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Legalese | August 2016

FDI Initiatives And their Attractiveness

The government´s ambitious goals for renewable energy are well supported by the potential of the exploitable resources that India has in this regard.
The future of India´s renewable energy story, as highlighted by the current government, is ´moving from megawatt to gigawatt´. The Ministry of New and Renewable Energy (MNRE) has pronounced a target of 175 GW of renewable energy generation capacity by 2022 (as on 30 April 2016, the figure stands at 43 GW). The government´s ambitious goals for renewable energy are well supported by the potential of the exploitable resources that India has in this regard.

Foreign Direct Investment (FDI) of up to 100 per cent under the automatic route was always available for renewable energy projects. However recently, the government has rolled out a red carpet for green energy and is looking at providing increased policy support in the form of subsidies, bundling obligations, viability gap funding, tax benefits, green bonds, feed-in-tariffs, etc.

Meeting the target and the increasing demands for power seems challenging, however, it can also be perceived as an opportunity for private and foreign companies. India has moved to the third positon, in EY´s Renewable Energy Country Attractiveness Index behind US and China (May 2016). In this regard certain initiatives have been taken to attract foreign players, especially by trying to address the major cost components for a renewable energy project being, land and costs of raising debt. These are briefly, discussed below.

Establishment of Solar Parks - There has been substantial reduction in equipment costs on account of improving engineering and technology, exploring efficient and larger equipment designs, however, this reduction has been negatively off-set with a rise in land costs. Given the fact that there are a number of renewable energy being developed, one has noticed that there has been a significant price rise in areas where such projects can be constructed. And as it appears, this trend will continue to rise, as land availability reduces. To offset this and to also make it easier for a foreign player to operate and establish a project in India, the government has proposed the solar park model- wherein land risk is substantially diluted. There are almost 20 government sponsored solar parks that are being developed, and in these it is proposed that developers would be provided ready to use infrastructure such as land and transmission facilities leading to lower risks and costs. Setting up of solar parks is therefore a welcome step.

Reduction in Offtaker risk - The real burden to facilitate investment into the renewable space lies on reducing of financing costs. There has to be a growth in overall loan availability and at the same time an increase in the willingness of banks to provide loans to the renewable power sector. A key risk to foreign investment and the consequent ability to raise debt for such projects, is the off-taker risk. In India, the largest off-takers, the distribution companies (discoms) are saddled with operational losses and are themselves under huge debt loads. Given that renewable energy projects are looking at selling power to the same set of discoms, the effect of this is compounded. It appears that the government is seized of this issue and consequently has launched a number of financial turnaround and revival initiatives for discoms such as the Ujwal Discom Assurance Yojana (UDAY), which are aimed at mitigating off-taker risk thereby encouraging foreign investment in this sector. However, the actual ground impact of these initiatives is still to be seen. If one may recall, the whole impetus of creating SECI and NVVN as the procuring agencies for solar projects in the past, was to avoid the negative perception of the DISCOMs.

Loans to renewables a priority- Cost of loan generally constitutes 20 per cent to 25 per cent of a power project´s cost. During the first phase of the National Solar Mission from 2010-2013, promoters had to largely self-finance solar projects due to lack of experience in financing solar technology on the part of domestic banks. While Indian commercial loans tend to be secured for 10-15 per cent, a USD or EUR loan could be raised at just 3-5 per cent. However, gradually, banks in India are realising that renewable energy projects are financially viable and more risk free than conventional projects, given their lower construction risks and gestation period. Even so, this hasn´t translated into cheaper loans. However, by a notification in April 2015, loans up to `15 crore for renewable energy projects are required to be treated as priority sector lending. This move should go some way in easing the availability of debt for the renewables sector.

Utilisation of the available funds- To address the technology and R&D gaps, a National Clean Energy Fund, has been set-up as a corpus for funding research and innovative projects in clean energy technologies by levying a clean energy cess at the rate of Rs.200 per tonne of local and imported coal. It is intended that funding from the fund is made via the viability gap funding route. However, even though the fund is now almost Rs.17,000 crore,, disbursements have been minimal. The government needs to seriously think through on this aspect and push for a higher sanction and disbursement rate.

Environmental Issues- In the past, there was a significant lack of clarity on the treatment of renewable energy projects under the environmental laws of India. In fact, there were a number of cases wherein the pollution control board of one state exempted such projects, whereas the pollution control board of another state made it mandatory for such projects to comply with these norms in totality. To address this ambiguity once and for all the government has finally clarified and issued a notification wherein wind and solar projects have been classified under the white list, thereby eliminating the requirement for such projects to obtain cumbersome clearances from the pollution control boards.

To conclude, the government is seized of the problems that plague this sector and given its ambitions in this regard, is working towards eliminating the obstacles that exist.

Nishant Beniwal,
Counsel and Prateek Bhandari, Associate, Khaitan & Co.

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