More power to InVTs

Sabyasachi Majumdar/Girishkumar Kadam | Updated on May 10, 2021

The government’s focus on clean energy will drive big investments

With the focus on infrastructure financing and criticality of infrastructure from the country’s economic growth perspective, Infrastructure Investment Trust (InVT) regulations were introduced by market regulator SEBI in September 2014.

InVT is mainly a collective investment vehicle to enable developers of infrastructure to monetise their assets by pooling them under a single entity (trust). Subsequent amendments to InVT regulations by SEBI have also remained favourable — most notably being the increase in leverage cap from 49 per cent to 70 per cent subject to certain conditions for publicly listed InVTs as well as no restriction on leverage for private unlisted InVT.

Thanks to supportive regulatory framework along with an improving market acceptability, overall assets under management (AUM) under InVTs in the country have grown steadily over the last six-year period to about ₹1.3 trillion through seven InVTs. So far, the fund raising by InVTs has been seen only in some infrastructure segments namely power transmission, roads, telecom towers, and gas pipeline.

The renewables (RE) sector is another promising infrastructure asset class for InVTs now, given the significant funding requirements expected in the country over the long term led by solid policy push by the Centre.

The Centre’s policy thrust remains strong with cumulative RE capacity target of 175 GW by December 2022 and 450 GW by 2030 [out of which 93 GW is installed as on February 2021]. This itself is likely to result into investment requirement of about ₹18 trillion over the next decade, to meet such ambitious policy targets.

An improving tariff competitiveness seen particularly in solar/wind/hybrid energy, along with the favourable regulatory framework remain the strong demand drivers for renewables in the country. Regulatory framework is also well established and remains favourable for RE, given the must-run status availability and renewable energy purchase obligation (RPO) norms laid out by State Electricity Regulatory Commission (SERCs).

From the developers’ perspective, InVT presents an opportunity to unlock an equity capital in the operational projects which in turn, provides a yield-based income for the long-term financial investors like pension funds, sovereign wealth funds and insurance companies. While there have been only few announcements of InVTs in renewable by prominent developers, the opportunities for the investors in long term are expected to remain significant.

Even assuming 20 GW of renewable assets through InVTs over the next 3-5 years, the overall AUM through this is estimated to increase by about ₹1 trillion. Further, the key factors such as portfolio diversity and dominant mix of operational nature of projects along with revenue/cash flows stability by virtue of long tenure power purchase agreements (PPAs) should support the business profile of such InVTs in renewable segment.

Further, the higher share of operational renewable assets having relatively superior and long tenure PPAs with stronger intermediary counter-parties such as Solar Energy Corporation of India Ltd (SECI) and National Thermal Power Corporation Ltd (NTPC)/NTPC Vidyut Vyapar Nigam Ltd (NVVN), is likely to be preferred by the investors in such portfolio, given the strong comfort over the standalone credit profile of such assets. Availability of such renewable assets with central intermediary PPAs is also expected to increase in the overall renewable installed capacity, from current mix of about 13 per cent as on March 2021 to about 30 per cent by FY 2025, given the strong project pipeline.

PPA delays

With a stable outlook on renewables, the incremental annual RE capacity addition is expected to remain at about 11-12 GW over the next 3-5 year period, with a relatively higher share of solar capacity addition. While the project pipeline remains strong at about 55 GW, key downside risk in the near term arise from the risk of delays in signing of PPAs and power sale agreements (PSAs) for about 20 GW capacity tendered by SECI and NTPC, given the expected increase in solar tariff rates amid the imposition of basic customs duty on imported solar PV cells and modules. Further, the resolution with respect to tariff renegotiation matter for the affected wind and solar IPPs in the State of Andhra Pradesh remains still awaited. More importantly, the financial position of state-owned distribution utilities, being the ultimate off-takers, still remains weak in majority of the States. While the Centre has initiated reform measures through draft amendments in the Electricity Act amid other things, timely implementation of the same remains to be seen.

There is also an urgent need for the State governments to have a strong political will and focus towards the financial turnaround of their respective discoms, so as to minimise operational inefficiencies and ensuring the viability in the operations.

Renewable InVT thus remains a win-win proposition both for investors and developers in the renewable segment. Stable regulatory environment and the market acceptability with respect to the risks associated in the renewable sector remain key factors too.

Majumdar is Senior Vice-President and Group Head, and Kadam is Vice-President & Co Group Head, ICRA

Published on May 09, 2021

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