9 November 2015


Will India replace China as the Global Hotspot for Investments in Solar?

Author: Edwin Koot, Solarplaza

Back in 2009 the Indian government had just launched the National Solar Mission (NSM) with a target of 22GW of solar power by 2022. And we have to say that, if progress and ambition growth in just five years is a reliable measure, India could well be poised to overtake troubled China as the hottest solar investment opportunity in the world.

The evidence is compelling. The government has itself dismissed its own 2009 goal and replaced it with a new target of 100GW by 2022. And the renewable energy industry is already aiming to exceed that renewed target. Adding serious weight to these ambitions are powerful social drivers. And unlike some countries, India is not short of viable land, although it does need to create an effective national distribution grid.

So what’s holding it back? No prizes for guessing the answer – investment complications. India presents its own unique challenges and disincentives to outside investors and to the financing and running of internal infrastructure needed to deliver these goals. There is also tension between these green goals and the established alternatives of coal and nuclear.

Clearly India has the potential to become a global beacon for solar energy amongst fast-developing countries, but first it must address these concerns and remove the hurdles to vital foreign investment. So this paper examines the size of this challenge – and raises one or two other hiccups that the Indian solar industry may face on its journey to 100GW and beyond.

The Starting Line

In 2009, the cumulative installed solar power in India amounted to 17 MW. This kept the country firmly out of the top ten global PV markets. At the same time, the National Solar Mission (NSM) had just been launched, and the very first of its 1MW projects was still to be built.

Fast-forward five years, and things have changed dramatically. Every state in the country has announced programs not just to support the new 100GW goal but to exceed it. And several states have already announced tender programs and other initiatives to create even more PV power generation capacity. The cumulative installed capacity by the time of our visit in October 2015 had already grown to 4.4GW.

To put it simply, India desperately needs more power.

India is growing, and growing fast. Upendra Tripathy, Secretary of the Ministry for New and Renewable Energy (MNRE), explained to the international delegation that took part in the 2015 trade mission organized by Solarplaza, that India is now at the same level of coal consumption per capita as the USA in 1850. To transform from this, a ‘developing country’, into a ‘developed country’, and with an eye on China’s experience, it knows this will see energy demand rocketing as GDP per capita grows exponentially (currently growing at more than 7% a year).

Government Vision

It seems clear that the government’s preferred direction is renewables, with the downside of slightly higher costs easily mitigated by faster implementation. Prime Minister Modi is also vocal about his concerns for global warming and has pledged to support measures to reduce greenhouse gases. And there is already evidence of real commitment, with Secretary Tripathy saying they will issue tenders for 15GW this year to ensure 12 GW of projects are commissioned during 2016.

However, remember that raised goal of 100GW by 2022? Well, PM Modi has since raised the stakes even further by defining a Renewable Energy goal of 350GW by 2030, of which 250GW should be from solar power. How achievable this is will depend on the ability to attract investment – something we consider shortly. But first let’s examine the growth potential from the industry’s perspective, and the help it is being given by government policies.

Market Forecasts

“India is the only country where within 18 months tenders are turned into projects. It will be the largest market and the only unlimited one, not based on or limited by incentives.”

This, coming from Thierry Lepercq, President of Solairedirect, one of the leading developers in India, is not just bold; it also highlights two key opportunities – the pace of project implementation and the absence of potentially restrictive influences.

Certainly, it is true that India is in some ways a more attractive market than some. But perhaps the key indicator is current activity, especially as the independent consultancy firm, BRIDGE TO INDIA has calculated that achieving 100GW by 2022 means a compound annual growth rate (CAGR) of 82%.

Market forecasts suggest that 40GW of the 100GW target should be realizeable through rooftop installations. Ketan Mehta, Director of Operations for Rays Power, a top-3 EPC contractor in India, is optimistic. His company is offering PV plants in a lease/PPA model, and his RESCO (Renewable Energy Service Company) model has investors set up to install solar plants on consumer and third-party roofs and sell power to the consumer at a mutually agreed tariff.

