India today operates the third largest electricity grid in the world, showing the progress already made on the key electrification-of-everything strategy articulated by the International Energy Agency (IEA).1 Cost-effective and reliable sources of energy will be a mainstay as the country leapfrogs into its next period of growth.
Globally the overarching theme in energy markets is the emergence of renewable energy as the dominant source in the coming decades. India has also embarked upon an ambitious clean energy drive with pledges to install 450 gigawatts (GW) of renewable energy capacity by the end of this decade to enhance energy independence.
Private capital has been a major contributor to the growth of renewables around the world. As per IRENA, the private sector remained the main provider of capital for renewables globally, accounting for 86% of investments in the sector between 2013 and 2018.2 In India too, the largest business houses have come on board to be part of the growth journey, with Reliance Industries a key new emerging sector leader.
When the sector was still at a nascent stage, financing through recourse against the developers’ balance sheet was prevalent. The vast majority of players provided security in tangible form through corporate guarantees or intangible form through cost overrun support for under-construction projects. With a sufficient demonstrable history of operations and the sector going mainstream, a variety of financing options have opened up for the incumbent players to tap into. This has helped in securing capital, but it has been accompanied by increasingly intense competition within the sector, with rock bottom tariffs being fetched in auctions across the country. Accordingly, a large proportion of India’s renewable energy capacity will be added by the largest players already operating in the industry, given the capital-intensive nature of the business, which requires access to massive amounts of funds at competitive terms.
The traditional financing structure and sources used to fund capacity expansion in the sector, primarily thermal assets, need to be augmented by other sources such as bond market issuances, asset monetisation and capital recycling initiatives.
A comparison of the capital structure changes of three of the largest listed players, Tata Power Company Limited, NTPC Limited and Adani Green Energy Limited (AGEL), each with increasingly ambitious green energy plans, illustrates how the leaders have funded capacity expansion in the past and what major trends will be at play in the future. On the one hand, NTPC presents an example of a government-owned utility transitioning to green energy. AGEL, on the other hand, is a privately owned pure play renewable energy company which is rapidly ramping up its capacity. Between them is Tata Power, an established private utility pivoting to renewables.
1 BP. BP Statistical Review of World Energy. July 2021.
2 IRENA. Global Landscape of Renewable Energy Finance 2020. FY 2020.