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Developers rushing to issue green bonds

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Indian developers have been rushing out to issue green bonds as liquidity in the Indian financial markets continues to stay stretched. An aggregate amount of USD 2.9 billion has been raised by Greenko (USD 1.3 billion), Adani (USD 862 million), ReNew (375) and Azure (350) in the last seven months. The spurt in issuance comes after a lull 2018 when no bonds were issued. Prior to that, a total of USD 2.5 billion worth of bonds were issued in 2016 and 2017. 

The bonds are being issued at a relatively unattractive cost of USD 5.65-6.67%;

The developers have no option other than to tap into green bonds to free up bank lines for their pipeline projects;

Because of worsening risk perception of Indian RE, the green bond option is available only to a very small group of developers with the necessary scale and reputation;

Most issuers have followed a template structure issuing bonds with bullet maturity of around 4-6 years. The bonds, rated sub-investment grade at about BB mark, have had to pay high coupon rates of between 5.65-6.67% per annum to attract investors. These rates are about 50-100 bp higher than respective rates two years ago. The one standout offering was made by Adani, which issued USD 362 million of 20-year bonds (average maturity of 13.3 years) against an operational portfolio of 570 MW of operational solar assets. These bonds follow a conventional project finance structure with: i) an annual redemption profile tailored to meet project cash flows; and ii) a tight security structure including several reserve accounts, cash waterfall mechanism, cash sweep and other covenants. As a result, the company managed to improve credit rating to investment grade BBB- and reduce cost to 4.625%, an all-time low for Indian RE developers.

Table: Green bonds issued by Indian RE project developers

Source: BRIDGE TO INDIA researchNote: Portfolio capacity includes only utility scale solar and wind projects except for Greenko. 

Overall, we do not deem terms, particularly the cost, of the bonds as attractive vis-à-vis INR term debt. But the developers are keen to free up bank lines for their pipeline projects as both availability and cost of debt have been impacted adversely in the local financial markets. Despite five interest rate cuts by the Indian central bank this year, the Indian lenders are weighed down by liquidity and asset quality concerns.

Green bonds should be an ideal option for the developers when interest rates in developed markets remain near all-time lows and debt investors are increasingly hungry for yield. Unfortunately, risk perception of Indian RE has taken a massive hit following recent instances of payment delayscontract renegotiation and curtailment. As such, this option is available only to a very small group of developers with the necessary scale and reputation.

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Sector reform essential to build growth momentum

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A mini-controversy broke out last week with Indian credit rating and advisory company CRISIL issuing a report claiming that India would under-achieve the 175 GW renewable capacity target for March 2022 by 42%. MNRE immediately issued a prickly rebuttal terming the report as factually incorrect and lacking credibility. It has expressed confidence that capacity target of 175 GW would “…not only be met but exceeded.” But it later betrayed its own statement by extending timeline for meeting the target from March 2022 to December 2022

The sector is facing double whammy of severe supply side constraints as well as weakening power demand growth;

States with high RE penetration are already struggling to cope with associated financial and operational challenges;

The sector seems likely to muddle along at 8-10 GW annual capacity addition unless the government backs up its ambitious talk with urgent reforms;

CRISIL has put blame for undershooting the capacity target primarily on policy uncertainty and falling developer interest. Those are valid reasons but there are more important exogenous factors at play. The sector faces serious supply side challenges on land, transmission and debt financing. There is a huge pipeline of 31.3 GW of projects in various stages of construction but most projects are facing delays of 6-18 months because of various bottlenecks. We stated just last week that utility scale solar and wind capacity addition has averaged below 2,000 MW over last six quarters.  Moreover, power demand growth in the country is showing worrying signs of a slowdown. Total generation has slipped by about 5% in the last two months over previous year. Power prices on the exchange have fallen to a two-year low of INR 2.77/ kWh. Weak demand is being attributed variously to slowdown in the economy and extended monsoon.

Figure: Monthly power generation, million kWh

Source: CEA, BRIDGE TO INDIA research

The bottom line is that the sector is facing the double whammy of execution challenges as well as weak power demand. Andhra Pradesh and Telangana, two leading RE states have formally raised the issue of excess renewable capacity and their inability to pay for it. We believe that Karnataka is likely to be facing similar challenges with RE penetration already in excess of 30%.

In such a scenario, it seems difficult and even inadvisable to add more than 8-10 GW of renewable capacity on an annualised basis. In fact, we believe that CRISIL’s estimate of 40 GW incremental capacity addition by March 2022 is a tad optimistic. Including about 5 GW of rooftop solar capacity, we estimate new capacity addition at only about 35 GW in this period. The government may not like these estimates but it needs to acknowledge industry concerns and be open to critique.

We maintain that long-term fundamentals of renewable sector remain very strong in India. But revival of growth requires a multi-pronged approach including power distribution reform, adoption of new technologies like storage and, progressive measures on ancillary services market and demand side management.

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Improving prospects of residential rooftop solar market

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Last week, Amplus Solar announced a foray into the residential rooftop solar market. The company, so far focused only on C&I consumers, plans to offer standard rooftop solar solutions backed by a long-term warranty and integrated financing solution.