Mehta explains: “Money is no issue and is lying around. Funding is not a problem as long as PPA commitments are paid. The feasibility of achieving 40GW rooftop projects depends on the continuation of net metering policies.” He continues by explaining that in some cities like Mumbai and Pune, energy rates for commercial consumers are above 11INR/kWh. “Customers could save 10-15% on their energy bill while on the other hand providing investors a leveraged return of more than 20%.

So what is the government doing at state level to support these initiatives?

Punjab offers us an insight. Dr Amarpal Singh, Chief Executive of Punjab Energy Development Agency, told us that the state of Punjab currently generates 218MW of its 2022 target of 4.2GW solar energy. To boost growth, it has launched a ‘single point of contact’ for projects, and since February 2015 has introduced fiscal incentives and a net-metering policy. Also, the State is willing to sign 25-year PPAs and has evacuation lines everywhere within only 7km. With this foundation in place, it opened bidding for 500MW of PV and received project proposals totalling 1650MW, with a lowest bid of 5.09INR/kWh.

There are other reasons why India is fast becoming an attractive investment alternative to other global markets.

  • BRIDGE TO INDIA claims that PV projects can be progressed from allocation to commissioning in only twelve months. They say that over the next two years there is an active pipeline of 14GW of PV projects, leading to a PV market of at least 5-6GW per year.
  • The national government has developed a policy for 20 GW to be delivered by 25 parks each of 500-1000MW, with the land and evacuation provided by the government. This has already attracted the interest of international investors and utilities such as China LP, Sembcorp, EDF and Fortum.
  • Regarding the rooftop program, BTI claims that so far 350MW have been installed across India, divided into 131MW residential, 121MW commercial and 98MW in industrial applications. The rooftop focus is on self-consumption., and with a net-metering policy and no subsidies, this segment is ready for unlimited growth.
  • In the commercial sector, solar PV has reached grid parity in 40% of the country’s states, and is expected to exceed 60% in 2018 as energy prices increase. By 2022, solar energy for both industry and commercial customers will be competitive in all states.

Secretary Tripathy is also bullish on the market potential of PV application on government assets: “40% of local governments in India currently pay over 6.5INR/kWh, when less can already be achieved through PV in India. After all, we have 8000 railway stations, schools and C&I roofs. So, for instance, the Delhi Metro will invest in another 500MW of solar to save another 3INR/kWh on their energy bill. There is enough low-hanging fruit available!”


The Investment Challenges

Against this positive backdrop sit some ominous obstacles.
The 175GW Renewable Energy goal set by the government will require approximately 260 Billion dollars of funding (16 Trillion INR), of which 20-30% is equity and 70-80% is debt. This is the challenge for India. And while foreign debt and equity providers might be interested, working with local partners (such as through co-lending) seems inevitable. And, with issues like Indians not being used to 2-3 year exit strategies, this may be challenging and require a different approach.

The costs of solar are dropping which should help to attract this interest, but the investment risk remains a disincentive.

EY, for example, claim that already bids of only 5.05INR/kWH (around $0.08/kWh) have been seen, an attractive cost in light of the lowest LCOE in the USA and the Middle East of less than $0.05/kWh. And while the winning bid in the first round of tenders in 2010 was 8INR/kWh and was greeted with skepticism, current bids are commonly around 5.2INR/kWh, at interest rates of 11.5-12% and equity IRR from 11-16% (according to BTI).

However, current debt rates are not feasible for foreign commercial banks, hence their being barely involved to date. While Indian developers claim that projects can be developed with 80% debt and 20% equity, the IRR requirements are for 16-18% with debt lower than 11%.

As a result, the market remains domestically orientated. Foreign banks cannot provide 10-15 year loans with these rates, nor with the present currency risks. The Indian Rupee has devalued 40% in the past seven years and remains vulnerable to dropping several percentage points in just a few weeks. Covering this currency risk makes the debt very expensive.

Interest rates cause less of a concern, but local partner inexperience is still a problem.

Satya Kumar, an experienced consultant and Managing Director of Shri Shakti Alternative Energy, talks positively of the downward trend in interest rates: “Rates have reached their lowest in 4-5 years and recently the Reserve Bank of India (RBI) decreased them again. Also, India has overtaken China with respect to Foreign Direct Investment measures. With growth and other positive macro-economic developments, India is becoming highly attractive to foreign investors.”

