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Renew | July 2016

India-US Trade | Walking the line

There is a natural alliance between the US and India, and both governments have committed to increase the bi-lateral trade through economic co-operation and support.

All major US conglomerates have significant presence in India, similarly, Indian companies are increasing their footprint in the US market. The US offers advantage of cutting edge technology in various fields, whereas India complements by offering skilled manpower.

Various large scale programmes initiated by the Government of India such as the ´Smart Cities Mission´, ´Make in India´, ´Digital India´, ´Start-up India, Stand-up India´, etc. offer a unique and huge opportunity for US-India collaboration.

India is rapidly transforming and is one of the fastest growing large economies in the world. Though, the future looks very promising, it is not an easy task. It is imperative for the world economy that the US and India join hands for a better and sustainable future.

At the recently held Indo-American Chamber of Commerce (IACC) National Conclave, KPMG released a report called ´India-US: trade - a formidable economic force, the way forward´, wherein it analysed India´s transforming energy space and role of renewable energy (RE) in achieving this.

The Indian Government has set an RE target of 175 GW by 2022, which if delivered, would cause a significant shift in the structure of energy sector in India. When viewed in the context of a country with 1,114 billion units (BU) of electricity requirement, growing at ~6-7 per cent pa, the opportunities arising are staggering.

The scale and diversity of opportunities could provide enough play for domestic as well as foreign entrants across the value chain including manufacturing, EPC, development, finance, and technology in core RE sector and allied areas like storage, electric vehicles, etc.

In a country where solar installations had merely reached 3.7 GW by end FY2015, nearly 8.5 GW of solar capacity was auctioned in FY15-16. Additionally, as per SECI, 33 solar parks across 21 states representing a potential capacity of close to 20 GW were approved.

However, on-ground challenges point at possible slippages and there could be delays in achieving the overall target. However, even with more conservative estimates, profile of the country´s power mix is likely to change considerably.

Opportunities for US
Opportunities in Grid Scale Solar across the value chain

Good irradiation in many states, relatively lower levels of RE penetration, strong central and state government policy and regulatory support to this sector, makes it an attractive investment consideration. Nearly 8.5 GW capacity was tendered out in the last year itself. Another 18 GW of solar tenders are expected over the next couple of years. With tenders increasing in size and more bids expected under the state as well as centre programmes, significant opportunities exist for participation by developers, EPC companies, financiers, etc.

Additionally, we see a rising play in the inorganic acquisition route as well, with non pure play solar developers such as EPC companies/module suppliers, infrastructure conglomerates looking to monetise their holdings and developers looking for partners to execute projects at hand.

Roof top offers prime share to first movers
We consider the time to be opportune for the entry of experienced roof top players, who, through their experience, business strategies and financing solutions, could capture a large share of the nascent but promising market.

We believe that a well fleshed-out business strategy that gives adequate consideration to aspects such as geography selection, customer selection, product offering (including financing solutions such as leasing etc.), a well-defined channel strategy, will have an early mover advantage in this space.

Electricity access and the role of development agencies The underserved rural population can gain significantly from efforts and support of philanthropic organisations in promoting off-grid and distributed RE solutions. Development agencies such as USAID, various foundations and other organisations working actively in the field of electricity access have already made their presence felt through pioneering work ranging from policy development assistance, to providing concessional loans/grants, capacity building, business model development, etc. in this segment.

Wind can be tapped with careful entry planning:
Based on recently observed annual capacity additions, we estimate greenfield opportunities in the wind sector to represent a 2-3 GW annual market. Other than sale to distribution licensees, opportunities for sale under open access to third parties are also available.

The wind sector has been witnessing an intense consolidation phase since the last few years. Opportunities are mushrooming owing to the sale of assets by AD investors or infrastructure conglomerates looking to refocus their businesses or private equity investors seeking to realise the value of their investments through suitable exit strategies including sale to strategic buyers. However, entry through the organic or inorganic route would need a careful state evaluation for aspects such as dispatch risks, etc.

