Global investors bet on India’s renewable energy sector

Global investors are turning towards investing in India’s renewable energy and grid projects as they seek to generate healthy equity returns from investments, says a new report by the Institute for Energy Economics and Financial Analysis (Ieefa), adding that these projects in the nation have historically yielded around 14-16% returns. 

The Ieefa report cites record-low solar power tariffs, plunging solar module costs, record-low interest rates, and the security of government-backed, 25-year power purchase agreements (PPAs) among factors making the renewables investment in India particularly attractive.

“Domestic and global institutions across the financial, corporate, energy, utility and government sectors are primed to deploy a wall of capital that India needs to fund its ambitious renewable energy targets,” said report co-author Tim Buckley, Director Energy Finance Studies, South Asia, Ieefa. 

$500-billion opportunity

The report highlighted while India had received more than $US42 billion investment in the renewable energy sector since 2014, it would require a further US$500 billion to reach 450 GW of capacity by 2030. This includes the $300 billion needed for wind and solar infrastructure, $50 billion on grid firming investments such as gas-peakers, hydro, and batteries, and $150 billion on expanding and modernizing transmission and distribution.

The report—co-written by Ieefa research analyst Saurabh Trivedi—follows the International Energy Agency’s new India Energy Outlook 2021, which estimates India’s capital requirement to follow a sustainable development path over the period 2019-40. According to IEA, India would need $1.4 trillion in additional funding for low emissions technologies to be on a sustainable path over the next 20 years—70% higher than in a scenario based on current policy. 

“Our [Ieefa] report focuses on the enormous amount of capacity building that has been undertaken in 2020 such that global capital is ready, willing and able to be deployed at unprecedented scale in building domestic, zero-emissions, low-cost renewable infrastructure in India,” said Buckley.

Key investors

The Ieefa report identifies the capital flowing into the renewables sector for new projects and infrastructure investment trust (InvIT) structures and the capital recycling opportunities for the National Investment and Infrastructure Fund (NIIF) for operational projects.

According to the report, the capital sources range from private equity, global pensions funds, and sovereign wealth funds, to oil and gas majors, multinational development banks and Indian state-owned enterprises and power billionaires.

“These institutions are now set to play a critical role in delivering on India’s renewable energy growth,” said Buckley. “Their transactions and investment commitments have helped build out financial and operational capacity in the renewable and grid infrastructure sectors.

“In fact, 2021 year started with the landmark US$2 billion investment by Total of France to acquire a 20% stake in Adani Green.”

According to the report, Canada Pension Plan Investment Board (CPPIB) and US investor KKR, the world’s largest private equity firm, are now major foreign investors in the Indian RE sector and leading the way. In December 2020, CPPIB acquired an 80% equity stake in SB Energy India at a valuation of US$525 million, and KKR acquired major stakes in the IndiGrid InvIT in 2019.

“Extremely low interest rates and ongoing economies of scale plus technology improvements are driving double-digit annual cost reductions in solar modules, and in 2020 we saw successive record low solar tariffs,” said Buckley.

“This sends a strong signal to global investors about the vast scale of potential investment available in Indian renewable energy projects with attractive relative equity risk-return metrics, particularly in the current low-interest rate environment. 

“Besides, the equity returns are underpinned by 25-year central government-guaranteed PPAs, provided by Solar Energy Corporation of India (SECI) and NTPC, building investor confidence. This trend continued despite the economic slowdown of 2019 and then the COVID-19 disruptions of 2020, and we expect global investors to accelerate deployment of capital as electricity demand continues to recover through 2021,” said Buckley.

The report notes that the Indian renewables sector is increasingly dominated by the major independent power producers like ReNew Power, Greenko, Adani Green, Tata Power, ACME, SB Energy, Azure Power, Sembcorp Green Infra and Hero Future Energies, which invested strongly in building capacity in international debt and equity markets.

It states that India needs more project developers with even greater balance sheet strength to tap the potential while providing more scope for investors given its huge renewable infrastructure ambitions. The local Infrastructure Investment Trust (InvIT) market is increasingly considered a key facilitator of this domestic-foreign capital interplay.

Co-author Saurabh Trivedi stressed the need to recycle existing investments in renewable energy projects, besides attracting capital into new projects.

 “Over the past two years, India’s renewable infrastructure sector has seen significant mergers and acquisitions activities, a growing list of green bond issuances, and spinning-off of operating renewable assets via infrastructure investment trust, or InvIT. This has helped unlock and recycle the existing capital, freeing up project developers’ capital to take on ever-larger tender opportunities,” he said.