The year 2014 marked a significant turning point in the Indian renewable sector. The country has claimed that it has estimated its renewable target, including 60 GW of wind power capacity and 100 GW of solar power capacity, to 175 GW by the year 2022, a six fold increase when compared to the current generation capacities of approximately 22 GW and 3 GW respectively.
This kind of quantum leap would do two things for India as it helps the Nation avoid the period of 2018 – 2023, when few coal thermal assets would be getting commissioned. Like they say in the case of Indian telecom, the country will bypass the stage of building fossil fuel power stations and go straight into the age of renewable energy. This would resolve the issue of stranded fossil fuel replacement power plants, which are said to be a problem even in countries with considerable renewable energy generation capacity like Germany.
More significantly, the renewable energy will be of benefit to the environment, and will accelerate the achievement of the Intended Nationally Determined Contribution INDC goals which include reducing emissions intensity of GDP by 33-35 by 2030 Based on 2005 levels, increasing the proportion of non fossil based power generation capacity to 40 of total installed electric power generation capacity by 2030, and establishing additional cumulative carbon sinks of 2.5-3 GtCO2e by increasing forest and tree cover by 2030.
Too Ambitious A Goal?
From the macroeconomic viewpoint, they all paint a picture of stronger growth and better economic performance of the country – lower inflation, lower interest rates, and comparably lower exchange rates; these are good indicators of the potential for the clean energy program in India.
Interestingly, after the initial euphoria that followed the announcement, the attention has shifted to whether there is the financial capacity in place to achieve the target or not. It may be understood why a goal is too ambitious looking at the Indian government’s limited budget that has been capped by a significant fiscal deficit and many other development goals.
The solar and wind sectors are expecting to inject around 3 trillion rupees within the next five years in order to expand their two fold capacity. About 70% of this amount is anticipated to be borrowed. Backed by the already stretched budget and the asset-liability mismatch, appetite for renewable projects is scarce. Deficiencies of banks funding a longer tenure debt with a lower around rate of interest, automatically pushes the costs of financing and, eventually the core of generation higher. In India, renewable clean energy projects typically borrow for between 10 and 12 years, at interest rates of 12-13% per year; in contrast in Europe 17-18 years financing is available at interest rates of 4-5 percent.
Long term investments insurance and pension funds which are invested by large funds have adequate corpuses but are limited to invest on high-rated debt only. It is therefore pertinent to say, there is a need to fill in the gap between the low-risk appetite of institutional investors and the high-credit-risk (relatively) profile of renewable clean energy projects.
The Problem Now
Historically, the NBFIs/Banks have lent finances to power projects for the full term of the asset loan. Currently, however, because most of their portfolio is burdened with NPAs and stressed assets, they are running out of their power sector exposure limits. As a result, this scenario looks to reduce the project financing options for new projects. In view of the fact that solar farms are often 25 year investments, The banks have to move the debt to any of the above instruments after the first two to three years of the cash-oriented structure.
Addressing The Problem/ Solution/Suggestions
Banks/NBFIs tend to lend for construction assets as they have an edge in doing the due diligence for these assets and undertaking the construction risk.
After the construction and stabilization of the project take-out financing can be carried out by doing the securitization of these assets by using the infrastructure trusts. This method will not only restore the banks lending capacity but, it will also reduce the operation period borrowing rate of interest.
Also, there is the suggestion that insurance and pension funds should be required to invest some part of their investments in these securitized instruments to create and maintain the market for these types of instruments.
Note: Reserve Bank of India went on to say in its notification, mentioning the inclusion of the renewable sector in the priority sector lending that investment in such securitized assets, where the underlying asset is also in the renewable sector, would be looked upon as fulfilling the priority sector lending norms.
Investment in such as credit insurance/guarantees through NCEF, tax-free bonds for renewable IPPS, and infrastructure trusts for securitization of assets will allow creation of space and appetite among the investors in the renewable sector.
Cash Flow Of Clean Energy For All Further Provide Growing Cash Flow
Due to low power-plant operational risk of renewable energy plants, cash flow is quite predictable. Due to this reason, international markets have seen a large pool of pension and insurance funds providing capital at low rates for renewable energy plants. Unavailability of reliable investors and lenders, due to poor financial conditions of utilities within India, is hampering long-term cost effective capital flow for renewable energy plants.
It is possible to develop a credit guarantee scheme enabling a government agency to issue guarantees for the construction of renewable energy projects against fees. Financing through NCEF guarantees can be extended to renewable clean energy generators. For instance, let’s consider a situation where, for the first three months after the invoice is issued, late payment is the risk of the developer, but after that, funds can be claimed from the guarantor.
The ultimate aim of cutting the financing costs is to lower the clean energy tariff based on wind or solar energy to a level equal to or even below the level of thermal energy. Therefore, there will be enough focus on the push that can be given to solve the following:
- Absence of Competitive Global Markets for Interest Rates – a normal traditional solar or wind clean energy project is obtaining a loan interest rate between 12% and 15%
- The Indian Banking Institutions offer Short Term Debt – the average life of senior debt has approximately 10 to 12 years
- Hedging Currency For Global Borrowing – the cost is a variable element to be taken into consideration before starting any discussion with the global agencies. There should have been a hedging between domestic and global funding arrangements which would have been done beforehand.
Global investments in renewable resources escalated by approximately 17% from 2013 to 2014. Countries with developing economies increased their investments by 36%, and were within striking distance of developed countries’ levels of investments. With abundant sunshine, averaging 50% to 70% more energy than what similar projects in Western Europe can generate, there is also no reason why India should not be able to effectively utilize the solar energy potential.
Author: Ratul Puri, Chairman, Hindustan Power Projects (Hindustan Power), India
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