In end-September 2018, there was a strong market buzz that the US-based investment firm Macquarie was about to acquire some equity in the country's largest renewable energy company, ReNew Power, buying from Goldman Sachs, which already holds a sizeable stake in it. ReNew, with around 6,000 MW of solar and wind projects, backed by several marquee investors, apart from Goldman Sachs - the Canada Pension Plan Investment Board (CPPIB), the Abu Dhabi Investment Authority (ADIA), the US-based Global Environment Fund (GEF) and Japan's JERA, and more - seemed an excellent choice. It was also then set to launch an initial public offering (IPO) of Rs 2,600 crore, following which its valuation was expected to rise. But neither the investment nor the IPO happened.
Another leading solar energy player, ACME Solar, with 5,500 MW of projects, has also deferred the IPO it had been planning since last year for raising Rs 2,200 crore. A third heavyweight, Azure Solar, with around 3,000 MW of projects in different stages, and the only Indian renewable energy company listed on the New York Stock Exchange, has seen its share fall 25 per cent to $12.50 when it listed two years ago.
The situation is a direct result of recent developments in the renewable sector and the aggressive bids (in some cases beyond the wherewithal) by some players. Though Sumant Sinha, Chairman and Managing Director, ReNew Power, claimed the Macquarie story was market speculation, he admitted that the current times were tough for attracting investment in renewable energy. While bankers are staying away because of their own challenges, the aggressive bids by companies (which are committing to supplying power at lower rates than ever to win the contract) are making the situation worse. In the absence of sector-oriented non-banking finance companies, many players are putting in capital by liquidating their equities. "This is now worrying most investors," one of the CEOs told Business Today.
Solar in India has been a great success story, at least till last year. Set a target of 100,000 MW by 2022, the country has increased its solar capacity from 2,600 MW in 2014/15 to 24,330 MW (till end-October 2018). But while 9,362 MW was added in 2017/18, capacity could rise only 2,661 MW till end-October. The slowdown is even starker in wind energy, where India, starting much earlier than in solar, and chasing a target of 60,000 MW by 2022, had set up 34,980 MW till end-October. This impressive figure conceals the fact that only 1,767 MW were installed in 2017/18 and just 841.35 MW in 2018.
Together, Central and state agencies had intended to get around 15,000 MW of solar and wind projects installed in 2018, but now may fall way short of the target. They also planned to bid out another 30,000 MW of projects, of which 20,000 MW have been auctioned so far. But of these 9,100 MW were subsequently scrapped. In the next fiscal, the worry is about the money.
Low Tariff Obsession
In wind, the slowdown began with the shift from a feed-in tariff regime - where every wind-energy producing state's power regulator set what it considered a reasonable tariff every two or three years - to auctions, in which projects were awarded to the lowest bidders. The first auction conducted by Solar Energy Corporation of India (SECI), a public sector unit under the Ministry of New and Renewable Energy (MNRE), in February 2017, saw a winning tariff of Rs 3.46 per unit, which was way lower than the feed-in tariffs - varying between Rs 4 and Rs 6 per unit - set by different states at the time. (In subsequent auctions, the lowest wind tariff has fallen further to Rs 2.43 per unit.) It convinced state discoms that they had been paying too much for wind energy, and virtually all of them promptly stopped approving any more projects on the basis of feed-in tariffs. With no certainty of getting connected to the grid, many wind projects stopped midway, and with not enough auctions being held, capacity addition reduced steeply.
Tariffs have fallen even more steeply in solar, making both wind and solar energy a perfectly viable alternative to thermal power in terms of cost. While as late as 2010, solar power used to cost Rs 17 per unit, the lowest tariff reached in two auctions of 2017 and 2018 was Rs 2.44 per unit. But investors are increasingly feeling that in their eagerness to bag projects at auctions, developers in both wind and solar have bid and won projects at tariffs that are plain unviable. They believe the tariffs were quoted making untenable assumptions - that interest rates will remain stable and government policies and regulations relating to the segment will be further liberalised in coming years.
