India is going full throttle to meet its ambitious renewable energy targets, on the back of government and regulatory support, reduced credit risks and more mature bidding processes. However, if the country’s renewable ambitions are to be realised, the international financing community, and innovative instruments, will need to play an active role.
A decade ago, India’s renewables capacity stood at just over 10 gigawatts (GW). Today, it is more than nine times higher, contributing 10 per cent of the country’s energy mix. Capital has been central to unlocking these gains. Since 2014, more than USD70 billion has been invested in the country’s renewable energy sector, as India has a liberal foreign investment policy for renewables allowing 100% FDI through an automatic route.
Now policymakers want to significantly accelerate this transition, quadrupling capacity to 450 GW by 20301, creating 40 per cent of India’s electricity from non-fossil fuels by 2030.2 And while recent trends are encouraging, as much as half a trillion US dollars will be needed to make it happen3.
“The local currency market will not itself be able to support the capital that is required to achieve some of these ambitious capacity targets,” says Prasad Hegde, Managing Director, Project & Export Finance at Standard Chartered. “However, given the flurry of activity in the sector, we see a lot of options around the corner.”
Closing the gap
Fortunately, interest is growing among international investors and the market is moving fast. In 2019, the first investment-grade bond in India’s renewable energy sector was launched, jointly coordinated by Standard Chartered.4 Since then USD8 billion of capital has been raised in the bond markets to support the renewables rollout, and Standard Chartered expects these volumes to rise further.
Key market fundamentals support this outlook. Creditworthy renewable-power developers benefit from a robust bidding process. As one of the world’s largest renewable markets, investors in India’s renewables also have the comfort of scale.
Due to the relatively greater risks surrounding early-stage renewables, developers have traditionally needed to offer greater returns. This has fostered a breeding ground for financial innovation. Recent years have also seen the entry of new debt issuers and sponsors, as well as changes in debt structures, including five- to seven-year foreign currency mini-perms. These align the need for certainty in interest rates (which are fixed by executing cross currency swaps from USD to INR) among India’s developers with investor appetite for returns.
Risk appetites are also increasing. While some local currency lenders and multilaterals still prefer plain vanilla, 20-year amortising structures, lenders and sponsors in the dollar market are increasingly willing to explore balloon facilities including high-yield bonds and mini-perm loans.5
Construction finance is also attracting interest, the past 18 months having seen around USD2.5 billion of international bank liquidity raised for the sector. Standard Chartered recently led and structured a landmark USD1.35 billion construction financing deal in the renewable sector, which attracted significant participation from the international bank market and has opened the doors for sponsors.
The resulting inflows of capital from international investments and innovative instruments are positively impacting refinancing rates, strengthening the market, and ensuring it will play a critical role in the years ahead.
The right moment
India’s need for global capital is well timed, and benefits from a supportive policy environment. Amid a low interest rate environment, India’s renewables offer 25-year power purchase agreements at scale secured by central government-owned sovereign counterparties.6 It also comes as global investors are reaching for higher, greener returns, amid pressure on funds and companies to disclose their climate risks and net zero plans.7 Indian renewables and innovative investments present a compelling package.
Yet India’s ambitions should be set in context. In the near term, coal will remain dominant in the country’s energy mix. Uncertainty also persists. Delays in tariff and power procurement approvals under the PPAs, evacuation bottlenecks and variations across states need to be addressed and streamlined. However, the government has approved legislation to address concerns and has committed to an environment in which contracts and investments are safeguarded.8
India is expected to see the largest increase in energy demand of any country over the next two decades, during which the International Energy Agency forecasts that solar power and coal could converge, each accounting for 30 per cent of energy generation by 2040.9
However, to achieve this, Prasad Hegde believes that global investors will play a crucial role. “International debt capital will remain extremely relevant for India’s renewables sector, especially given the overall capital requirement to meet the 450 GW target,” he says. “The capacity targets are really ambitious. But where we are today, it makes me believe that the sector is on the right trajectory.”
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.