Is The SB Energy Exit A Worrying Sign For India?

By Now, the news of SB Energy’s portfolio buyout by Adani Green Energy (AGEL) has been well reported.

The 100% buyout of SB Energy India assets by AGEL for $3.5 billion, for a fresh 4954 MW of additions to AGEL’s total  assets including project pipeline, has been cited as a possible warning sign for India’s renewable sector.

Keep in mind that this is the sector that could, purely on headline numbers, lay claim to being one of the brightest spots in an economy otherwise struggling with many large slow moving sectors that have dragged down growth to well below optimum levels promised or needed. After all, total solar capacity has moved from under 3800 MW in 2014 to over 40 GW in 2020 end. That’s the sort of growth almost no sector that involves producing a real good can claim.

For AGEL, the acquisition brings 3,554 MW of capacity currently under construction, and importantly, 1,400MW of operational  solar capacity that is already generating revenues, taking AGEL’s own operational capacity to 4.9 GW. The latter is especially important to AGEL, as the highly valued firm needs all the operational capacity it can show to keep investors interested in its massive promise. At overall capacity of 24.3 GW now, it is ever closer to its target of 25 GW of capacity (operational or under construction), that it had set for 2025. How investors judge just a figure of just 20 percent that is actually operating, we should know soon enough.

All the projects included in the deal have 25-year power purchase agreements in place with sovereign-rated counterparties, including Solar Energy Corporation of India (SECI), NTPC and NHPC.

Coming back to the perception, we covered a story just yesterday on how EY Global has ranked India as the word’s third most attractive market for renewable energy. A ranking where we have touched no 2 (in 2017) and just recovered from no 7 last year.

Not too long ago (although it seems like a world away sometimes), we saw record low auction prices, where almost all the winners were foreign firms. Almost every one of these firms is a global major in it for the long haul, and saw a real opportunity in India. They were also ‘forced’ to consider India due to reducing returns in other markets, and tough barriers in the biggest one of all, China. Solar has clearly won the perception battle on costs, and will make an even stronger case on reducing pollution, come winter.

Finally, despite its consistent underperformance, hopes remain high that the market will get closer to its ‘potential’, even as we miss the 100 GW target for solar by 2022. Enough money is being poured into manufacturing, rooftop solar and more to build adequate momentum for broader support for solar.

So why did SB Energy quit? The firm, quite frankly, had built a good reputation for  the quality of its assets here. However, their biggest project, a 750 MW plant at Kadapa in Andhra Pradesh, is still to take off. The firm had struggled to win big at most of the recent auctions, finding itself outpriced due to its higher cost structure, or unprepared due to its internal issues. Bharti, the 20 percent partner in the JV had a rough run during this period in its core business, telecom. The Softbank name that gave it so much cachet as a bankable name, is also known for audacious ambitions, big bets on the future and high involvement strategically. India’s power sector, such as it is, allows for none of those strengths to be expressed. Be it the sole focus on lower costs, political issues in states, and finally the discom buyers who never seem to have the money or the plan to allow solar to move fast. Not that Softbbank didn’t try. When it started, it promised to invest $20 billion by 2020 to build 20 GW of solar. Then in 2018, Founder Masayoshi Son  promised free solar power after their plants completed their 25 years rated life. Finally, the firm allowed stories of a blank cheque ($ 60 billion) approach for a really ‘large’ project. A project in fact, that could take it to its 20 GW target with a single move. Quite simply, India’s solar, and power sector cannot handle something that big. And that’s what happened.

Costs, regulations, and (lack of) patience. You can bet Softbank is not the first, and will not be the last, to leave India for these reasons.  With an investment requirement of $20 billion per annum to 2030, India could certainly have done with Softbank’s contribution. Who knows, perhaps it might yet find a way.

So Is There a Problem?

Of course there are problems. More than we  can list in a single article perhaps. The amended Electricity Act is still stuck. And no less than Power Minister R.K. Singh had pushed it as the solution to some of the most persistent regulatory, contractual and business challenges faced by the renewable energy sector.

The majority of the discoms, especially in some of the largest markets across the country, remain wary of, if not outright hostile to more renewable energy. Future growth is seemingly tied to a sharp increase in power demand, along with some serious rethink on multiple thermal and even some Hydro projects that should be shelved. Or retiring old thermal plants that continue to get extensions despite missing deadlines to modernise or pollute less regularly.

Perhaps the biggest problem is the problem of financing. Not many firms in the sector seem to have access to it, or at least have it on the same terms as some of the majors like Adani Group, the Tatas or even Renew Power get. That has made consolidation the byword, as smaller players with good PPA’s on their existing assets are forced to exit due to lack of fresh opportunities. With the Adani group emerging as the buyer of first and last resort. AGEL, about whom much has been written about vis a vis its market valuation and ability to find well funded partners when that isn’t enough stands out for a valuation that rewards promise over performance, so far. It’s the sort of  luxury Softbank usually likes. But perhaps India isn’t big enough for two such firms in the private sector especially.