ROD MORRISON, EDITOR, PROJECT FINANCE INTERNATIONAL:
What are the optimum financing solutions for Indian clean energy in this rising interest rate environment?
Jean Monson: For context, renewables as a sector is a success story in India and that success has been achieved in three ways.
One is cost. It must be as cheap as possible and that’s achieved with targets and a plan of how to get there. It must be done efficiently, and you must show progress against targets. Finally, you must make a lot of it for the energy transition to succeed.
So, in three of these points, India has been extremely successful.
India currently produces the cheapest solar PV in the world at US$30 per megawatt hour (Mwh). This is a tenth of the price a decade ago when it was US$300/Mwh. Indeed, solar tariffs hit an all-time low of US$1.99/Mwh in December 2020. In terms of cost, we are there. You can’t ignore it - it’s just the cheapest form of power right now.
In terms of targets, India has raised its hand to say it will establish 500 gigawatts (GW) of renewable energy capacity by 2030 and outlined its net-zero-by-2070 commitments at COP26. It’s on track to achieve it as well. The amount of installed renewable capacity as of April, was 165 GW.
Ten years ago, India was producing less than 1 GW of solar power, and today it is at 60 GWs. Solar power generation has increased at a phenomenal pace, which illustrates the execution track record of the past few years.
The third element is ‘repeat’: continuing to produce renewables as cheaply as possible, driving the economies-of-scale down even further, and building more of it so that the rest of industry can be electrified – even the hard-to-abate sectors: heavy industry, steel, cement, etc.
We need to increase the pace of renewable power generation.
In terms of financing, the markets have been awash with cheap and available debt in recent years. Between 2019 and 2021, bond markets were flying. Similarly, on the bank side, the number of green-field financings we did in the solar and wind sector were also at record numbers. If it weren’t for covid, you would have seen a lot more of me in India.
But now, the picture has changed completely because of the macroeconomic environment and geopolitical events - the Ukraine-Russia war is causing a lot of volatility and there are rising interest rates. The Fed is hiking rates and RBI has done two increases to catch up.
We’re now seeing a cyclical reset in rates, which in many ways is a natural consequence of the prolonged period of quantitative easing brought about by extremely low interest rates. The renewables sector has greatly benefited from the low-rate environment, but now it’s starting to change.
The good news is that margins are stable, thanks to increased competition from new money coming into renewables. Nevertheless, because of the rise in interest rates, hedging costs are exorbitant. The spike in interest rates is really causing a delta between external commercial borrowing (ECB) and domestic rupee financing.
In the past, a typical playbook between the two forms of financings has been a 5-to-7-year mini-perm, which ECB lenders like, structured on a 20-year notional debt sizing. That gets taken up in the capital markets as the project becomes operational.
For lenders such as SBI, 15- to 20-year rupee financing is more the model.
Now, because of the changing interest rate environment, we’re seeing a convergence of the onshore and offshore curves which makes it competitive for lenders, such as myself, to quote rupee facilities in a mini-perm format without the hedging costs.
If you still prefer to go for 5-to-7-year mini-perms on an ECB basis, then it’s expensive to get long-tenor hedges. Banks understand that and have started to move away from demanding a full tenor hedge. That’s something very new. Banks are seeing hedging periods shorten and go on a rolling basis.
There’s a lot of unique and creative financing structures coming into the market.
One thing to bear in mind in relation to ramping up the scale of renewable energy building is that we can’t do it on a single wind farm or solar plant financing basis. We’re having to club projects together. We’re seeing our projects being increasingly clubbed together and financed on a pooled basis. This allows for greater efficiency, but it also allows for projects to get refinanced as they reach completion. This creates a bit of a churn of capital, which allows banks to recycle their balance sheets. It’s more efficient.
Rod Morrison: How does a bank get comfortable with shorter hedges?
Jean Monson: There are different structures, but it also depends on the financing package. Prior to the appearance of shorter hedging periods, the norm was to have a full tenor hedge, door-to-door, or maybe an 80% hedge. And against that you might have certain protective measures around the structure to ensure there was cash in the system – perhaps no distribution, higher lockups, prior to the time of refinancing you need to have reserve cash, or you need to come up with a re-hedging plan. Things like that.
So, there are certain tools and mitigants. But one of the biggest triggers for banks getting comfortable with shorter hedges is the concept of green-field projects moving from a bank finance capital basis, to being recycled into the capital markets when they’re operational, on a take-out basis. If you blend the two into a single structure such that there is a hard obligation for the project to enter the capital markets, then that gives us comfort that there will be some form of refinancing.
