable.
Among NBFCs (non-banking financial companies), only three – IREDA, PTC Financial Services and L&T Infra — seem to be carrying the flag now. Rajat Gupta, CEO of Ostro Energy, a renewable energy company, observes that these three companies understand the industry’s business well and are “super quick” to deliver on needs. Other power-focused, public sector NBFCs, Power Finance Corporation and Rural Electrification Corporation, which, though under pressure from the government to lend, are too straight-jacketed by rules to finance meaningfully.
Thus, even amid the cheer of today, questions about the industry’s future hang overhead like a dark cloud.
It is hard to blame the financiers. The Indian renewable energy sector is saddled with a unique gamble: the ‘discom risk’, or the risk of the State government-owned electricity distribution companies buying power produced by energy companies, and not paying them on time.
It could get worse: the discoms may just refuse buy the power. In Tamil Nadu, where solar power producers set up projects lured by the lucrative feed-in tariff of ₹7.01, and now find themselves left with a customer who doesn’t want to buy. Banks, already bitten by rising NPAs (non-performing assets), understandably baulk at lending to wind and solar projects.
“There is a sense of insecurity (in banks),” says Sunil Jain, CEO and Executive Director of Hero Future Energies, one of the country’s leading renewable energy companies. He says banks have become particularly sensitive in the last 5-6 months, after being hit by NPAs, and take an eternity to process loan applications, as they keep “verifying and re-verifying everything”. Talk to officialdom and they will point to how things have gotten better. After all, there is no dearth of funds – the hurdles lie in risk perceptions. In an attempt to mitigate such risks, State-owned IREDA has now come out with a raft of initiatives to this end. There are now funds to assure the lender of repayment, at least partly, if the borrower fails to pay, and funds that assure the energy company of payment, in case the discom fails to pay up.
Renewable Energy Secretary Upendra Tripathy speaks of a plan to provide incentives to discoms that support rooftop solar projects (discoms typically dislike rooftop projects because they take away their better-paying customers.)
India being a graveyard of failed schemes, few show enthusiasm for these initiatives. Nothing comes without a price and unless the basic problems, such as discoms’ health and transmission infrastructure are fixed, the risks are bound to be priced somewhere down the chain.
A way out
So, where does one find the ₹75,000-odd crore every year for debt-financing renewable energy projects? Hero Future’s Jain feels deepening the corporate bond market and raising the limit for external commercial borrowings (ECBs) could help. Despite an increase in corporate bonds over the last few years — from ₹1.92-lakh crore in 2010-11, it rose to ₹4.80-lakh crore in 2015-16 — there is the understanding that deepening the bond market is not easy.
The growth has come from a few initiatives such as opening an electronic trading platform and liberalising foreign investments into bonds.
However, the basic problems remain: that of a narrow investor base, the absence of protection mechanism such as credit-default swaps (which allows the trading of credit), the government crowding out others by being a dominant and risk-free issuer, and the absence of a robust secondary market. None of these is amenable to easy resolution. For example, how politically feasible is it to broaden the investor base by allowing pension and insurance funds to invest in corporate debt?
Liberalising ECBs might help, but that is not a route open to all. Raising funds from abroad is “neither easy nor cheap”, notes Gupta of Ostro Energy. Add to this the cost of hedging for currency fluctuation, and the rates are not cheaper than local debt. Nevertheless, freeing ECBs opens up another source of debt, even if not cheaper. Jain suggests creating a fund, with a corpus coming from the government and a small cess in electricity tariffs, for subvention of hedging costs.
Some believe that Infrastructure Investment Trusts (InVITs) could help to some extent. InVITs (like the YieldCos in the US) are companies, or ‘Business Trusts’ to which developed and operational energy plants could be sold. The fundamental assumption behind these structures is that there are investors who are warm to the annuity-like steady income the wind and solar plants receive, and will put their money in InVITs with which to buy the assets.
In practice, finding such investors has been difficult. As underlying risks remain, it is unlikely that investors will put money in InVITs. “If there was an interest, by now there would have been investment bankers coming to us and making pitches,” says Sumant Sinha, Chairman and CEO of ReNew Power, one of India’s larger renewable energy companies. “But there has been none.”
As the curtains fell on REI 2016, the availability of debt funds remained the elephant in the room.
Last year, India installed around 6,500 MW of wind and solar projects, which would have required around ₹30,000 crore of debt. In a few years, this number might need to be tripled. You might call it a tall order.