A huge global capital pool is mobilising to invest in renewable energy and grid projects in India – but how much investment is needed to reach the country’s 2030 target?
The South Asian nation – which is the world’s third-largest emitter – is aiming to increase its clean energy capacity from about 90 gigawatts (GW) currently to 450GW by the end of the decade.
According to a report by the Institute for Energy Economics and Financial Analysis (IEEFA), pull factors for investing in India’s renewable energy push include solar power tariffs hitting record lows, plunging solar module costs, record low-interest rates, and the security of government-backed, 25-year power purchase agreements (PPAs).
“Domestic and global institutions across the financial, corporate, energy, utility and government sectors are primed to deploy a wall of capital that India needs to fund its ambitious renewable energy targets,” says Tim Buckley, report co-author and the IEEFA’s director of energy finance studies in South Asia.
$500bn investment required to reach 2030 renewable energy target in India
While the renewable energy sector in India has received more than $42bn in investment since 2014, it will require a further $500bn in order to reach its 2030 capacity target, according to the IEEFA’s report.
This includes the capital cost of adding more than 300GW of new renewables infrastructure, firming low-cost but intermittent renewable power generation, and expanding and modernising grid transmission and distribution.
The analysis comes on the back of the International Energy Agency’s India Energy Outlook 2021 report, which highlighted the country will need $1.4tn in additional funding for low-emissions technologies in order to be on a sustainable path over the next 20 years – 70% higher than in a scenario based on current policy.
“India has a once-in-a-generation opportunity to transform its energy system, and the benefits of doing so are huge,” says Buckley.
“India could dramatically improve its energy security by reducing reliance on expensive fossil fuel imports.
“The ongoing solar energy deflation – now about 2 Indian Rupees ($0.027) per kilowatt-hour (kWh), below the marginal fuel cost of coal-fired power plants – gives India the economic incentive to accelerate its energy transition and be a world leader in helping to solve the climate crisis, plus address chronic air pollution and water stress.”
Buckley says the report focuses on the “enormous amount” of capacity building that has been undertaken in 2020, which has led to the point where global capital is now “ready, willing and able to be deployed at an unprecedented scale in building domestic, zero-emissions, low-cost renewable infrastructure in India”.
Of the $500bn investment required, the IEEFA estimates that $300bn is needed for wind and solar infrastructure, $50bn for grid firming investments such as gas peakers, hydro and batteries, and $150bn on expanding and modernising transmission and distribution.
Range of institutions set to play “critical role” in delivering India’s renewable energy growth
The report identifies the capital flowing into the renewables sector for new projects and infrastructure investment trust (InvIT) structures, as well as the capital recycling opportunities for the National Investment and Infrastructure Fund (NIIF) for operational projects.
The sources of capital range from private equity, global pensions funds and sovereign wealth funds, to oil and gas majors, multinational development banks and Indian state-owned enterprises and power billionaires.
“These institutions are now set to play a critical role in delivering on India’s renewable energy growth,” says Buckley. “Their transactions and investment commitments have helped build out financial and operational capacity in the renewable and grid infrastructure sectors.”
He highlights that 2021 started with the landmark $2bn investment by French energy firm Total to acquire a 20% stake in Indian clean energy company Adani Green, which is aiming to develop a 25GW renewable portfolio by 2025.
The Canada Pension Plan Investment Board (CPPIB) and KKR, the world’s largest private equity firm, are now major foreign investors in the Indian renewable energy sector, according to the report.
In December 2020, CPPIB acquired an 80% equity stake in SB Energy India at a valuation of $525m and KKR acquired major stakes in the IndiGrid InvIT in 2019.
Buckley claims “extremely low-interest rates and ongoing economies of scale plus technology improvements” are driving double-digit annual cost reductions in solar modules, with 2020 delivering successive record low solar tariffs.
“This sends a strong signal to global investors about the vast scale of potential investment available in Indian renewable energy projects with attractive relative equity risk-return metrics, particularly in the current low-interest rate environment,” he adds.
“In addition, the equity returns are underpinned by 25-year central government-guaranteed PPAs, provided by Solar Energy Corporation of India (SECI) and NTPC, building investor confidence.
“This trend continued despite the economic slowdown of 2019 and then the COVID-19 disruptions of 2020, and we expect global investors to accelerate deployment of capital as electricity demand continues to recover through 2021.”
India needs to “recycle existing investments in renewable energy projects”, says analyst
The report notes that the Indian renewables sector is “increasingly dominated” by the major independent power producers (IPPs) – ReNew Power, Greenko, Adani Green, Tata Power, ACME, SB Energy, Azure Power, Sembcorp Green Infra and Hero Future Energies – and that each has “invested strongly” in building capacity in international debt and equity markets.
But the IEEFA believes these renewable energy giants face “growing competition” from the likes of Vena Energy/Vector Green, O2 Power, Ayana Renewable Power, Torrent Power and Sprng Energy.
As pressure increases on high-polluting firms to reduce emissions, it notes that the Government of India fossil fuel majors such as NTPC and NLC are starting to “rise to the decarbonisation challenge”, with Coal India Limited and Indian Railways “increasingly looking to pivot aggressively as well”.
In the grid transmission sector, private sector challengers to Power Grid Corp, led by Adani Transmission, Sterlite Power and IndiGrid, are “driving grid expansion” and “modernisation at lower costs”, according to the analysis.
Saurabh Trivedi, report co-author and IEEFA research analyst, says that as well as attracting capital into new projects, India needs to “recycle existing investments in renewable energy projects”.
He adds: “The key institutions that are playing a pivotal role in refinancing existing operating renewable energy assets are private equity, sovereign wealth funds, global pensions and infrastructure funds, global fossil fuel utilities, and oil and gas majors. Institutional investors are wary of construction risk.”
Trivedi notes that, over the past two years, India’s renewable infrastructure sector has experienced significant mergers and acquisitions activities, a growing list of green bond issuances, and spinning-off of operating renewable assets via infrastructure investment trust, or InvIT.
“This has helped unlock and recycle the existing capital, freeing up project developers’ capital to take on ever-larger tender opportunities,” he adds.
“But India needs more project developers with even greater balance sheet strength to tap this potential while providing more scope for pension investors.
“The local infrastructure investment trust market is increasingly being seen as a key facilitator of this domestic-foreign capital interplay, opening up and enhancing the depth of the domestic Indian finance sector.”