Rod Morrison: Anita?
Anita Karnik: Over the last five to seven years, the whole market has moved towards renewables, and we have moved with it.
There’s been a lot of innovation in financing over the last two to three years and one of those areas is channelling multilateral funds. You have commercial lenders, you have bond markets, and you have a lot of other market participants, but it’s important that we provide the best concessional rates to these projects to make them more viable. This is something that can be done by channelling multilateral funds and something we have successfully managed to do over the last few years.
Renewable energy projects usually require long term financing at affordable rates, given the long project life and typical power purchase agreements. This is even more important for projects having newer and relatively expensive technologies (like hybrid/storage-based projects) – as it helps in the overall project viability. This is where long term, concessional multilateral funds can make a significant impact.
Particularly when channelled through a local lender, such long-term funds could help insulate a project against short term refinance risk – which is critical in an increasing interest rate scenario. Access to multilateral funds and the associated requisite adherence to a higher level of quality and environmental standards has also got the potential to increase awareness of and improve the commonly followed practices.
There’s more willingness by corporates, by the larger players, to reach globally acceptable standards for the environmental as well as the technical aspects of a project. This was not there a few years ago.
With increasing ESG awareness, borrowers are more interested in raising standards and branding themselves as sustainable. This has been a good development for the overall market.
Now we are mostly financing solar and wind projects, but we will also be doing this for other areas in the future, such as hybrid projects, or maybe electric vehicle financing. A whole host of projects under the broader umbrella of ESG.
One other popular structure is where borrowers have tried to use non-fund-based limits to cover the first two to three years of a project and then refinance it in the capital markets or in rupees or various other options. This allows you to keep costs low and helps the internal rate of return (IRR).
You can have capex letters of credit (LC) or buyer’s
credit to keep costs low before you decide whether you want to go for long-term rupee financing or go to the
bond market or use any kind of refinancing tool. It gives you some breathing space to decide what tool you would like to go for.
The larger players that tend to win the utility scale bids, have a lot of financing options available to them and, as the market has developed, we’ve seen bid tariffs coming down year after year. And, of course, the utility scale projects function as a benchmark for other players who are, maybe, one step smaller. Financing at the scale end of the market gives a signal as to where the overall market is heading and what kind of financing structures can be accessed. We are trying to develop broad-based structures that can be accessed by all the larger players as well as the slightly smaller players.
Rod Morrison: Which multinationals are you talking to?
Anita Karnik: We have worked extensively with the World Bank, the European Investment Bank, the German Development Bank, KfW as well as others. We are in discussion with many DFIs since everybody’s interested in supporting climate mitigation or adaptation projects.
India is a focal point for all of them - they have seen the kind of targets we have and the kind of market potential there is. With that being the case, it is difficult for anyone to really ignore India in terms of financing opportunities.
It’s a win-win. It’s great for project developers and it’s great for lenders to have more financing options available to them. It allows the market to spread out in different ways. Three or four years ago, we were looking at plain vanilla solar or wind financing but today we are looking at hybrids or round-the-clock (RTC) or peaking power projects.
Rod Morrison: What’s coming up in the next 12 months and how is the market responding to changes in the debt capital markets?
Anupam Misra: We entered the space earlier than most large Indian groups; we started in around 2015. Our first project was a very large one in Tamil Nadu and that gave us confidence that the industry had legs, that this technology is something for the future. It also resonated with what the Government of India asserts - that India would not be a follower when it comes to sustainability and that it would show the way forward to not just the developing world but the developed world as well.
The government’s message is that it is not just the responsibility of the government or the social sector or the corporate sector to go down the renewables path, but every citizen is responsible. Everyone must take steps to reduce their carbon footprint. That is the only way we can go from where we are today to achieve the 1.5-degree scenario. And it is in that context that we set out on our renewable power strategy, which for us is a theme centred on the decarbonisation of power generation.
Adani Green today is a leader in this space. It’s soon to become the largest renewable energy player in the world and we’ve set ourselves a target to produce 25 GW by 2025 and around 45 GW by 2030. Currently we are building solar, wind and solar/wind hybrid projects. We’ve established that these can be set up on a large scale, that they can be financed at scale at the construction stage, as well as being refinanced at scale.
All the financial products available to any global player, any global utility, are also available to Indian developers. There are a few nuances around Reserve Bank of India (RBI) requirements, but structures have evolved such that financing is available. If you have a viable project, one in which you yourself are ready to commit 20% to 30% equity as part of project cost, then there is funding available from the capital markets, institutional investors, and the banking market.
