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Interaction | July 2018

Only players with deep pockets can survive the RE business

<span style="font-weight: bold;">Animesh Damani, Managing Partner, Artha Energy Resources (AER)</span> says that the renewable energy space has turned into a &quot;gigawatt platform game&quot; where only those with abundant financial muscle can survive. He feels that clarity on the transmission network policy and removal of unreasonable levies on private power purchase agreements (PPAs) will greatly help in returning buoyancy to the sector.<br /> <br /> <span style="font-weight: bold;">AER has a unique business model where you support early-stage ventures from the returns of your renewable energy assets. How does that work?</span><br /> Artha India Ventures (AIV), the sister concern of Artha Energy Resources, made the initial investment by purchasing a windmill in Rajasthan. This generates 18 per cent internal rate of return (IRR) that is consequently invested into early-stage start-ups. These start-ups require copious guidance and a small amount of capital to survive the initial period, where expenses exceed income. That is where AIV offers its network, mentorship, and the initial capital, generated by the windmill, to help build these businesses.<br /> <br /> These investments mature over a period of four to five years and yield a 60 per cent IRR, the profits of which are used to procure more energy assets. These assets increase the cash available for AIV to invest in start-ups, and the cycle continues. Over a period of three to four years, AIV has developed an impressive portfolio of 57 start-ups. The entire system became self-sustaining within just two exits. Not only has it created tremendous value for the start-up ecosystem and environment, but also has brought in some impressive returns for us.<br /> <br /> <span style="font-weight: bold;">Since 2014, AER has closed transactions worth $800 million. How much of this investment is in the renewable energy sector and what is the break-up vis-a-vis wind and solar?</span><br /> AER has driven investments which sum up to 15 per cent in biomass, 15 per cent in hydro, 40 per cent in wind, and 10 per cent in solar. That means, 80 per cent of our investments are in renewable energy assets alone. Other than that, we are also involved in road and highway projects, which sum up to 20 per cent.<br /> <br /> <span style="font-weight: bold;">What are some of the recent interesting trends regarding renewable energy assets that emerge from your exhaustive pan-India database?</span><br /> During the initial period, the growth in renewable energy came largely from independent power producers (IPPs) and retail investors. Due to attractive tax benefits in the form of accelerated depreciation of 80 per cent, these retail investors made up a significant portion of the installed wind capacity in the country. However, over time, with the reduction of accelerated depreciation to 40 per cent and with the introduction of auction-based tariff regime, retail participation has been completely wiped out. The new auction rules require a minimum bidding of 50 MW. This has ensured only those with deep pockets are able to participate. Hence, we never see any retail consumer participating, let alone winning a bid. Today, retail consumers who place orders for wind turbines or solar ground mounts are doing it only for their captive use.<br /> <br /> The renewable energy sector has evolved into a gigawatt platform game in which only those with deep pockets can survive. Eventually, such trends always lead to concentration of renewable assets in the hands of a few. With that being said, solar roof-top installations are increasing by the day. This can be attributed to increased awareness on the savings generated through solar. The installations are being led by educational institutions, hospitals, commercial complexes, and industrial consumers.<br /> Since solar is a relatively new technology, there is still a considerable apprehension among clients regarding the viability of projects. The sales cycle is long and involves a lot of time being invested in educating the clients. Moreover, finance is a major constraint for a majority of industrial consumers. Many have undertaken expansion or are dealing with a bleak industrial demand. There has been little to no government action on this front. About 20-30 per cent projects tend to drop off at the final stage for want of funds. <br /> <br /> <span style="font-weight: bold;">Intense competition, especially in the solar sector, has put pressure on electricity tariffs. How do you see the situation evolving from the return on investment (ROI) perspective for projects?</span><br /> The greenfield scenario in the country is slowly maturing. The Badhla bid of 2.44 has not yet been breached and every auction after that has seen winning tariffs approximately in the range of Rs 2.6û3.2. At these bids, the ROI was not very attractive for the emerging players. While established players with large balance sheets can attract investment at lower rates, they seem to be comfortable with lower ROI. This scenario will remain consistent for the time being. However, bidding on low ROI inherently reduces the cover that conservative investors maintain to ensure that their projects can withstand dramatic fluctuations in panel pricing or on imposition of duty.<br /> <br /> <span style="font-weight: bold;">Is there adequate clarity on the regulatory front to keep the Indian renewable energy sector sustainable? How can it be returned to buoyancy?</span><br /> While there is enough clarity on the auction-based tariff regime, there appears to be a lack of coherent policy on the transmission network. The expansion in transmission network has not kept pace with the installation of renewable capacity. Although the new auction guidelines provide some comfort in the form of prompt payments and 100 per cent uptake of the power generated, the renewable assets installed in the feed-in-tariff (FIT) regime are being subject to frequent grid curtailment. Case in point, Rajasthan shuts down the grid daily for a couple of hours on an average. This is being done even after implementing scheduling and forecasting (S&amp;F) for wind energy. The S&amp;F was implemented to help the state load despatch centres (SLDCs) plan better and reduce grid curtailment. However, that seems like an empty promise at this point.<br /> <br /> Since government power purchase agreements (PPAs) are no longer attractive for retail clients, the next big opportunity is in private PPAs or bilateral exchange of power. However, this segment is not being allowed to take off due to unreasonable charges, surcharges, duties, and other levies charged by the state distribution companies. The frequent flip-flop in charges is the norm and without stability on this front, including a reduction in charges to reasonable levels, this segment will always underperform. <br /> <br /> <span style="font-weight: bold;">Going forward, what are some other segments that you might be looking at for expansion? Is there any possibility of your investing in charging stations for electric vehicles (EVs)?</span><br /> It is at a very nascent stage. We should give EVs some more time before taking a decision on it. Presently, there are not enough EVs running on the road that would warrant an immediate look at investing in this sector.<br /> <br /> <span style="font-weight: bold;">-&nbsp; Manish Pant</span><br />
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17 Oct 2016
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20 Sep 2016
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20 Jun 2016
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