ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailMenu BurgerPositive ArrowIcon PrintIcon SearchSite TitleTitle ChevronIcon Twitter

ReNew Power turns to solar as sector grows

On the roof of a ball bearing factory in the northern city of Manesar, a ReNew Power array generates 265KW of solar power (Courtesy: ReNew Power)

GURGAON, India -- After five years in the clean energy sector, India's ReNew Power Ventures is now taking the government's lead and turning its focus to solar power. Backed by Goldman Sachs, the company is hoping to double its business in the next year, boosted by growth in the highly competitive industry.

     Sumant Sinha, chairman and chief executive of ReNew, has built one of the largest renewable energy companies in India, focusing on harnessing wind energy. The government has now set a target of 175 gigawatts of renewable energy, or 15% of total capacity, by 2022. Of that, 100GW is expected to come from solar power, 65GW from wind and the rest from biomass and hydro.

     India currently has just 5GW of installed solar power and 24GW of wind. According to a 2015 report by the consultancy KPMG, solar will become a major energy source by 2025 and could be up to 10% cheaper than coal by 2020. KPMG estimated that solar power will provide 5.7% of India's energy needs by 2020 and 12.5% by 2025.

     "ReNew is one of the big players," said Kanika Chawla, junior research associate at the Council on Energy, Environment and Water (CEEW), a not-for-profit policy research institution in Delhi. "They were one of the first players to get private equity money as part of their equity and they've made it work. ReNew has grown pretty fast; it's expanding constantly and has recently won more bids that will push its growth further."

     Sinha was chief operating officer at Suzlon Energy, a wind turbine supplier, but left to start ReNew Power in late 2010. The first and largest investor in ReNew was Goldman Sachs, which came on board in 2011 with $200 million, since raised to $370 million. Other investors include the Abu Dhabi Investment Authority, the Asian Development Bank and the Global Environment Fund, bringing total investment in the company to $650 million.

     "Our play was broad-based renewable, not just wind," said Ankur Sahu, co-head of private equity in Asia at Goldman and a board director of ReNew.

     "Given its environmental impact, coupled with [the] cost of technology coming down and the government focus to promote renewables and the continued supply-demand gap in traditional energy... we believe that [the] renewable space continues to be attractive," Sahu said. "We want to keep bidding and keep going in a disciplined way."

     Goldman also helped to establish Japan Renewable Energy, a company set up to build large-scale solar and wind projects, in Tokyo in 2012.

     So far, ReNew has 1GW of installed renewable energy capacity, of which 850 megawatts is generated from 27 wind farms and the rest from four solar farms. In the current financial year, it expects to add another gigawatt of capacity, 850MW of which it hopes will come from solar.

     The company declined to disclose revenues but said that in general, these projects are cash-positive from the start. Once a company wins a bid, its tariff is set, along with the tenure of the project, providing a visible and predictable revenue stream.

     "The draw [to solar] was that there was a general sense that costs of solar were going down, that it was becoming a more viable energy source in the future," said Sinha. "So if we were a clean energy company, why would we be limiting ourselves to wind only? It made sense to look at solar."

Bids tighten

India's power sector needs to grow up to three times over the next 15 years and this fact alone has drawn a fair amount of interest from foreign investors, said Santosh Kamath, partner and head of renewable energy at KPMG in India.

ReNew Power’s solar plant in Sheopur in the central Indian state of Madhya Pradesh produces 50MW of power (Courtesy: ReNew Power)

     Foreign investors like the structure of these renewable projects and see few pitfalls if the solar panels work as they are meant to. However, Sabyasachi Mazumdar, senior vice president at research company ICRA India, said more foreign investors might have come in "if the tariffs weren't as aggressive as they have been."

     ICRA estimates that current capital costs are 60 million Indian rupees per MW. At that cost, a tariff of 4.80 to 4.90 rupees per kilowatt hour is required to turn a profit, according to Mazumdar. "If you go too much below that, then your returns get impacted," he said. "Last round, it dipped to below 4.50 rupees."

     Typically, Indian states invite producers to bid for the provision of solar plants and award contracts to those that seek the lowest tariffs. As a result, companies have been pushing bids down to win a foothold in the business. Last year, some bids went as low as 4.34 rupees per kWh.

     In wind energy, the states dictate the tariffs. Until about a couple of years ago, ReNew was focusing on the states of Maharashtra, Rajasthan and Madhya Pradesh. It dropped out of bids for the last state after the state government slashed tariffs from 5.92 rupees per kWh to 4.78. It is now targeting Karnataka, Andhra Pradesh and Gujarat.

Teething pains

The different methods of awarding contracts in wind and solar are a problem for the industry, which is pressing for a unified process. Solar bids can be made at both central and state levels. For newcomers, this dual-track process can be complicated. In addition, land acquisition for the projects can be a confusing process.

     In most cases, companies must negotiate and buy the land they need. On rare occasions when states offer land, competition is strong and the process can be tedious and time-consuming. However, solar parks backed by the central government are an exception -- 20 have been announced, each with capacity of 1GW to 2GW, but none are yet fully operational.

     Apart from investing in land, operators also have to consider the infrastructure needed to transmit the power generated, which some have had to build and fund.

     Initial costs can be huge, requiring substantial financing. Despite showing strong interest, investors are cautious about entering the nascent industry, recognizing that competition could drive down profitability. The CEEW estimates that India needs $140 billion to reach its target of providing 100GW of solar power. But Indian banks lend only about $90 billion annually to the power sector, of which renewables typically account for only a small portion.

     There is also policy uncertainty. To encourage wind power, the government introduced a 0.5 rupee incentive in 2009 for producers for every unit they feed to the grid. This incentive is likely to expire March next year. "It makes the difference between the viability of a project and the non-viability of a project," said Sinha.

     Sinha, whose father Yashwant Sinha was the country's finance minister in an earlier government, is not new to tackling problems. In his last role at Suzlon, he helped to refinance the company's outstanding $3 billion debt during the global financial crisis. Before that, he set up the retail venture of the Aditya Birla Group.

     His solar strategy is clear -- he prefers to buy the land required because such projects typically attract less competition, and to work with states that are mandated to buy renewable power. As for financing, ReNew has raised $1.2 billion in the debt markets in addition to the $650 million provided by its investors.

     Like all producers Sinha is concerned is that competition has significantly tightened bids. But that could just be teething pains. "The bids are lower because the cost of financing has gone down and that means there are also more players," said Chawla. "And that's indicative of a very healthy market."

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Get Unlimited access

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends June 30th

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media