Below are the excerpts of our recent interview with Mr.Rishi Agarwal, Zonal Head-project & Structured Finance, Aditya Birla Finance Ltd.
What are the risks involved in raising the capital for renewable energy projects?
Capital coming in the form of pure equity is fine. But in India, funds / Investors often do not undertake pure equity Investments, opting instead for fixed return instruments to fund projects. Risk involved in such instruments is that the return is based on certain assumptions, like reduction in cost of debt post commissioning, achievement of certain levels of PLF, and extension of working capital cycle. To give that kind of equity return to a third party may not be feasible.
On that note, what are the most popular risk management mechanism and instruments available for renewable energy project developers?
The renewable energy project developers face a different set of risks at various stages of the project. Key risks during construction period include performance of EPC companies who will construct and commission the plant, surety of land acquisition (including ROW for evacuation / transmission, etc. Most importantly, the developer needs to be careful about the counterparties with whom they sign the PPA. The creditworthiness of the DISCOMS keeps on swinging over a period of time and can impact the economics of the project.
The delivery and completion of project on time is a challenge as is the reliability of the radiation data or wind data. There are tools to mitigate them. Now there are derivative products which are available from the insurance companies which guarantee a minimum level of wind or sun radiation. If the generation guaranteed by the manufacturer is not acheived, you can have a counter-guarantee or the risk coverage from the insurance company about the wind or solar reliability.
How can Indian renewable energy sector attract foreign investment?
Foreign investor hate uncertainty. The biggest risk which I see currently is that the DISCOMS, due to their weak financial status, are forcing the developers to stop the supply of power and adopting restricted power supply strategy. Since there is no take-or-pay concept in renewable energy and grid availability is also an issue in some states, offtake by DISCOMS is uncertain. The Government is addressing the issue by using SECI and NTPC as intermediaries.
Risks relating to land acquisition etc. are being addressed through Solar Parks.
Currency risk is still open which can be addressed by Dollar denominated PPA’s
In the last 2 years what kind of different projects has your company invested in?
We have invested in wind, solar and hydro projects. As on date our renewable energy book is ~ Rs 1800 crores. We have also underwritten projects and later successfully sold them down.
We have underwritten both wind and solar projects for Indian and foreign promoters. We were the first one to underwrite a wind energy project for a Offshore PE platform.
Our company is fairly confident on renewable energy as a financer. The only challenge or difficulty which we see is the management of environment, basically regulators as well as the DISCOMS which can act as spoilsports. One must remember that renewable energy is intermittent and can’t be the base load and also not a 100% reliable power. When batteries become commercially viable and we are able to store power, then renewable energy can become reliable source of power. On thermal side we have over capacity in the country. Availability of coal is not a problem. Due to over capacity and underutilization of plants, the per unit cost of power rises which then has to be subsidized. With more capacity there will be a huge subsidy. The subsidy increase is due to purchase of costly power from renewable sources and high base level capacity charges for thermal power plants.