There are five basic risks in renewable energy projects: construction risk; once the asset becomes operational there is counterparty risk; O&M (operation and maintenance) risk and then there are two risks which fall under EBIDTA - rate risk and refinance risk.
Our capital management plan in Adani Green is very, very simple.
Construction risk will be taken by the bank market and by select institutional investors. We are ready for that. We will reduce the construction time period, ensure that the time period is not so long that we compromise the underlying portfolio risk. But post that, when you look at anything that is post commissioning and stabilisation - and stabilisation for renewable projects is broadly around six months - for those projects, we look at the long-term capital markets.
We issued a small bond in October 2019 and that was important for the market because it was the first investment-grade bond from the renewables space. The bond’s 20-year amortising structure removed the rate risk since it paid a fixed rate of interest rather than floating. And there was no refinancing risk, because in 20 years you basically amortise around 70% to 80%, and the balance goes on the balanced PPA plus non-PPA period, which is where the market is evolving.
So, with that, we mitigate three risks. - Our construction risk mitigation focuses on building our projects within budgeted cost and time targets. while O&M de-risking is something on which Adani Green continues - through tech-enabled O&M focus.
We have taken a business plan and de-risked all the elements. Now we must replicate this strategy to achieve scale. Our next project will be five GW and we’ve now identified a site which can house a 20 GW project.
We share the same ambitions with the rest of the world - to build projects of size, but nobody’s putting it into plan as quickly as India.
Over the next 10 years, Adani Green has a US$20bn capital expenditure target. We also have another vertical that will look at decarbonisation. This will be decarbonisation of industrial and mobility where we plan
to invest another US$50bn, so that will be US$70bn in total for us.
And then we have other businesses: green infrastructure, transmission, ports, airports and datacentres. That brings total capex over the next 10 years to around US$100bn. About 95% of this is either green or green infrastructure capex.
One other element to our renewable power strategy is that we will develop end to end module manufacturing business in India. We will have something for wind turbine generators - that’s under construction, and we’ll also have something for electrolysers – that’s in the planning.
There are a few other groups in India also looking to do that, so that will build a manufacturing ecosystem in India. India will not only be a developer of renewable assets and a long-term holder of renewable assets, but it will also have the full end to end supply chain ecosystem, which means we won’t be exposed to the supply chain vagaries we saw last year.
The next stage is that the energy counterparty doesn’t necessarily have to be the government. You will see a lot of high-grade-rated corporates and other counterparties, other models of power purchase coming into play. A lot of our own businesses are looking at sourcing captive power, and that will be phase two of this evolution. That will turbo-charge growth.
We’re convinced that India will reach its target of 500 GW in renewable energy. In addition, there’ll be more GW built for hydrogen, so you’re talking about another 100 GW of renewable power from green hydrogen if the government is to hit its target of producing 5 million tonnes of green hydrogen.
Until now, the government has been supporting the market, but the corporate sector will start joining in. And the benefits are there for everybody to see. You’re getting access to premium pricing on your products if you are 100% sustainable on the back end.
Over the next 12 months, we are going to continue our plan at Adani Green, so we will be financing a few other projects. We’ll also execute the first take-out of projects that are financed by the banks. For that, we are targeting the US SEC-registered route, which will give us access to a larger financing market. We’ll be the first Indian corporate to do so.
In addition to that, we’ll continue to grow on our inorganic journey as well.
Rod Morrison: Given the turmoil in the international debt capital markets, how do you plan to sell the US bond?
Anupam Misra: In February this year, just before the Russia-Ukraine war, we started roadshows for a bond take-out for Mumbai Airport. Although we had feedback that we could have priced the transaction, we decided not to. Instead, we activated Plan B: the US Private Placement market. We got one US investor to write a check for US$750m and the transaction was completed in about three weeks. It shows that we have alternative options for whenever the capital markets get choppy.
Global capital markets never stay choppy for very long, however, and they are going to open up pretty soon. Pricing may be slightly wider, but when you’re building a large portfolio, you win some, and you lose some. You just have to continue to build. You can’t stop and try to time every transaction, because once you get into that mindset, you’ll probably not do anything.
If there is a slightly higher premium to be paid due to market volatility, then that’s something we are aware of but, as demonstrated this year, there are options.
Rod Morrison: Can you share anything with us on your proposed hydrogen project?
