Finance

Interview
India’s 2022 Renewable Energy
goal would require in excess
of $75bn in investments
To get from the approximately 70 GW of renewable today to the 175GW target for 2022 would require
in excess of an additional $75bn, with most of it in the form of debt. In an interview with Subash Deb,
Deputy Editor, Infraline Plus, Mr. Gagan Sidhu, a Delhi NCR-based Senior Independent Adviser, who
focuses on advising companies seeking to raise and deploy capital in the Renewable Energy space, says,
the Indian banking system by itself just does not have the headroom to absorb such a large amount in a
short period of 4 to 5 years, from a credit growth as well as a sector concentration risk perspective.

Q
How important is foreign in bridging the gap.

capital for India to achieve
its 2022 target of 175 GW
of installed renewable energy
capacity?
Very important. It’s estimated that the
Indian banking system already has
exposure in excess of Rs 6 lakh crore
($100bn) to the power sector. To get
from the approximately 70 GW of
renewable today to the 175 GW target
for 2022 would require in excess of
an additional $75bn, with most of it
in the form of debt. In my view, the
domestic banking system by itself just
does not have the headroom to absorb
such a large amount in a short period
of 4 to 5 years, from a credit growth
as well as a sector concentration risk
perspective. It would be ideal if the
domestic bond market could step in,
but that’s debateable. As such, foreign
capital is required to play a critical role
Q
How do the 2022 targets
tie in with India’s CoP21
commitments?
India made two commitments in Paris.
Lower PPA First was a 33 to 35% reduction in
tariff itself emissions intensity, and the second was
becomes a that renewables would account for 40%
of installed capacity, both to be achieved
competitive by 2030. As of today, renewables is
advantage, already at 20% of installed capacity
and such if one excludes large hydro from the
projects, up definition of renewables, and at 33%
if one includes it. What this means
to a point, may is that if a net addition of 105 GW of
merit a lower renewables is forthcoming by 2022,
hurdle rate and no new thermal capacity comes
as compared on line in the meanwhile, India is on
track to meet the second commitment
to projects well before 2030 even if we exclude
with higher large hydro from our definition of
PPA tariffs renewables. And as electricity is the
single largest contributor to emissions

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in the country at close to 40%, surpassing on
the second commitment will go a long way
in helping meet the first emissions intensity
related commitment.
Q
What is your view on the way the
renewables landscape is evolving in
India?
One of the things that strike me is the almost
clear separation between companies that are
anchored in the thermal focussed business
models of the past and those that have
made a mark for themselves in renewables.
There are many reasons for this but in my
view topmost on the list is excessive return
expectations rooted in misevaluation of
risk. Most thermal focussed companies
have not fully appreciated the significantly
lower overall risk profile of renewables
and continue to expect thermal inspired,
or other arbitrary return levels. This is the
main reason why they have been relegated
to the side-lines while a new generation of
companies captures the renewables space.
There are other reasons as well. With
thermal, there has always been a great deal of
management focus dedicated to complicated
power plants prone anyways to cost overruns,
a scramble to secure feedstock, and an
attempt to tie-up highest possible tariff
PPA’s with state Discoms under bi-lateral
arrangements. These are very different skill
sets compared to what it takes to succeed in
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the renewables ecosystem which operates
under a transparent reverse auction PPA
tariff discovery regime, with quasi-sovereign
entities often fronting the PPA’s, and where
off-take & off-take credit risk is everything.
That is why I believe the few companies such
as Adani Group that have sizeable thermal
and renewable businesses have chosen to
separate the two, because it’s not just the
financial capital which evaluates renewables
differently, but it also takes a different kind
of human capital to evaluate and execute the
Bypassing projects themselves.
banks and
Q
You mentioned the bond market
accessing earlier. Do green bonds represent
debt capital a real opportunity for Indian
directly from companies?
Bypassing banks and accessing debt capital
the source directly from the source via the bond market
via the bond is a great way to reduce cost of funding,
market is a particularly for refinance of execution risk
great way to mitigated projects. However, before we get
into the subject of green bonds, it’s useful
reduce cost to compare the domestic and overseas bond
of funding, markets in general.
particularly First of all, India is rather unique in that
for refinance our equity capital markets are much larger
than our debt capital markets. It’s usually the
of execution other way around in many large economies.
risk mitigated Secondly, government securities of various
projects kinds comprise almost three fourths of the
bond market in value terms. Finally, the fact

that in excess of 90% of all bonds rated by
CARE are rated AA or above clearly indicates
that the market is practically non-existent as
we move towards the higher yield end of the
spectrum. So I’m afraid that greening by itself
may not be a sufficient incentive to persuade
an already reluctant domestic bond investor.
As a case in point, I can’t recall much
renewable project or portfolio level domestic
bond market activity in the last couple of
years– and even one issue that I do recall
required credit enhancement despite the fact
that it was operational and with an A graded
state Discom as off-taker.
The story in the overseas bond markets is
very different. There appears to be appetite
for both USD & INR Masala bonds from a
variety of Indian issuers – from renewable
project developers looking to refinance,
to financial institutions looking to shore
up their liabilities side in order to increase
lending exposure to renewables. What is
really interesting is that in some refinancings
by developers, appetite was not just limited
to projects with NVVN & SECI off-take, but
also extended to those with a range of state
Discom off-takers as well. Contrast this to the
situation in the domestic bond market that I
described earlier.
So in conclusion, greening will only
enhance an already receptive international
bond market. While the jury is still out
on whether green bonds offer a pricing
advantage versus their plain vanilla
counterparts, they will no doubt enhance
the pool of international capital available to
Indian issuers. This is further evidenced by
the fact that while HSBC estimated a total
of $221bn worth of green bonds outstanding
globally late last year, they also predicted an
additional $400bn of new green issuances in
2018 alone.
Q
What is your view on recently
discovered PPA tariffs? Do they
represent a risk?
It’s important to distinguish between lower
margins and risk – they are not one and the
Interview
same thing. Faced with the prospect of lower
PPA tariffs, developers have a couple of
choices. Cutting corners on construction may
seem the easy one as this has the appearance
of maintaining margins in an Excel
spreadsheet, but in practical terms revenue
and margins inevitably suffer. Now someone
may say see how low tariffs resulted in poor
quality construction, but this is the result of
a conscious, albeit short-sighted business
decision rather than an uncontrollable risk
manifesting itself. The second way of looking
at it is to accept the fact that maintaining
quality will come at the cost of margins. But
Most thermal the question to ask is, in light of imperfect
focussed contractual off-take obligations, do these
lower margins as a result of lower PPA tariff
companies
have the same, or alternatively, a higher
have not fully likelihood of being achieved as compared to
appreciated the competitions? And remember that given
the a 25 year horizon, the competition is not
just projects in the same tender, but projects
significantly
that will be built ten years hence as well. My
lower overall point here is that in many ways a lower PPA
risk profile of tariff itself becomes a competitive advantage,
renewables and such projects, up to a point, may merit
a lower hurdle rate as compared to projects
and continue
with higher PPA tariffs given uniformity in
to expect input security & cost for renewables, and the
thermal commodity nature of electricity in general.
inspired, This approach of non-static hurdle rates
or other is just one of several ways in which risk &
return evaluation criteria diverges between
arbitrary that used for the thermal businesses of the
return levels past, and what will be applicable to the
renewables ecosystem of the future.
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