Renewable energy as catalyst for capital markets atmanirbharta

Covid-19 triggered a months-long nationwide lockdown in India that put the brakes on economic activity. A calibrated unlock is presently underway, but all signs point to a long haul ahead. It’s no surprise that electricity demand also suffered sharply. Power demand had already begun softening in 2019, and the lockdown only made a tough situation worse.

One could, therefore, be forgiven for presuming that capital deployment towards the power sector would be a fairly low priority in the wake of the lockdown. The reality, however, is more nuanced. Economic disruption has brought to the surface an already simmering de-coupling of renewable energy (RE – solar and wind primarily) from other generation sources, which is manifesting on multiple fronts now.

Take power generation to start with. In the weeks following the lockdown, aggregate nationwide power generation slumped sharply, with coal-fired generation hit particularly hard. In contrast, RE supply was far less disrupted. RE’s minimal operational and maintenance complexity, and its capacity to continue producing electricity in the face of severe manpower and supply chain disruptions, are among its many strengths. 

Policymakers have also stepped up their efforts to increase RE deployment following the lockdown. RE’s must-run status was reinforced on multiple occasions. Previously scheduled auctions to award RE capacity took place. Tenders for new capacity were also floated. That these were undertaken at all in the face of such a steep fall in overall demand is remarkable.

How did developers respond to the situation? Heightened risk aversion best describes post-lockdown sentiment across industries but RE developers went against this trend. An auction for 2 GW of solar capacity was held by a first-time tenderer, and a first-time bidder was among the winners.¹ India’s first auction for a round-the-clock RE energy tender returned prices competitive with firm supply from conventional sources.² Although the power generated from this tender will fall short of representing true firm supply, firm RE power is the way forward in the future. In yet another instance, a manufacturing-linked pre-COVID generation commitment was voluntarily upsized from 2 GW to 8 GW, making it the world’s largest single solar capacity award.³ Most impressively, a new record low solar tariff was also set in an auction held during such trying circumstances.⁴

Investors too began to turn their attention to the shares of RE developers at a time of plummeting global stock markets in the weeks and months immediately following lockdown.⁵ This despite the fact that shareholders are last in line in terms of claims over RE developer cash flows. These investors chose to vote with their wallets, bid up RE developer share prices, and accept lower-earning yields, all because they sense immense future growth. This vote of confidence by global capital was probably not far from the thoughts of developers in India as they persisted with incremental capital deployment commitments in the face of unprecedented uncertainty.

RE has demonstrated its resilience as a generation source. Developers have continued to bid for RE capacity despite demand-side shocks. Investors have spoken with their wallets. It’s the turn of policymakers now. How they build on the gains made by the ongoing de-coupling will determine if India can successfully put itself on the ambitious 16 percent compounded annual growth rate path required to take RE from 86 GW today to 450 GW by 2030.

Achieving 450 GW of RE generation will require several hundreds of billions of dollars in debt capital. That’s not even counting the accompanying investments in storage and transmission. Given the scale of the requirement, foreign debt capital should always be welcome. But this shouldn’t mean that alternative domestic sources are left unexplored.

Indian investors have been stuck between a rock and a hard place in terms of choice for too long. Fixed deposits offer meagre returns, partly because they are hostage to banking sector inefficiencies. Relatively high non-performing asset (NPA) levels have left little room for banks to offer attractive interest rates to depositors. At the other end of the spectrum, equity markets come with their own set of risks as we have seen in recent months. The domestic bond market, which should ideally offer a balance between the two extremes, has a size limitation.

A policy intervention that opens up the domestic bond market to RE is thus the need of the hour. It will go a long way in addressing the demand-side restrictions and supply-side constraints, which have equally hampered bond market development. CEEW estimates that an annual subsidy equivalent to just 4 per cent of the 2020–21 budget outlay for power and RE is capable of mobilising bond market flows of INR 76,000 crore (USD 10.85 billion) over five years. This is a sufficient quantum of capital to debt finance a doubling of solar capacity over its operative window. Most importantly, it represents an impressive 16.7x cost–impact economics. Let RE be the catalyst that cost-effectively spurs domestic debt capital markets to scale new heights, in the process also allowing RE to wean itself away from excessive dependency on foreign capital. Atmanirbharta, or self-reliance, after all need not be restricted to manufacturing alone.