Fulbright US-India Series: Gagan Sidhu | Director of Finance at CEEW

In this conversation we will be speaking with Gagan Sidhu, who heads the Center for Energy Finance at CEEW, one of India’s leading energy think-tanks. In this conversation, we breakdown India’s energy financing landscape: who the major players are, how the industry is structured, how much investment is being driven in currently, and what is required to attract more international investment. Hope you enjoy our conversation!

Topics covered in this episode:

  • How is the financing side structured? (ex: long-term debt, equity, development capital, etc.)
  • What role does each player have in the development of projects and when do they come into the project?
  • Will the cost of financing will be a major differentiator for solar tariffs moving forward between companies?
  • What are the primary challenges on the financing side that we are seeing today and what solutions can help facilitate cheaper investment into the space?


00:06 Karan Takhar
Hello everyone, this is Karan Takhar, and welcome to the Zenergy podcast. Over the past decade, India has done an impressive job of integrating renewable energy into its energy mix. For this Fullbright podcast series, I sought to investigate the enabling factors and potential of India's global leadership in renewable energy, with the focus on solar. This Fulbright series is broken down into Four Seasons. In this season, through conversations with leaders who have been instrumental in developing the Indian renewable energy sector, we will highlight how India has managed to integrate 35 gigawatts of solar in just a span of 10 years. We will also explore what These leaders believe the key challenge is to be as this sector further develops.
In this conversation, we will be speaking with Gagan Sidhu, who heads the Centre for Energy Finance at CDW, one of India's leading energy think tanks. In this conversation, we break down India's energy financing landscape, who the major players are, how the industry is structured, how much investment is being driven in currently, and what is required to attract more international investment. I hope you enjoy our conversation.
Hi, Mr.Gagan Sidhu thank you so much for joining us. I really appreciate you taking the time and I want to start out by just asking you to briefly introduce yourself so that we can get in the brief understanding of like the context of your involvement in the Indian renewable energy sector. Could you please provide a brief introduction?

02:04 Gagan Sidhu
So, Karan Thanks again for having me for this podcast. I'm Gagan Sidhu and I'm a director at the Centre for Energy financed at CW. CW is a leading Policy Research by the institutional think tank. It's one of the leading such Institutions in Asia and the Centre for Energy Finance, of which I'm a director. The mandate for force is pretty much to advance the energy transition and we do it in a couple of ways. One is by providing solutions that we feel will unlock capital flows that are required to hasten the energy transition and the other way we do it is by providing market participants and stakeholders. Intelligence on events that are unfolding as the transition progresses. So you know As you have figured out, it's about clean energy and it's about finance and finance is what my background has been from a professional perspective. I'm actually looking at finance from 1/3 lens in this phase of my career at CW. I've looked at finance previously as an investment banker, and investment banking is fairly simple business. It's all about arranging capital, either your own or if you don't want to do it changing it from somebody else. The second phase of my career was on the other side of the table, where I was a CFO for a renewable energy business and that was all about drawing in capital. What I'm doing now is, of course, working at a Policy Research institution where we are connecting the dots between the different stakeholders that participate in this market, be it the private investors being the companies that actually operate in this space and policymakers as well as sources of capital and we sort of sit somewhere in between and try to make sure that each of these stakeholders is interacting as best as they can and you know, have the information required to make those decisions that will drive the energy transition.

004:22 Karan Takhar
Thank you, for expanding on that and with respect to the various stakeholders, can you help us understand like how the renewable energy finance space is structured, meaning like who are the different players in this space? What role does each player have in the development of projects and when do they come into projects?

