‘Fundamental demand’ drives renewables uptake in India

Last year’s COP26 climate summit in Glasgow failed to achieve the lofty goals many had hoped for – but it did, if nothing else, finally get several countries to put firm deadlines on reaching net-zero carbon emissions.

One of the nations that made such a pledge was India, whose prime minister, Narendra Modi, committed his nation to a target of net-zero by 2070.

That goal is obviously a very long-term one (10 years longer than China’s pledge, for example) but it has helped set the direction of travel.

Modi said that India would increase its non-fossil fuel energy generation capacity to 500GW (representing an addition of 450GW at the time of the announcement) and secure 50 percent of its generation needs from renewable sources by 2030. These two measures should help to reduce the country’s emissions to below one billion tonnes per year.

Rahul Agarwal, vice-president and head of infrastructure and institutional investments at investment promotion agency Invest India, told Infrastructure Investor last October that the targets represented an enormous opportunity for investors: “The 450GW target seems very, very large today, but if you look at per capita power consumption, India’s is relatively small – we’re one fourth of consumption in China and one thirteenth of consumption in the US. It has started to show changes, and month-on-month electricity consumption is rising,” he said.

“When things become economically viable, there is rarely a country that is better than India in executing. Solar and wind have both become affordable for emerging economies, so we have been able to replicate these projects again and again,” Agarwal said at the time. “In my view, we are one of the most aggressive emerging economies in cutting down our emissions – we’ve promised to cut 33-35 percent of our emissions by 2050, and the entire 450GW target is testament to that.”

The investment case is backed up by the International Energy Agency, which said in its India Energy Outlook 2021 report: “An expanding economy, population, urbanisation and industrialisation mean that India sees the largest increase in energy demand of any country, across all of our scenarios to 2040.”

The IEA also found that solar is set for stellar growth, as utility-scale solar is now out-competing existing coal-fired power on costs, even when paired with battery storage.

But the use of coal has increased in recent years, rising from supplying 33 percent of India’s primary energy demand in 2000 to 44 percent in 2020, according to the IEA.

So how big is the opportunity for energy investors? And what barriers still remain to India’s energy transition?

Supportive policies

Several large institutional investors have made investments in Indian renewable energy in recent years. Among them, Copenhagen Infrastructure Partners committed $100 million in 2021 through its New Markets Fund I to develop a 1.7GW portfolio of assets alongside Amp Energy India, while Canadian pension CPP Investments committed an additional $247 million, building on an initial $144 million investment, to ReNew Power Ventures, a clean energy company with more than 5.6GW of capacity.

Macquarie Asset Management, which owns solar assets in the country totalling approximately 1.7GW in capacity, is another of the big players in the sector. It has made investments through MAM funds, UK Climate Investments and the Green Investment Group (recently integrated into MAM itself).

“If you invest in emerging markets, you can’t ignore India – and the energy sector is a particularly attractive area”
Darius Lilaoonwala, Augment Infrastructure

“There is a fundamental demand for energy in India,” according to Deep Gupta, a managing director of Macquarie Asset Management. “As Indians become more urbanised, people are buying more air conditioners and refrigerators, meaning that they are becoming larger consumers of electricity. And this is not just happening in the biggest cities, but in the smaller urban areas as well.”

The Indian government’s policies are supporting investment, he continues. “A lot of thermal generation assets are starting to come out of the system, and India has a lot of available resource in both solar and wind. It’s a big country with a lot of land, and because of the monsoon season, onshore wind turbines also make sense.

“If you look back, the development of India’s roads sector has been a big success because of government targets. Setting those targets helps you to reach a much more substantial scale, more quickly, than if you don’t set those targets. The government has become a lot more analytical over the years in setting and monitoring targets, too.”

Augment Infrastructure is an emerging markets-focused GP established in 2021 by Darius Lilaoonwala and Viktor Kats, former co-heads of the IFC Asset Management Company’s global infrastructure fund. The firm’s first investment was in CleanMax, billed as India’s largest provider of renewable energy to commercial and industrial customers.