Anupam Misra: We’ve announced a joint venture with Total - Total will be a 25% partner in our green hydrogen effort. It’s going to be housed under Adani Enterprises, in an entity called Adani New Industries Limited. Our green hydrogen strategy is linked to India’s capability to generate the lowest cost renewable power. When you’re able to get cheap renewable power then you get cheap green hydrogen. And that can then be used for downstream industries.
Another aspect to our green hydrogen foray is absolute control on the supply chain. For that, it’s important to get into fully backward integrated manufacturing of modules. We will manufacture wind turbines ourselves; for example. The facility is already under construction.
As I mentioned earlier, we have identified US$50bn of capex over the next 8-10 years. That translates into around 2-1/2 to 3 million tons of green hydrogen.
If we talk about strategic imperatives for India, our green hydrogen plans cannot be more relevant. If India gets this right, it will go from being a net importer of energy and fertilisers to a net exporter. And with that comes unparalleled soft power.
The world needs a solution for overall energy and not just power generation. Green hydrogen holds promise, but the question is how quickly can we get down the curve so that it costs less than US$1 per kg?
We expect India to get there first.
Rod Morrison: Kailash. In terms of the ReNew Power story, how do you see the financing markets in the next 12 months?
Kailash Vaswani: As a company, we are at around 8 GW of total operational capacity, we have another 5 GW in the pipeline, and we have huge ambitions.
In terms of financing our ambitions, we can see that market conditions are changing rapidly.
There was a point in time where interest rates were relatively low and project returns were stable. But with increasing interest rates we have seen an impact on returns. Nevertheless, given the long-term nature of our projects, we hope that things will even out over time.
We are a large borrower, both in the Indian market and internationally in the dollar bond market and the dollar loan market. Liquidity is still there. We are in the process of closing the financing for two of our large projects and there’s great demand out there. In fact, there was so much interest in our RTC project that we were oversubscribed by almost two times on the dollar loan where we saw a lot of new banks looking to finance projects in India for the first time.
As far as the dollar bond market is concerned, we tapped it over a 15-month period between October 2020 to Jan 2022 to raise close to US$2bn. That market has shut for now and we don’t see it opening any time soon.
We have always focussed on expanding our lender base and diversifying into different markets. The last time the dollar bond market shut – during covid, the Indian banking system still had a lot of liquidity, and we were able to do a lot of financing and refinancing at home.
We were able to refinance a dollar bond with a rupee solution, much ahead of its maturity, so we announced a call on our US$500m bonds from 2019 and refinanced in fixed rate rupees. There still a lot of domestic liquidity and rates have still not caught up. My advice: whatever you can fix right now, do it.
That transaction completed last month, and bond holders were pleasantly surprised because, not only did they get their money back at a decent price, but they also got the call premium. With this sort of option available, it should ease the refinancing risk of the whole sector. The fear of what happens after five years when there’s a refinancing date was always a concern of bond investors. The fact that we did not refinance the dollar bond with another dollar bond convinced them that there are other financing pools available to take out some of these assets.
The company is also backward integrating into manufacturing. Given all the noise around commodity prices or module availability, we are trying to protect our supply chain. So, we have announced plans to get into module manufacturing and cell manufacturing. On green hydrogen, we also have large plans. We have a joint venture with L&T and IOCL.
Rod Morrison: Sajal, tell us about your view on the bond market.
Sajal Kishore: I think it’s no surprise that renewables have been a tremendous success story.
We have been rating all the renewable bonds from India since its inception. Before the pandemic you had four large renewable groups accessing the markets: Adani Green, ReNew, Azure, and Greenko. And post-pandemic in 2021, we saw a lot of new issuers coming into the market.
In terms of technologies or fuels that were hitting the market, it has been wind, solar, or the wind/solar combination. Then we started rating pure solar/wind hybrids and subsequently even hydro.
Investors have a good understanding of the key risks facing Indian renewables now. The key risk from Indian renewables largely remains counterparty risk. For the greenfield renewables, construction risk tends to have less of an impact on the eventual rating outcome given that technology is largely proven, and the scale, complexity and duration of completion risk assessment is also less complicated.
The benefit of having sovereign-linked transactions in rated renewable transactions, projects where SECI or NTPC are off-takers, provides debt investors a lot of comfort. However, there is less of a default risk issue overall for counterparty exposure – its largely a liquidity management issue.
One thing overhanging the sector was the Andhra Pradesh decision to renege on their power purchase agreements (PPA). That led to a protracted legal fight, but the outcome has been favourable and so that risk is also dissipating.
