India Renewable Growth

Renewables:
A way to participate in the India growth story

India is at the forefront of many investors’ minds given the recent elections and upcoming local currency index inclusion. The country’s enticing growth proposition, fueled by a diversified and innovative cluster of technology and solutions sectors, continues to draw in growth-seeking investors and as a bit of haven in a landscape full of uncertainties. Compared to other parts of the world, India’s economy is exhibiting resilience – credit growth, pickup in investment cycle, robust consumer spending and rebound in services – and is currently among the fastest growing economies. Having surpassed China now as the globe’s most populous nation, India’s attractive story remains underrepresented in many investment portfolios.

While there are many versions of the India story to tell, we feel one of the brightest is the renewable energy sector within the corporate bond universe. India’s transition challenge is immense: it is the third largest carbon emitter in the world; however, the country has implemented aggressive clean energy targets which will be hugely significant in the global fight against climate change, much of which is being financed via the private sector and investible in the bond market. India is deploying solutions such as clean hydrogen, energy storage, carbon capture and sustainable aviation fuels in addition to traditional solar, wind and hydro projects, aiming to reach net zero emissions by 2070 and meet fifty percent of its electricity requirements from renewable energy sources by 2030. Prime Minister Narendra Modi has announced specific goals for 2030, including installing 500 gigawatts of renewable energy capacity, reducing the emissions intensity of its economy by 45 per cent, and reducing a billion tonnes of CO2. Progress is already underway: India has overachieved its commitment made at COP 21 Paris Summit by meeting 40 per cent of its power capacity from non-fossil fuels, almost nine years ahead of its commitment, and the share of solar and wind in India’s energy mix have increased tremendously.

Our senior credit analyst, Reema Ghosh Roy, recently returned from a research trip to India to meet renewable companies, financing companies and regulators and confirmed the country’s commitment to clean energy and the immediate opportunity for bond investors. Policy support for the renewables sector remains strong and on the supply side, new projects are expected to increase soon.

Additional key takeaways include:

• After a lull due to the pandemic, auction for new renewable energy capacity rebounded strongly in FY2024. India auctioned a record 70GW during the year, beating its own annual target of 50GW and significantly higher than the 10-15GW/year that were auctioned before
• Focus is shifting from vanilla wind and solar projects to complex projects with storage solutions. Thus, large amounts of capex is needed for renewable projects, storage solutions, transmission and manufacturing facilities
• The Modi-led government is acutely cognizant of market forces, and realize they need to eliminate unnecessary risks to attract capital and make use of bond markets. Auctions are now mainly done by central agencies (SECI, NTPC, NHPC, SJVN) to reduce counterparty risk
• The Late Payment Surcharge (LPS) scheme has shown great success to reduce the dues owned by the state distribution companies (discoms) and improve liquidity for the power producers. States are also required to make timely subsidy transfers to the discoms to ensure their financial wellbeing
• Judicial courts have upheld all PPA contracts, which ensures visibility and stability for the renewable companies’ cash flows

Because of the large, expected capex, access to cheap funding remains key for the sector. Onshore funding channels for renewable project financing remain strong and in a range of 9 - 9.5 per cent. Thus, they have not been much impacted by the increase in USD rates. And in fact, we saw many USD bonds being refinanced with onshore debt. We expect this theme to continue supporting the dollar bonds which are still outstanding.

However, even as it sets its sights on net zero, India faces several pressing near-term challenges. The biggest limitation for the renewable sector now is the evacuation infrastructure. In addition, land availability could be a concern in a few years, but most developers still have ample suitable land on hand. The supply of equipment (solar panels, wind turbines) has been volatile due to global forces and domestic policies. The government is providing incentives to manufacture some of these onshore. India has numerous policy measures in place that could address some of these challenges and accelerate the shift to cleaner and more efficient technologies. We are excited for the ongoing development in the country’s path to a more sustainable future and look to investment opportunities in India, especially in the renewable energy space.

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