Fulbright US-India Series: Saurabh Agarwal | Managing Director of Caisse de Dépôt et Placement du Québec (CDPQ)

In this episode we will be speaking with Mr. Saurabh Agarwal, Managing Director of Infrastructure in the South Asia Practice at CDPQ. In this role, Mr. Agarwal directs CDPQ’s infrastructure investment efforts in South Asia, and leads business development in the region. We discuss CDPQ’s decision to acquire a majority ownership stake in Azure Power and how the investment climate is involving in the Indian renewable energy space. Hope you enjoy!

Topics discussed in this podcast:
1. When you are looking for projects to invest in. How do you locate these opportunities and how important do you believe having a strong network is to be able to find the opportunities?
2. CDPQ's majority stake acquisition of Azure Power - what led to this decision?
3. Challenge associated with signing power sale agreements
4. Overall investment climate in India


00:02 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 Fulbright Podcast series, I sought to investigate the enabling factors and potential of India's global leadership in renewable energy, with a 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 episode, we will be speaking with Mr. Saurabh Agarwal, Managing Director of Infrastructure in the South Asia practice at CDPQ. In this role, Mr. Agarwal is leading CDPQ infrastructure investment efforts in South Asia as well as developing long-term partner relationships in the region. We discuss CDPQ's decision to acquire a majority ownership stake in Azure Power and how the investment climate is evolving in the Indian renewable energy space. I hope you enjoy. 
Hi, Mr. Agarwal. Thank you sincerely for taking the time when it comes to locating good investment opportunities. Can you provide some insight into what the process for locating good investment opportunities looks like and whether you believe having a strong network Is an important component of that process?

02:08 Saurabh Agarwal
Yeah, absolutely. You hit the nail on the head. Quickly zoom in to identify who are the possible partners and what is whether or not those partners will align and if that and if that initial assessment works, then we basically go and invest a lot more time into those Fish and chips, then we build on the opportunities. It's a slow process. It's not easy. I have to say there are times when we are able to make it we have to propagate. They are not. Many of those deeper agreements do not happen. Valuation mismatches and governance dispatch is there a lot of things, and ultimately to close the transaction, It takes a lot of effort, probably not more so than what it does in the Western world, but that's the nature of the work that we have here in India, and since we are doing this for the downtown our Thesis is that you know, it may take a couple of years, three years, five years to build out your portfolio, but by the end of it, if you have built out a large portfolio with credible partnerships, then it will be there to stay for long -term, so all that effort is worthwhile. So we tend to spend a lot more time and effort in building out our platforms.

03:36 Karan Takhar
That makes a lot of sense, and yeah, I feel like now is especially a good time to be investing in these long-term projects in India because of its incredible growth projections. So like, those who are well positioned now will be more likely in a better position to tap into like those growth opportunities, and I'm just curious as here, like honing in on those UR investments specifically, I know that CDPQ recently upped its initial 21% stake that it took in 2016 in Azure to now about 50% equity ownership. Could you talk about first like how the Azure Initial 21% investment was kind of introduced to the CDPQ portfolio and then what led to the decision to up that 21% to about 50%?

04:48 Saurabh Agarwal
The first investment was done just prior to my arrival. Uh, but I can tell you anecdotally the investment decision was again, as I said, in 2016. We opened up India as an office. Various asset classes started looking for investments opportunities, I'm sure some bank reached out with Azure which must be raising capital at that point in time and we ended up becoming a Pre-IPO investor in Azure with a I believe it was actually more like 17 or 21 but we can check the math 1617% shareholding right in the beginning thereafter it once I joined in March 2017, we do looked at the investment, we assessed that this investment probably has potential to go very big, but we needed to make sure that if we want to take this big then we also want to have enough say in the governance and how do we manage this platform as a large investor and so we realized that so as in when we provide more capital to the business our position will go up, and we were not, we were not averse to doing that and then slowly as we kept providing growth capital that company needed, we continued to increase our position and ultimately we came to 50 plus position, it was both by the needs of the company to fulfill the needs to support the growth and also our desire to ultimately get into a controlling position which allows us to have sufficient oversight and governance at the board level.

06:33 Karan Takhar
Got it. I also read that a current major challenge for independent power producers In the current context in India when they're building renewable power plants are the delays in signing power sale agreements between auction agencies and off-takers. Could you talk about how the bidding process in India works and why this challenge persists?