Fitch has seen a variety in financing or the debt structures on rated transactions. When we started rating these transactions, you were typically looking at three-year, maybe five-year maturities. Then there has been the Adani Green 20-year transaction in 2019, which was 74% amortising, and now you have transactions with tenures in between but more generally with 5 to 7 years maturity. So whilst these transactions are typically bullets with an element of refinancing risk, we increasingly see cash preservation measures or structures, like mandatory cash sweeps, forced cash sweeps, trigger points or government-counterparty linked cash sweeps, which have been put in place to mitigate some of the refinancing risks.
As Kailash mentioned, there appears to be domestic rupee funding available for upcoming USD bond maturities - investors will draw comfort from that there is an alternative avenue of funding available to alleviate that refinancing risk.
All these factors have been supporting renewable issuance over the past few years. While last year issuances were phenomenal, increasing interest rates and dislocation of global capital markets is proving to be significant challenge for issuances this year and that is leading to a slowdown in bond deals. Nevertheless, offshore renewable transactions have been typically for refinancing, so there is no pressing need to tap the offshore markets.
But equally, as Anupam mentioned, given that there is such a significant pipeline of renewables, most renewable groups will have to eventually access offshore markets and find alternative ways of structuring debt.
The Fitch-only rated Mumbai Airport transaction was a classic example. This was the second rated USPP transaction from India in recent times in which we were involved. Apollo, the single US private placement investor on the transaction, saw the long-term value in Indian airports and recognised Mumbai airport’s potential in the commercial capital of India and macroeconomic fundamentals supporting future growth.
There is an appetite for airport assets in Asia, given the low propensity to fly, a rising middle-class, and growing economies. There’s a lot of growth in these assets with demand from debt & equity investors, so we expect to see more of these types of private transactions in future.
Rod Morrison: Santosh, we’ve heard about the Andhra Pradesh case and the growth of the C&I (commercial and industrial) market. Could you give us some flavour on the development of the off-take market in India?
Santosh Janakiram: For a while, the C&I market was stuck with all sorts of regulatory and legal problems. but it will probably come into its own over the next 12 months.
The critical element here is counterparty risk, particularly from a financing point of view: who is going to buy the power and who is going to pay for it?
That continues to be a question that needs addressing, from a regulatory standpoint, from an open access point of view, in respect to accessing the transmission network, and from a utilisation perspective.
The pandemic is a good example of where the industry shut down for a period. And in those situations, what happens to open access when you don’t need to run factories and malls. All those questions need to be addressed before someone like Jean comes back with the finance. That is going to be an important focus.
The other aspect I’d like to mention is related to the domestic financing framework.
Anita spoke about the use of multilateral financing on a back-to-back basis but what’s been missing in India is a sensible regulatory outcome for Indian financial institutions to go into this market in a meaningful manner.
There is a Green Bonds Framework, the International Financial Services Centres Authority (IFSCA) has a framework, but the RBI has nothing. That is something the regulator is seeking to correct, and I think it’s going to be important to develop that as a theme over the coming months, given Kailash’s example of refinancing in the rupee market.
The proposed RBI framework, including a defined taxonomy, looks to identify regulatory benefits, be it a risk weighted or liquidity ratio related matter, which can be offered to banks or that they can ask the banks to pass on to customers, is going to be an important element.
The framework needs to talk about the transition from where we are today: grey, brown, whatever colour you want to call it, and moving into blue or green. The development of a transitional framework is something we will look out for over the next 12 months.
Rod Morrison: If the C&I customers go to Adani and ReNew, the distributing companies (DisComs) lose their best customers, is there a trade-off?
Santosh Janakiram: There is a trade-off. There’s a bit of a regulatory answer that is slightly longwinded, so bear with me. The draft regulations were intended to be protectionist for the DisComs but, despite that, the C&I market developed.
Now the government has a couple of other schemes in place that seek to alleviate some of the pain for DisComs, be it through long-term refinancing of payments that the DisComs need to make, be it through the fact that DisComs are now able to directly sell green power.
You’re not just talking about corporate developers being able to sell green power directly, but also the ability for DisComs to brand green power and sell it directly into the market. There is a mix-and-match approach where it’s recognised that the quantum of energy that needs to go into the marketplace is significantly more than anticipated. That’s led to distribution utilities and corporate developers of power jostling for position in the market. This tension will continue to exist and that will lead to some litigation. It is also the reason draft regulations will take time to come out. Ultimately, it’s not bad tension if it gets resolved in the right way.
Rod Morrison: Jean, we have heard a lot about the corporate PPA market. How exciting is this growing market?
Jean Monson: (At this point there was a power cut in hotel and the transcript ended)
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