Foreign investors are pairing up with local independent power producers to tap into India’s booming solar market despite problems with timely payments, land acquisition, and grid access, IHS Markit analysts say in a recent analysis of India’s PV market.

The analysts note that sovereign wealth funds from Singapore and Abu Dhabi, along with banks like Goldman Sachs, funds like Copenhagen Infrastructure Partners (CIP), and utilities such as Japan’s JERA currently hold sizeable stakes in solar projects led by Indian developers. Further, major banks like JP Morgan and Standard Chartered are prepared to underwrite many of the green bonds that Indian power producers are floating to add to their renewables portfolios.

India is eager to attract foreign investment as the country aims for 450 GW of installed renewable capacity. For investors, the nation’s solar market offers a high-growth area. 

“Foreign investors see India’s solar market as a high-growth area, and many are buying substantial stakes in local firms that know the market and operate successfully there,” Conway Irwin, IHS Markit’s climate and cleantech research director who analyzed the solar market data.

“Foreign investors also are flocking to India because they need “a home” for the $88 trillion they have pledged to meet the Paris Agreement goals to limit global warming to 1.5 degrees Celsius above pre-industrial levels,” the analysis also quoted Tim Buckley, energy finance director for the Institute of Energy Economics and Financial Analysis (IEEFA).

And as the International Energy Agency noted in a July report on global electricity markets, India today represents the third-largest electricity consumer in the world. Demand is set to grow once it resumes economic activity that the COVID-19 pandemic brought to a crawl in the past two years.

IEEFA estimates India will need a $500-billion investment in new renewable installations to reach its 2030 goal of 450 GW, of which roughly half will be in solar, 20% in wind, about 10% in grid-firming technologies such as battery storage, and the rest devoted to upgrading grid distribution and transmission services.

Major drivers: Full ownership, long-term PPAs

Foreign investors are drawn to India as the nation offers up to 100% ownership in any renewable project in which they have a stake, something that China doesn’t allow. A 25-year power purchase agreement (PPA) is another reason. The PPA is secured in some instances by sovereign guarantees via the Solar Energy Corporation of India Limited (SECI), which is under the administrative control of the Indian Ministry of New and Renewable Energy.

In this way, analysts say, foreign investors may be able to mitigate, but not eliminate entirely, the risk of untimely payments from individual state agencies—the purchasers of much of the renewable capacity. It also appears that some of the more successful renewable project developers in India have portfolios that are spread across various states, thereby allowing them to decrease their risk by avoiding putting all their eggs in one basket.

For the local renewable energy developers, IHS Markit said, “the promise of lower cost of capital associated with backing from stable, foreign financial institutions allows them to bid more competitively into price-sensitive markets in India than competitors that rely primarily on domestic funding sources.”

Investors look for prospects that will provide opportunities on a sensible, risk-adjusted basis, Buckley said. “And what India is offering is a $500-billion prospect of new investment in already government-guaranteed infrastructure assets in the renewables space,” the report quoted IEEFA’s Buckley.

In addition to the scale of capital deployment opportunities and strong, consistent energy policy framework offered, Indian renewable energy projects have historically provided “healthy project-level” equity returns in the range of 14-16% that are much higher than those available in say Germany or Japan, Buckley wrote in a February analysis of the global capital flows underpinning India’s transition to a low-to-zero carbon economy.

IHS Markit analysts agree.

Independent power producers with strong foreign financial backing enjoy substantially lower capital costs because they can access lower-cost financing from overseas investors and avoid domestic borrowing costs that can run as high as 9-10%, said IHS Markit’s Irwin.

“The negatives posed by the lack of timely payments by state agencies, which are the largest purchasers of renewable energy, is more than offset by all the reasons for going into India in the first place,” Buckley said.