Since around 90 per cent of solar panels and modules used in India are imported, mostly from China and Malaysia, they also maintain developers have erred in expecting solar panel prices, which have, indeed, fallen greatly in recent years, to stay the same or continue to fall even lower, and that the Indian rupee will not depreciate. In fact, the rupee depreciated around 12 per cent against the US dollar in 2018. In end-October 2018, rating agency CRISIL warned that as a result of such depreciation developers, who had won solar projects in the last nine months, would find panels substantially more expensive than they had estimated.
"Bankers are not buying the combination of assumptions developers have made and are asking us to put in more equity before agreeing to financial closure for our projects," says the CEO of a renewable energy company, not wanting to be named. "This is forcing us to dilute our stake to bring in more funds, or to use up our internal proceeds." This does not apply to the wind segment, where towers and turbines are all manufactured locally.
If developers have been injudicious, the government has also made matters worse with its excessive emphasis on lowering tariffs. In September 2018, MNRE sent SECI a note instructing it not to allow solar tariffs above Rs 2.50 per unit. SECI had already begun setting "ceiling tariffs" in both its solar and wind auctions, but now its solar ceilings cannot go beyond this limit. Developers find the very idea of ceiling tariffs unfair. "This is very unnatural and reduces our flexibility when we are planning bids," says Sunil Jain, CEO, Hero Future Energies, which has around 1,200 MW of wind and solar projects. The impact of MNRE's note was seen in SECI's 2,000 MW auction that followed, which attracted total bids of 3,200 MW - a tepid response, considering SECI auctions are usually heavily oversubscribed. An auction of the same 2,000 MW size held by NTPC, around the same time, drew, in comparison, total bids of 6,300 MW, simply because it did not impose any cap on tariffs.
Developers, however, fear that given the government's attitude, the likes of NTPC, as well as the renewable energy agencies of state governments, could also follow SECI's example. "It is unnecessary and unproductive for SECI to set the maximum tariff permissible every time it holds an auction," says T.R. Kishor Nair, Chief Operating Officer, Avaada, which has around 5,000 MW of projects. "It is impossible for it to remain conversant with all the technological advances being made in this segment, as well as the financials developers have to work with." Sinha of ReNew notes that there is already a general slowdown. "At a time when banks are not forthcoming with debt and interest rates are being reworked, bringing in a cap on auction tariffs is certainly not industry-friendly," he says. Another solar developer pointed out that setting such limits practically amounted to re-introducing the "feed-in tariff" regime of the past.
Another governmental step that has discouraged the sector is frequent cancellation of auctions after they have been conducted and winners announced, because the winning tariffs were not as low as expected. The renewable energy agencies of Maharashtra, Gujarat, Uttar Pradesh and Karnataka have all done so. "Bids have to factor in several aspects including the financial strength of the procurer, the strength of solar radiation in the area where the project will be set up, the transmission facilities available there, the cost of procuring the equipment and more," says the CEO of a solar development company. "Every bid cannot be lower than the earlier one. Because of different credit ratings of state discoms and Central PSUs, tarrifs will differ."
While pushing hard to lower tariffs on the one hand, the government has also imposed a "safeguard duty" on imported solar panels and modules on the other - 25 per cent for the first year, followed by 20 per cent for six months and 15 per cent for another six. Considering solar equipment is mostly imported, such duty is bound to raise tariffs rather than bring them down. (The MNRE's September note to SECI recognises this and allows for an increase in tariff of 18 paise per unit if safeguard duty has to be paid.) The step was taken following a complaint by domestic manufacturers of solar equipment to the Directorate General of Trade Remedies (DGTR) that imports were causing the local industry serious injury.