Lilaoonwala says that the government’s renewable energy targets are “hugely important” for investors, especially international institutional investors.

“India has done a very good job of articulating its targets for renewable energy over the last 10-15 years, and that has resulted in so many international players, such as sovereign wealth funds, Canadian pension funds and others, coming in to complement the domestic players that are active in the sector. If you invest in emerging markets, you can’t ignore India – and the energy sector is a particularly attractive area,” he says.

Risks and opportunities

As with any emerging market, there are risks to investing in India, but these are not insurmountable – especially when weighed against the potential opportunities.

“All investments involve risk, but we are comfortable with India because the government has a long history of supporting private investment, and if something arbitrary does happen you have access to the courts and tribunals to seek relief. Historically, when the government has made policy changes or altered the rules of the game, it has always been on a look-forward basis – they have stayed clear of retroactive changes, which is sensible,” Lilaoonwala says.

“It is important to go in with your eyes open, and of course regulations have changed over time. But this is not a risk that is unique to India.”

Grid congestion was also not cited as a major concern by the investors we spoke to, despite this still being a point of contention in other more developed markets, such as Australia and the US.

But there are some country-specific risks to consider, especially with utility-scale projects, MAM’s Gupta says.

“If you’re looking at long-term PPAs with utilities, the health of the utility is the most important thing. In our experience, you can rate the utilities – some have been consistently good, others less so, which should factor into your investment decision,” he says. Energy policy in India is split between the federal and state governments, with most utilities owned at the state government level, so where you choose to invest can make a difference.

“There is a fundamental demand for energy in India”
Deep Gupta, Macquarie Asset Management

Gupta also highlights what he calls a “newer risk” surrounding PPAs. The federal government has established central nodal agencies in each state to develop, co-ordinate and secure financing for renewable energy projects.

“When these central nodal agencies come out with tenders, they usually have a soft commitment [around offtake] on the back end, and because they don’t have their own balance sheet, they have to rely on state-level utilities and distribution companies for that. If there is a difference in expectations between the parties, it can take a lot longer to sign those PPAs.”

Finally, Gupta says, there are still challenges around debt financing, although there are signs that this may begin to improve soon.

“On the commercial side – and this is true for all infrastructure sectors – India still does not have a long-term fixed-rate debt market. It’s very difficult to raise a 20-year fixed-rate bond in India, for example. The government has tried it on and off but there hasn’t been much interest. It is starting to change, but we’ve not found large pools of insurance money or pension fund money backing these long-term projects yet,” he says.

Platform for growth

Both Macquarie and Augment have plans to invest more in the sector and see the potential for future growth as the government’s targets continue to shape the power market.

“We think India will also become an interesting market for us to explore areas like battery storage, the electric vehicle market and charging infrastructure. Those markets aren’t quite there yet, but we’re sure India will be an early adopter of some of these technologies and we hope to invest in these spaces in the near future,” Lilaoonwala says.

Augment’s Kats adds that the firm is also using India as a launchpad for expansion into other markets in the Asia-Pacific region.

“We’ve seen a number of companies go from India into the Middle East and Southeast Asia and it makes a lot of sense to do so, especially in the C&I space that CleanMax operates in,” he says.

“Our customers at CleanMax are taking them to the UAE, Bahrain, Saudi Arabia, Thailand and other markets. Being in India helps you to establish a regional platform, and having your engineering and procurement base there can allow you to be cost-competitive, because the scale of the market allows you to do a lot of work in your home base, sourcing the entire volume of equipment that you need, and export from there.”

The IEA’s report outlines a range of possible scenarios for India’s energy transition, depending on government policies and how quickly the country’s economy rebounds from the pandemic slump and other economic shocks.

But it makes one thing clear: the opportunity is huge. India is the world’s third-largest consumer of energy, and consumption is set to grow further. Renewable energy has a large part to play in all the scenarios the IEA considered, and investors are poised to take advantage.