07:06 Saurabh Agarwal
Well, Azure itself is a is facing some of these challenges, probably much more so than many other developers. We bid and won a contract of actually the entire 4 gigawatts with underway manufacturing linked solar tender process, which was run by the central government agency, sake, and this was in late 2019, and we are sitting today in late 2021, and we haven't signed, we've barely signed I won't say I think 300 odd way towards out of this 4 gigawatts and we haven't signed any meaningful capacity out of this, so the big reason for this failure to sign the power purchase agreements is because we have a fundamental disconnect between the straight government to state governments who are the actual buyers of the power their discounts versus the central government escape at least in this case, this was not yeah, and there are many other reasons as well, but fundamentally central government put out this policy which supported local manufacturing of solar panels and on that basis it put out the bids. Adani and is 0 there were the only two companies which one capacity in this bid, running 18 gigawatts, was 0140 watch, and then under the Psyche Letter of Intent, you are assured at least that once you have won the psyche bids, then somebody, some state will buy the power at those numbers and there has been the track record of the psyche and that is what gives a lot of comfort to the investors That once you have a second contract you're not going to face trouble, however, in this particular instance, states did not even listen to psyche oh, and acne clear is we have a federal system where states come to decide whether they want the power and certain price and it doesn't matter whether certain committed to or auction process let it was anybody decision, it was a completely an auction-based model and that auction price was not supported by the states In the future and things kept going worse as the psyche kept delaying that what you say signing of the agreements with states said those delays led to shift in the market and the market started offering the pricing panel pricing kept going down. New bids started coming in at much lower levels to 60s to 50s to 40s to 30s, you know, it's it's a falling knife. It kept going down and down and down now, and the more it goes down, the worse it gets for anybody. Any state utility will take up more expensive power, which was legitimately bid and won, but it was one at a different price. So yeah, so this, this is 1 issue, and then primarily, it has to do with basically states willingness to buy power at the right price and, secondly, not being able to convert its auction discovered prices Into an actual agreement. Somewhere there is a disconnect, and that disconnect is, you know, needs to be solved because if center wants to realize it's targets, then it needs to have better mechanisms to enforce it, uh, in force to the states whenever the power prices that you discovering their options, those have to be accepted. So it needs to be a little bit more ground up. I think an option is that shaky, uh, pre-commits or states pre-commit their capacity with cycling, and then they take comfort from partner safety will get the best possible price surgical take your time and whatever price is discovered, then states have to buy their power pricing questions some mechanism like that has to be devised. I'm simplifying it because it's extremely complex. Each state has its own politics. That goes on. Power is an extremely sensitive subject, so I realize the issues, but you know, I do feel that there is a need to address this and some mechanism maybe to sort this out.

11:54 Karan Takhar
Understood. Ends from the financing side, so I recently read a report from Bloomberg New Energy Finance where they analyzed the different investment shares for foreign investors across several emerging markets, and it stated that India Lags behind other key clean energy markets in terms of the amount of foreign investments that is inherent in the Indian clean energy space, which it stated stood at around 28% investment share from foreign investors and of course, CDPQ is constituted as a foreign investor in the Indian context, and I'm just curious as to like whether you could talk a little bit about what were some of the key hesitations some of your team over these past few years, when you do invest in an emerging market like India and then additionally in an emerging sector.

13:03 Saurabh Agarwal
So I want to put that in perspective because I think 28% by in itself is is is neither here nor there. I think one has to look at the evolution of the sector over the years and how it has, how the investment has come about. If you analyze last decade, you will see that the 28% is a very fast build-out from potentially 0% Right, It was primarily always under government hands there, not even private players. Forget about international, right? And then private players came in, and then some investors came in, and then now we see a lot more, and so it's a story of any emerging market build-out as and when large institutional investors started going into those pockets, then those markets offer opportunities, they start making investments. That's my #1. So I would say 28% is not bad where the current situation is today. However, that being said there, there are certainly issues that are there today to bring this up much more. They should have been 5060, perhaps even 70%, right like you see it in the other most of the markets, developed markets, and we could have or we maybe we can still get there. The difficulty right now that I see is primarily driven by these uncertainties on the case because it's difficult for long-term investors to take the risk that they will put on in all efforts to make a bid and set up a team. Uh, you want to be the project, and then even if they win, they have no certainty that the PPS will come through, so that, to me, I think is probably the number one risk. Uh, in current times, aside from that, I think there is a bit of competitive intensity that has changed the cost of capital by substantially. The bids are extremely competitive and borderline aggressive, I would say, which leaves very little upsides and primarily only downsides when you bid for projects, so some investors will get uncomfortable with that situation because you don't want to enter any winners, curse that you keep winning, but then you were winning effectively tools because your project is never going to make that much money that you anticipate, so one has to be disciplined, and In the long run, I believe market will correct itself. I think these are all always short-term phenomena as sometimes there is ample liquidity, there is a lot of cash-flush, uh, and therefore people don't know what to do with their money, so they sort of put in that in even necessary terms that what is the normal expectation so that will happen and then you have to be disciplined, and you sort of do not go beyond what you really need to bid for you will lose some, but then the opportunity will come. You will win some, and maybe some Investors will have lower cost of capital anyway, and they'll set up projects. So I think, uh, a disciplined approach for a continuous flow of projects, if she can do that, and if she can ensure that those contracts do see the light of the day quickly in a time bound manner, uh, If you offer proper PPE's, then I think there is enough interest, and people will bid, and people will win, and people will build projects. I think we already have enough investors lined up with lots of capital to deploy. Uh, I mean, more investors can come in, but already there are some very large investors like ourselves and others who have big ambitions to deploy capital in green future energies is just a matter of getting the right level of contractual structure.

17:10 Karan Takhar
Thank you so much, Mr. Agarwal, for your time and for providing all this great insight. Really appreciate it.

17:17 Saurabh Agarwal
Thank you, Karan.

17:21 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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