Residential rooftop solar accounts for a tiny 16% share of the total rooftop market in India;

Long payback periods, lack of standard financing and technical solutions have held the market back but the outlook is beginning to improve;

Falling costs, improving supplier interest and favourable policy stance should see market growth outstripping other segments;

Unlike in most other countries, residential consumers account for a tiny 10% share of rooftop solar market in India. As of March 2019, total installed capacity in the residential segment is estimated at only 690 MW. Average annual installations are estimated at only about 187 MW per annum. The market is not only much smaller than the C&I rooftop market (1,500 MW per annum) but has also been growing erratically. Many factors explain this tepid state of affairs – long payback periods, high upfront cost, lack of standard financing as well as technical solutions backed by reputable vendors. These factors continue to hold the market back, but there are some encouraging signs of the market opening up.

Figure: Residential rooftop market growth

Source: BRIDGE TO INDIA research

We expect growth to pick up in the next 2-3 years on the back of improving project economics and supply eco-system, increased consumer awareness and favourable government policy. Payback period on investment can be as high as 10 years depending on consumer tariff and rooftop system cost but we expect it to fall to an average of less than five years by 2022 as grid tariffs rise in response to poor DISCOM finances and system costs fall. In any case, retail consumers have lower return expectations and are happy with overall returns of about 10% on their investment.

Improvement in supply side eco-system and consumer awareness may be other game changers. While the C&I market continues to grow rapidly, intense competition and low profitability is pushing players to look at newer opportunities. There seems to be growing interest in the residential market both from start-ups and corporate players. Even the financiers, disenchanted by high risk in the utility scale market, are beginning to explore this market. Moreover, as consumers see more rooftop installations on their office premises, local metro stations and schools, hospitals etc, rooftop solar is moving from a technical curiosity to a proven energy system. Once the early adopters move in, the network effect should take over.

Favourable government policy should also help. Capital subsidies have been withdrawn from all consumers bar residential consumers, who can still avail capital subsidies of 20-40% depending on system size. The Indian government has set aside INR 66 billion for capital subsidies for residential consumers over next three years. We expect DISCOMs to offer less resistance to net metering for residential consumers because of lower applicable grid tariffs.

States are jumping in. Gujarat recently announced a scheme to install 800,000 residential systems aggregating to 1,600 MW capacity by March 2022. Other states are likely to follow providing a major boost to the market.

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Project execution slowdown to continue

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Utility scale renewable capacity addition has been in a slow mode for the past eighteen months. We estimate Q3 2019 capacity addition at only 2,549 MW (solar 2,114, wind 435), about two-thirds of scheduled capacity addition. Since touching a record high of 5,111 MW in Q1 2018, quarterly capacity addition has averaged at less than 2,000 MW, substantially behind the implementation schedule and government targets. The execution slowdown is in stark contrast to soaring tender issuance and allocation numbers. Total project pipeline – projects allocated to developers and at various stages of implementation – now stands at an all-time high of 30,447 MW.

Delays in land acquisition, transmission connectivity and debt financing are the foremost reasons for slow progress;

Equity availability is also getting impacted due to increasing concerns about poor project viability, high political risk and lack of successful exit precedents;

The slowdown looks set to persist for at least another 12-18 months;

Figure: Utility scale renewable capacity addition, MW

Source: BRIDGE TO INDIA research

There are many reasons for the execution slowdown, foremost among them delays in land acquisition, transmission connectivity and debt financing. Land acquisition and transmission bottlenecks are posing acute challenges specifically for the inter-state transmission system (ISTS) based tenders. The government’s move to issue ISTS tenders, where project developers are allowed to locate their projects anywhere in India, was aimed at meeting renewable power demand from hinterland states (Punjab, Haryana, Delhi, Uttar Pradesh, Bihar and Jharkhand) at attractive tariffs. These states have historically had very little RE penetration because of limited land availability and lower renewable resource. But ISTS tenders have exacerbated execution challenges with most developers inevitably choosing Rajasthan for solar projects, and Gujarat and Tamil Nadu for wind projects. More than 80% of total ISTS capacity allocated so far is believed to be located in these three states.

Debt financing problems are another major factor behind the slowdown. The sector started facing lending restrictions back in early 2018 after the NBFC solvency crisis. Debt financing outlook still looks bleak as lenders exercise caution in the wake of worsening DISCOM payment delays and Andhra Pradesh PPA renegotiation attempt.

Figure: Leading developers by pipeline capacity, MW

Source: BRIDGE TO INDIA research

Note: Solar-wind hybrid projects are clubbed with solar projects.

There are other factors affecting progress. Equity availability is getting impacted due to concerns about project viability and, stalled GST and safeguard duty ‘change in law’ relief claims. Projects not eligible for safeguard duty relief are most likely to delay implementation to beyond H2 2020, when the duty expires.

It is not a surprise that the sector is witnessing such extensive delays. Unfortunately, most of the problems look set to persist for another 12-18 months. The government needs to move quickly to address investor concerns, otherwise it risks losing credibility.

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