Fulbright US-India Series: Sidharath Kapur | CEO of Acme Solar Holdings

Sidharath Kapur is the recent CEO of Acme Solar, which is India’s largest utility scale solar development company. In this conversation Mr. Kapur discusses renewable energy financing in India — beginning with an assessment of how much investment is required to achieve India's renewable energy targets. In this conversation Mr. Kapur breaks down a key challenge in the India solar market, which is the deficiency of long term debt financing at attractive rates.
Mr. Kapur concludes by introducing a proposed concept of renewable financing obligations, which could be the key for sustaining this industry over the long term. ​ ​ ​

Topics covered in the on this podcast: ​
[02:05] What are India's targets for renewable energy for the next years?
[3:57] Investment requirements needed to reach these targets
[5:32] What are the key sectoral challenges that need to be overcome?
[8:30] What is the problem with transmission infrastructure?
[10:19] What are the key hesitations for lenders?
[15:00] Is there significant international investment coming in?
[19:30] Mr. Kapoor's introduction of the renewable power financing obligation
[25:31] Will India remain and further become a leader in the solar sector?


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 Fulbright 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 challenges to be as this sector further develops. In this episode, I'll be speaking with Mr. Sidharth Kapur, the current CEO of Acme Solar, which is India's largest utility-scale solar development company with 5.5 gigawatts of capacity. In this conversation, we explore key challenge in the Indian solar market, which is how to attract the necessary capital to hit India's ambitious renewable energy targets hope you enjoyed this conversation with Mr. Kapoor. Thank you so much for taking the time to speak with me. I was reading your very interesting article titled a Finance Structure that matches ambitions for the renewable energy sector and would like to dive into your proposed concept, which I found super interesting. However, prior to doing so, it would be nice to set the stage, so first, can you give some context in terms of India's targets over the next years and, by your calculations, how much investment this would require both from debt and equity?

02:15 Sidharath Kapur
India has a very ambitious officially. You know the official numbers. They are 175 gigawatts by 2022, which is the stop script and jump away, and 450 GW, which is by 2030, which is much further down the line and possibly more realistic than the 175 against the 175. We have only done about 86 gigawatts so far, and we are sitting in the middle of 2020 and another couple of years. You're talking of doubling the capacity, so, effectively, this target looks extremely ambitious, and the challenges, of course, are multifold, and these challenges we can discuss as we progress in this conversation, but the targets are, as I said, pretty ambitious.

03:16 Karan Takhar
Understood, understood, and yeah, with respect to the challenge I would like to ask, I know that in your article you mentioned long-term financing is a key challenge, and this is kind of what I would appreciate focusing our conversation on because I know this is a very important challenge in terms of being able to achieve these targets and specifically in your article I know you mentioned over the next two years by estimate, we need 100 more gigawatts. I know that's not exactly how much we need, and you did provide specific numbers in terms of the breakdown for debt and equity. Could you talk a little bit about those numbers?

04:02 Sidharath Kapur
I mean, if we have to achieve, say, 175-180 gigawatts for renewable power over the next couple of years and taking a very broad ballpark of almost 4 1/2 crores, if I may use crore, which is roughly about $700,000.

04:24 Karan Takhar
Just a quick note. Mr. Kapoor is referencing the cost per MW.

