IFCs have become very active in the RE space, says Manish Chourasia, CEO – Tata Cleantech Capital Ltd in an interview.
Manish Chourasia, CEO – Tata Cleantech Capital Ltd, speaks about the role of infrastructure finance companies (IFCs) in supporting the government’s ambitious renewable energy targets in an interview with Monica Chaturvedi Charna...
Kindly elucidate on the role of infrastructure finance companies (IFCs) in promoting India’s RE capacity target of 175 GW.
The current government’s ambitious target of increasing the renewable energy capacity 3.5 times by 2022 (from 50 GW currently to 175 GW) would require additional funds in the range of US$ 130150 billion, depending on the global price scenario of solar and wind technology. Of this, 25-30% is expected from sponsors’ equity and the rest through debt instruments. Traditionally, debt financing for clean energy projects was provided primarily by commercial banks and a few non-banking financial institutions (NBFCs). However, in last 2-3 years, IFCs have become very active in the renewable energy (RE) space and their share in funding has increased significantly. As funding requirement to the sector is huge, IFCs will have to play a significant role. Banks alone will not be able to meet the huge funding requirement of this sector as their exposure to the traditional power sector is already large.
What are the key drivers for IFCs to invest in India’s clean energy programme?
There are essentially 3 key drivers for IFCs to invest in the clean energy segment: a) Clean energy is now a survival imperative for humankind; b) Effective financial intermediation is fundamental to the growth of this business in India; and c) Exponential growth in technology is slowly but surely eliminating subsidy element in this business. Even with all the pledges made in the 21st meeting of the Conference of Parties (COP 21) of United Nations Framework Convention for Climate Change (UNFCCC), the temperature rise would be 2.7oC, while the goal of UNFCCC is to restrict it to 2.0oC positively and 1.5oC on best effort basis.
The key inference from this is that we are going to see much higher cuts in emissions than the efforts made earlier since it is essential for the survival of humankind. As far as India is concerned, we are already the world’s 3rd largest emitter of greenhouse gases, and have a responsibility to do something unique i.e. bring power to our entire population and grow at the rate of 6-7% per annum, without dramatically increasing carbon emissions.
Realising this, the government is targeting more than 3.5 times increase in RE capacity by FY22. This targeted growth would require debt investment of about US$ 105 billion (50% of current outstanding to infra -sector) and equity investment of US$ 35 billion assuming a debt: equity ratio of 3:1. Further, the government has voluntarily communicated to UNFCCC to reduce emission intensity of its GDP by 33-35% by 2030 from 2005 levels, and to achieve 40% cumulative power installed capacity from nonfossil fuel based energy resource by 2030. To honour this commitment, the total investment required is US$ 2.5 trillion. Thus, there is huge opportunity for financial intermediation in this segment.
What are the key challenges in achieving this target?
The key challenge in our renewable energy programme is that it is based on subsidies. For example, today it is possible to purchase power from exchange at Rs 2.5 but state power utilities have committed to renewable power producers
to buy power at around Rs 4-6 or even higher in some cases through power purchase agreements. The issue is that the commitment is from agencies, most of which have negative net-worth. However, technological innovations continue to drive down the cost curve in this industry and this will eventually lead to elimination of subsidies. For example, the cost of solar panels has reduced from US$ 100 per watt in 1970 to less than 45 cents per watt today, a reduction of over 200 times. This is as against the cost curve for fossil fuel based power where the cost curve continues to increase.
How is Tata Cleantech Capital engaged in this space?
Tata Cleantech is a specialist infrastructure finance company, as a joint venture between Tata Capital with IFC, Washington primarily in the business of providing debt solutions to clean energy, energy efficiency and other sustainable infrastructure projects. Apart from this, the company is also into clean tech advisory covering techno-commercial advisory on clean energy, water projects and also into financial advisory covering equity placement, debt placement and mergers & acquisitions related services. We have built a portfolio of over Rs 1800 crore since inception, largely driven by our excellent quality asset book. In the advisory space, we have completed a carbon footprint study for Chennai and Bangalore as part of the EU funded clean tech advisory assignment and identified a number of projects for further development.
While solar and wind sectors are getting all the attention, small hydro and biomass are still on the backburner. Comment on the future prospects of these two sectors.
Small hydro projects are relatively more difficult to implement on account of land acquisition related issues, higher gestation period and geological surprises during project implementation. The other issue has been high levels of siltation leading to wear and tear of the machinery during its operating phase. Significant delays in project implementation has rendered a number of projects unviable as the sponsors did not have the required financial flexibility to fund attendant cost overrun. To ensure development of this segment, we need to first factor learnings from the past. Projects need to be funded more conservatively only when land and regulatory approvals including power purchase agreements are in place. The government will have to play an active role in ensuring that only credible players are given development rights and relevant infrastructure like transmission are readily available. Secondly, there should not be uncertainty around regulatory approvals.
In the biomass segment, the key issue has been the availability of raw material at a reasonable cost. For any project to succeed in this segment, it is critical to have a strong enforceable contract for supply of the raw material. However, the availability of raw material is based on consumption of large amount of water, which could prove to be a roadblock in scaling up this segment.
How much capacity have you already financed in the renewable energy space and particularly in the rooftop solar segment?
Tata Cleantech Capital Ltd (TCCL) is quite active in the solar energy, wind energy and small and mini hydro energy space. We have participated in debt funding for about 2,900 MW capacity of renewable energy projects. With about 70 projects funded till now, we have been instrumental in saving approximately 4.5 million tonnes of CO2 emission annually. In the rooftop solar segment, TCCL has partnered with some reputed contractors and is actively exploring viable financing models including term loan and operating lease. With the advent of newer, more sophisticated technology in both power generation and storage, we expect this sector to grow significantly.
In what capacity is TCCL involved with energy efficiency projects in India?
In the energy efficiency segment, TCCL is mainly focused on providing debt solutions. We have two models of funding – Firstly, where energy saving company (ESCO) gets payment from the user, linked to the savings made from the installation of new equipment, and secondly, in which a fixed payment is made by the user to the ESCO, based on his comfort level on estimated savings from the set of new equipment. We have funded quite a few projects in this sector and our experience has been very good with no delay in any repayments.
What will be your strategy for wind sector projects in view of the fact that incentives like GBI and AD are likely to be withdrawn?
The wind sector may see investments coming down if benefits like generation based incentives (GBI) and accelerated depreciation (AD) are withdrawn. Consequently, lending to the RE sector is likely to shift even further to solar. However, we believe that eventually wind turbine generator manufacturers will come out with better technology, which should result in higher plant load factors (PLF) to offset the effect. We also believe that the government will continue to offer some benefits in order to continue the growth momentum in the wind sector.