'Renewable energy may not need subsidies if there's fair market pricing'

Business Today , Tuesday, October 15, 2013
Correspondent : Anilesh S Mahajan

Sumant Sinha is Founder-Chairman and CEO of one of the biggest renewable energy companies in the country, ReNew Power. Earlier, he headed the Aditya Birla Group's retail venture and subsequently was Chief Operating Officer at wind energy major Suzlon. He discusses the potential of renewable energy, and related matters in an exclusive interview with Business Today:

Q. How is wind power business coming along?

A. Our company is first of all a renewable energy focused company. It's not just wind. We want to do wind and solar energy and eventually other renewable sectors as well. Wind is what we have started with and we have become quite large, but the policy environment has not supported us so far.

As far as the overall power sector is concerned, today we have 200 gigawatts of total energy capacity. By, let's say, 2020, it will double to 400 gigawatts. The target of the National Action Plan for Climate Change (NAPCC) is to generate 15 per cent of power from renewable sources, which means 15 per cent of 400, or 60 gigawatts. But given the fact the plant load factors in renewable energy are about one third of conventional energy we actually need 180 gigawatts of renewable energy capacity. We have 25 gigawatts today and going up from 25 to 180 in a matter of seven years means adding 25 gigawatts per year - that is the entire installed amount - which we all know is not possible. Even if we grow massively from now on, we will not be able to achieve the NAPCC target.

If you see the resource side, there is ample resource availability in both solar and wind. There is no resource constraint. But there are execution, financing, and regulatory constraints. Now financing constraints will go away if the regulations are appropriate. So according to me financing is a dependent variable. The real constraints are regulatory and execution. As far as execution is concerned, in solar the only constraining factor is land acquisition. If land acquisition can be speeded up, you can certainly add more capacity. So it comes down to regulations issues.

Q. What are the problems with the regulatory framework?

A. It is very confused right now. The power sector is almost fully controlled by the government, coal mining is done by a monopolistic government agency, Coal India, 90 per cent of the distribution companies are state owned, transmission companies like Power Grid are entirely government owned, so are generation companied like NTPC, National Hydro Power Corporation, Nuclear Power Corporation. So the large part of generation is in the hands of the government and of course till eight to10 years ago generation was completely under government control. Now the situation has comparatively eased and going forward the percentage will keep going down. But the pricing on the consumer side as well as the supply side is all set by the government, so the whole sector is still very much government controlled and government driven. Therefore again the regulations become important.

Now let's look at where renewable pricing is today. On an incremental basis or marginal basis coal based power today will cost at four or five rupees depending on where the plant is located etc or five rupees if we have to import coal. The average purchase price of all discoms today is three rupees. But the marginal capacity they are coming up with is certainly four rupees plus. If we look at gas based plants, firstly, gas availability is not there. Secondly, even if it is there, at $8 mmbtu the pricing is almost five rupees and if we look at the actual imported LNG it is closer to $14 mmbtu which makes the price of gas based power almost seven or eight rupees. Now the point is all these prices are in a way the standard prices but as scarcity comes up prices can be higher and prices will keep going up. Now if we see renewable energy, first, the prices are stable. What we get on day one is the same that we get on day 20. Secondly, today wind is at around Rs 5-5.50 per unit, so the price is not that far from where you would argue a fair-market pricing of coal based power today would be. So where actually wind is concerned we are competitive with conventional energy.

Today solar energy is seven rupees a unit but if we give it three or four years it will also be competitive. So in the interim, until conventional prices go up even higher, you will probably not even need subsidies if pricing becomes fair market pricing. But to the extent the government keeps giving cheap coal to power producers, you have to give something (to the renewable energy sector) as well otherwise we are competing in a distorted price framework system. So that is the issue. So when they say that renewable energy needs subsidies to survive, the need for subsidy is because our entire power market is totally distorted today, there is no actual fair market pricing happening today

Q. In this ecosystem, where does ReNew fit?

A. We are a renewable energy focused independent power producer and our business model is to add to our own capacity and to sell the green power. We have now 320 MW of commissioning wind energy assets in different states of India and we are selling in most cases to state discoms and distribution companies. But we are also selling to private customers. We are the first company to sell green power to private customers in Gujarat and Karnataka. Where we fit in is basically we are the fifth or sixth largest renewable energy company in India.

