Long wait for solar energy IPOs

Will India have its first listed renewable energy company anytime soon? The answer is still clouded in uncertainty. In September last year, the ACME Group had filed a draft proposal with the markets regulator to float an initial public offer for its solar power arm. Its initial plan to raise Rs 22 billion was reduced to Rs 10-15 billion later, but even that didn’t work out, as the Securities and Exchange Board of India objected to ACME’s valuations in the initial red herring prospectus.

In February this year, Singapore’s infrastructure conglomerate Sembcorp filed for an IPO to list its India energy unit. It reportedly planned to raise over Rs 40 billion. Nothing has been heard as yet. Then there have been talks about Chennai-based solar energy firm Refex Energy’s plans to go public. Names of Mytrah Energy and Adani Green Energy have also been doing the rounds in the IPO circuit, with no results so far. 

Hopes have soared once again, with the mother of all renewable IPOs getting Sebi’s approval last week. ReNew Power is expected to go in for a public offer that can raise more than Rs 45 billion in one of India’s biggest listings so far this year. Goldman Sachs and Canada Pension Plan Investment Board are among the backers of ReNew, which has close to 4,000 megawatts of operational wind and solar power generation capacity and another about 1,700 megawatts under development.

ReNew has impeccable credentials. Founded in 2011 by Sumant Sinha, it recently bought Ostro Energy in one of India’s biggest renewable energy deals. Its marquee investors include Abu Dhabi Investment Authority and JERA — a consortium of two of the biggest Japanese utilities. Even with this impressive track record, the ReNew IPO, according to a report in The Economic Times, is likely to be delayed due to difficulty in filling the anchor book demand at the valuation the management was expecting. ReNew has not yet responded to the report, though its earlier plan was to come up with an IPO before the second half of this year.

The uncertainty over the timing of the ReNew IPO mirrors the confusion over the state of the solar industry in India. There is no doubt that India has made impressive strides in renewable energy, but the problem is that tariff-based competitive bidding and competition are squeezing equity returns of the players. But ReNew is in a leadership position by virtue of the scale it has built up, and looks better prepared to withstand the shocks caused by some illogical bidding by some of its competitors who seem desperate not to miss out on the opportunity provided by India’s grand plan of adding 225 GW in clean energy by the end of 2022.

The euphoria, which made some of the players in the industry blind to potential risks, will cost the industry hard. ACME, for example, had bid a record low of just Rs 2.44 for every unit of electricity it eventually produces from a solar farm in Rajasthan in May 2017, giving rise to growing fear over a potential solar bubble. For many, these are products of short-term thinking, which could leave projects at risk of collapse even though others have touted falling solar electricity prices as an example of India’s changing energy landscape.

 
There are other concerns, too. The ambiguity over the goods and services tax structure for the industry is also raising serious concerns over the viability of many projects. Though the GST rate is 5 per cent, the Authority for Advance Rulings recently held that solar projects would face an 18 per cent tax, and not 5 per cent. There is more. The industry is new, so grandiose central government plans fumble at the state level. 

Several state governments such as Uttar Pradesh and Tamil Nadu have not kept up with their power-purchase obligations. 

Then there is the problem of safeguard duty on solar panels imported from China and Malaysia, which was notified on Monday, making India the second country after the US to impose such duties. More than 90 per cent of panels and modules used in Indian solar projects come from these two countries. This has left the industry concerned about the viability of around 27,000 Mw of projects, some of whose PPA/bids are closed. According to ICBC International Research, the duty may have the opposite effect in the short run. ICBC’s Hong Kong-based analysts have said that India will continue to rely heavily on imports from China over the next one to two years as imports will remain cheaper than domestic production even with the tariff. The tariff, they said, is likely to harm domestic project developers, raising costs by at least 12 per cent, without affecting China’s position as the key supplier of panels and modules.

In short, the solar energy ecosystem will founder if these concerns are not addressed. The World Bank has described India as having “among the best conditions in the world to capture and use solar energy” as the majority of the country’s tropical landmass is located optimally for peak solar radiation. The government has to make sure that the industry doesn’t burn itself out.