Green energy firms see red as funding dries up

Renewable energy five years ago was seen as a sunrise industry like e-commerce, with start-ups backed by investment funds jumping headlong into business. But now there is a fear of nonperforming assets (NPAs) cropping up in the sector.

The renewable sector is facing the double whammy of traditional funding sources, like banks and private and venture capital funds, drying up, and falling tariffs making project funding difficult.

“There is no loan for capex, no debt for funding. Rates of interest have gone up. States are usual laggards in paying. The benefit of lower panel prices has been neturalised by a depreciated rupee. Then there is the goods and services tax, the safeguard duty, the crisis in nonbanking financial companies — a concoction that can be fatal for any developer,” said a chief executive officer. There are close to 50 Gw of renewable energy projects — 40 Gw wind and 10 Gw solar — that require refinancing, said a senior executive. These projects were bid out over the past two years and have been commissioned. The market expects 8 GW solar and 6 GW wind projects to be added this year.

The central government has put a floor of 50 Mw for bidding rounds that central agencies and states will conduct. A bidder, therefore, requires at least ~2 billion in capital, and for a capacity of 250 Mw, up to ~10 billion will be required.

“Developers are bidding mostly for 100-200 Mw. But the lower the capacity, the worse the cost-efficiency. If I bid for a large capacity, which private equity (PE) will invest ~10 billion in one go? Also, there is a risk of higher tariff being cancelled. I am walking on a thin sword,” said an executive of one of the India’s leading renewable companies.

Tariffs in solar have fallen 80 per cent in the past five years to ~2.44 per unit (kilowatt per hour). In wind, after bidding was introduced in 2017, the tariff has reduced by half to ~2.45. According to market calculations, any tariff below ~2.8 leads to an internal rate of return (IRR) of less than 10 per cent for a renewable project. The Centre recently cancelled ~2.77 a unit bid by SoftBank Energy, citing it to be “too high”.

In a recent presentation to the Centre, the solar industry highlighted the reluctance of banks to finance renewable energy after they burnt their fingers in the conventional sector.

They see renewable as a higher-risk proposition owing to the large capex involved, regulatory fluctuations, delayed and inconsistent payment by states. Developers say constantly falling tariffs have pushed banks further away.

“Banks have been cautious in investing in the power sector because they don’t think that the projects will be viable in the long run. They hesitate to lend because they find companies bidding at such rates aggressive. There is a very little margin of safety on the project. They are scared about the project becoming a non-performing asset instead of lasting for 25 years,” said Animesh Damani, managing partner, Artha Energy Resources, an investment bank focused on renewable energy.

Global trends seem to have turned unfavourable. From $150 million last year, global corporate funding by PE/venture capital in clean energy has gone below $100 million this year — the lowest in the past four years, according to Mercom Capital Group. The import-dependent solar power industry is bracing for cost escalation on solar panels as the rupee weakens against the dollar.

At the same time, India has imposed the safeguard duty on imports from China.

This paper recently reported about 26 companies that are fresh loan defaulters, and at least 10 of them are in the solar and wind energy space.

Vinay Rustogi of Bridge of India say renewable will face financing issues in the short term. “The domestic financing environment has generally become much more difficult because of the non-bank financing company financing crisis and squeezed liquidity. Interest rates have gone up significantly. At the same time, the rupee has depreciated and the risk framework for renewable energy projects is also not looking too attractive,” he said.

Signs of distress are catching up with companies. ReNew Power, which has the largest portfolio in India, has reportedly postponed its initial public offering (IPO). Earlier this year ACME Solar Holdings Ltd also junked its IPO plans. It has the largest pipeline of 2.5GW with no funding tie-up, said sources. There are no buyers for the projects of 6-8 GW put on the market.

In the past one year, most of the prominent names in the sector have shied away from bidding for projects owing to falling tariffs and lack of credible financing. The Indian Renewable Energy Development Agency (IREDA), in its Annual Report 201718, said it found itself “constrained to fund higher capacities of 500 MW and above”. Its IPO is on hold.

A group of developers have urged the government to retire reverse bidding and rather have closed bidding. The government, however, is unlikely to accept it.