Indeed, one of the measures being discussed to overcome this currency risk is dollar-denominated PPAs. The government recently announced its plans to launch a 1000MW dollar-rated PPA for around $0.07/kWh.

Since the beginning of 2015, RBI has lowered its key interest rate by 1.25 % points, which will definitely make PV projects more attractive to investors. However, there is still the challenge of working with local partners, as Sanjeev Gupta, Managing Director of NEXGEN Financial Solutions in India explains: “A typical challenge for a relatively young market is the lack of a success track record with a local partner. Things like the timely availability of the debt for project development are a challenge, certainly with multi-lender agreements. Legal issues and lender’s synchronization can also be time-consuming.”

Gupta sees a lot of scope for improvement and financial innovation, including yieldcos, green bonds, masala bonds, priority loans, debt sculpting etc. The equity side offers opportunities took such as Quasi Equity, InvITs (Infrastructure Investment Trusts) as well as ways to exit project investments

Other Angles

We’ve taken a detailed look at the investment challenge, but what about other challenges?

First amongst these is the question of Discoms (state level energy distribution companies). As many of the cited experts have said, they have never yet defaulted on payments in India, but they still remain a concern for foreign investors. Can they honor the 20-year PPA contracts with the PV project owners?

There seem to be two sides to the argument – one positive, the other cautious.

The Indian energy distribution companies are currently rated on their credit positions, but tariffs don’t always correspond to cost. 30% of India’s power consumption is for agricultural use, but this is heavily subsidized (cost is 10INR but supply is at only 1INR).

It is a political issue, and according to Dr B.V. Rao of IREDA, the Indian RE Development Agency that deals with Discoms “we have not experienced problems with their credibility – maybe delays in PPA payments, but no major problems. There is no risk.”

From the more cautious corner, Shikhin Mehrotra, Head of RE Consulting at Mercados BMI, explains that all Discoms are making losses in India. Government subsidies are a permanent feature across all states: “The governments are exploring options to find permanent solutions to the persistent issue of Discoms’ debts.”

Ravi Khanna, CEO of Solar Business at Aditya Birla Group, is more cautious, saying that the demand side economics needs to be reorganized. “ In India actually power is available at very competitive rates but offtake is poor! Discoms are simply not financially strong enough to buy all the power, they are carrying the burden of providing subsidised power and inefficient tariff recovery systems .” So he expects that big (foreign) equity providers will wait for the solar PV market to settle down in 3-4 years, as happened in European markets. “Things will get crazy first. Developers will show irrational exuberance and some will go into financial difficulties  which will offer an excellentopportunity for serious players to enter and consolidate.  Solar project costs will come down but the emphasis on quality and reliability of assets is supreme. Investors need sustainable EBITDA numbers and till that confidence is gained foreign investors will be cautious.”

Other challenges include: 
Availability of land: India presents two contrasts, one an opportunity, the other a challenge. Developing a 500-1000MW PV plant in the sunny deserts of Rajasthan wouldn’t pose huge problems. By contrast, the more densely populated states do, especially with land ownership scattered across multiple families. Here a smaller maximum project size of 50MW seems more realistic.

100GW solar power grid: The German KfW will provide $1 Billion of funding for a ‘green corridor’, a highway of high-voltage lines connected to all the new large solar parks. This grid will also balance solar with the hydro, storage and gas plants. But will this be sufficient? And will it come in time, given the present rate of solar development?

Made in India: The very real hunger for solar energy can be sated quickly by importing the PV modules and systems.  But wouldn’t it be better for the Indian economy to build all of this within India, to create a truly Indian solar industry? The question is whether Indian technology can deliver the goods. If it buys it in, what non-energy value might it miss out on? Local experts are beginning to emphasise that the National Solar Mission (NSM) should be part of the mission, ‘Made in India’.

India Speaks

Despite the challenges, leading figures in India continue to present positive arguments for the viability of the industry’s growth.

