When it comes to capital expenditure, the Indian solar energy sector is an exception in the overall infrastructure space. While other infrastructure sectors have slackened, solar has seen massive investments.
In March, power minister Piyush Goyal said the country will add 15 gigawatts (GW) of solar power capacity by June 2018. To be able to achieve these figures, renewable power producers will need access to large sums of capital.
This need to raise large sums of capital to tap the Indian solar opportunity has led to firms chasing capital providers with deep pockets, lower cost of capital and longer investment horizons.
The ‘patient capital’ that solar companies are looking for can only come from the likes of pension funds and sovereign wealth funds. A few of these have already placed bets in India—such as Singapore sovereign fund GIC Private Limited, Abu Dhabi Investment Authority (ADIA) and Canadian pension fund Caisse de dépôt et placement du Québec (CDPQ).
Recently, GIC and ADIA invested $155 million in Hyderabad-based renewable power producer Greenko Energy Holdings. ADIA has also invested in Delhi-based ReNew Power Ventures Pvt. Ltd, where it led a $265 million round in 2015. CDPQ invested close to $75 million in Azure Power last year. The experience of these investors has created interest in others to explore the Indian market.
These include the likes of Investment Corp. of Dubai, UK Green Investment Bank Plc and State General Reserve Fund of Oman.
According to industry experts, the interest of such investors is being driven by multiple factors such as the regulatory environment in the country, the government’s push to promote renewable energy and a mature base of assets.
“A few things that have changed in India during the last few years as far as this sector is concerned—improved regulatory environment and clarity, proactive facilitation by the government and local bodies and the government’s commitment to promote the sector—have drawn huge investor interest,” said Sudhir Dash, managing director at investment banking firm Investec Capital Services (India) Pvt. Ltd.
Lower costs of project development have also made the economics more attractive for these investors.
Project costs—mainly equipment costs—have moderated significantly during the last couple of years, Dash said. “The combined impact of both these developments make a compelling opportunity for the investors to actively access investment opportunities,” he added.
The scale of the opportunity that India offers, relative to other geographies, to investors is another major factor. “The most significant difference between India and the vast majority of other developing economies is the scale of the market and the consequent business opportunity,” Akshay Jaitly, partner at law firm Trilegal, said.
India also stands out for the large number of sophisticated promoters who have taken early-stage risks to develop assets and provide proof of concept to the industry, he added.
Out of the 175GW target that India has set for renewable power installation by 2022, 100GW is targeted to come from solar. In March, the government increased the target for solar capacity installation under the so-called solar park program to 40GW from the earlier target of 20GW.
According to market research firm Mercom Capital, solar installations in India reached 12,288.83 megawatt as of the end of FY2017. Companies too are preferring pension funds and sovereign funds over other financial investors such as specialized infrastructure funds, given their lower cost of capital.
“Most of the infrastructure funds have these pension and sovereign funds as their LPs (limited partners) and hence these funds seek an IRR (internal rate of return) which is in excess of what they have to provide to their LPs. From the developers’ point of view, it makes better sense to source investment from the pension funds/sovereign funds directly, if they can,” said Dash of Investec.