Plummeting RE tariffs edge out small players even as bigger ones expand biz

The sharp drop in renewable energy tariffs is encouraging smaller players to exit even as larger ones look to innovative financing methods to expand their portfolios

Last month, Adani Green Energy Ltd (AGEL) signed an agreement with Japan’s SoftBank group and India’s telecom-to-real estate conglomerate Bharti to buy S B Energy for $3.5 billion, making it the largest acquisition in India’s renewable energy (RE) business.

This deal indicates the churn that is taking place in the sector that could see the emergence of four or five big players. This trend is likely to disrupt the financial markets as well with the emergence of newer financing instruments to support the growth of these large-scale players. Until recently, private equity (PE) was the preferred route for renewable energy companies; now, many companies could opt for listing, or floating infrastructure investment trusts (InvIT) or other forms of innovative financing.

The churn was well underway in 2020 when, according to RE consultancy Mercom Research, close to 3 GW of projects were acquired. This is a 200 per cent increase from 962 Mw of projects acquired a year before. AGEL has led the pack, becoming a 25 Gw company four years before its targeted year.

With back-to-back acquisitions, AGEL is now the country’s largest renewable energy company, acquiring 300 Mw in 2020. Since January this year, it has made four acquisitions totalling 5 Gw. Apart from the mega-SB Energy deal, it acquired 20 Mw from Hindustan Clean Energy, 50 Mw from SkyPower Global and 75 Mw project from Sterling & Wilson.

Much of this consolidation is based on the fact that many PE-backed RE companies tend to sell after the assets are five or six years old. “It is a natural churn,” said a senior sector executive, but added that declining returns also determined the exits. “From the expectation of more than 15 per cent internal rate of return [IRR], solar project owners are settling for 9-10 per cent IRR. For a company that has to give a return to a PE firm, selling makes more sense,” he explained.

The falling IRR has, in turn, been the result of a sharp drop in tariffs. The rate of solar power has fallen below Rs 2.5 per unit from around Rs 3 per unit in 2018-2019. “The underlying thought process is that returns based on current market rates are not viable for some of these players. From a perspective of returns, a lot of players want to exit the sector as returns have gone down in the past five years. These are also the players that thrive on bidding of utility scale projects, which is precisely where the tariff bloodbath is taking place,” said Animesh Damani, managing partner at Artha Energy Resources, a Mumbai-based energy advisory.

“There are times when tariffs have been as low as Rs 1.99 per unit, which are not sustainable,” he added.

This makes things tough for smaller RE players, who are likely to exit, but for large players, this is a comfortable situation because tariffs have become more competitive with other energy sources. “Now it seems the rates have stabilised — a competitive rate that is not too low for returns, and the payment risk has subsided due to their competitiveness,” said Mohit Kumar, lead analyst at investment advisor DAM Capital. 

With the decline in bidding for projects and construction delayed due to Covid-led restrictions, bigger companies such as Adani and Tata are relying on acquisitions to accelerate their growth. According to RE consultancy JMK Research, during FY2021, about 3.5 Gw of new utility-scale solar capacity was added in India. Compared to the previous year (FY2020), installations were about 39 per cent less.

Many of these larger companies would now look at innovative financing routes to fund their growth. For instance, AGEL has tied up with a dozen international banks across the globe for construction financing. Hero Future Energies, a subsidiary of the two-wheeler major, has shifted its headquarters to London to access cheaper funding. ReNew Power, founded by former finance minister Yashwant Sinha’s son Sumant, is in the process of listing on NASDAQ via a Special Purpose Acquisition Company, or SPAC, a publicly traded shell company that acquires businesses.  

Tata Power initially planned to launch an InvIT for its RE power investments after it had taken the decision to exit from coal-based power altogether. “We need to make a conscious decision on our renewable assets,” Praveer Sinha, Tata Power managing director, said in an interview to Business Standard.

Now the company is looking at an IPO as an option. “Now we are in a much better position. Our discussions with investors and analysts suggested that we can have a larger play. We can possibly look at all assets in renewable — manufacturing, EPC, utility scale, micro grids, EV charging and use this as a platform for renewable business under ESG,” Sinha explained.

India’s first power transmission InvIT, IndiGrid, which was set up in 2016 and sponsored by investment company KKR and Vedanta group’s Sterlite Power, recently acquired two solar assets of the West Asian and North Africa-based FRV Solar Holdings totalling 100 Mw at Rs 660 crore, a first for the Trust.

Going forward, there would be more such asset movements. As Kumar pointed out, “There are 95Gw RE assets in this country. A majority of the assets are owned by small players who will look to exit the space. InvITs offer an opportunity to sell the assets at nine to ten times EBITDA versus the private market return of seven-eight times EBITDA). That makes it a good proposition and we think there is a place for many third-party InviTs in the renewable space."