In Conversation with Mr. Anirban Das,Associate Vice President,Kotak Infrustruture Debt Fund
Please brief us about Kotak Infrastructure Debt Fund's operation in Renewable Energy Sector?
Kotak Infrastructure Debt Fund (“KIDF”) is the newest entity in Kotak Mahindra Group, representing the group’s focussed entry into long term funding for the infrastructure sector, and renewables is a core focus area for KIDF, forming 30%-40% of the current asset book. We are working as long term partners with quality sponsors who have a proven project track record.
KIDF has a lean and well-knit team where each team member has significant experience in the infrastructure sectors, particularly renewables and roads. This has enabled us to quickly devise a well-defined strategy towards the renewables sector and leverage relationships to implement the same.
We are looking to play a key role in development of the sector, by providing longer tenor debt to operational projects. It serves as a win-win situation for all parties – developers getting longer tenor funds at competitive rates while the lender is protected from construction risk, and banks’ books are freed up of Asset-Liability Management (ALM) issues.
In addition, KIDF brings with it the benefits of the full range of financial services provided by Kotak. We are in an ideal position to provide developers a one stop solution to most requirements – ranging from long term debt to structured funding to capital market solutions (both debt and equity).
What are the risks involved in raising the capital for renewable energy projects?
Renewables is a capital intensive sector, with almost annuity type returns spread over a long tenor (25 years or more). Such long tenors come bundled with associated uncertainties to the annuity type cash flows – be it the regulatory framework, interest rates, exchange rates or the technology itself.
Technology improvement coupled with demand supply dynamics driven by Chinese manufacturers has been a particularly important factor for solar energy. From 2011 onwards – which is roughly when grid scale solar projects began in the country - tariffs have dropped from Rs. 17 to Rs. 2.44 today. It’s a structural change, solar moving from the realm of CSR to actually becoming the mainstay of all future power generation capacity addition.
However, there is a flip side to this welcome development. Almost every new auction results in a new record low tariff, it also raises a question mark about procurers honouring earlier higher tariff contracts. And I am not even talking about Power Purchase Agreements (PPAs) being renegotiated. There are enough mechanisms outside PPA available to DISCOMS that would make life difficult for developers. Contract enforcement, as it is, is not a strong point for India as a country. And these PPAs are quite weak in terms of safeguards provided to developers in the event of procurer default.
So, on one hand, we have to deal with extremely low tariffs for new bids which have built in the positives in the bid price while ignoring the negatives. And many of those negatives are coming true – module prices are at above 35 cents whereas 25 cents was assumed, no clarity on GST etc. Customs duty on imported modules and Anti-dumping duty are also on their way, let’s hope those are applicable on a prospective basis only.
On the other side, these low bids are also making developers of earlier projects jittery about the possibility of tariff renegotiation.
In the last two years what kind of different projects has your company invested in?
We are only a year old company. However, within this short span of time, we have invested in renewable projects across states, programs and timelines. We have exposure to wind and solar projects operational for more than 5-6 years as well as around 1-2 years. We have invested in renewable projects in a tariff range of Rs. 3.56 – Rs. 10. We have exposure to counterparties like NTPC Vidyut Vyapar Nigam Ltd. (NVVN), Solar Energy Corporation of India (SECI) as well as state DISCOMS of Gujarat, Telangana etc. This is a constantly evolving sector and the only way to stay relevant is to stay abreast with happenings in the sector on a day to day basis. We are an India-centric, knowledge driven institution and we keep upgrading our intellectual capital that enables us to take informed investment decisions.
What are investors looking for while investing in solar projects?
One thing is clear – renewable energy is going to provide bulk of the capacity addition going forward. And this is true not only for India, we are following a well-established global trend. So, in spite of all the concerns, there will be investments in solar.
We are currently still in a phase where solar / wind plays a role of complementing thermal capacity as base load, but a shift to a regime where renewables actually replaces thermal energy is not really far-fetched any more. The government is doing its bit by actively promoting the sector - the 100 GW target may not be achieved by 2022, but it certainly acts as a strong signal of intent. Investors will always be interested in clean energy in a country where such clear intent is present.
And if we look at the recent guidelines for future solar as well as wind auctions, there are significant steps that have been taken towards addressing the single most important risk factor, i.e. counterparty risk. National Thermal Power Corporation (NTPC) / SECI is brought in as counterparty (or state government guarantees are provided for state DISCOM PPAs), provisions for termination payment and deemed generation brought in. We are also talking about load shedding being penalised - proper implementation of this shall correct the artificial reduction in power deficit.
As an investor, I would be positive about the macros and the intent.
What are the key Risks faced by lenders while funding Solar Projects and which mitigation strategies can be used
All risk factors that are applicable for equity investors are equally applicable for lenders, since we are funding over 75% of the project cost. Construction timelines and land acquisition plays a part, as in any infrastructure project.
However, for a technology intensive sector like solar, it is more relevant to look into the module quality since we are talking about a timeframe of around 15-20 years here. This assumes even higher importance with the low tariffs – conducting detailed due diligence is critical. Just seeing the module manufacturer name in Tier I list may not be enough anymore, It is time to expand scope of lenders’ engineer assignments - bills of material for cells sourcing, specifications of back sheet, tests for long term degradation etc. We also need to build in replacements needed during the project life, especially for inverters. Then there is the question of financial health of module manufacturers, can we stipulate bankruptcy insurance to cover for such situations? There could be some resistance as it adds to the module price, but in the long run, developers will also benefit.
The other key risk falls under the broad category of counterparty risk - which are the DISCOMs on whom long term calls can be taken? What are the tariff levels with which we are comfortable? What is a reasonable amount of sponsor skin in the game? etc. Every lender would generally have a comfort level defined for each of these parameters. The levels will defer across institutions depending on risk appetite, as well as for the same institution over time as part of constant recalibration on basis of market feedback.
One last key risk factor, and it deserves a separate mention, is evacuation risk. Renewable energy, especially wind, poses significant challenges to the grid due to its inherent variable nature. This might not have been that important till a year ago as renewables formed a very small proportion of the power mix, but steady augmentation of evacuation capabilities would be of critical importance for sustainable growth of the sector. As a lender, looking at the evacuation system and associated approvals will be a key requirement.
Anything else you would like to add?
I would go back to the old concept – infrastructure has to take lead for a country to grow. Augmentation of power generation capacity is critical and renewables would form bulk of the incremental addition. Government measures have been largely positive. Steps have been announced to plug some of the key loopholes such as termination payments, deemed generation, curtailing load shedding, etc.
At the same time, regulators need to be careful about measures like anti-dumping duty. We need to maintain a fine balance - the Make in India initiative cannot come at the cost of jeopardising growth of the sector itself.
Worldwide, there is a conscious shift from fossil fuels to renewables, and India will not be any different. There will be temporary turbulences, but the sector will remain a long-term attractive bet at macro level.