Checklist: What foreign investors must know about investing in India′s solar sector

Checklist: What foreign investors must know about investing in India′s solar sector

SunEdison, one of the world's largest solar power giants, hit the headlines recently as it filed for bankruptcy protection in the US. The Indian arm of the firm, however, remains determined to keep its nearly 1.7 GW projects going. Here its managing director analyses some dos and don'ts for industry players. India is expected to be among top four markets globally in solar installs over the next five years, largely driven by the mission level push of the central government with a vision of deploying 100 GW of solar by 2022. Under the leadership of power minister Piyush Goyal, 6950 MW of solar capacity has already been bid out in the last two years and the installed capacity stands at 6762 MW as of March 2016. Combined with a steep decline in solar PV capex over the last two years to less than 0.9 $/Wp installed (for utility scale plants) and resulting drop in solar electricity tariffs to 7 $cents/Kwh, growth in solar installations is only going to accelerate further. As a result, the solar power generation in India has already attracted many foreign developers, and investors and several more are evaluating investing in the sector. Hence as the title suggests, this article attempts to provide guidance to foreign investors looking at solar in India. Note that this is not meant to be exhaustive, but rather highlights a few key areas that should be kept in mind by a foreign investor looking at Indian solar market.

  1. Understand that India is not a single homogenous market: While the power sector is essentially governed by the Electricity Act 2003, both central and State governments have a say in the formulation of specific policies and regulation concerned with electric power generation, transmission and distribution. As a result, every state has its own set of regulations, demand supply dynamics, and tariff regimes that define the power sector within the state. The financial health of state discoms also varies widely, and political considerations impact progress of renewable generation within a state. Hence it is important to develop a nuanced view of the Indian market while formulating overall strategy.
  2. Invest for the long haul: A minimum 10-year view (and preferably longer) needs to be taken by investors eyeing the Indian solar market. The model of developing projects and selling either pre-construction or immediately post construction is untenable for the Indian market because of equity holding restrictions, and because the government as well as lenders frown on a “develop and flip” model. Besides developing, financing, executing and managing high quality solar projects in India, that meet or exceed threshold returns is almost impossible without a strong local team that can successfully navigate the complexities of the Indian power sector. Finally, patience is a virtue, and it is important to be prepared for extended periods of time of subdued activity resulting from political and market dynamics.
  3. Think through capital structure carefully: Having a clear perspective on capital structure based on eventual exit/monetisation strategy for the invested capital is critical to ensuring that the return on invested capital stays true to the original investment thesis. Returns are already stretched due to competitive tariff bidding, so any inefficiency (eg: transaction costs, capital gains etc) resulting from having to re-structure at a later point in time for an eventual exit has the potential to diminish eventual realised returns. It pays to get the top tier law firms and tax/accounting firms!
  4. Invest in an experienced and grounded local leadership team: Power project development, execution and management in India is complex and is not for the faint hearted. In addition to heterogeneity of the market and the complexity of regulation, land aggregation, acquisition and permitting is difficult with land laws varying across states. Additionally, most solar project sites tend to be located in rural areas with their own socio-economic and political dynamics that need to be navigated carefully. An experienced leadership team that understands these elements and has experience dealing with these complexities is essential to ensure success. By “grounded”, I mean that the key leaders should not hesitate to roll up their sleeves and get their hands dirty to debottleneck problems on the ground.
  5. Pro-actively engage with key government & regulatory stakeholders: Electricity is a concurrent subject i.e. both central government and state governments are involved in formulating and enforcing regulation. CERC (Central Electricity Regulatory Commission), the central regulator, is a guideline formulating body, and the SERCs (State Electricity Regulatory Commissions), are responsible for drafting state specific regulations and implementing/enforcing them. As a result, it is important to build capability to not just track regulatory developments at the centre as well as state, but also actively engage with key government and regulatory stakeholders. Government & regulatory affairs needs to be a critical function ideally driven directly by the local leadership.
  6. Fully leverage the local execution eco-system: Many renewable energy investors tend to have global relationships with vendors and EPC providers and it is natural to try and leverage these relationships to execute projects in India. However, it may well benefit the investor to work with Indian vendors and EPC providers, as the local solar PV execution eco-system of suppliers, PMC (Project Management Consultants), EPCs is now well developed in the country. In fact India now has the distinction of building solar projects at the lowest capex in the world. It is true that panels largely continue to be imported from China but there are a number of good quality local panel vendors as well. Single axis trackers are also now available in India and several top tier invertor suppliers have also started production in India. And local EPC companies have experience of delivering good quality projects on time. Hence thinking local would be beneficial. Besides it can also help you score a few brownie points with the government that is eager to support “Make in India”!
  7. Build a strong compliance function: If you intend to be a long term investor in Solar Power, it is inevitable that the local team will have to deal with management of multiple legal entities, since solar projects tend to be built under separate SPVs. Eg: One large developer present in the country for many years now has over 150 legal entities that are being managed by the local team. Given the complexity of Indian tax, labour, companies act and foreign investment regulations, managing all compliances across numerous entities is an incredibly challenging task. Hence investing in a strong team to handle compliances can prevent many headaches later.
The solar sector in India has just crossed an inflection point and is expected to grow rapidly in the near future. Foreign investment will be crucial to help power this growth and I hope the above-mentioned key areas serve as a useful ready reckoner to all foreign investors looking at investing in India.
Rahul Sankhe is a veteran in the Indian solar industry, with vast experience in this sector, from providing inputs for the National Solar Mission Policy formulation to setting up and running Indian Operations of SunEdison. He has also worked with McKinsey and in the Silicon Valley during the tech boom of 1990s.

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