India could attract massive investments to fund the ambitious renewable capacity addition currently underway to meet the 450 GW capacity target by 2030. It allows domestic and global investors and lenders to participate in the market, which offers profitable returns.

At a session titled ‘Financing Renewables – Where is the money coming from?’ scheduled for April 27, 2023, panelists shared information and opinions on financing avenues for projects, new manufacturing facilities, expansion, products, and startups.

The panel included P K Sinha, ED (Projects) at PFC; Hitesh Paliwal, Sr VP & Zonal Head, North Zone Corporate Banking Group at SBI; Akhil Dokania, Director at Avendus and Sandeep Upadhyay, Managing Director at Centrum Capital.

Priya Sanjay, Managing Director, Mercom India, moderated the session.

Funding Renewables

Renewables have, over time, earned investors’ trust with long-term returns on projects with longer life.

Sinha said, “With the government setting an ambitious goal of 450 GW, the renewable sector would easily attract a business of up to $500 billion, out of which $300 billion would be for solar and wind, $50 billion for storage and $150 billion for transmission lines needed to evacuate that power. We see it as a huge potential in the market for us as lenders to grow.”

He added that PFC has subsidized interest for the renewables sector – ranging from 8.5 to 10% depending on the project and the integrated rating.

PFC, a government-run power sector lender, approved loans worth ₹200 billion (~$2.44 billion) in the last financial year, with around ₹140 billion (~$1.71 billion) disbursed to support 5,200 MW of wind and solar projects during the financial year.

Dokania said India would need over $15 billion in capital annually to add the required 25 GW of solar yearly. He noted that green hydrogen and green ammonia project funding might be limited in the near future but will require an annual capital influx of up to $7-$8 billion.

With India needing to accelerate capacity addition in multiples to reach the target at the end of the decade, Sinha said that PFC must lend 20-30% higher than last year.

Paliwal said that SBI was actively lending to the renewable sector.

“When you look at the overall market share for the power sector, it stands at 30% for us, and almost all of it is the renewable energy sector. We actively fund the IPPs (independent power producers) at the utility-scale or the C&I segment. We have done well even in the rooftop segment and are very well placed to fulfill the government’s future ambitions,” he said.

Upadhyay said that renewable energy projects have the benefit of generating revenue in a straight line with the power purchase agreements drafted for 25 years straight.

He said, “The discounted cash flow continues to be the most fundamental way to evaluate renewable energy projects, where 12-13% of these projects get discounted at the cost of equity. There is also an element of premium that the platforms will continue to get in terms of the critical size and the diversification element they may have. This can be in the mix of operational and pipeline assets. The C&I segment also gives a diversified position to a portfolio of IPP’s assets. The quality of debt, the tenor, etc., also make the valuation of these projects more beneficial.”

Sinha said, “We have a basic criterion for funding renewable energy projects in place: they should have a well-structured power purchase agreement. We then analyze the promoter/developer aspect from where the equity is coming in and then the project analysis before we proceed with the proposal. We have developed an integrated rating, and the interest rates are linked. The most important part is the project’s implementation and the commercial terms.”

Paliwal said SBI’s decision on lending is premised on cash flow visibility, availability of natural resources, and the efficiency of resources to mobilize the funds.

On the electric vehicle, the technology employed plays a crucial role in being creditworthy, apart from the conventional metrics.

Upadhyay said, “Regarding the electric vehicle (EV) sector, issues around range anxiety and battery life persist. From an equity standpoint, there is major traction for service providers as they are not directly investing in technology. At the same time, their banks would keep improving as the battery range keeps improving. From a debt standpoint, lenders are more assured as there is asset-backed financing, a philosophy they can associate with. However, manufacturers have to be mindful and plan for the technology in the long term.”

Counterparty Health

While long-term PPAs with power distribution companies provide a developer with lenders’ support due to assured revenue, the financial health of the DISCOMs themselves is a cause of concern.

Sinha said that the Ministry has taken various steps to make DISCOMs more efficient, one of them being Revamped Distribution Sector Scheme (RDSS) notified in 2021-22 for five years, under which grants worth ₹3.3 trillion (~$40.32 billion) are to be disbursed to state DISCOMs for energy efficiency.

He added that the government has now placed a clause for the DISCOMs to reduce their AT&C (Aggregate Technical & Commercial) losses to 12% from 15% if eligible for these funds.

If the efficiency parameters aren’t achieved, the grants are converted into loans, which has made the utilities more vigilant. The state DISCOMs must also ensure all subsidies are paid up to date by the end of every financial year and account to be prepaid and presented in front of the board.

Sinha noted that the revenue leakage from the state DISCOMs was exacerbated by freebies like the first 200 units free in places like Delhi, etc., and state departments defaulting on bill payments must be plugged.

Funds for Manufacturing

Upadhyay said he hoped that manufacturing gets its due credit in the whole renewables ecosystem as it continues to be the weakest link. He feels the funding in manufacturing is still driven by strategists wanting to invest, while the lending community continues to be apprehensive as we haven’t decoded the entire value chain.

He said, “Today when we fund a module manufacturer, there is still a dependency on cells. Cell manufacturers’ reliance on the supply of ingots and wafers still exists, which impacts the capacity additions over time and the related financing. The payback period for manufacturing is much faster than the projects; it is also supported by various policy initiatives by the government, which makes the payback faster by 7 to 8 years, whereas IPP would need a 20-year loan.

Upadhyay urged government financing institutions such as IREDA, PFC, and SBI to constitute a special funding segment to support manufacturing, especially in the solar space.

Voicing his support for financing the manufacturing segment, Sinha added, “We have done much financing for solar manufacturing lately. Last year we supported 6 GW of module manufacturing and 3 GW of solar cells. We ensure a total commercial arrangement is in place before approving such loans and have disbursed loans for major manufacturers like Adani, Vikram, Avaada, Waaree, etc.”

“SBI is a pro-manufacturing bank, so we are open to funding any such projects across the renewable segment,” Paliwal said. “Battery storage for us is also more of a manufacturing proposal, where we haven’t seen much traction yet. If we were to include cell into battery manufacturing, it is a huge CAPEX we are open to extending funding to.”