Clean Energy Investment Trends 2020

Key Findings

• Utility-scale solar PV and onshore wind projects continue to be highly leveraged, with average debt-to-equity shares of around 75:25 (Figure 1). Lenders were also willing to lend for long tenures, of 16-18 years, at interest rates of around 10-11% (Figure 2). Where perceived risks were higher, so were interest rates; up to 50 basis points higher as compared to projects with the most creditworthy off-takers, controlling for other factors (Table 1).

• Solar PV EIRR expectations stood at around 15% on a weighted average basis over the course of 2019 and the first half of 2020. These edged up from 14% in the first half of 2019, to 16-17% over the second half of the year through mid-2020 (Figure 3). This rise likely stems from policy and market uncertainty over potential contract renegotiation and the imposition or extension of duties on solar PV imports, later reinforced by supply chain uncertainties caused by Covid-19 and delays to power purchase agreement signings in 2020.

• While EIRR expectations for central off-takers and Gujarat discoms were at par, in states where the off-taker utility presented a higher credit risk, required returns were assessed to be nearly 80-200 basis points higher in 2019 (Table 2). Higher spreads were observed for projects between centre and state off-takers in early 2020, perhaps reflecting higher risk aversion among investors as a result of the disruption caused by Covid-19 and other ongoing policy and market developments.

• Lower EIRR expectations are also associated with projects with better access to land and timely grid connections. EIRR expectations for projects to be set up on solar park sites (which provide developers with ready land and evacuation infrastructure) were 20-260 basis points lower as compared to those for projects where the developer made arrangements for land (Table 3).

• Limited tendering activity for wind power in 2019 precluded a comprehensive examination of equity returns in that sector. Projects analysed corresponded to those with more creditworthy off-takers (central agencies and Gujarat discoms) and estimated EIRR expectations averaged around 13 per cent (Figure 4). These were comparable to solar EIRR expectations for the same category of off-takers over the same time period. Moreover, the need to abide by tender-specific tariff caps in the face of rising equipment costs in 2019 due to limited supplier options could also have capped EIRR expectations.

• An evolving level of competition within tenders has been an important determinant of equity return expectations.
  Several recent tenders have been characterised by lower competition, in terms of the amount of capacity bid compared to that tendered, likely as a result of prevailing policy, regulatory, and market uncertainty. These tenders have been associated with higher expected returns by investors (Figure 5).

• While the top 10 solar PV developers (in terms of sanctioning capacity) have changed from one year to another over the 2015-2018 period, in 2019, this trend reversed—seven out of the top 10 solar PV developers in 2019 were the same as those in 2018 (Figure 8).

• For wind, there has been a greater amount of churn among developers, perhaps indicative of waning interest to invest in wind capacity amid the heightened execution risks (Figure 8).

• The timely availability of suitable sites for setting up renewable energy projects is emerging as an additional challenge for both solar PV and wind projects.
• Land-related constraints have slowed the development of solar parks, with the share of new solar PV capacity sanctioned in solar parks down to less than 10% in 2019 from over half in 2017 (Figure 9). In addition, challenges with land availability in wind-resource rich states have delayed wind project development and brought new tendering to a standstill, particularly in the wake of changes in land policies in Gujarat.

• Payment delays and volume risk* represent key downside risks that, if realised, can significantly undermine returns.
  Given the competitive nature of India’s renewable auctions, developers generally do not factor in these risks in their bids and underlying financial models. Yet, small negative variations in both factors can create considerable deviations between realised and expected returns – as illustrated in the trajectory of realised EIRR for the median expected solar EIRR over 2019 and the first half of 2020 (Figures 10 and 11).