04:30 Sidharath Kapur
And that includes the cost of capital expenditure, land acquisition, connectivity, overhead, everything, so if you take a broad ballpark number, you're talking of almost he lead of funding of totally almost 470,000 crores. Rs.470,000, if I may convert into dollars billion, yeah, you're looking at almost $60 billion of funding; that's a pretty cheap number, and Ultimately, you will probably need almost $20 billion of equity and another $45 billion of debt. It could be because of the major push by the Government, and the Government is doing a lot of things on the regulatory side, you know, the one challenge which is quite apparent on the face of it is that electricity sector is a state subject also in India it's a concurrent subject, so it also comes within the purview of the state It's not just a central subject. So while the Central Government is extremely focused on developing new power and they are mindful of bringing about regulatory changes, there is a resistance at the state level you know the state level. The discounts are in a very bad shape power has always been used by the state government as a tool of appeasement and subsidies, so as a result of which, most of the discounts their financial health is in a poor stage; they are any attempts by the Central Government to bring about changes in the electric we have some major challenges from states like entrepreneurs. There they are talking about renegotiating and opening up power purchase agreements of the path. We have few states which don't have the money to pay, although they have the intent to honor their contracts, so you know you have a mixed bag of situations. There is developers, a lot of money tied up in these kinds of regulatory issues. The Government also is planning to import trade barriers and entry duty for imports of capital equipment for renewable power starting from 1st August, they are planning to impose Import duty, import tariffs, which will increase the cost of inputs and with the hope of encouraging local manufacturing of power now in this background investors are extremely interested because you know you are still getting fair degree of equity returns in Indian project your question is really the debt side of it is the challenge because banks today are early AG about lending to renewable power sector because the club renewed power and power everything into one big hole and ink like state government not paying state government trying to manage on PPL doesn't help the situation so, in this background, the biggest challenges are of course, the funding side and the second are of course, you know the regulatory type because any developer to keep putting up a project which is going for say 25 years we need long-term totality and long-term predictability, certainty, something which needs to be brought about in the regulatory framework which has Issues today, the Government is trying to fix it I think we need to move back that is the second side of the story. The funding also depends on various other things which needs to be fixed. One is the regulatory side, 2nd is the transmission capability and the transmission infrastructure. Unfortunately, has not matched the growth and ambitions of the renewable sector.

08:52 Karan Takhar
I actually just spoke with Mr. Baba earlier, Appraisal POSOCO, who heads POSOCO earlier, earlier in the afternoon. So no, this is really nice. Yeah, I'd love to hear your thoughts on that as well in terms of the transmission infrastructure.

09:09 Sidharath Kapur
Transmission infrastructure, definitely sooner, greater trust because typically developers are trying to concentrate in certain states where the solar, you know, the light is very strong, so you know, effectively if you put up projects in these kinds of states where the sunlight is strong, and the conversion of sunlight to electricity is at a much higher efficiency level, it makes the project much more viable. So effectively, one will need to therefore focus on these states where the transmission capability will need to be augmented very significantly in the next we get available future. I think that's another key area which needs to be addressed.

09:59 Karan Takhar
That makes sense. That makes a lot of sense and in terms of you allowed to how like some states in India, they like underpays, for example, I was reading up on this. They try and renegotiate Ppa's based on the prices they're seeing in the present moment with regards to the perspective from lenders, are you finding that lenders, even if a contract was made, say with a more fully creditworthy entity like SECKY, will the lenders still apply that same hesitation to projects that are In contract with a SECKY.

10:45 Sidharath Kapur
So you know it, could you brought up this point? It's a very important point as of date, contract with SECKY NTP, the HPC, who are the punting counterparty. These contracts carry much more credibility and are naturally much more in demand from developers and investors however, having ended, SECKY even need to sell power to the various states so while there is a PPA wiki, there will be a power supply agreement which is back-to-back now while Techie is taking a counterparty risk with the developer and they are providing assurances that the payments will be made a tricky impact a very deep-pocketed organization balance sheet is fairly small even now and In case there are significant difference take SECKY on the power supply agreements there is the concern that what will you do with all the PPL with which it has signed no one will, of course, have to take a call that SECKY is a Government of India entity and Government it they will support it In case there is a financial distress situation then what will happen so, you know, these are some of the questions which are still at the back of minds of various develop the root cause is the very poor financial capabilities of the state discount that needs to be addressed and they are trying to address it to the amendments in the Electricity Act and I hope that you know, those go through there is resistance from a few states against some of the provisions of the Electricity Act, but one will have to address the issues at the grass-root level and that's all like he cannot in case there are even 20% defaults on PSA like he will not be able to meet financial obligations of the PPL banks today are not taking a I would say putting everything into one bucket and trying to say that look there are various in the sector there are very few lending institutions who are lending It is really the PFP which are lending state banks, I started a little bit but most of the other commercial banks are QQ lending and you know despite the banking sector being flush with liquidity as a whole, of course, you know they KG of money because we are in a situation where banks balance sheets may get eroded over the next one year looking at these kind of situations they are themselves kg of onward lending to sectors where there can be accelerated defaults It's not a very healthy situation from a financing bank. We need much more deeper financing sources, and that will only come from if the commercial banks come forward and lend on a, you know, much larger data.