No doubt, local manufacturers were unable to compete on price with Chinese and Malaysian ones, because the latter have advantages of scale and their governments' support. The Indian government initially tried to help its manufacturers by holding separate solar auctions, in which developers pledged to only using local equipment could participate, but this ran afoul of WTO norms and had to be stopped. Since then, local manufacturing has been in the doldrums, with at least one leading player, Indosolar - saddled with losses of Rs 58 crore in 2017/18, and earlier accumulated losses of Rs 141 crore - headed for bankruptcy. It gets such few orders that it utilises barely 10 per cent of its installed capacity. Most of its peers are not doing much better. But whether safeguard duty - announced in July 2018, and imposed from September, after litigation opposing it had been quashed - will actually boost domestic manufacturing has been questioned.
"Safeguard duty is hardly helping," says Gyanesh Chaudhury, CEO, Vikram Solar, one of the country's biggest solar panel makers. "Panels and modules are still getting a 'pass through' from Customs, on furnishing a guarantee the duty will be paid later if required. There is still no incentive to buy from domestic manufacturers." Safeguard duty can only be imposed for a limited period, during which local manufacturers are expected to scale up to a stage when they can compete with their global counterparts. "The safeguard duty is helping no one. There has to be a comprehensive policy to support manufacturing in India," says Ashish Khanna, MD & CEO, Tata Power Solar. The MNRE Minister R.K. Singh has told them that if they take up the challenge, safeguard duty could be extended for a little longer. But they have so much catching up to do and the incentives are so few, that no company is even attempting to. The MNRE had finalised an ambitious solar manufacturing policy in 2017, with many subsidies and concessions which would have cost the country Rs 20,000 crore, but the finance ministry turned it down.
Another government strategy to ramp up solar manufacturing has been to link it to projects allotted through auctions, but that, too, does not seem to be working. In June, SECI came out with its first "manufacturing-linked" tender - those bidding should also commit to manufacturing 30 per cent of their project size. In all, it sought to auction 10,000 MW of projects linked to 3,000 MW of manufacturing. But there were no takers, leading to the auction being postponed six times, and SECI raising the ceiling tariff from Rs 2.75 to Rs 2.85 per unit. Even so, only one bid was received - for 2,000 MW linked to 600 MW of manufacturing. "The risk profiles of solar developers and manufacturers are different," says Jain of Hero Future. "Nowhere in the world have equipment manufacturers turned developers or vice versa. The idea is conceptually incorrect." Amit Kumar, Partner at PriceWaterhouseCooper's India Chapter, agrees. "The gestation periods for setting up solar development and solar manufacturing projects are different," he says. "One important reason solar tariffs fell was because manufacturers and developers distributed the risk. That won't happen if they are the same company."
Hoping for the Best
"We are still doing well, we have deep pockets," says Sinha of ReNew. "But whenever we bid we do so very cautiously. It is true that the scenario is making the debt market jittery." The projects from the windy states are now drying up, with only Gujarat, Maharashtra and Tamil Nadu coming up with auctions in the last two fiscal years. They are dependent on the Union government-promoted SECI for the auctions. This is squeezing the pipeline for equipment manufacturers. Tulsi Tanti, Chairman, Suzlon Group, the country's biggest wind equipment maker, is optimistic the situation will improve. "The wind segment will bounce back from 2019," he says. He is pinning hope on the 10 GW-odd SECI auctions in the last fiscal. But like him, most wind power companies and their investors are worried about the dipping tariffs.
The MNRE officials as yet see no reason for course correction. "Renewable tariffs can go even lower, making this a lucrative option for the states," says one of them, seeking anonymity. "Despite the ceiling tariffs, developers are still bidding in SECI auctions." But at least one developer fears this is not necessarily a sign of the sector's health. "Companies are building their portfolio to swell their equity," he says. "When debt is hard to come by, funds can only be obtained by diluting equity and the bigger the portfolio, the more equity that can be diluted. It may well turn out to be a trap."
MNRE Minister Singh was appeared more accommodating. "We are monitoring every bid and are speaking to all stakeholders," he said. "We will look for solutions which are a win-win for all."
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