When the current Indian prime minister, Narendra Modi, came to power in 2014 he pledged that India would achieve a total of 175 gigawatts (GW) of renewable energy by 2022.
With 110 GW installed on under construction today, from just 35 GW in 2014, they are well on their way to achieving and even exceeding that target, according to data from the Ministry of New and Renewable Energy.
The capital fuelling this boom is coming from both domestic and foreign investors, with the likes of GIC, Goldman Sachs and the Canadian Pension Plan Investment Board among those that have already taken part in funding rounds totalling billions of dollars.
“India is possibly the leading foreign [investment] destination right now for renewable energy,” Sumant Sinha, chairman and managing director of ReNew Power, one of India’s leading renewable power groups, told FinanceAsia.
The figures back up his claims.
Between 2012 and September 2017, the 10-largest investments in renewable energy startups in India topped $1.7 billion, according to data from CB Insights. Leading the way is ReNew Power, with $942 million in disclosed equity funding since its first round in the third quarter of 2011.
Sinha believes that this large influx of foreign investors is down to two core factors – a transparent auction process to allocate capacity and the current fragmented state of the market.
And global investors appear to be keen to back these claims. La Caisse de dépôt et placement du Québec (CDPQ), a long-term institutional investor, boosted its investment in Azure Power, a leading solar player in October to $240 million for a 40% stake.
“Azure Power is a leader in the fast-growing sector of solar power in India, a priority market for CDPQ,” Emmanuel Jaclot, Executive Vice-President, Infrastructure for CDPQ said in a statement confirming the investment.
CAUSE FOR OPTIMISM
The government introduced competitive auctions to allocate capacity in 2015, creating a level and transparent playing field for power producers.
“This means that nobody has any extra ability to capture capacity, there is no way to cheat the system as it is fully transparent. So, typically, most of the auctions are for 1000 megawatts (MW) and are oversubscribed by two to three times for the first round of bidding,” Sinha said.
All the participants can see all the bids being made during the auction (but not by name) and bidding continues down as participants drop out until the capacity is allocated to the (lowest) winning bid.
“This transparency is very important for us and our investors, as if there is a change of government for example, then we cannot be accused of any hanky-panky, which used to be the case,” Sinha said.
The second core factor, according to Sinha, are the opportunities that such a fragmented market offers for investors.
As one of the largest players in the market, ReNew Power provides about 1% of the total electricity production in India, but only around 9% of the total in renewables, according to Sinha.
So there are many smaller players currently in the market and Sinha thinks the reason for this is simple.
“Getting capital for a new project as a new entrant is easy right now. The entry barriers are low and you are starting from scratch financially, so to speak,” he said.
But getting the capital for the second, or third projects is where Sinha believes many of these new entrants may fail.
"To build a sustainable business, you have to prove to investors that you have a financially sustainable business,” Sinha explained.
“So if you have overextended yourself in your first project, getting finance for future projects will be that much harder. This is where established players, such as ourselves, see the opportunity to acquire the assets after construction, and take out the risks involved during the construction phase,” Sinha said.
To be sure it is still relatively early days in India’s renewable energy sector.
But as the costs of production fall as technology improves, especially in solar power, the opportunities for investors to partner with established players as the market consolidates is one Sinha believes will drive future investment.
ReNew Power has already dipped its toes into the market, acquiring Ostro Energy Private in April for around $1.5 billion, partly funded by the Canadian Pension Plan Investment Board's $247 million investment in ReNew in April.
“As the market consolidates, opportunities to take over existing assets will increase and add value to existing players,” Sinha said.
And where there are opportunities, capital will flow.