India’s energy demands are increasing with growing GDP and population growth and the said demands have come from all aspects of the economy – industrial, commercial, agricultural, and residential. The key area for the demand side management will be to monitor energy intensity. With growing Energy Intensity, investments have to be multiplied or added (at least). The $189 billion requirement includes $57 billion in equity, and $132 billion in debt for our country overall, as per the report of Niti Ayog.
The potential for investment up to 2022 is $411 billion, worldwide. The investment potential for equity is $220 billion (four times the equity investment required), and the investment potential for debt is $191 billion – 45% more than required. This indicates that more than sufficient investment potential is available for financing the renewable energy targets by 2022.
Energy Scenario in India
Although India is blessed with geological advantages, what it lacks is infrastructure and unhealthy norms on the transmission and distribution of such energy. Although currently, it is recorded that major contributors of total energy supplies with over 60% of our energy needs are satiated by coal, of which many states have large deposits of the same, it is high time post-Covid, which has made us question sustainability and therefore, investments in renewable energy is going to rise (see footnote #1 for reference).
Investments have been invited from both foreign and domestic institutional investors, but they are facing significant barriers to investment in renewable energy. These barriers to investments by both domestic and foreign institutional investors are (in priority order): off-taker risk, lack of transmission evacuation infrastructure, currency risk, regulatory risks, and a mismatch in return expectations.
Beyond these barriers, India’s renewable energy sources are wind, solar, biomass, and small hydropower, for them having installed capacities of 37.5 GW, 33.7 GW, 9.9 GW, and 4.7 GW respectively.
With growing energy needs and now with the world expecting a major electronic automobile boom, India, too, should stand out to achieve her 2022 mission. India has an estimated potential capacity of 720 GW alone in Solar, 102 GW in Wind Power capacity, 25 GW in Biomass, and 20 GW in Small Hydropower (see footnote #2 for reference). However, the estimated potential capacity is not equivalent to power supply; but the two are positively correlated, as a rise in potential capacity implies a commensurate rise in supply. Therefore amplifying investments in renewables is imperative to attain India’s Potential growth. Over and above this, many ministerial debates and policies have been framed around this sector, which is eyeing massive investments.
From the government’s side, the Central Electricity Regulatory Commission (CERC) estimates that the capital investment required is Rs. 50 Million/MW and as per the norms of CERC, the capital structure of power generation projects should be a 70:30 debt to equity ratio.
The Eleventh Plan shares with us that the private sector’s capacity expansion is substantially high with 33% of the total incremental capacity coming from the Private Sector. And in the Twelfth Plan, the share rose to 50%. The government expects investments from group companies like Tata Group, Reliance Group, GVK Group, Adani Group, GMR Group, and Torrent Group which are active in power generation. Apart from these, investments from Domestic Independent Power Producers (IPPs) like Hero Future Energy, Mytrah Energy, ACME Solar, Azure Power, and CLP India are also welcomed, but due to ill DISCOMs, the sector faces investment shortages in the generation stage.
Attracting Investments through Banks
As per RBI norms, banks’ credit exposure to domestic IPPs cannot exceed 15% and an additional 5% on the account of infrastructure. Such risk exposures are for all infrastructure projects, including projects related to power. Since the exposure of banks in the power sector is huge, these banks are under duress to finance any more infrastructure/power projects. Bank investment in the power sector is primarily through lending to project developers for tenures as long as 12 years. Banks during these crucial and critical moments have also been supporting the power sector in India but the rough side of the reality is this is done through reforming and at multiple times DISCOMs have been bailed out of financially weak situations.
Commercial banks in India are the most popular option to finance the construction stage of renewable energy projects which carries higher risks, while institutional investors are well suited to refinance the outstanding debt of operational renewable energy projects. When commercial banks begin financing a project, they determine the initial lending rate assuming a long-term loan which incorporates high construction risk in the first few years and lower project risks after construction. Due to the effects of averaging, relative to the risk undertaken, this may lead to a lower interest rate. Thus banks have a strong incentive to remain invested in the project after construction is completed.
Further, the improvement of distribution segments is the key to the long-term sustained growth of the power sector. This would significantly depend on decoupling the power sector from politics and disassociating political will from state DISCOMs. Efforts have been made to address the issues that relate to the distribution segment along with ensuring competition in the unbundled segments of the sector, especially for bulk power. Moreover, farmers are encouraged under the PM-KUSUM Scheme to install solar panels, and generate and subsequently sell the electricity produced at home.
Furthermore, a gradual reduction in the cross-subsidy burden on the sector and improvement in operational and commercial efficiency would help improve the financial condition of the Indian power sector. The transition management has no longer proven to be the most difficult task and has effectively and efficiently tried to balance the commercial goals and social obligations the sector faces. This has balanced commercial prudence at one end and the social acceptability of the reform at the other.
- Energy Statistics India 2021, Ministry of Statistics and Programme Implementation, Government of India
- Ministry of New and Renewable Energy (India), “National Solar Mission Grid Connected Solar Rooftop Programme in India,” 2019.
- Central Electricity Authority (India), “Renewable Energy Sources,” 2020; India Brand Equity Foundation, “Renewable Energy,” 2017
- Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014
- RBI, 2015; Infrastructure Debt Funds (IDFs):
Consultant (Strategy) and Author