Unlocking home non-public capital for Indian Renewable Vitality Sector, Vitality Information, ET EnergyWorld

Unlocking domestic private capital for Indian Renewable Energy Sector, Energy News, ET EnergyWorld

From Vikas Dawra

In 2015, at a turning point in India’s journey to renewable energy, the country announced the much-discussed 100-gigawatt solar power target by 2022, a five-fold increase from the original JNSM target of 2010. A cumulative RE-installed capacity of 175 GW became expected by 2022, with a contribution from wind amounting to 60 GW. In early 2020 India raised this target again to 450 GW by 2030.

The starting capital for Indian renewables came from tax credits, with Indian companies taking advantage of the 80 percent accelerated depreciation rate. Effective March 31, 2017, that rate has now been reduced significantly and, along with the lowering of corporate tax rates (as well as the elimination of dividend distribution taxes), depreciation or tax savings are no longer a driver of RE investments.

The next wave of equity investments came from private equity-backed renewable energy IPPs, with Indian and global PE companies posting significant capital. Over time as the sector has matured, the returns from PE (+20 percent IRRs) to utility returns (12 percent + rupee IRRs) have decreased significantly. Accordingly, PE investors with high returns have given way to high-yield, low-risk capital pools, including large infrastructure funds as well as sovereign wealth funds and pension funds. There were selected success stories of these early PE investors who exited via M&A, but a successful IPO of a RE-IPP is still pending on the Indian capital markets. The listed InVits & REITs experience is still in its infancy to effectively conclude that the Indian listed market has buyers for high yield stocks (as opposed to growth stocks).

The above two factors would potentially mean that much of the equity for India’s RE growth story would continue to come from the private market – either through large institutional investors setting up their development platforms or through private InVITs.

Some sector experts have warned that returns in the Indian RE-IPPs have fallen to such a level that future investments may become rather unattractive. The point is not that the returns are inadequate, but that the risk of attracting global pension or insurance money is unacceptable.

While this low-risk, return-oriented money is conveniently betting on an operational renewable project worldwide, an operational project in India continues to suffer from a low credit profile of inconvenience and the risk of renewed collective bargaining. This counterparty risk explains the existing preference of all institutional investors who only converge for NVVN or SECI PPAs. These investors have little appetite for high-tariff government PPAs, although they are now available at attractive IRRs (in some cases a 500bp return higher than a comparable NVVN or SECI asset on sale).

To contribute to this already distorted investor preference, even the credit institutions are now skeptical about providing recourse debts for these high-tariff government PPAs – although the payments are currently one-off and these projects were awarded through an open, transparent tendering process. Ironically, the private capital invested in these projects came from the earliest actors providing capital to the Indian renewable energy sector when the sector had not yet reached grid parity and the sector had not matured to current levels (in terms of policy and Technology), standardization of PPAs, etc.) and thus this capital played a key role, so to speak, in order for the sector to achieve its current attractive state.

Even from a tax point of view, all SPVs (i.e. companies) established after September 30, 2019 can claim the lower corporate income tax for manufacturing (power generation is considered manufacturing for this purpose) but that benefit is denied the older projects, those housed in SPVs were admitted earlier. This is clearly an area where policymakers and regulators need to take certain steps and actions to tackle this dichotomy – and ensure that this private capital invested in government PPAs (interestingly, most of that capital is domestic private capital) is good is protected and receives the necessary incentive or support to offset its natural economic disadvantage of a high tariff.

If stranded domestic private capital in these old government PPAs finds a meaningful exit or a meaningful return – this can spark a new wave of domestic capital investment in renewable energy IPPs – this time spearheaded by domestic corporations and Indian family offices to achieve their two goals Invest in environmental sustainability and generate long-term returns. Finally, a successful history of renewable energy generation coupled with the ongoing technological revolutions in electromobility and storage will help India achieve its “Atma-nirbhar” goal in the energy sector while strengthening its commitment to the environment.

[Dawra is Joint MD and CEO, Yes Securities]

[Disclaimer: The views expressed are solely of the author and ETEnergyworld.com does not necessarily subscribe to it. ETEnergyworld.com shall not be responsible for any damage caused to any person/organisation directly or indirectly]


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