By Angus McCrone,

Chief Editor,

Bloomberg NEF

There is a paradox when it comes to India and its renewable energy sector. On the one hand, the country has impressive successes to point to – our analysts expect India to install 2.9GW of onshore wind this year, and as much as 10.8GW of PV, confirming it as the world’s second-biggest solar market after China.

It has also been running a fiercely competitive renewables auction program, resulting in some of the lowest electricity tariffs seen anywhere. In Gujarat last month, for instance, bidders won 500MW of PV capacity at tariffs equivalent to $33 per MWh, without any index linking.

However, judging from the country’s flagship renewable energy event, RE-Invest 2018, held in Delhi this month, there is anxiety as well as optimism among India’s investors, developers and manufacturers.

For investors, there is the worry that the auctions are just too cut-throat and that some of the projects awarded may prove not to be sustainable financially. Michael Eckhart, global head of environmental finance at Citigroup, said: “The fear is that we are creating a wave of project bankruptcies and refinancings over the next five years.”

In the same session, Shri Chinmoy Gangopadhyay, director of projects for Power Finance Corporation, said: “We are trying to look at solar energy projects from the angle of their long-term viability. As there are very little entry barriers in the solar business, so everyone has entered and promoters try to move out in a few years. This sometimes creates difficulty in assessing the viability of projects.

“There are also issues with regard to the quality of solar panels. There is no benchmark to assess the quality of solar panels. Suppliers who are tier one today, fall out of that position later and there is difficulty in ascertaining quality,” Gangopadhyay added.

For manufacturers, the concern is that competition has cut their margins to the bone, if not into the bone – in wind, this has been compounded by the scaling-back of policy support – and this will make it hard for home-grown suppliers to survive against larger overseas competitors.

There are also worries about the electricity distribution companies, or “discoms”. They carry out a vital role as offtaker for power generated by wind and solar projects, but many of them have been in financial difficulties, raising a question mark about the security of revenues for developers. To some extent, that concern has been alleviated recently with the so-called UDAY program, which aims at restructuring their debts. But it has not gone away entirely.

Rohit Khanna, program manager of the energy sector management assistance program at the World Bank, told the conference that the credit-worthiness of the utility offtaker was the biggest concern for his organization when investing in renewables around the world.

There is also a view that the discoms are not yet offering the same sort of support to corporate power purchase agreements, or PPAs, as utilities do in Europe. Corporate PPAs are growing in popularity as a way for companies to lock in low power prices, and for renewable generators to secure revenues. However, someone (generally a utility) needs to offer services such as balancing so that the customer gets constant power, and the discoms have been lukewarm about doing this.

For international investors, one of the biggest concerns is over currency exposure. Renewable energy project tariffs are denominated in rupees, not dollars, and the Indian currency tends to be highly volatile. In the last year, it has slid from 65 to the dollar, to 74. Lenders may be able to hedge currency risk for a short period, but such hedges are either not available or are prohibitively expensive for longer durations.

Measures to address some of these issues were put forward by speakers at RE-Invest. One idea was a new test on the debt service coverage ratio of projects being bid at auction, to try to minimize the risk of bankruptcy. The suggestion was that no bids should be accepted with a DSCR of less than 1.5.

Another was that India should adopt index-linking in its auctions. In most other countries, electricity tariffs agreed at auction are automatically raised with inflation each year – providing protection for the revenues of projects and also creating an attractive asset for institutional investors.

Kuljit Singh Popli, chairman of the Indian Renewable Energy Development Agency, or Ireda, which is influential in policy-making circles, welcomed the ideas. He told the conference that the financial structure of auction bids is already subject to scrutiny, and that some of the risks “would always remain”.

Amid the concerns, there is undoubtedly a sense of momentum. Prime Minister Narendra Modi was there to open the RE-Invest event just outside Delhi, pledging to widen the membership of the International Solar Alliance, which is touted as an OPEC for meeting the world’s future energy needs.

And Bruce Hogg, head of power and renewables at Canada Pension Plan Investment Board, one of that country’s largest long-term investors, told the conference that his group was “attracted by the sheer scale” of the clean energy sector in India.