The Risk In Renewables, And How To Reduce It

The Fourth Plenary session at REINVEST 2020 looked at the risks in investing in renewables in India, and ways to mitigate those risks. A panel with India’s leading renewable financiers, developers and global players narrowed down the key issues and some possible solutions.

Pankaj Jain, Additional Secretary, Department of Financial Services, Ministry of Finance, moderated the discussion.

Starting off first was  Pradip Kumar Das, Chairman and Managing Director, IREDA. Das placed the demand for financing in perspective first up, pointing out that based on India’s targets for 2030, Rs 1.5 lakh crores or USD 20 billion would be needed per year to 2030.  Pointing out how solar today had proved many naysayers wrong, who doubted bids at Rs 2.44 or Rs 2.36 earlier, Das stressed that the clarity in government policies and support from the government has helped break new ground all the time. “It is equally important for all lenders to have an adequate capacity building, to prevent the emergence of credit gaps, as beyond wind and solar, even bioenergy and Compressed  Bio-Gas are emerging as big areas for financing. Today our interest rate on RE financing is lower than REC and PFC” he added. Das stressed the quick-thinking decision making that has characterised decision making from the government, something that has added a lot of comfort for investors.

Simon Stolp, Lead, Energy Specialist, The World Bank shared the World Bank’s own experience in India, in terms of two instruments the bank had designed for the sector 3 years back, which, to the bank’s surprise, failed to find traction.  These instruments had sought to address two fundamental issues with the Indian market, as he saw it. “First is the poor financial health of the sector, stemming mostly from the publicly-owned distribution utilities, and their limited ability to raise cash and costs”. Calling them the Achilles heel of the sector, Stolp shared how they have spent over 1.5 billion dollars to support the financial turnaround of Discoms in 9 Indian states. “We are backing private sector participation with transition financing”

The second issue he flagged was the lack of options to reduce risks in the wholesale market. First to enable other options for trade for renewable energy providers to provide long-term contracts and to increase market participants that will support renewable energy generators around the issue of variability. A market for ancillary services for one was a starting point, in his view.

On the measures they offered that failed, payment risk was one. “We proposed a number of credit enhancing instruments to the market. One was structured product that would have credit enhanced renewable projects by covering up payment risks from discoms across a range. It would have cost 4 paise per KWh to the developer to access that guarantee. We predicted net savings of 40 paise per kWh. The commercials were very transparent, and it got a very lukewarm response. Made us wonder just how developers are managing risks. Especially when another instrument they designed to manage forex tail risk facility, where they would have taken the first loss on a range of forex movements got a very poor response, even after considering that most developers might have been raising money domestically.

Sumant Sinha, Chairman and Managing Director, ReNew Power: started off by responding to Stolp’s query on just how developers are managing risk in India. “Frankly, we don’t deal with risk too well. That’s impacts everything we do, from raising new capital, to the discount rates and more. Talking about the Renew Power approach to discom risk, Sinha said that  “One is, we know the track record of different discoms. We take that into account in our financial models by assuming a receivables period accordingly.” “From a cash flow standpoint, it’s a little bit harder. Even assuming a 3-month delay is not standardised.  Working capital can still fluctuate. You always build in a lot of buffer at a corporate level”. Pointing out that brining in SECI as the interposing offtaker has been by far the best move taken by the central government as it allowed projects involving them to get lower ratings, better terms as well.

The second is to try and enforce the LC (Letter of credit, where a Discom is supposed to open an LC for 60 days when contracting a power purchase)  mechanism.

The third area he highlighted was the push to inject liquidity into Discoms through PFC and REC, which possibly have a better ability to collect than individual generators have.

Sinha’s view was that a long term solution to the discom issue must necessarily include a push to privatise the distribution sector. “The political class will recognise that this is in the best interest of consumers, and ultimately theirs too”.

While asserting that the renewable energy sector today had the credibility and record to be counted as a mainstream sector, Sinha did point to a key challenge. With financing requirements set to climb to 3-4x of existing levels, there was a need to broadbase the market beyond the few government-owned NBFC’s funding actively. Both for the long term health of the market, as well as to meet demand.

Sridhar Rengan, Managing Director-Finance, Brookfield, a global investor that has almost $20 billion dollars of renewable assets under management,  flagged their poor experience in Andhra Pradesh, where the state tried to renegotiate PPA’s on a project they had acquired, as completely avoidable. He said that even as they are open to greenfield projects in India, the Andhra experience had forced them to gravitate towards SECI backed projects, a route that simply could not take India to its targets eventually.

He highlighted how global interest is very high in renewables financing today, with fixed-rate financing for upto 20 years in global markets. Tenure is shorter, rates are floating, even as revenue is capped. That added to the risk profile of projects. Calling it a great opportunity to design appropriate instruments for the market here, he stressed on the need for the sanctity of contracts again.

Sean Kidney, from Climate Bonds Initiative, spoke on high despite the Covid lockdowns, funding for renewables had barely paused. With larger global economies committing to ambitious targets to be zero carbon, he said India would also benefit from the funding that would be available for renewable energy now.

Priyantha Wijayatunga, Director, Energy Division of South Asia Department, Asian Development Bank focused on how India had a key role for the whole neighbourhood, when it came to renewable energy. Be it lower costs if manufacturing happened here, or even the nature of contracts and pricing, success in India was vital to encourage countries in South Asia to move ahead too.

Abhishek Bansal, Director, ACTIS, the private equity fund, shared how the fund has invested $800 million equity in renewables in India. The company’s sale of Ostro Energy was one of the largest renewable energy deals at the time. Bansal estimated that India had actually done very well to attract foreign capital so far. “Over 90 percent of renewable energy assets have been built by foreign investor capital. Having said that, to attain targets, we will need to raise far more equity, and recycling of greenfield equity becomes very important”, he added.

Opening up the yield market further, besides lender limits, better tax treatment, were all areas that could be improved, he added. Highlighting how domestic debt capacity availability for renewable energy was probably close to 7 billion dollars annually, Bansal pointed out that the actual number was probably even lower after taking into account exposure limits, which made a very strong case to attract global debt too.

Clarity and visibility on issues like taxes and duties as a key area for him, as that would help avoid the red tapism involved in applying for say, pass-through of costs. Thus, grand fathering of projects already allotted was high on his agenda.

Ravinder S Dhillon, Chairman & Managing Director, PFC shared that  RE assets in their loan portfolio had grown at a CAGR of 44 percent.  On managing the risks of duties or taxes, he referred to the recent SECI tender where the winning bid was at Rs 2per unit. There is a fixed formula there,  where there is a provision for a 0.005 paise per Kwh per lakh or 50 paise increase in tariff for every 1 crore increase in cost per MW due to a change in policy. That provided bidders with a lot of assurance on the future risks of added costs.

Bruce Hogg, Managing Director & Global Head of Power & Renewables, Canada Pension Plan Investment Board was pleased with India emerging as one of the largest renewable markets in the world, and the policy efforts that have brought it here. Talking about his own fund’s plans to take investments in renewables from $6 billion to $15 billion he stressed on the need for revenue certainty, sanctity of contracts, and any other uncertainty that can be managed. Welcoming the entry of SECI as an intermediary, he said that clarity on issues like SGD is very important. He was confident that enough funding was available for Indian plans, provided the basics were in place and the country fared well on global benchmarks.