14:13 Karan Takhar
I see. Thank you for that clarity, Mr. Kapur, and through my interviews, I know the ISA, for example, has ambitions to create a solar bank, kind of like a World Bank, but specifically for solar projects with its member countries so maybe that could help drive down the cost of financing another question I have because this interview series is specifically tailored to US Energy Financiers, I believe that the Indian market, just through all my conversations, has a lot of potential and gets these problems that you've alluded to definitely are ones that keep recurring through my conversation and however, I would like to hear your perspective in terms of what role international lenders can play in terms of helping to facilitate cheaper debt flows into the India renewable economy what will be required to attack their financing? Yeah, what role do you think international financiers can play in terms of you are seeing a lot of international finance players in the current market?

15:30 Sidharath Kapur
I am not seeing very, very many of them in the play right now. Yeah, intimately India needs to people because you know the PPS are signed in rupees. So effectively, you don't want a mismatch between your revenue currency as well as your funding currency, although some developers in India have raised dollar debt in the form of bonds from overseas markets, but you know the hedging cost of that is fairly.

16:04 Karan Takhar
Due to the currency risk.

16:06 Sidharath Kapur
Into the currency risk and effectively apart from the hedging cost, you know the accounting side of it is fairly complex so for these develop and you know the ultimately their landed cost of debt may not be different to the cost of rupee debt that is available in now the rupee cost of debt is something which has to be addressed we are seeing that the cost of debt in India is has come down fairly sharply in the last six months because of reduction in the central bank rates which have been transmitted to some extent, but most of the banks are not lending they would rather lend a retail borrower who is borrowing for buying a house or a car or for consumer goods rather than to lend for projects on a long term, 15 to 20-year basis or then the risk of those projects are something which probably they still need to grapple with and having said this, there is the resistance to lend to entities which are N AA rated entities which are rated. I'm talking about dating in India. Aerated or triple B. There is a resistance of bank, student, and power sector has been painted with a risk profile as a whole which is not a very healthy risk profile and lenders, therefore, need to be scheduled and pushed to lend renewable power, which in my view are fairly safe projects as long as the counterparty does not default, but big risk Is that which also the lenders see is that Paris will fall. We are talking about that is now of 2.36 per unit now In a few years, there is a possibility that the cause of reduction in cost update, as well as reduction in cost of capital equipment and modules this cost, may come down to as low as ₹1 Or, you know like it has happened. You know, the lowest tender n the world is Abu Dabi. Out there lost the tender lowest court was almost ₹1.00 per unit now, in this situation, this opens up the risk of default from the counterpart because if they see that, their costs of power is yeah, after seven years or eight years, is almost two to three times, then the weighted average cost of power in that period of time. They are naturally going to find ways to see that how they can either wriggle out or how they can close these kind of contracts. These are all the big issues we're gonna be back.

19:07 Karan Takhar
This makes a lot of sense, and now, just moving towards the finance structure and concepts that you proposed in your very interesting article, where you mentioned that, unlike other priority sector lending obligations, banks are not mandated to lend To Ari projects given the long-term sustainability impact of these types of projects, it is time to rethink this, perhaps. Can you talk about this concept that you proposed in your article?

