Interview: Public Market May Not Have the Appetite for More Than 2-3 Large Renewable IPOs

The current pass-through mechanism entails a long-drawn process which needs to be examined: Aditya Aggarwal, director of Vector Green Energy Private Limited


In the past couple of months, a slew of government regulations have been announced for the domestic renewable sector. Mostly, these policies have been aimed at dealing with the ongoing uncertainties concerning the Indian solar sector and finding new ways to add more capacity to the grid.

In the light of these developments, Mercom’s News team got in touch with Aditya Aggarwal, the director at Vector Green Energy Private Limited, a holding and operating company of renewable assets for IDFC Alternatives & Partner IDFC Alternatives, to get his opinions on the state of the industry and what he thinks the future holds for it.

India Infrastructure Fund II – an infrastructure fund managed by IDFC Alternatives, has established Vector Green Energy Private Limited (“Vector Green”) as the operating company for its renewable energy investments, and has a vision to grow it into one of the leading players in the country while maintaining a focus on profitability and regular cash yields.

What are some of the positive and negative trends that you see in the sector currently?

The renewable energy sector has been growing at a fast pace and has a visible growth outlook for at least the next few years. Be it renewable IPPs or investors or contractors, everyone is excited to be part of this growth story. Full credit goes to the policy makers who have been articulating and relaying continuous growth signals. Let’s take the example of the recent MOP circular advising revision in the RPO trajectory, a quick back of the envelop calculation shows that the renewable installed capacity targets add up to about 200 GW by 2022.

As a result of these efforts, the industry has been able to attract large institutional players who are expected to lead industry growth in the coming years. The other very big positive is the growth of solar in the C&I (commercial and industrial) space where consumers are realizing the true benefits of going solar, by seeing a significant reduction in their power cost and ease of installations.

Although the outlook remains positive, a couple of points require focus from the policy makers. The health of DISCOMs is the most prominent concern in the minds of industry players. A healthy DISCOM is beneficial for both end users as well as renewable developers. Another key area of concern is that in the recent past there have been certain moves which have created policy uncertainty in the minds of industry players (such as additional duty imposition, opening of signed PPAs, etc).

Finally, the establishment and maintenance of appropriate transmission and distribution capacity to support renewable generation is critical. While central and state governments have taken steps to address all of these issues, these remain a work in progress. A successful resolution of these matters would be essential to allow India to realize its renewable potential.

What is your take on anti-dumping and safeguard duty as it stands now? Are you comfortable with the pass-through option in the PPAs? Does it give you confidence to bid more and sign PPAs?

At the outset, let me clarify that Vector Green Energy Private Limited is a renewable IPP that is currently focused only on aggregating operating capacity. While we are not presently involved in greenfield operations, from our perspective, the answer to this question lies in the way the solar industry has evolved in India. Since the very first bid under the National Solar Mission, the focus has been to achieve the lowest possible tariff and to ensure this, bidders were given free rein to source equipment including modules from any suppliers, either domestic or global. The government has been successful in this aim and renewable tariffs today are below grid parity. At the same time, due to global supply, there has been limited development of domestic equipment manufacturing capacity in India.

To protect the domestic market from unfair trade practices, the government has explored duty imposition in case suppliers are resorting to unfair trade practices. On the other hand, any imposition of such duties is likely to result in an increase in final tariffs for the buyers of renewable power. We believe that the policy makers need to make a choice between lowest possible tariffs to users and protecting the domestic manufacturing industry while also complying with international trade law provisions. It also needs to be highlighted that the manufacturing + PPA scheme recently announced may be a more effective way to ensure the objective of promoting domestic manufacturing, while also being less disruptive.

In this regard, the government’s stand on pass-through of taxes and duties is a good example of the government listening to and addressing stakeholder concerns. While renewable developers have been willing to be responsible for market risks (such as market price of equipment or financing costs), the same is not true for uncontrollable factors such as taxes and duties. These concerns became even more pronounced when talks around ADD and safeguard duty started gaining traction. In such an environment, a developer preferred to withdraw from bidding rather than to take up such uncontrollable risks, the case in point being the bids invited by Maharashtra and Karnataka. Against this backdrop, the government’s move to provide clarity on taxes and duties has addressed developer concerns and resulted in several successful auctions since. Having said that, the current pass-through mechanism entails a long-drawn process where neither the timeline nor the quantum of the tariff pass-through is assured to the developer. The government should investigate this and establish a fair and transparent framework for computing the impact and a timeline for completing the same.

Are you pleased with the tender and auction activity lately?

The increased tender and auction activity has been one of the most positive developments in the sector over the past year. More than 15 GW of tenders have been opened across solar and wind. A periodic and identified auction schedule has freed up the industry from its self-imposed annual capacity constraints. At the same time, since muted auction activity was a key concern for renewable developers last year, it is particularly heartening to see that the government has shown its willingness to listen to and address developer concerns. Such responsiveness should further encourage renewable developers and will play a critical role in India achieving its revised target of 227 GW.

