While, the solar industry seems attractive in the long run, equity investors are currently adopting a “wait and see” approach. It is unlikely that Phase I of JNNSM will see private equity investments from Indian investors.
This was the outcome of an Official Side Event at DIREC 2010, organized by India Carbon Outlook and CIIE, where a panel of investors discussed the barriers for equity investment and raising risk capital for grid-connected solar energy. The panel discussion was moderated by Upendra Bhatt from cKinetics and comprised of a healthy mix of project developers like Sunborne Energy and Acira Solar with a group of leading equity investors in India like IDFC, Ecolutions, Olympus Capital and Wolfensohn.
Equity puzzle: Rs 4500 crores of equity within the next 12 months
Under the Jawaharlal Nehru National Solar Mission (JNNSM), India has a goal of installing 20GW of solar power by 2022. The target is to be achieved in three phases with the first phase from 2010-13, second phase from 2013 - 2017 and the third phase from 2017 - 2022. 1GW of solar power is targeted to be installed in Phase I with both Photovoltaic (PV) and Concentrated Solar Power (CSP) technologies getting equal weight.
JSSNM has incentives in the form of feed in tariffs (FIT), solar purchase obligation, accelerated depreciation etc. to attract private investment in the sector. The total funding requirement for the current phase will be to the tune of Rs 15,000 crores of which Rs 10,500 crores is expected to be debt capital (70%) and Rs 4,500 crores will be equity (30%).
Most of the conversation so far has focused on the debt piece with the assumption that project developers will be able to raise the equity on their own. And it very well appears that it may indeed have to be the case since institutional equity investors on the panel showed little appetite to get involved.
Why is the equity investor community skeptic?
- Risk Return Mismatch
From the investors view point, there exists a severe risk return mismatch in solar projects, with returns not being attractive enough considering the current cost structure and other risks associated with the investment. Though the per unit FIT of Rs 17.91 for PV and Rs 15.31 for solar thermal announced under JNNSM offered attractive returns, the introduction of FIT bid and bid bond has created uncertainty (regarding the actual FIT received by the project and added to the risk).
Pinaki Bhattacharya of IDFC Private Equity felt that solar feed-in- tariffs may reach unviable levels with reverse bidding. Kiran Patil from Ecolutions believed that FIT of Rs 15 per unit for first ten years is good enough to provide reasonable returns – as is there in the State of Gujarat.
The Holy Grail for the solar industry is achieving grid parity. In its absence, dependence of tariffs makes Power Purchase Agreements (PPA) an extremely critical piece of the investors’ decision making process.
Lack of availability of accurate solar resource data (primarily satellite based instead of pyrometer based) leads to problems in yield estimation based on solar resource and technology. Difference in projected output and actual output due to lack of accurate solar irradiation data adds to the risk of the project investment. Technological and operational risks add to the issues of bankability of projects which remains a big challenge for investors.
As per Lavleen Singhal of Acira Solar, other hindrances to private equity investment in solar projects include inadequate grid infrastructure, environmental concerns regarding water and land use especially for CSP and continuity of government policy.
As stated by Kiran Patil from Ecolutions, expectations of an external investor for solar investment include an unambiguous policy statement, stable returns based on well defined FIT, single window for investment in the project and availability of Non Recourse financing from Nationalised Banks and financial Institutions of India.
The solar business is still in its infancy in India and would typically warrant venture capital funding though the return expectation matches that of infrastructure project equity investments. This risk return mismatch is making equity investors vary of the solar space.
- Lack of exit definition
Another issue with equity investments in solar projects is the lack of scale. With the project capacity restricted to 5MW per solar PV project and allowance of only one project per developer, economies of scale can’t be reaped.
As pointed out by most panelists including Sanjiv Kapoor of Wolfensohn Capital, security of the initial investment and exit options are important issues for a PE investor which need to be dealt with before we see more investment in the solar space.
- Equity investors cautious about investing in manufacturing
The clause in JNNSM which stipulates procurement of cells/modules and equipment for solar thermal projects from domestic manufactures, prevents the project developer from sourcing the best in class materials with highest efficiency and lowest cost from across the world. This protectionist policy may also hurt the Indian solar export industry by attracting legal issues with the WTO as was the case with Ontario.
In September 2010, Ministry of Economy, Trade and Industry (METI) of Japan filed a complaint against Canada with the WTO regarding the requirement of domestically sourced goods for solar projects under their solar feed in tariff scheme. Japanese government is against the less favorable treatment meted to Japanese manufacturers due to the protectionist policy followed by the Canadian solar subsidy program.
But there is a silver lining!
Considering the issues stated above, the panel which comprised of both project developers and private investors felt that Phase I of JNNSM may not be able to attract much equity investment. However, the outlook for the future was positive.
Pinaki Bhattacharya of IDFC felt that though initial few solar projects may face operational teething troubles, financial environment is expected to improve with acceptance of solar as a viable business with adequate returns. IDFC has made a couple of investments: one in manufacturing (Moser Baer) and one in a project development company (Green Infra). More attractive tariffs with no reverse bidding, improved policy and regulatory environment leading to bankable PPAs, building irradiation database, reducing technology costs and availability of non recourse finance will add to increasing the attractiveness of solar investment.
“History tends to repeat itself and we might see what happened in the telecom industry in the mid 1990s play out again”, said Kapoor of Wolfensohn. He was referring to the extremely high telecom bids in the first round of privatization. “The early movers that took high risks got scooped up by players at the later stage. We can expect to see something like that with the more aggressive bidders in this stage too.”
According to Himraj Dang from Olympus Capital, the opportunity for equity investors lay in off-grid. “In a future of higher fossil fuel prices, off-grid projects begin to look extremely attractive”, said Dang.
The Indian solar industry should use the impetus of the JNNSM/state programs to create an ecosystem of off-grid solar developers, EPC contractors and O&M providers to prepare for declining FIT by reducing technology costs and increasing best-in-class global sourcing of materials and to create new markets/applications outside the JNNSM by targeting diesel parity.
Image Courtesy: India Carbon Outlook