04:48 Gagan Sidhu
Sure. So, Uhm, yeah. So, Karan, I think, uh,  I think when we're talking about renewable energy, I'm guessing we're talking about, let's say, utility-scale solar and wind for a minute. Let's just limit it to, that because If we expand the definition, it can get quite vast and have too many moving parts, but yeah, yeah Utility-scale solar and wind is a good place to start. We have about 93 gigawatts of that capacity installed and operating in India as of today. Of course, we've come a long way from some of the First Utility-scale solar plants that were built in India back in 2012. Speaker 3But we have a long way to go. You know, we have our target is 400 And 50 gigawatts by 2030, and that requires a compound average Compared an annual growth rate of about 15 to 20% annually to grow from 93 gigawatts to 450 people. So you know, in terms of financing at a project level, of course, it is Equity in debt, Equity is usually a smaller portion about let's say 25% and the debt is 75%. Of course, these are broad numbers. There are many factors that go into sizing the amount of debt which lenders are willing to extend Let's look at the big chunk first, which is the debt, which constitutes about 2/3 or, sorry, 3/4 of project costs And then if I were to create a sort of a visual matrix of where this is coming from, it comes from Yeah, it comes either from India or overseas on the one hand from a geographical perspective and within each of these two geographies it either comes from institutions, institutions of banks or non-bank financial companies or it comes from the capital markets, which is basically the Bond market traditionally these projects have been debt financed at the time of construction by Indian banks in BFC so, therefore, most of the capital from the on the debt side came from within India. From institutions the bond market for renewable energy projects, which is usually meant to refinance those initial project loans. The domestic bond market is pretty much shut For reasons of extreme credit conscious. Let's not get to that a bit later, so you have the domestic institutions lending, but not the domestic bond market. From the international side, the story is actually reverse. What you have is the overseas bond markets lending quite aggressively To refinance these project goals, but not the domestic, not the, not the international institutions that much. So just To give you a bit of context, you know. It's the way I sort of say it quite often is that the pandemic has put a much sharper focus on green and, you know, I think national ambitions are much higher and much loftier. Today than they were before You know, in Pre pandemic, pandemic times and that's actually showing up in terms of capital flows as well. So in the first five months of 2021, more money has flowed from the international bond markets to Indian renewable energy projects than in any previous calendar year in the last, ever since the first green bond was issued by any developer. So that's I'm counting about 3 1/2 billion dollars in the first five months. From overseas bullet markets. So again, as I said in summary The money, you know, 3/4 of the Money at a project level comes from in the form of debt Domestically, it comes from institutions. Internationally, it comes from The bond market.

08:42 Karan Takhar
Super interesting  So it actually seems like it kind of works out where the Indian institutional investors are willing to lend Whereas the foreign institutional investors have some hesitancy, but then the bond markets are very active internationally, whereas domestically they're a little less active But my question is why or like what do you find are the reasons for why international institutional investors are Hesitant to Lend to these projects?

09:19 Gagan Sidhu
You know, I think that's a great question, and having worked at a bank that did look at projects financing the power sector across geographies including India. You know I can tell you that There's a hesitancy amongst lenders from amongst institutional lenders Feeling from the perspective of the apprehensions on the way discount finances are today. Uhm and that reluctance may not be as high in the bond market, where bond market investors are, you know, willing to trade off Some of that risk in return for a higher return. But having said that, I don't want to say that we Had earlier this year one of the first Institutional financings for renewable energy developers for Adani. I think it was about a $1.3 billion loan, project loan which was sanctioned by a clutch of international banks. But then again, I think this loan, if you look at the loan documentation in detail, it's not long-term project finance. It seems to be some conditionality regarding even that, that being taken out soon into the project. But, clearly, even when you have such high ambitions as 450 GW, you need to have all four boxes kind of work, you know you so the four boxes would mean it would mean the domestic bond market opening up and we're doing whatever it takes to actually open that up as well as getting international lenders to invest because You know The Indian domestic banking system just doesn't have the headroom to fund this, even more, To to quantify the challenge, you know, I can't. I estimate that building this 450 GW of Our capacity is going to require about $200 billion or just for the generation. I'm not talking about transmission and storage. That's $200 million required and guess what, the aggregate. Exposure of the Indian banking system and the FCS is to the entire parse. It's 100 $60 million, you know So clearly that one box doesn't have the headroom to fund 200 billion, so each of the four boxes has to fire up.

11:48 Karan Takhar
Super interesting. Thank you for providing those numbers, and yeah, I was reading about that Adani. Inflow from the international banks until that is like a compilation of 12 international banks that came together to provide that $1.5 billion loan and I Also was reading that Like oftentimes what happens is for when clean energy companies like build a large utility-scale solar or wind farm. They usually sell it off after a few years of it being operational in order to give them the financial leeway to build or bid for newer projects. So I'm just trying to understand in terms of like the timeline of when these financiers come into projects so for example, like these international institutional investors or even domestic do they come in initially, help raise the development capital and then say like the projects bid out are built out in a few years like in Adani or are new will they then usually an approach like who would they approach to sell the project?

