India has made incessant progress in conventional as well as renewable energy generation over the past few years. However, with growing population and burgeoning energy needs, we require focused strategies to meet our future energy requirements. At present, concerns on global climate change, shortage of domestic coal & gas and need for energy security have led to the focus on renewable energy sources, particularly solar and wind power

The Story so far             

Investments in the solar / wind power sector are typically sensitive tochanges in Govt. policy. The initial wave of renewable energy growth story was powered by wind energy that saw India adding more than 10 GW of windpower capacities between 2003 and 2010, and about 70% of this wind capacity addition was to leverage benefitsunder Accelerated Depreciation (AD)

The second wave saw emergence of biomass energy and small hydro power, although these sources could not replicate the growth seen in wind energy

The third wave saw explosion of solar power in India. Post 2011 when the technology started getting industrialized worldwide, India declared its intent to aggressively adopt solar technology by announcing Jawaharlal Nehru National Solar Mission (JNNSM). Consequently, solar power capacity addition registered a CAGR of 33% between 2010 and 2014

Future Growth under Renewable with Solar and Wind

By 2020, India’s solar and wind power sectors are expected to at least double their capacity from the current 24 gigawatt (GW). The cost per unit of electricity generated from solar/windpower has fallen substantially over the past few years. However, it still remains relatively high in order to be on parity with conventional sources of power. If renewable sector has to compete with other sources of power, it would require longer tenure funding at lower interest rates. While banks have been supportive, their ability to provide longer-tenure debt and lower interest rates is limited because of Asset Liability Mismatch risks

It has been estimated that wind and solar sectors will require around Rs. 3,00,000crores in the next five years to double the currently installed capacity. About 70 percent (Rs. 2,10,000crores) of the same will have to be funded through debt. Alternative sources of financing that fulfill the needs are critical to development of solar and wind power sectors

Pension funds and insurance companies with significant corpuses can invest only in high-rated debt due to regulatory environment. Another source would be to tap foreign currency borrowings at lower borrowing costs. However, the risks of exposure to foreign currency need to be mitigated without increase in effective interest rates. There can be various mechanisms, which can be deployed to match the needs of these investors, such as:

  • Credit enhancement for bond issuances
    Pension funds and insurance companies would be keen to invest in bonds with satisfactory credit rating. Partial guarantee helps in raising the credit quality of debt issued by project Special Purpose Vehicles (SPVs). For example an infrastructure financing institution offers partial guarantee to enhance the ratings of bonds issued by infrastructure companies, with an option of backstop guarantee from multilateral financing institutions

    Similarly, a public sector bank has in the past guaranteed NCD issuances by corporates. However, RBI has put in restrictions on further issuances of guarantees by banks on the basis that guarantee issued by any bank distorts price discovery of the debenture or bonds and hampers the development of corporate bond market
  • Infrastructure Debt Funds (IDF)
    IDF facilitates the flow of low cost – long term funds from both domestic and international investors to capital intensive projects. It can be set up as a Trust through the mutual fund (IDF-MF) route or as a Company through the non-banking finance company (IDF-NBFC)

    IDF-MFs have been given the flexibility to invest in the securities of infrastructure companies or projects including renewable sector. Further, RBI has recently allowed IDF-NBFCs also to undertake investments in non-PPP projects and PPP projects without a Project authority, provided they have completed at least one year of satisfactory commercial operation in infrastructure sector.Requirement of tripartite agreement in PPP projects without a project authority and non-PPP projects has been done away with. This will further allow access to funds from IDF-NBFC for renewable projects and release of bank resources to fund new renewable projects after refinancing by IDFs
  • Takeout Financing
    Some of the Infrastructure financing institutionsofferschemes,whereby the institution takes over a portion of residual loan provided to the infrastructure projects at a relatively lower interest rate. The interest rate applicable would be based upon the strength of the operational project and is determined by its internal / external rating. Such schemes provide an option of reducing the interest rate burden of operational projects
  • Securitization of renewable project cash flows
    Securitization can help renewable projects get additional debt based on the strength of operational cash flows to fund other business investments or other under construction projects. In these transactions, SPV secures additional debt by securitizing the project cash flows in the debt capital markets for refinancing existing bank debt. The instruments can be structured to replicate cash flows from a portfolio of different operating projectsto diversify counterparty, regional and technology risks. Recently, some of the staterun banks have provided funding to operational wind power projects under the pool financing model
  • Bidding in Foreign Currency
    Recently, there have been suggestions of developers placing solar power bids in foreign currency (US Dollars). This source of generating income in dollars would mitigate the impact of currency fluctuation in case the project borrowings are also in similar currency. Foreign capital providers,who are also skeptical,would be willing to invest with little currency risks on borrower

Renewable Energy has enormous potential to provide a solution to ever increasing energy requirements of India. It can also play a vital role in rejuvenating India’s economy by creating millions of new jobs, permitting the country to accomplish energy independence and reduce its trade deficits. However, rather than relying only on capital subsidies, we need to focus on facilitating the flow of low cost-long term funds to bring per unit energy cost of renewable energy on par with traditional sources of energy


Vineet Agrawal

Senior Vice President with Project Debt Syndication Group, IL&FS Financial Services Ltd.


Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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