Q. You are basically looking at regulatory hurdles to be removed?

A. Exactly, we spend a lot of our time in discussions with the government in figuring out ways with them on how to allow and expand more capacity. For example, I am the Chairman of the CII renewable energy committee; we have WIPPA, SIPPA associations (i.e. Wind Independent Power Producers Association, Solar Independent Power Produces Association). So we work through all these forums to try to have discussions and dialogues with planning commission, ministry of finance, ministry of renewable energy, and ministry of power.

Q. Given these constraints, are your investors happy with your performance?

A. They are reasonably happy. See the investment is just two years old right now. In two years we have already become one of the largest companies in this space. I think we have overtaken lot of our peers, but I think beyond that, and more importantly, we have actually put up good quality assets. We have a very good team of people, close to 100 people in our company with a wide range of experience in wind and solar energy. Secondly, we are choosing our projects carefully. Execution-wise, things have been fair, but having said that, we are at a very initial stage of our company's growth. The potential market is large and there are miles to go.

Q. How are your investors responding to the complex situation renewable energy is in?

The question should be directed to them, but let me answer on their behalf. They are long term investors and they are here to create value and this is not the first wind company they have invested in. They have also invested in similar companies in the US, Japan, and Germany so they understand the space very well. They know that good businesses are not built overnight. They are patient investors.

Q. How much has your company grown?

A. We started off only two and half years ago. In revenue terms this is the first full year. I can't give you a number and frankly we haven't talked about numbers till now.

Q. Where are you heading in next 5 years?

A. Clearly we want to be the leading company in this space and by leading I'm not specifying volume terms but more in quality terms - good quality assets, organisation, people etc. Of course, it also means that we can't be the 50th in the industry and say we are the leading company. Obviously you need to be one of the top few companies as far as size is concerned. I think over the period of next four to five years, we will just start growing in size and will branch out in other areas of renewable energy as well.

Q. There have been some problems following the banks' decision to put renewable energy companies in the same bracket as the conventional power generation.

A. We are not facing any issues because the banks are not lending to conventional power right now. But they are lending to renewable energy and also looking for more projects. Only costs have gone up. But perhaps we have been fortunate; our company has enough capital and is professionally managed. So I'm hoping the banks have developed a comfort level in lending to us because we have raised quite a lot of debt financing from banks over the last two years. Therefore now we have built a relationship.

Q. What is your debt-ratio?

A. Typically you have 70:30 or better than that, anywhere between 60:40 to 75:25 depending on the quality of the project sponsor, etc.

Q. How much of your equity is with Goldman Sachs?

A. Goldman has already invested $250 million in the company and has committed another $135 million. So we have close to $400 million equity capital. In terms of ownership, Goldman owns the majority share of the company.

Q. How many projects do you have?

A. We have 11 projects. Of these eight are fully commissioned and three are under construction. We have a pipeline of new projects, but we haven't started active construction.

Q. How many projects are in the pipeline?

A. I don't want to out a number until we actually decide to go ahead. But there is quite a bit of pipeline we have.

Q. What about solar projects?

A. In solar we have explored a lot, but when we started off, Phase I (of the Jawaharlal Nehru National Solar Mission) was already over, so we could not take part in that. If you look at it, there has been very little addition in solar because all that we have is basically state schemes, none of which have been successful. The focus was on pushing the price down as far as possible. They don't differentiate between the AD (acceleration-depreciation) and non AD bidders, so AD bidders have a natural advantage over IPPs like us, of almost one rupee. So if a state government calls for bids and says it will accept the lowest bid and the depreciation has a straight forward one rupee advantage on us and the state government says you have to match the lowest bid to get the allocation, obviously we can't do it.

Q. What do you think about the present situation in economic terms?

A. Unfortunately, interest rates are very high. Also, no foreign investor is going to invest in a scenario where there is no stability in the exchange rate. Suppose an investor from an MNC invests in India when the rupee is at 65, where the rupee keeps jumping up and down, and if falls to 75 a month later, he won't be a hero in his company. So why take the chance? Therefore, no foreign investor is going to invest right now.