13:06 Gagan Sidhu
So, I think it's a, this is a great way to move the sort of discussion to the equity side because it's the equity sponsor or the developer who is actually making those decisions to sell or to recycle capital, etc. You know, it's his decision to make at the end of the day, not the lender's, although the lender gets paid back. 1st but the decision-making on the future of the project is largely. You know it's in terms of who's gonna own it now that's going to be made by the equity sponsor. I think the key, one really interesting or one of the obvious ways to look at it is that. Let's look at the word. Developer and see what that means, typically to me, a developer is somebody who, you know, develops, and builds new projects and the way renewables are I think it offers the potential to differentiate between the developer and you know, because developer need not be the long-term owner of that project forever, and that's slightly different for let's say more complicated things like thermal, coal-fired plants, etc. because even setting aside the green aspects for a minute and increasing investor hesitancy to back them, the reality is a much more complicated to run, but on the other hand, you know, for solar and wind plants, at the cost of oversimplification, you just need to get up in the morning and wait for the sun to shine or the wind to blow that's about it, and you don't even need to. Do your own Eminem, you know, it's all, it's all third party. If you want so, What that means is. It literally is a set of cash flows that don't require too much complexity in terms of managing it, the only thing you need to figure out is will get paid in time, so which makes this set of cash flows very recognizable to financial institutions, and after all, Member financial institutions are private pools of capital, hedge funds, private equity funds. You know they're always hungry, looking for new Avenues or new instruments that they can then syndicate out to their investors. So think of a high net worth individual, or think of a private pool of capital sitting in the US or Asia or Europe which wants to allocate a small percentage of its capital. To fixed income type cash flows and you know, lo and behold, that's what renewable.

15:42 Gagan Sidhu
So, you know, it's the developers that develop. I'm not sure that I buy the argument that developers are great, necessarily great buyers of projects, because I think investors have given them money to build more projects rather than to buy existing projects. I'm sure there exceptions In that case, but more often than not, I think developers develop. That's what their investors in the mindful and And and I think. Uhm, you know one of the ways they can then develop more projects is to offload these operational projects to financial institutions, and I think even if you don't offload them, I think there's value to be had in splitting up you're Under development cash flow profile and. The operational cash flow.

16:39 Karan Takhar
That makes a lot of sense. So generally do the developers approach it as Private equity funds? Is it mostly like do the purchasers of projects mostly use Equity to purchase the projects? Or again, do they like using their own tap into their own debt equity network to then buy the project and that process restart? Is that generally how it happened?

17:06 Gagan Sidhu
Well, yeah. So typically when you look at a loan documentation, you know in case there is a sale of Of a project the loan documentation will require, we will give the lender the option to exit at that point or you know Lender will require this equity sponsor will require lender approval to sort of to shift ownership of the project. So yeah, I mean it can be it Can be variety Of scenarios, you know, I mean you could have We have the Existing lenders stain place, you could have that lender taken out by new lender. You could have a capital coming in very interesting ways you know to fund that project. Well, it actually it's not to fund the project is to Take out the existing method.

17:56 Karan Takhar
 I see And my last question on this specific topic involves like a breakdown of the institutional investors. I feel like I'm still not super clear in terms of who those players are If that makes sense.

18:14 Gagan Sidhu
Sure, sure. Yeah, so if I look at the Institutional investors, uh On the And let's split it up between debt and equity for manager. So some of the big debt, some of the big sources of Debt for renewable energy. Projects so the big Indian institutional sources are The likes of. LNT Finance you know. Kharadar, State Bank of India, what have you, Yes Bank used to be being invested. A big lender. So those are the those are the banks in Enbseries, member finance in Orange, CPFC are not banks there, the non-bank finance companies. As well as the trader And then on the equity side, that's a very interesting question. So then on the equity side, I think if you Want to look at the equity side of any Indian developer. Uhm, I think you'd find that. Actually, if you look at the liability side of the holding company, I think you'd find That the equity or pure equity itself is a very thin sliver. You know people equities and I would almost. I think the word used is often this thinly capitalized. So the bulk of the liability side is also some form of fixed income or hybrid instruments, you know, so from that perspective if you were to look at a renewable energy holding company. It's nothing but a capital passthrough vehicle. So in a sense, it's also a lot like a bank and a nonbank Or non-bank finance company where the pure equity on the liability side is very tiny And a lot of the others. A lot of the other bits of the liability side are made up of fixed income type of Of of capital. So, therefore, the pure equity makes a return. If you borrow that capital at the holding company level at X percent and invest it as equity in your project at X plus percent, and this thread is what is the return that goes to the Pure equity which is, which is the same way banks owned by Finance companies operate.

