‘If policy makers don’t keep a vision beyond lowest price of power, the industry can’t sustain’

Mytrah Energy Chairman RAVI KAILAS to B Dasarath Reddy on the country’s renewable energy (RE) sector and insights from his company’s journey. Edited excerpts:

Your vision was to build 5 Gw of RE projects in India. What do you now think of that goal?

I think it will be greater than that. When we started in 2010, the whole industry size was 10 Gw and the industry outlook was that we grow to 30 Gw in four or five years. Now, we are talking about 300 or 400 Gw of capacity. You might achieve only 100 G2 but that is still three times of what we anticipated a few years ago. So, our vision and ambitions will grow along with the rest of the industry.

Your journey so far?

When we began, average ownership size was less than 1 Mw. We were the first player to say we want to build big scale and create an industry out of it. Till then, almost all the players received finances on a parent’s balance sheet. We had over 3,000 owners of that 10 Gw — it purely an accelerated depreciation-based business.

One of our goals was to create scale and a second was a different business model. We succeeded in both. We created a fairly unique business model, where we were involved in almost all aspects of projects. We have also been unique in that we are now probably one of the largest among privately owned companies, unlike most peers. We have no significant external shareholders; our sponsors own almost 95 per cent. This also allowed a lot of entrepreneurial decisions; this is still an entrepreneurial phase. The industry is to resolve some basic issues.

Has profitability been a constraint in growing fast?

We have 42 projects, 17-20 wind energy ones and about 20 solar sites. I don't think there is a single project where we have under-performed on generation or revenue. They are all extremely profitable. In the nine years since we started, we have not defaulted on one debt repayment and this is unique in the infrastructure industry generally in India. We have dealt with 30 banks, and drawn and repaid ~15,000 crore.

The past two years have been very different but the idea that of the incremental assets that had been built, we should have a significant share, still holds good.

Power availability has gone up in some regions; some states are now counted as power surplus. Has the recent slowdown got anything to do with this changed supplydemand equation?

This power surplus only means you have more power than you have contracted. It doesn't mean you are surplus to what is the need for society. The actual demand for power is far greater than where we are today. It is hard for us to even imagine how much more power we require. We require another 1,000 Gw to satisfy even current demand. I would say the industry is poised for the biggest growth ever in the next five to 10 years, more so than the past five to seven years.

The industry has had a slowdown for some reasons. Those who had bid low (to win projects or contracts) were not able to get loans. If project viability is in question or you have difficulties in realising dues, lenders say they want more cushion in terms of the debt to equity ratio. The past few sanctions have come at 50:50. Who will put 50:50 equity if you don't get that kind of return? Also, the lending in India has been constrained in the past one year, as we have an almost non-existent debt capital market.

How, then, is the industry coping with power (payment) dues?

Our cycle with the discoms (distribution companies) is that they have to pay us in 35-45 days. If they pay after one year, what do you do? So, the industry had no recourse against its only counter-party. In fact, you have no choice for 25 years (the normal power purchase agreement or PPA period), unless the counter-party is held accountable. There are cases already where people have not been paid for 18 months. If the whole industry is not going to get paid, it has larger implications than simply those 5-10 companies.

It is also a serious issue facing the banking system, as a large part of the lending book in India is (for) energy. The receivables have become so large, ~35,000 crore to ~45,000 crore. The central electricity regulator is acting on these and other issues.

Has this situation impacted the repayment ability of RE companies, too?

We have been able to service the loans because renewables, fortunately, are a high Ebitda (operating earnings) margin, as high as 90 per cent. Which means that even if you are paid a little bit late, we can pay (loans). But, you are using cash that you would have used traditionally for building new projects, not for servicing these loans.

So, it has given some cushion for the industry to hold on for a little bit but it won't protect us if people are still being extremely aggressive. But., overall as an industry, I would say it has had one of the least default track records for almost 25 years.

Will the industry be able to strike a balance between competition and viability in future auctions?

Over the past six months, prices have been trending up but this ~2.8-~2.9 (a unit) that they are achieving in auctions is still not viable enough. We need at least over ~3 or ~3.20 to get viable. Half the bids in the past six months have been cancelled because there were no bidders. If policy makers don't keep a vision beyond the lowest price of power, the industry cannot sustain.

Andhra Pradesh is seeking revision of renewable energy PPAs, citing the lower prices being quoted by the same developers in auctions. How do you view this?

Fundamentally unfair. You have every right to say that in future I am not going to give any more contracts but you can’t go back and change with retrospective effect.It was not only a party to party contract but was considered a contract with the state, based on which the projects were funded. It is a contract based on a particular moment, based on your financing conditions at that time, and these are not small amounts.

You are talking of ~40,000 crore of investment in Andhra where you are now saying, 'No, no, can we please renegotiate?! If this becomes the norm, the industry will suffer. We will have power cuts. We don't have growth in thermal energy and large scale hydro is almost impossible in India. RE is growing, a little bud has come but you can cut it (off). Luckily, the courts have completely ruled against this. The CERC (central sector regulator) has written very strongly, saying this also makes no sense for the state.

Everybody starts as a private entity and then goes for an IPO (initial public offer of equity). With Mytrah, it was the opposite. You withdrew listing on the London Stock Exchange and you have also decided not to go for an IPO in India. Why?

This is to do with market conditions. If you see the Indian market, there is still no large RE play for the same reasons and issues we mentioned earlier. It’s easier for more sophisticated private investors to take a longer-term bet on the industry.