Also, if you look at the corporate sector as a whole, particularly the infrastructure sector, who has the equity capital? Lanco's market cap is down to about Rs 1000 crores from Rs 30,000-40,000 crores. GVK is down to about bRs 1500 crores. GMR to a pathetic number, say between Rs 3-10 thousand crores. Suzlon is down to about Rs 1000 crores. You see, these were companies which had billions of dollars of market capitalization. They could raise money at any point of time. Today, they are struggling to survive. They don't have any money to invest. Reliance, Adani and Essar have debt issues. Videocon is also one of them. None of them are going to invest any fresh capital. They have been dealing with their debt issues for a very long time.

Most of the domestic companies like the Birla Group have money but they are totally fed up with the system. They'd rather put their money overseas. Growth is happening in the US. Cheap assets can be brought there and can be of advantage to them when the growth picks up. Same is true of Europe. So one would rather shop there than shop in India.

Foreign investors are not investing. Domestic investors do not have the fire, the will power to invest. Banks have hidden huge NPAs in their books, which will surface some day or the other. They have to deal with them. Net worth of equities is declining due to these issues. So where would they get this capacity to invest huge amounts of debt capital in projects which the government is not clearing? So any project of any face value is not going to happen. It's too late. They should have done it two years ago.

For instance, look at FDI in retail. It is so confusing. Nobody wants to do anything here. And this is going to happen in various sectors. Therefore, the whole situation is bad, interest rates are high; demand is falling off. So if you do business any more, you are not going to assume that the growth rate is at eight per cent. This means that the investment cycle is going to take a long time to restart and that the government isn't yet doing enough. And it won't be able to do enough as the general elections are a few months away and you never know who's going to be in power next. You may put in your money assuming a particular party will come to power but a third front or someone unexpected may come. So this may mean another two to three years of instability. So who's going to invest?

Q. What can the government do to correct things?

A. There is very little that the government can do. It is trying to do as much as possible at the moment but that won't be enough. It is too late. People are suffering because of the government's (earlier) inactivity.

What can happen is the following - the rupee is depreciating. We don't know how it's going to end up. It could be 65, 60 or 70 (against the US dollar). Whenever it settles down, what will happen is our trade deficit will slowly be corrected. Export-oriented industries will start getting better. IT and tourism will start getting better. Whereas, import-oriented industries such as consumer durables, automobiles etc will begin to shrink. Oil prices will increase eventually, and oil demand will fall. So rebalancing of the economy will need to happen and such rebalancing takes time. Banks will have to clear up the huge NPA mess, market capital will need to be built up and confidence will slowly return. IPOs may restart and may raise money. Inflation may come to a tolerable level. The RBI may lower down interest rates in the future and demand for consumer goods may rise. But such things will take time to reach equilibrium. And only when we reach that point, will growth restart. And that will take a year or two. So what can stimulate this? If a government comes in which can win the confidence of the markets, sentiments will change.

Q. Do you think the US government shutdown will impact India?

A. US government shutdown won't, but the debt ceiling on October 17 will. It will affect not just India but whole world as the US will default. It will have disastrous consequences for the global financial system.

Q. What should be the corrective measures?

A. India can't do much. We can only insulate ourselves by increasing repo rates some more so that there is no capital flight out of India when we suddenly have risk-off situations arising. On the other hand the US fed reserve tapering will get postponed which will give India more time to build defensive positions with higher interest rates and more reforms.

Q. How do you rate the recently passed land acquisition bill?

A. It is going to make life very difficult for industries. The cost of acquiring land is going to increase substantially. But what is more worrying is the time period. The government is involved, the local bodies are involved. So you see, the more power you put in the hands of any government organisation, the worse it is. And this is what exactly this bill has done. This will also mean a long gestation period.

 
SOURCE : http://businesstoday.intoday.in/story/sumant-sinha-on-renewable-energy-subsidies-and-more/1/199574.html
 


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