Guaranteeing India’s renewable energy ambitions

Jump-starting an economy that has stalled due to a several month-long lockdown requires injection of liquidity at scale. In this context, non-banking financial companies (NBFC) may be viewed as conduits capable of delivering liquidity quickly to those who need it the most.

Among the liquidity support measures announced by the Government of India (GoI) on 13 May 2020 was an INR 45,000 crore (USD 6 billion) Partial Credit Guarantee (PCG) Scheme¹. Under the scheme, the GoI guarantees the first 20 per cent of losses resulting from capital injections into eligible NBFCs. The newly announced PCG scheme will supplement the INR 1 lakh crore (USD 13 billion) PCG scheme announced last year². The 2019 scheme aimed to encourage the acquisition of NBFC loan portfolios by public sector banks by extending a 10 per cent first loss guarantee on the purchase.

How are interventions designed to support NBFCs relevant to renewable energy (RE; solar and wind primarily)? As it turns out, NBFCs share some interesting parallels with RE development holding companies (holdcos), and a government guarantee designed to provide liquidity support to NBFCs can also be tailored to impactfully mobilise capital flows towards RE.

Take capital stack similarities for instance. A term used to describe the liabilities side of balance sheets, RE holdco and NBFC capital stacks can often look similar. This should not come as a surprise. Both are fundamentally in the business of deploying capital towards yield-generating assets: long-duration investments in power plants in the case of the former, and short to medium maturity loan portfolios in the case of the latter. In fact, holdcos of other types of infrastructure may share capital stack similarities with NBFCs as well. What sets RE apart is the scale of the GoI’s clearly articulated ambitions.

The GoI’s stated goal of achieving 450 GW of RE generating capacity by 2030 sets the quantum of capital required, and the pace at which it needs to be mobilised, apart from any other kind of infrastructure. If anything, Covid-19 only appears to have strengthened the GoI’s resolve to de-carbonise India’s power sector. As a result, just as the economy needs lots of liquidity, and quickly, to recover from a Covid-19 induced stall, RE too needs lots of capital, and quickly, even if the growth path to 450 GW were to be somewhat moderated. 

So how can credit support from the GoI facilitate the mobilisation of capital towards RE? Like most other infrastructure, RE capacity is also majority project debt financed at the time of construction. If the accompanying investments in storage and transmission are taken into account, achieving 450 GW of generating capacity may well require several hundreds of billions of dollars worth of incremental project debt. Viewed in this context, project debt finance for RE in India appears to be caught in a three-way circularity.

First, banks and NBFCs, as the principal sources of power sector project debt, do not have the headroom to supply the staggering incremental quantum required by themselves. Second, the domestic bond market is not yet open to refinance of RE project debt. This is because existing RE project loans remain insufficiently rated to access the bond market on a standalone basis. Third, while credit support is available on a commercial basis, the all-in pricing makes credit-enhanced bond market refinancing of RE project debt unattractive to the issuer.

It is in this context that liquidity support measures for NBFCs show a way forward for RE. Under the PCG scheme, the GoI is effectively subsidising investors to encourage them to extend liquidity to NBFCs. The subsidy takes the form of a percentage loss that the GoI is prepared to guarantee at no cost to the investor. An intervention along similar lines can be instrumental in solving the RE project debt circularity as well. In the case of RE, we suggest an approach that subsidises the cost of bridging the gap between where RE project loans are rated today, and where they need to be rated in order to access the bond market.

CEEW-CEF estimates that GoI support extended in the above manner can facilitate the mobilisation of bond market flows of up to INR 76,000 crore (USD 10 billion) over a five-year period. Restricting the end use of bond proceeds to refinance of in-place project debt would ensure that capital thus raised flows back to banks and NBFCs. This would, in turn, allow banks and NBFCs to extend new project debt capable of funding a doubling of India’s 32 GW³ of installed ground-mounted solar capacity without stretching their balance sheets. The subsidy’s cost-impact dynamics are also compelling. Its average annual cost of INR 911 crore (USD 121 million) equates to just 4 per cent of GoI’s INR 22,000 crore (USD 3 billion) budgetary outlay for power and RE in 2020–21⁴.

Stimulus packages have been announced for a range of industries in response to the Covid-19 pandemic. Interventions that keep RE ambitions on track are also much needed. Liquidity support measures that have been announced for NBFCs represent an apt template for RE, and a refinement to that template may be all that is required to set India firmly on the path of achieving its 450 GW ambitions.