20:30 Karan Takhar
Do you have any specific like names for who the major holding companies are?

20:37 Gagan Sidhu
I know, So yeah, I mean it's each Of the developers would have an uh, would Have a holding company at the apex of their structures.

20:46 Karan Takhar

20:47 Gagan Sidhu
Yeah. So you, you could, you know, one could take a look at the balance sheets of those companies and get a pretty clear perspective.

20:58 Karan Takhar
Yeah, I saw Adani acquired SP energy. For $2.5 billion, that must have been a major move.

21:07 Gagan Sidhu 
Yeah, that was I think as I said the exception to The general rule by developers I think I've have Given capital to develop Uh, projects.

21:18 Karan Takhar
Super interesting and I feel like I have such a more solid understanding of how on the financing side is structured and I was reading a DW analysis from a few years back and essentially it was expressing how up to that point. The majority of the decrease in solar tariff costs Was stemming from the decreasing cost of hardware like trim panels and et cetera. However, like moving forward that the cost of financing will be a major driver in terms of reducing solar tariff costs moving forward, and I think just the breakdown in that specific year from January 2016, I couldn't find anything more recent. Not only at CDW, but elsewhere. Maybe there are some reports out there, but from January 2016 to May 2017 was the year that was analyzed and Hardware accounted for 73% of the solar tariff reduction was the cost Of financing accounted for 27% of the tariff decline, so  It does show That the cost of financing was declining during that period, but I'm curious like now Are you seeing that this argument holds where like the cost of financing is starting to become a major driver in terms of the solar tariff cost?

22:53 Gagan Sidhu
It's a good question. I think also to add to what you said, you know the cost of financing also probably fell because the conditions were Viewed to be, you know, attractive for that capital to invest in India because the cost of financing is not going to just fall. For no reason. I think it's it's also because the government or the policymakers, you know, came up with some really Very interesting things that really drove the explosion, the solar market in India that some of them were of course getting up Was I sovereign entities like NTPC and SECKY to execute the PPA instead of having the PPS directly with discounts, which of course also happened in parallel. But that in itself, you know drove or that that that has waged the risk perception in the eyes of many investors and you know when risk goes down, so does the cost of of the capital associated with that. Let's go down. So that's what happened with that, plus things like mitigating land aggregation risk by arranging. Solar parks, which enabled investors and developers to pretty much plug-and-play Projects. So that was I think one of the things or couple of things, couple of the factors that drove the reduction in the cost of capital. You know, cost of capital or risk perception or new entrants coming in is always going to be a factor that's going to drive down well. Tarves how much, it's difficult to say But to give you an idea. You know some of the lowest tariffs that have been achieved in the last 6-7 months have been sub-two Rupee level tariffs, and if you see who the people are the entities are who are bidding for those you NTPC pop-ups. So you have the national Thermal Power Corporation of India is now bidding for solar power It's and that's a whole new ball game, because Remember, NTPC raises money. In the bond market in India, so the bond market is open for the likes of letting you see because it's for a sovereign. They raise it very cheaply and if you know, if that is a capital that's going to compete with other people, then I can tell you That that's a big advantage, that. NTPC has over a lot of other players. So, yeah, that's that, that's, you know, capital is going to drive down tariffs and it's going to be driven down through not just a secular reduction in this perception, but also because of newer entrants who have access to capital at attractive rates entering the market, and that's that brings you back to sort of. There was a loop on this Remember this is a business with Zero barriers to entry Pretty much. But you know when you compare it to other sorts of energy, and that's why I almost think that And I always ask myself, is this a business with a first mover advantage or is this a business with a late mover advantage? You know, I  think the answer is a bit of both.

