India is on the cusp of a renewable revolution, with the government and the industry complementing each other in facilitating the wider adoption of renewable energy in the country.

With an ambitious target of 280 GW of solar by 2030, the country must install nearly 26 GW of solar every year. For this to happen, India needs to project itself as an attractive destination for investors.

While the annual project installations surpassed the 10 GW mark in 2021, investments of about $10 billion (~₹748 billion) flowed into the Indian solar sector. Even though installations were higher in 2021, the investments were lesser than in 2017 due to lower project costs (₹40.1 million/MW in 2021 against ₹42.3 million/MW in 2017).

Last year was a landmark year for renewable energy-oriented corporate mergers and acquisitions (M&A) in India. Domestic manufacturers brought in large portfolios and leading solar manufacturing technologies.

In the recently concluded ‘Mercom India Solar Summit 2022,’ held in New Delhi on July 28-29, there was a session titled ‘Financing, M&A, and Deal-Making – Trends Going Forward.‘ The panelists discussed the implications of financing and M&A as India expands into solar manufacturing and large-scale projects continue to grow.

The panelists were P K Sinha, Executive Director (Projects), Power Finance Corporation (PFC); Sreekumar Chatra, Sr. EVP, Edelweiss Alternative Asset Advisors; Hitesh Paliwal, Sr. VP & Zonal Head, North Zone, Corporate Banking Group, SBI; Vikash Garg, Director of Business Development, Statkraft India; and Ashwini Kumar, Chief Risk Officer, Tata Cleantech Capital.

Raj Prabhu, CEO and Co-Founder of Mercom Capital Group, moderated the session.

Need for more investments as the solar sector grows

Speaking on the current financial scenario, Sinha revealed that PFC had disbursed ₹320 billion (~$4.03 billion) in the renewable sector, with ₹220 billion (~$2.77 billion) going to solar. “Around ₹17 trillion (~$214.26 billion) will be required to meet the 2030 goals. Out of that, we will disburse ₹750 billion (~$9.45 billion) in the next seven to eight years. The market has stabilized, and things are looking good. Even global pension funds are also investing in the sector.”

Hitesh Paliwal said SBI was the biggest bank in the country. “We command about 30% of the market share in the energy and power sector. We have financed nearly 20 GW of solar projects and command 30% of the market share in the renewable sector. Our focus is to lend on the solar side.”

Ashwini Kumar said, “We are into wind, solar, C&I, and rooftop. Now we are also moving to other sectors. If developers make money, then only we can spend. In the future, we may enter into the residential rooftop segment. We lend to projects in the range of ₹800 million (~$10.08 million) and ₹4 billion (~$50.41 million).”

Quality assets in demand

Sreekumar Chatra said the most critical thing in any transaction is the asset quality and the counterparty. Also, the recurring legacy issues affect the overall assessment of the projects.

Chatra said, “We did an internal study and found that bigger players hold 50% of all projects, and nearly 20 GW of projects is held by fragmented players (subscale players). It’s not easy to find good assets in the solar space. Only 15-20% of good quality assets are in the country, making it challenging to acquire projects.”

He claimed that quality assets with fewer legacy issues are in demand. This kind of industrial discipline will help everyone coming into the market. And also, more indigenous players will come to the market.

Sharing his views on the criteria followed while backing a project, Sinha said, “When a promoter comes to us, we look at the tariff (optimal tariff), which is accepted by the market. We see how the equity is going to come. We analyze the promoter to see the flow of equity. We also examine the promoter’s financial track record and analyze the project. We analyze land acquisition aspects, clearances, EPC contracts, and other aspects of the project. We ensure that there is a proper contract, a proper bank guarantee in place, and how much the project is going to earn once the project becomes operational. We also have an internal rating process, which evaluates the various aspects of the projects.”

Paliwal said, “We look for the availability of offtakers, long-term PPAs, and the quality of modules. There are inclement weather conditions across the country, and we look at the insurance of the modules in these kinds of weather conditions. The ratings of distribution licensees is also essential.”

“We cater to small as well as big players. We have earmarked nearly 55% of funds for the solar sector, which comes to around $6 billion (~₹474.55 billion), which is a big number. The ecosystem has evolved, and we have installed around 38 GW in the last five years. Some of the other things we look at are the pedigree, guaranteed offtake, and plant load factor. The secondary market is also mature in the acquisition of these projects.”

Vikas Garg agreed. “Currently, we have 30 MW of hydro and 76 MW of solar. We are slightly different from others. We come to our decision based on the balance sheets. It helps us to take more risks on projects. We do try to predict the future. The quality of assets is paramount, and the regulatory framework is also essential.”

“Along with this, we also look at the business ethics of the companies. India is a very attractive market for us and perhaps the largest growth market for us. Another thing that is of utmost importance is how the projects are getting implemented on the ground. This affects everything, including lending,” he added.

Funding challenges

Outlining the process and the challenges while financing a project, Ashwini Kumar said, “We look for the quality of projects and the ability to pay regularly, clauses in PPA and termination clauses, and the lock-in period. These are some of the factors that have to be reviewed for each project. You need to balance out everything and make a realistic assessment of the future. We also need to understand the challenges in funding. Some key challenges are the quality of the offtaker, quality of the counterparty, and payment delay issues. Risk assessment and the identity of the EPC contractor are also critical, along with other factors.”

Sinha explained that the health of DISCOMs was critical as they are the ones who will pay the money. “To improve the health of DISCOMs, the revamped reforms-based result-linked power distribution sector program was introduced. It was also aimed at reducing AT&C  losses. The AT&C losses have to be reduced to 12-15%. The DISCOM dues have been mounting, and for transparency, we introduced the PRAAPTI portal, where you get all the details of the dues and other aspects related to DISCOMs. We also introduced the liquidity infusion program to clear the dues of the DISCOMs. Also, all the state departments need to clear their dues on time, and the subsidy that has to come from the state should come on time.”