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With installed renewable capacity of 103 gigawatts (GW), or 26 per cent of total capacity, India is steadily moving towards its 2030 renewable energy target. But achieving 500GW of non-fossil fuel capacity by the end of the decade is a tall order.
Availability of cheap long-term finance is among the most critical prerequisites given the capital-intensive nature of renewable energy technologies which require the majority of costs to be front loaded.
Institutional investors have the capability and the appetite to provide the huge, long-term capital infusions needed to support renewable projects.
India also has a vast and growing pool of institutional capital. The life insurance industry has combined assets under management (AUM) of ₹39 trillion (as of March 2020). Historically, these assets have been invested in Central and State government securities and investment grade debt securities of the largest corporates in the country. In 2020 more than 60 per cent or ₹23.7 trillion of investments were made in Central, State and other approved securities.
Pension funds from the National Pension Scheme (NPS) and Employee Provident Fund Organisation (EPFO) which had a last reported AUM of ₹6.6 trillion (October 2021) and ₹16.6 trillion (March 2019), respectively, are another pool of domestic institutional capital which can be deployed at scale into the renewables sector.
While the risk associated with direct investments in renewable energy might not yet qualify as investment grade for domestic institutional investors, investments through the infrastructure investment trust (InvIT) route provide a viable option for them to take sector exposure.
InvITs are pooled investment vehicles which enable direct investment of capital from investors in primarily operational infrastructure projects. Besides diversifying risk by investing across a pool of assets, key features of InvITs such as mandatory distribution of 90 per cent of net distributable cash flows to the unit investors, a leverage cap of 70 per cent on the net asset value, and a cap on exposure to assets under construction help de-risk these investments further.
Regulatory changes
The regulatory environment is also changing to accommodate InvITs as an appropriate instrument for institutional investors. Earlier this year, the Insurance Regulatory and Development Authority of India (IRDAI) allowed domestic insurers to invest in debt securities and subscribe to units of listed InvITs.
In a similar move, the Reserve Bank of India in November 2021 amended foreign exchange regulations allowing foreign portfolio investors (FPIs) to invest in InvIT debt securities. Further EPFO, which manages the biggest pension corpus in the country, recently approved investing up to 5 per cent of the annual deposits in alternative investment funds (AIFs) including InvITs. This is in addition to the already established rules by the Pension Fund Regulatory and Development Authority (PFRDA) which allow private sector (tier 1) NPS subscribers to invest in units issued by InvITs.
To top it all, in August 2021, the Securities and Exchange Board of India (SEBI), reduced the trading lot size of listed InvITs, to increase retail investor participation in these securities.
IRDAI’s approval came as a welcome move with insurers lining up to subscribe to the InvIT launched by state-owned Power Grid Corporation of India Ltd (PGCIL) and a non-convertible debenture (NCD) issuance by IndiGrid, both power sector platforms.
While 10 per cent of the total book of IndiGrid’s NCD issue came from insurers, PGCIL’s InvIT raised ₹34.8 billion from anchor investors including insurers.
InvITs are steadily making inroads into the Indian financial markets as an instrument of choice for power sector infrastructure owners to monetise their assets and for investors to gain exposure to the sector. A comparison here with its developed world counterpart, yieldcos, can provide valuable lessons.
In 2015-16, several listed yieldcos saw their market capitalisations tank when the yeildco bubble burst. A major reason for the debacle was the massive amounts of debt capital taken up by the yeildcos in order to continue growing their dividend payouts.
In an Indian context, InvIT norms are more stringent compared to yieldcos with leverage restrictions in place, but investor expectations regarding risk-return dynamics need to be moderated so that a similar situation does not occur in India.
The writer is Energy Finance Analyst, Institute for Energy Economics and Financial Analysis (IEEFA)
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