19:46 Sidharath Kapur
Yeah, so you know, In India, you have a concept of renewable power obligation which every state government is required to meet and adhere to, so they have to buy a certain minimum renewable power as part of their power mix. If they don't do it, they can purchase renewable energy certificates, which are issued by developers who don't have GPS Yeah, let's stop people who are eligible for REC, which are generated. So states can either buy power as part of their obligation to renewable sources, or they can buy a receipt, so there is all already this kind of a concept where there is a mandate to go and buy renewable power now if we take this concept a little further and say that look what is RBI and Government of India we find that every lender is required to lend renewable power. Green power who works at an extent, and that becomes a mandate for every lender as part of their portfolio. It makes a lot of sense. I mean, I mean they are free to lend to any other project. They can go and lend to a steel project. You can lend your project manufacturing plots they can or textiles or cars or whatever lending to a renewable power also has a certain advantage, which I mean, yes, the project needs to make sense from a lender point of view, but it also has certain sustainability impacts on the environment, on the economy, and A it will replace costly imported fuel B It will improve the environment C It will provide much cheaper power, so there is a very clear social angle also apart from the economic angle, who lending for renewable Now, in this background, if we mandate that banks should be provided a certain compulsion or push should be given so we can do that, the Government can do it and each bank which lens will be given or something which is called very similar to an RFP, which will be a RFP, which is a renewable final certificate so if XYZ bank planes XYZ to developers, which is entitled to RFP, which it can trade, which can sell the power exchange to other banks who have not met their obligations or who don't want to meet their obligation so effectively it also provides that there is an economic value add In the form of RFP which is generated two banks who are taking this risk of lending to the renewable sector and they can transfer it to someone else doesn't want to take this risk for him as a shortfall in the risk which he is taken in this sector so that I think will give a major and if the Government, the Government doesn't have target for any other major sectors. For example, it doesn't have a target for Rd. I need to build, you know, so many million kilometers in the next five years. It doesn't matter. It doesn't have a target that I need to build this much million, this much million capacity of cars that will come automatically because people will invest in less than those sectors, because those sectors, you know, apart from meeting economic criteria, they don't need any social criteria, correct? But yeah, they meet certain economic packages, but for renewable power, there needs to be an especially because of the other spin-offs which are non-economic as part of this application well, that's what, you know, I had somebody proposed the Government, of course, you know this is one of the things which can be thought about. There can be many other innovative parts that can be done to see that, apart from putting a target on uh divide both saying that this is the target I want to meet, there needs to be very clear, actionable item, and one of the actionable items is definitely the financial side, the other actionable items is the regulatory but, you know, these are two very critical pieces which needs to be tackled after we ensure that renewable power obligations and targets can be met.

24:30 Karan Takhar
In the interesting, very interesting statistic that was in the article where if a renewable financing obligation wasn't was imposed, it is estimated that even a 1% obligation will bring in a funding capability almost Rs.125,000 crores just a 1% obligation, right, that's right.

24:59 Sidharath Kapur
You know, I don't think this is the total the balance sheets of all the banks in India, and if 1% will release almost no £125,000, It won't give a major thrust because you know when banks will why? For each other to lend to renewable sector. They will look for good projects, then look for good developers and look for credible developers.

25:27 Karan Takhar
Thank you. Thank you. This is a very helpful conversation. Very last question to you is, do you think India will continue to be a leader In the solar space?

25:40 Sidharath Kapur
I believe so. One, because India has been economic motivation do it because, hey, you know, gas is imported, so whatever gas you buy, you're paying in dollars for it #1, #2 high-quality coal is not available in. What code is available in India is not a great quality, and it contributes to environment deterioration in a very significant rate. Right the good quality code is all-important, so that also means I'll go up on it. If one has to look at energy security for India renewable sector is a very plausible way forward because not only India has got abundant wind, but it also caught abundant sunlight, so this is one area which I think will make a lot of economic sense for India if it is, you know, wants to become, as they say, self-sufficient Atamnirbar which the Prime Minister had called the second thing is that there is a very strong push from the political leadership the Prime Minister himself is very passionate about this sector and he has, you know, the International Solar alliance had been his brainchild. He has talked about one world, one sun, so, you know, there are various initiatives that he himself is driving, and that gets calculated, and the Ministry of Renewable Power itself also has some excellent people, also headed by a very proactive minister, which keep on focusing on how changes can be brought about for the better we make this sector much more vibrant so in my view these factors will contribute to make India definitely a leader in this.

27:42 Karan Takhar
Thank you, Mr. Kapoor. Period time and for this great insights. Really appreciate it.

27:49 Sidharath Kapur
OK, alright, Karan.

27:52 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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