The private PPA market could flourish with the help of a few government policies such as increasing AD benefits from 40 per cent to 80 per cent as well as ensuring the segment stays free of policy changes. - Animesh Damani

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Renewable energy as the upcoming investment class

It is a known fact that the Indian economy has grown phenomenally well over the last two decades. This growth has been complemented by a strong financial system which led to the rise of 4 major asset classes: Equity, debt, gold and real estate.

Up until now, Indian household wealth of over $5 trillion had been majorly invested across these asset classes. Infrastructure while promising had been out of the reach of a majority of India’s 3.4 lakh dollar-denominated millionaires due to the requirement of high Initial Investment. With the advent of renewable energy as the 5th asset class, an increasingly large number of HNIs are now participating in the infrastructure story. Renewable energy projects offer investor superior returns, regular cashflows while also contributing to the betterment of the environment.

It is evident that over the long term, renewable energy generates the 2nd highest returns of any asset class in India. Moreover, renewable energy offers the advantage of monthly cash-inflows vis-à-vis other asset classes that entail a one-time cash inflow, which is mostly dependent on the sale of the asset. Equity, gold and real estate assets returns are subject to market cycles wherein, the asset value depreciates during a down-cycle and appreciates during an up-cycle. Hence, entry and exit timing is of utmost importance whereas debt offers quasi-immunity from market cycles in exchange for guaranteed but lower returns.

Despite its inherent attractiveness, the renewable energy sector of India has been experiencing mixed funding growth. On one hand, large funds with access to low-cost financing are funding utility-scale project auctions by center and state governments. This has led to large projects being built at ultra-low tariffs.  While on the other hand, smaller existing investors are shying away due to the large quantum of funds required for such projects. It has also been difficult to attract new investors towards retail financing of renewable energy due to low awareness, inconsistent central and state government policies, high GST burden, low tariff rates, absence of new government PPAs for smaller capacities, and an inefficient energy transmission infrastructure.  All of this has led to an installed capacity of only 77 GW of renewable energy in the country – a figure that is far off from the target of 175 GW by 2022 by the government.

Majority of the current renewable energy growth in the country is a result of the large-scale auctions that are being funded by developers who have access to low-cost capital. And most of these developers seem to face no issue in repeatedly raising funds (mostly because of their reputation) and then bidding out other players at auctions as well as at subsequent bids whereas for smaller developers, access to capital is a major issue. They get little support from banks as there is a demand for additional collateral (such as real estate). The money invested in renewable energy asset is not considered to be worthy of being a collateral, which makes it even difficult to get funding in this sector. Additionally, 83 per cent of Indian state discoms have a credit rating below “Junk” status with only 7 state discoms commanding a credit rating of A or higher. The poor financial health of the discoms spills over to the entire power sector causing a burden on generators and consumers alike. Certain large discoms are known to have an average payable of over 500 days to power generation companies. Hence, generators face large working capital requirements to service debt and other obligations inherently reducing their own financial viability. Given the poor credit rating of these discoms and the increased working capital requirement banks are reluctant to fund these projects for smaller developers. Thereby, offering no alternative to the smaller developers to raise funds for future projects, whereas the large developers continue to raise low-cost financing with ease.

Given the investment scenario, smaller developers are increasingly looking at the private PPA market. The simple reason for this is that the investment per project is much smaller in comparison to the utility-scale projects. Hence, an investor can distribute the risk over multiple projects. RESCO provides a stable monthly cash flow for investors which is more prompt in comparison to the government payback time. Moreover, the tax incentive in the form of accelerated depreciation gives investors a small tax benefit. The policy risk is extremely low simply because we are not using the grid since the power is produced and consumed at the same location instantaneously. However, the purely commercial nature of these transactions carries a high counter-party risk i.e. one to one. With India being a high network and relations driven society it becomes easier for us to get a sense of the promoter’s credibility in the market. But, in case of disputes the only option to resolve it would be via court which can be a lengthy process. The private PPA market could flourish with the help of a few government policies such as increasing AD benefits from 40 per cent to 80 per cent as well as ensuring the segment stays free of policy changes.

Another promising avenue for renewable energy funding in India was Open Access. Open Access allows large users of power — typically having a connected load of 1 MW and above — to buy cheaper power from the open market. The idea is that the customers should be able to choose from many competing power generation companies–instead of being forced to buy electricity from their existing electric utility monopoly. It helps large consumers particularly the sick textile, cement, and steel industrial units by ensuring regular supply of electricity at competitive rates. However, such projects have faced stiff opposition from the existing utility monopolies. The monopolies have ensured that there are arbitrary charges and regulations governing open access projects.  This has reduced the price advantage that power companies were able to offer through open access affecting their efficiencies. Open Access projects have a high policy risk wherein the policy horizon is usually provided for three years which makes the modeling of a 25-year project difficult. Moreover, within those three years, there have been amendments in the policies which make it a risky proposition for investment.

Therefore, the most important thing that the renewable sector needs right now is a centralised model that has uniform policies and strict guidelines across all states. The government should permit net metering for RESCO projects (of all sizes) and these projects should not be subject to cross-subsidies or surcharges.

For Open Access, the government should have a clear policy for 25 years that is not subject to retrospective amendments. Also, the abolishment of the state monopoly of discoms will go a long way in solving the issues with power distribution and transmission. This will help in building a stronger ecosystem and open the market for investors. Furthermore, if the government completely privatises power generation and consumption, the market will be set to boom.

Artha’s roadmap

Artha is looking forward to developing around 15 MW in RESCO greenfield projects. To advance investments in the sector, the company is launching its first SPV of Rs 25 crore to support the initial set of projects over the next 12 months.

For the second phase of projects, Artha plans to establish an Alternate Investment Fund of Rs 150 crore that will last up to 2-3 years. Going ahead, the company aims to establish an InvITCo fund with an excess of Rs 500 crore to fund future projects.

Animesh Damani

Managing Partner
Artha Energy Resources