26:14 Karan Takhar
Very interesting, and I guess wrapping up here, thank you so much for your time and all of these amazing in touches Like what do you believe will be the major drivers to enable like the cost of financing? Could slowly decrease over time and I guess another way to reframe that question is what do you think will be required to open up the Indian bond market further and to bring in more international institutional investors, maybe the discomfort improving financially are there any other major challenges that you perceive I know you already mentioned that main constraint. Yeah, I think I see accessing the bond market in is really important and I think it's also important because it's kind of a chicken-and-egg thing. India is kind of unique in that it's fairly large and sophisticated. But it's one of those rare cases where the bond market is actually smaller in size than the equity markets. In most of countries, it's the reverse. Bond markets are much bigger in the case, and that has got to Do with the fact that You know, there's a limited retail investor participation bond market as well as I think there's a, there's a, there's a paucity of supply of the kind of credits that the bond market likes, you know, and because the majority of the bond market participants are kind of, I would say institutional and somewhat constrained in not having the flexibility to invest in. Bonds below a certain rating. So therefore you know if you don't have enough of those rated bonds in the market, then it's a circular sort of chicken and egg situation. I need to open up. The Indian bond market. We actually worked on a solution last year, see at CW. It's a, we call it a subsidized credit enhancement. So what we're talking about is Taking the current Loans which may be rated at, you know, whatever rating Giving them, I would say in Simple terms in insurance writing, a small insurance policy. So that they achieved the kind of rating which would allow them entry into the bond market and what we figured was that the amount of capital required this is from last year so at that time the solar. The Bastille was about 33 gigawatts and I Said you know If you want to take 33 gigawatts to 66 kilowatts. We estimated that the amount of capital required To open up the bond market to actually write that insurance policy Was in over Five years or something like six, $700 million, which sounds like a lot, but it's actually not a huge amount. Over five years, you know, so that in itself would actually open up the Indian bond market to the developers that would open up capital for quantum to allow the Doubling of capacity.

29:35 Karan Takhar
That's super interesting. That's honestly not that much capital It would seem Charles not like.

29:41 Gagan Sidhu
But if you think you got it for over 5 Years you're talking about it. Uh, you know, $150 million a year?

29:48 Karan Takhar
Yeah, and considering Adhami just bought SP for 3.5 billion It's one company, with 5 gigawatts in capacity.

29:59 Gagan Sidhu
Yeah, So, you know, it's not much and I think it's also something that Is required, not just from a solar or renewable perspective. Also, I think you know it. It also takes the box in terms Of getting the Bond market to expand in size and also opening it up because you just don't have the amount of capital that you need for 450 Eagle once lying with the banks.

30:24 Karan Takhar
I see and then the second part of that question, I think I'd like to kind of hone it more specifically to focus on maybe how the US and India can partner from the financing side you see Anyways that the US can help maybe facilitate India to achieve the 450 gigawatts and what do you foresee is the benefits to the US for helping facilitate that process?

30:57 Gagan Sidhu
So it's true. So you know some of that money from the bond market, international bond markets are already coming from The US. So just to give you a rough breakdown of the shirt. Uh, I would say about half of the bond market investors or half of the money that is raised via these bond market issuances actually comes from within Asia and the balance 50% is split half and a half roughly between the. The US and Europe. So 1/4 of the money is already coming in if you want to look at it from that perspective, you know, from the international bond markets to Indian Ari. Uhm, I think Going forward, I think we need to start also looking at not just funding, perhaps the 4:50 Giga Watt Of a generating Capacity also start thinking about what it's Going to take to have The storage and transmission and beyond functioning, you know, in harmony Because I think you can't have 150 Giga without transmission, without storage and also I guess a pretty decent penetration in terms of electric vehicles, which by the way in India is less than 1% as of the financial year ending March 31st .88% to be precise. So, so I think from the US-India perspective or the US-India Corridor perspective, as you said at the outset, clean energy I think is a great platform to bring the two countries together. I think capital. For some of the more interesting things which haven't received, sufficient capital is important. Perhaps storage, perhaps transmission, and perhaps even. No capital for technologies that are Going to be Required to integrate the two And moving Even further you know blurring the sort of the lines between capital and technology, let's just talk about technology itself you know which will be required to make this transition happen So I think you know the the the capital for 450 Giga Watt I Think you may not get there exactly, but it's going to You know it, it will get close to it from capital. Perspective, but it's the only other Stuff that you know is not making it to the conversations yet enough anyway, which I think capital from the US would be extremely welcome And I think That with this technology and think for the US. it's, you know, It's a huge Market that then opens up. Getting its technology to be applied in a country of billion plus people.

33:50 Karan Takhar
I hope you enjoyed that episode and do check out the show notes for more information on my guest. See you next time.

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