Hydro offering a brownfield entry
Sale of existing assets by companies looking to de-leverage may throw open attractive prospects in this segment. There are several hydro plants which are near completion but due to overruns face cost escalations. These plants are looking at entering into long term Power Purchase Agreements (PPAs). Assets which are able to execute PPAs which provide adequate returns despite the cost escalations, may be an immediate investment target. The attractiveness of some of these plants can increase significantly if they have the ability to act as a balancing resource for a state or a region.

Storage: A new dimension to closely evaluate
Storage presents an immense opportunity for U.S. players in India. The market for the sale of products is set to evolve as costs come down and a higher penetration of RE manifests itself through associated issues of grid integration etc. We believe that U.S. companies need to explore innovative business models such as that of Energy Service Companies which can offer a compelling value proposition to customers by reducing upfront costs.

Along with storage, the government´s efforts in the EV space need to be closely watched as this can give rise to considerable opportunities for EV manufacturers in the country.

A $50-60 bn opportunity for financiers
We expect at least a USD185 billion financing requirement (equity and debt) to support power sector growth (including RE of approximately USD50-60 billion) till FY 19-20.

Corresponding debt requirement would be approximately USD140 billion. Based on the trends observed in availability of capital to the power sector, we estimate that around USD100 to 110 billion will be available in conventional debt over the corresponding period leading to a shortfall from domestic sources and there will be opportunities for alternative sources such as international capital. Longer tenure debt (17-18 years and above) at attractive costs offering value enhancement opportunities to sponsors would have an edge. To this extent, the lines of credit to Indian RE financiers, that support in developing new products that allow access to lower cost of capital would be important. On the equity side, there are considerable opportunities for investments in green field as well as in brownfield projects where sponsors are looking to partially or fully monetise their holdings. Further, there is significant potential for Indian RE businesses to raise capital in the U.S.

Conclusion
In October 2015, India submitted its Intended Nationally Determined Contribution, pledging a reduction in the carbon emissions intensity of GDP by 33 per cent to 35 per cent below 2005 levels by 2030 and an increase in the share of non-fossil based power generation capacity to 40 per cent of installed electric power capacity by 2030. This gave a whole new credence to the government´s vision for an RE rich future in India and its conviction to walk the line. While the sector presents an enormous opportunity, a nuanced approach is required to be taken by U.S. companies evaluating opportunities in India.

State diversity implies that market, regulatory, commercial and technical risks are wide ranging across Indian states. Further, dynamic factors at work could change the future outlook towards a state and these need to be continuously watched.

Some such aspects are:
The easing energy and peak deficit situation in many states could change the state´s willingness to enter into incremental RE contracts.
Fulfillment of renewable purchase obligations could also reduce the availability of tenders/PPAs.
Given sensitivities related to high tariff increases and weak financial position of several discoms, the commercial impact of procurement of RE on the discom´s financials will be a critical element which would need to be evaluated.
The recently announced central government programme for power sector reform ´UDAY´ which provides for a revival of discoms through actions such as state takeover of discom debt, measures for improvement of operational efficiency, etc., could potentially result in turnaround of struggling discoms. This could considerably reduce the commercial risks associated with setting up RE projects in the concerned states.
With high levels of RE penetration, current and future technical risks affecting dispatch would need consideration along with the state´s ability to deal with the same (through the presence of flexible loads or balancing resources, enhancement of transmission capacity, etc.). While investments are being made in the transmission infrastructure at the national level, the timely execution of these projects, especially at the state level, is an important factor for ensuring the smooth pace of RE capacity additions.
Incentive structures offered by different states to attract investments in their arena need to be looked at. On the whole, there is an enticing role for American investors and companies to play in India´s unfolding RE story opportunities exist across the value chain. While the sector is still young, there are complexities driven by a diverse set of dynamics. In such a situation, a judiciously planned entry strategy needs to be adopted to find a value accretive role in the RE sector.
Authors: Nitin Atroley, Partner and Head - Sales and Markets, KPMG in India; and Vikas Vasal, Partner and Head - India-U.S. Corridor, KPMG in India.

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