Events in India’s solar market have spooked investors: can it regain confidence?

Retroactive changes by “rogue states” breed uncertainty

India needs $330bn in investment to achieve its ambitious commitment to have 40% of its installed power capacity coming from renewable energy by 2030. 

On paper, it aligns with the objectives of responsible investors seeking to support the Paris Agreement. However, recent cases of Indian states “going rogue” and reneging on agreements with solar energy developers – as well as the current COVID-19 pandemic delaying an estimated 3GW of renewables projects in the country – have sent jitters through the market.

“The [Indian] renewable energy market is not in a good place,” Mahua Acharya, Asia Director at Climate Policy Initiative (CPI) says.

The Indian government has a target to install 175GW of renewable capacity by 2022, of which 100GW is expected to come from solar energy. While the issues arising from COVID-19 are global, there are other setbacks that are more specific to India.

Large solar providers are facing low tariffs for their electricity after a series of unsustainable auctions competed on price. More worryingly, the Institute for Energy Economics and Financial Analysis (IEEFA) says renewable energy investment in the country is being hindered by a lack of competition and financially distressed energy distribution companies.

State-owned energy distributors are often not meeting outstanding payments to power generators and curtailing the amount of power received from them. Further, the IEEFA says some states are forcibly renegotiating legally-contracted tariffs. “This situation is increasing the risk for power generators, including renewable energy generators and their financial backers,” says IEEFA energy analyst Vibhuti Garg.

Acharya from CPI says the “elephant in the room” is contract certainty. “Some Power Purchase Agreements (PPAs) [with developers] were signed at prices higher than today’s market price. Some states said they were not going to honour those contracts. Some distributors simply do not pay – outstanding dues to companies are serious. So from an investor point of view, it doesn’t add up to being a good investment destination.”

She adds that India’s energy distributors and state governments have made it difficult for rooftop solar to fulfil its potential. In a joint report from WWF and renewable energy specialists Bridge to India, the pair describe “fierce backlash” to distributed, open-access energy, saying it is increasing market uncertainty. “Open access cost exemptions have been gradually withdrawn by many states including Karnataka, Andhra Pradesh, Madhya Pradesh and Maharashtra,” they say. “In addition, many states simply deny grid connectivity approvals or frustrate project developers through arbitrary implementation issues.”

Many grids are also reaching capacity for renewable energy, says Acharya. “The overall situation is indeed being addressed, albeit slower than the market expects.”

Overall, however, she is cautiously optimistic. “There is an investment opportunity in the sector provided that you are able to cherry pick. Some states are better than others.”

Shantanu Jaiswal, Head of India Research at BloombergNEF says the uncertainty around Indian state Andhra Pradesh is the biggest concern for the sector currently. “It’s not the first time some state has tried to make retroactive changes to tariffs. In one case, the Electricity Regulatory Commission denied it. In the case of Andhra Pradesh, the central government has been quite firm that contracts cannot be reneged. The issue will be resolved at Andhra Pradesh’s High Court.”

Last summer, Andhra Pradesh said it would not honour contracts to buy from solar farms citing high tariff prices that it wanted to cut by half. The battle has dominated headlines in India, and has unsettling echoes of Spain where, in 2010, the government retroactively axed solar subsidies, pulling the rug out from under developers and investors, and instilling a mistrust in the sector that the country has only recently started to overcome.  

“The [Indian] industry is definitely feeling the pain, but my belief is it will come out much stronger,” says Jaiswal.  “The central government has taken a clear stand. After it has been all done and dusted it will be very clear to all investors that contracts will be honoured.”

Jaiswal says solar energy in India provides an especially compelling opportunity for scale and revenue stability for long-term investors – PPAs in India are signed for 25 years, much longer than in many other countries.

Large international pension funds and asset managers are investing heavily in solar in India for this reason, notes Vaibhav Pratap Singh, Senior Analyst at the CEEW Centre for Energy Finance, who says they are attracted by the guaranteed fixed returns. 

In January, European alternative asset manager EQT and Singapore’s state investment firm Temasek Holdings set up a $500m renewable platform India. Dubbed O2 Power, it is EQT Infrastructure’s first investment in India, and will target 4GW of installed capacity across solar and wind projects. 

Last year, sovereign wealth funds GIC (formerly the Government of Singapore Investment Corporation) and Abu Dhabi Investment Authority invested over $800m into Greenko Group, a major renewable energy producer in India. Canadian pension fund Caisse de dépôt et placement du Québec also has exposure to India’s renewable energy sector with investments in CLP India and Azure Power. 

And Canada’s largest pension fund manager, Canada Pension Plan Investment Board, has backed India’s first renewable energy-focused infrastructure investment trust InvIT and has a $391m commitment to ReNew Power, one of the biggest renewable energy producers in India.

Actis, an emerging markets-focused private equity house, sold a 1.1GW renewable energy platform to ReNew Power in 2018. It has high exposure in India and is one of the largest renewable energy investors in the country, with a current commitment of $475m. It says that the Indian Government’s large and long-term renewables programme offers a highly attractive investment opportunity for Actis.  

James Magor, Responsible Investment Director at Actis, says one of the recent successes of the programme has been the transparency of its auction process, which “effectively eliminated any possibility of corruption when PPAs are awarded”.

“The Ministry of New and Renewable Energy (MNRE) should take a lot of credit for the work done in setting it up, which has brought confidence to private sector investors,” he adds. 

But some investors are still wary. Encourage Capital has avoided utility-scale renewable energy opportunities in India for some of the reasons already described. “The tariff structure made the economics unattractive for us as a private equity investor,” says Partner, Ameya Bijoor. “And the reneging of contracts in certain markets like Andra Pradesh has destroyed investor confidence in that segment.”

Instead, Encourage focuses on on- and off-grid rooftop solar and has raised a $57m fund in this area. Bijoor explains: “We think there is a 15GW opportunity. 5.3GW of rooftop solar has been deployed so far, so there’s still a massive market left open for development.” 

“It is the most appropriate place for us to play from a risk-adjusted return perspective, primarily focused on commercial and industrial customers who pay the highest electricity tariffs in the country and are looking for savings.”

Bijoor does say that the on-grid rooftop solar market in India has faced some policy uncertainty. The state of Uttah Pradesh has cancelled net metering for commercial and industrial customers, for example; but he says this problem is not unique to India. 

“We can still look at opportunities where you are not feeding into the grid, because then you aren't selling and it makes net metering less relevant,” he says. “We’re in early days here, but we are seeing a trend that is here to stay.”