India: Sunny Days Ahead

That stemming climate change needs urgent attention and decisive action is news no more.  The need for clean energy is being felt like never before.  As a country with the third largest carbon footprint, India needs to find solutions.  Paradoxically though, in a country with the fourth largest coal reserves the per capita electricity consumption is abysmally low and a significant number of Indians either have little or no access to electricity, while uninterrupted and reliable electricity supply is a challenge for others.  The significance of the largely untapped renewable energy potential in India – particularly solar – is therefore hard to miss.  In its Report on India’s Renewable Electricity Roadmap 2030, the Niti Aayog (the successor to the erstwhile Planning Commission) estimates India’s solar potential to be in excess of 10,000 GW. 
 
The Indian Government has set ambitious targets – 100 GW of solar energy by 2022; compared with the present total installed solar capacity of 3GW, the task seems herculean.  The National Solar Mission is lagging behind schedule as well.  The Indian Government however is stepping on the gas with a massive push for renewable energy generally and solar energy in particular.  In December 2014 it announced a scheme for developing solar parks and ultra-mega solar projects.  At least 25 such solar parks across states, each with a capacity of 500MW and more with a total central financial assistance of about US$675 million are planned over a period of five years.  The scheme envisages various modes of implementing these solar parks – either through the designated state nodal agencies or the Solar Energy Corporation of India (“SECI”) or a through a joint venture of the two, or by private solar developers in collaboration with the relevant state government.  Replicating the success of the Charanka Solar Park in Gujarat and the Bhadla Solar Park in Rajasthan is clearly a priority for the Government. 
 
The Indian Government’s emphasis on solar energy has met with positive response from states, and the state of Andhra Pradesh and the newly formed state of Telangana are emerging as frontrunners in taking this initiative forward at the state level.  Both have clear solar policies in place and are pursuing this opportunity aggressively.  While the Andhra Pradesh policy sets a goal of 5GW of solar energy in the next five years – half of which is envisaged to be set up in the form of solar parks in line with the central government’s policy – the Telangana policy does not set a target but does demonstrate a resolve for harnessing the solar potential of the state.  Both states provide incentives such as exemption from electricity duty and also from cross-subsidy surcharge for solar energy consumed within the respective states, but the Telangana policy additionally provides for a single window clearance and a number of incentives and concessions.  The top three states in terms of installed solar capacity namely Rajasthan, Gujarat and Madhya Pradesh will need to be on their toes with Andhra Pradesh and Telangana snapping at their heels.  For perhaps the first time, states seem to be competing for their fair share of solar power and more. 
 
Although these efforts should have a positive impact on the investor sentiment – especially foreign investor sentiment – and encourage investments in this space, debt financing for solar projects in India has been a bottleneck, with Indian banks either having limited capacity or appetite or both.  The proposal of Mr Piyush Goyal – the Minister for Power, Coal and New & Renewable Energy – could therefore be a game changer.  It is proposed that solar power purchase agreements (PPA) with distribution companies (discoms) will be denominated in US Dollars, thereby enabling developers to access cheaper foreign debt which in turn could result in a dramatically lower solar power tariff.  To explain, debt from Indian banks and financial institutions generally cost around 12-13% while the cost of foreign debt is about the same after aggregating LIBOR, credit default spread, interest rate hedge and currency risk hedge, the last component accounting for almost 4-4.5%.  A US Dollar denominated PPA – which therefore obviates the necessity of the hedging cost – opens up the possibility of borrowing cost dropping to 6-7% translating in lower solar tariff.  While of course this does not do away with the necessity of a hedge per se, it is proposed that a hedging cost of INR 0.90 or about 1.5 cents will be added to the tariff to provide for depreciation in the value of the Indian Rupee.  With this the final tariff could be in the region of INR 4.50 or 7.5 cents, significantly lower than the current solar tariff of INR 6-7. 
 
This power can then either be sold directly to the discoms or can be bundled with power from conventional sources.  The proposal is still being considered by the Government, but it does certainly seem to have the potential of significantly improving the contribution of solar energy in the electricity mix if it sees the light of day. 
 
While smart, out-of-the-box solutions can create opportunities for a solar revolution, leveraging other accessible contemporary funding sources is important.  Close on the heels of the first-of-its-kind domestic issue of Indian Rupee denominated green bonds aggregating about $160m by Yes Bank, the EXIM Bank of India launched a five year green bonds issue of $500m in March this year. 
 
This is significant for a number of reasons: it was the first US Dollar denominated green bond offering from India, the first benchmark-sized green bond out of Asia in 2015 and the third ever green bond issuance out of Asia.  Significantly, the EXIM Bank was looking at raising only $250m but it garnered double that amount thanks to an over-subscription by more than three times.  Although in this particular case, EXIM Bank will use the proceeds to fund eligible green projects in countries including Bangladesh and Sri Lanka, green bonds are an attractive fundraising avenue for renewable energy initiatives generally and solar projects in India in particular.  A prediction therefore of the possibility of Indian issuance of overseas securities meeting environmental criteria surging to $1.5bn annually in the next two to five years should inject excitement in this immensely potent sector. 
 
India seems intent on aligning itself with the Sun.  Positive intent appears to be coupled with beginnings of decisive action.  Steps being taken by the National Thermal Power Corporation to buy 15 GW of solar energy on behalf of the Ministry of New & Renewable Energy (MNRE), its commitment to add another 10 GW of solar capacity itself, the Power Trading Corporation seeking to call bids from solar project developers on behalf of MNRE, coupled with enthusiastic response from the Indian private sector including Adani Power’s plans to set up a 1 GW solar park in Tamil Nadu and a 10 GW solar park in Rajasthan should strengthen the belief in India’s solar future.  Apollo will be smiling.
 
Upendra Joshi
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A senior member of the corporate and infrastructure team of the Firm, Upendra has rich experience in all aspects of law and documentation relating to infrastructure projects including power (conventional and renewables), telecoms, mining, ports, airports, oil & gas, and project financing and has headed several large infrastructure related matters and has substantial experience in regulatory aspects of nuclear energy.  Upendra has advised on a number of major M&A transactions including