India’s renewable energy market will continue to see consolidation as other avenues of fundraising like initial public offer (IPO) and infrastructure investment trust (InvIT) continue to be challenging, Gaurav Singhal, managing director and India head of energy vertical, Bank of America told ET.

India’s renewable energy market will continue to see consolidation as other avenues of fundraising like initial public offer (IPO) and infrastructure investment trust (InvIT) continue to be challenging, Gaurav Singhal, managing director and India head of energy vertical, Bank of America told ET. Singhal and his team have been involved with all the four big deals in the renewable energy sector in India in 2021 so far as advisers– Adani Group’s acquisition of SB Energy, Thailand’s GPSC’s acquisition of 42% in Avaada Energy, ReNew Power’s merger with blank-check company RMG II for public listing, and ORIX’s $ 980 million investment in Greenko Energy. Singhal expects sector leaders to attract capital as there are far too few “high quality, mid-sized” renewable assets available in India. Even as solar power tariff is likely to increase in India, it may still remain among the lowest cost producers, which will lure foreign investors. Following are the edited excerpts of Singhal’s exclusive interview with ET:

Renewable energy assets have been in talks with investors for some time. What are the factors contributing to the deals fructifying now?
We have close to 80- 85% market share of all large transactions as an advisor in the green energy/sustainable finance space. There is a sudden flurry of activity seen in this area because: One, there is a merit in having a business which gives you a visibility of 25 years of contracted cash flows with reasonably strong counterparties. These renewable assets are fundamentally solid contracts and solid businesses to own and operate. Second, there is a massive rush of liquidity in the green energy space as the world moves towards reduction of carbon emissions and hence, the opportunity set is large. India is committed to reducing its carbon emissions by 33% by 2030, from its 2005 levels. This is a challenging target considering – India’s carbon emissions have increased by 335% in the last 20 years. Therefore, to achieve this ambitious target, India has embarked on a target of adding 450 gigawatts of renewable energy by 2030, which requires a growth rate which is 1.5 times higher than the global growth rate in the sector. This puts India on the map from both – scale and growth perspectives. If you look around globally, you will not easily find this type of combination of massive scale and growth potential.

Projects which have a track record and have achieved maturity in projects have been able to close deals. Is that a key factor investors are looking for?
The execution risk of renewable energy projects is very well defined now. People know that there are players who are able to deliver it, and there are players who may find it relatively tough to make returns. The market is consolidating amongst the top players as the economies of scale and cost of capital become important. So new capital formation is happening, but largely towards the leaders in the sector, which is a feature of a maturing sector. That’s why we see a large amount of interest from investors wanting to back large platforms like Greenko, ReNew Power, Adani or there is consolidation where existing companies are buying out smaller players because they want to expand portfolios.

There are signs that solar module prices will rise more, and the government is now pushing for more localisation. Will these factors change the outlook?
The direct investment in India’s renewable power over the next 10 years is estimated to be $280 billion, which is seven times more than what India spent on coal generation capacity in the last 10 years. Another $200 billion will be spent on transmission and distribution infrastructure, most of which will be to support renewable energy. That’s close to $500 billion going into the sector in some shape and form; the equity investment required alone could be $100 billion to $150 billion over the next 10 years. This is a humongous requirement and a massive opportunity for a nation of our size. With this kind of an opportunity, it is in India’s interest to be self-reliant. In the past, we moved towards self-sufficiency in thermal power, where the best plants actually started coming from BHEL. Now that the economics is defined and government policies are in place, investors will start investing in other parts of the value chain. Yes, it would lead to a temporary increase in prices by a few paisa per unit, but even with that, we will still remain the cheapest power producer in the world. Renewable energy is right now priced at Rs 2.02 rupees a unit, while blended cost at the grid level is still around Rs 4 a unit. Therefore, even if there is a slight increase in renewable energy cost, the economics would still work. We as a bank have been extremely busy with deals and international investors are showing tremendous interest in this sector and there is no shortage of capital.

India has had issues in the renewable energy value chain. But now Reliance Industries is looking at renewable energy, and even at Hydrogen energy. The Adanis are also investing on the value chain. Will big conglomerates investing in the value chain be a game changer for the country?
The focus of the likes of Reliance, Tatas and Adani in this sector is welcome as they bring the right size, scale and technology and help evolve right economic models. If power is lowest cost, abundantly available, and reliable in India, we stand a great chance of producing industrially and commercially viable solutions for hydrogen and script the next chapter of the green revolution in this country, if not for the world.

Are more companies looking at SPAC like ReNew Power?
We await a successful completion of the listing of RMG – ReNew Power SPAC. That will give us great insights post listing on investor behaviour. There are two offshore listed companies now – ReNew Power and Azure Power – which in some ways establishes the fact that Indian players can have listings abroad as a direct listing or by way of the SPAC. That’s an avenue which companies would explore, even in the domestic market which has historically shied away from supporting power sector companies, may get interest back especially depending upon how these two companies perform. One product that we were hopeful about but is still not stacking up is InvIT; had that picked up, there would have been a flurry of capital market activity domestically. It still hasn’t picked up because there is no natural growth of revenues in the projects and cost of debt still remains high. Domestic IPO market has been challenging for these companies. So it will remain a merger and acquisition dominated place.

You have been involved with four deals, all those involved big portfolios. Are there any more big portfolios in the pipeline? What is the deal pipeline looking like?
India has a scarcity of high-quality, mid-sized portfolios in India. A lot of consolidation has already happened, and a certain amount of consolidation will continue to happen. But it’s not like we are spoiled for choices where there are 10 players who would be consolidating. What will happen is that more capital will come into the existing players. There would also be some capital recycling; companies with mature portfolios can carve out a certain section of their portfolio and offload it to private investors. Large players would also do it for capital optimization.

What can go wrong now? What are the red flags?
One of the things that promoters of green assets talk about in terms of risk is challenges on execution – acquiring land has increasingly become difficult. Also, the contracts are getting more complex. A contract having “round the clock supply” of renewable energy is not everyone’s cup of tea; people will have to re-model themselves. The other risk is India’s ability to raise dollar bonds because the investments we need cannot come only from the domestic market.

https://cfo.economictimes.indiatimes.com/news/boas-green-energy-banker-sees-ma-continuing-in-india-driven-by-cost-scale-economics/85025378