One key thing that policy makers should keep in mind is irrational exuberance that is being displayed in some of the recent auctions. While excessive competitiveness may lead to near term joy (lower tariff for end user and capacity addition for developers) this may sow seeds for failure in the future. This was precisely what happened in sectors such as roads and thermal power as developers outbid each other to win capacities even at the cost of future viability. That experiment did not end well for the developers or other stakeholders including lenders and off-takers. The policy makers should continuously strive to achieve the lowest sustainable tariff and modify bidding guidelines appropriately to ensure that the entire sector’s future does not get derailed by the actions of a few participants.

What states look attractive for project development right now?

We are attracted to states that have a clearly defined policy framework that is supportive of renewable energy and is willing to abide by its stated intent not only during the development and construction phase but also during the operating life of the project. One of the key factor is the payment track record of the off-taker. This is one of the key reasons why renewable developers have increasingly moved to bid for central off-takers such as SECI and NVVN (NTPC Vidyut Vyapar Nigam Ltd). Another critical thing to remember is that an ideal partner state does not differentiate between projects that supply power to its own utility and one that supplies power under the central PPAs. We believe states such as Gujarat, Punjab, and Telangana fit this definition well and are quite attractive for us.

Solar tariffs have hovered around the 2.71 (~$0.0398)/kWh mark in the recent auctions. Do you think this trend will continue?

Bid tariffs typically reflect the participants’ views on the expected project cost and project risk perception of the participants. In the past, with falling capital costs, participants were able to bring down bid tariffs while maintaining their expected returns. This trend was somewhat reversed in the last few rounds of bidding as equipment prices increased and as a result the tariff realized inched up. Going forward, we expect the relationship between bid tariffs and bid parameters (equipment costs and project risk perception) to continue to play out. With China’s policy changes, we expect equipment prices to head southward again but conversely the cost of debt financing has been inching up again with a hawkish outlook for the future. The interplay between these opposing will determine the bid tariffs realized in the upcoming auctions.

There has been a spike in IPO filing activity recently. What do you think are the reasons behind it?

Over the past few years, the renewable industry has witnessed the emergence of renewable IPPs that solely focus on developing and operating renewable projects with upwards of 2-3 GW of project capacity. With the renewable industry coming to the fore and industry players expanding in scale, listing on the public markets is a natural next step. A public listing provides these companies access to relatively lower cost of capital thereby enhancing its competitiveness during bidding. At the same time, a public listing also provides a viable route to monetize on investments made by early stage equity investors in these companies.  The Indian public market presently may not have the appetite for more than 2-3 large listings from within renewable space. In that sense the companies that have progressed on their listing plans may enjoy a first mover advantage. Considering the fervent activity in the industry, we believe that once the traditional listing route has been established alternate routes such as an Investment Trust listing should also open up for the mid to large renewable IPPs.

Do you see consolidation coming with acquisition activity picking up?

As mentioned earlier, with the emergence of renewable IPPs, the industry consolidation has been underway for the last 3-4 years. In the initial years, renewable capacities were either owned by companies where renewables were a non-core business or by investors seeking tax breaks. Over the years, as institutional renewable IPPs have set up their business, many of these companies and entities have divested their projects to these renewable IPPs. The IPPs were able to take up these projects and through its expertise in the space, improve operational performance and bring down operating and financing costs. This is the strategy followed by IDFC Alternatives when it set up Vector Green Energy Private Limited around 15 months back. Vector Green was set up as the operating cum holding company for IDFC managed funds’ investment in renewable power in India. The company today owns 11 projects across five states aggregating to ~ 350 MW. Our asset management platform is established now and can scale up to assimilate larger capacities from incremental acquisition.  Being an institutional investor, our focus is not just on scale but also on the sustainable cash generation by the capacity owned by Vector Green. We are looking at delivering double digit cash distribution to our investors starting this year in addition to capital appreciation. Going forward, we expect industry consolidation activity to normalize as renewable IPPs take up increasingly large portion of greenfield capacities being added. It should also be noted that a part of the overall consolidation market involved players that have been banking on short term valuation arbitrage between public and private markets something which is yet to be demonstrated.

What are your thoughts on the new Hybrid Policy?

MNRE announced the Hybrid Policy in May 2018 and it is a welcome step to realize the untapped potential of the existing wind or solar projects. As you would be aware, RE projects do not operate at their peak rated capacity most of the time and are able to utilize only one fifth of the capacity on an average, therefore developing a hybrid capacity will help better utilize the evacuation infrastructure already put up which would ease the pressure on the transmission utilities for creating fresh evacuation systems for upcoming capacities. The policy broadly outlines the contours under which the hybrid systems would work and will provide the guidance to the stakeholders. We also understand that some pilot tenders are being released which will prove to be a test case for the policy. This is another thoughtful initiative taken by the Government towards its aim of establishing an enabling platform achieving the ambitious target of 227 GW of operating capacity.