Vikram Kailas is Managing Director of Mytrah Energy, India, an IPP (Independent Power Producer) with wind and solar assets. He explains that the debt is completely driven by Indian banks: “Only 30-40% comes from foreign Development Institutions. There is no lack of equity or liquidity in the Indian market.”

He sees rooftop projects as slightly more risky if focused on 20-year PPA agreements, with issues like rooftop access and owners looking for cheaper energy supply options over time. But he supports the security of Discoms: “So far Mytrah has encountered no issues with Discoms expect perhaps some delays in cash payments. Discoms generally have lower credit ratings but are credit worthy; none of them has defaulted. You can focus on the more financially health states in India to make sure their Discoms won’t fail.”

Vinay Rustagi is Managing Director of Bridge to India (BTI) and a financial expert. He explains the significance of refinancing in attracting foreign investment: “There is no shortage of liquidity in the Indian market and Indian investors are looking for new investment opportunities. The key to improving the return from solar projects is the refinancing. One option is to split pre- and post-commissioning financing, with the latter having lower cost due to lower risk.”

Secretary Upendra Tripathy outlines that: “India offers an attractive investment climate to (foreign) investors, with 10-year tax holidays on profit and accelerated depreciation options.” He goes on to explain why the cost of debt is such a challenge: “A new global mechanism is required to reduce hedging costs, now at 7%! Even if KfW from Germany is offering a loan to Indian Banks at 1.5%, the money is only actually available at 10.5%. The Indian banks take 2% and the hedging cost is 7%. For this reason innovative financing, like a Dollar Fund, is now being developed.” He is also quite sure that Discoms will not fail in their PPA payments, but even so a payment security fund will be created: “Payments may be delayed 3-6 months, but no Discom has failed so far in the history of India.”

Devin Narang is Managing Director of sustainable resources company Sindicatum: “The challenge in India is the cost of depth and getting the profit out of India. For investors a long-term vision is required in order to make money. We have not encountered any problems and the Ministry of New and Renewable Energy (MNRE) is cooperative. For Long Term Equity Funds there are great opportunities.”

Kishor Nair is President of Welspun, a leading developer in India with investment by ADB and GE Capital amongst others, is also optimistic although focuses on the longer-term cycles for solar investment. Welspun works around 25-30% leveraging and sees 80% debt as achievable soon: “What is missing is direct equity; for market growth, debt is not so much an issue. Investors will look at the opportunity cost. Today, the Indian Rupee is the least risky currency in the BRICS countries. You should have a long-term vision; this sector will grow without a single doubt. Climate change will even enforce the development of the market.”

So, on a more positive note, foreign investors are looking for new opportunities, and with the Chinese economy faltering, India could be the alternative they need. But the challenge remains equity somewhat more than debt. And the lack of a successful track record and the current development boom being driven by inexperienced new companies might keep big foreign investors on hold for some time yet.

Postscript: Is India Ready for the disruption?

Against this backdrop, one crucial question remains that may convince the potential investors in India’s solar industry. Given the enormous economic growth and related power requirements, does it still make sense for India to invest in new coal or nuclear power plants? If the cost of solar comes down to $0.04-0.05/kWh in a few years’ time, how can such an investment be justified financially, let alone environmentally?

There is no doubt that solar energy is already a powerful disruptive factor in the thinking of India’s energy future. And who would take the financial investment risks for coal and nuclear, with an amortization time of more than 30 years, when solar is already cheaper?

And finally, it’s only right to return to the unique social and demographic nature of India as an essential ingredient in the debate. Local stakeholder management and involvement is vital if a major grid connecting India’s future PV power plants is to be possible. It will be unacceptable to build huge and modern, sometimes fenced and lighted, solar parks if the neighbouring villages derive no power at all from them.

Distributed solar power for households not connected to the grid should be part of the solar mission. And hence local mini-grids and storage will become a major theme in India.

And what of that other equally enormous need – water? Solar can be used to make desalination a realistic solution…

The arguments for India’s drive towards a solar future are not just compelling; they’re the only arguments. What remains is the challenge of putting together the financial and investment jigsaw, and integrating it with parallel developments that also help India to fulfill its ambition of growing into a fully developed country with a sustainable future.

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