Kindly tell us about the genesis of PFS.
When reforms took place in the power sector in 2003, the leading public sector undertakings dealing with power like NTPC, NHPC, Powergrid and Power Finance Corporation, in discussion with the government, thought of setting up an organisation which could encourage power trading in the country. This is how PTC India Ltd. came into existence, and the company started doing long term, medium term as well as short term power trading.
However, since private players were also foraying into the power sector, a need was felt to assist these private players for setting up their projects. But, PTC being a power trading company realised that it was not their job to do funding. Hence, around 2007-08, PTC in association with Goldman Sachs of USA and Macquarie Group set up a non-banking finance company. Started as an unlisted company, PFS soon got listed after the interest of the other two partner firms started weaning off. In 2011, the company made its first public offering. Today, 60 per cent of PFS is owned by PTC and the balance by the shareholders (numbering nearly 100, 000). Initally, we did debt funding for thermal power projects but by 2012-13 we realised that thermal is going to have a lot of issues (because of fuel availability issues) and so we shifted our focus to renewable energy (more on wind and solar).
From the total pie of PFS’ funding, what is the share of thermal and renewables?
As of today, the share of renewables is 37-38 per cent, thermal is 55-56 per cent and the remaining 6-7 per cent is for logistic projects. It is an interesting emerging field. Earlier, Railways used to carry out most of the jobs including storage of goods, etc. But, now they are offloading this work to publicprivate partnership companies. Going forward, our wishlist is to have 50 per cent of the funding for renewable energy projects. This year, we are going to sanction around Rs 4,000 crore of which Rs 3,000 crore will be for renewables. Of the balance (Rs 1,000 crore), half would be for thermal and the rest in the form of structured financing.
With the new government’s focus on renewable energy and boost to infrastructure development projects, how do you see the mood of financial institutions and banks for offering finance to the power sector?
Besides issues with regard to coal availability, there were also concerns about promoters not being able to bring in equity. As a result of these issues, projects were getting delayed and cost overruns were happening. All of this led to the banks becoming reluctant to lend to the sector. Fortunately, there are a lot of specialised financial institutions like Power Finance Corporation and REC that can lend even the entire 100 per cent of their portfolio to this sector. Also, with their balance sheet size growing, even banks are now coming back on track to finance power sector projects. They are developing a more positive outlook towards the power and renewables sector and some of them have in fact, already become active in financing renewable energy projects. Going forward, renewables will be a good business proposition for banks.
Could you tell us about some renewable energy projects that PFS has recently funded?
Most of the top players in the renewable energy space are our partners, and our wishlist is to further expand this list. In the coming 1-2 years, all the major names who are not yet associated with us, will become our partners. Having said this, considering that projects as huge as 1,000-10,000 MW are being contemplated (even by the public sector), we look at having a share in their pie as we are not in a position to completely finance such big projects.
There seem to be very few takers among Indian renewable energy firms for the promised US funds aimed at boosting renewable energy projects, thanks to the uncompetitive pricing. Your comments.
The US has 2-3 ways of lending; one of course is through the Exim Bank which encourages export of solar equipment from their country. As far as Indian developers are concerned, they cannot be put to the risk of foreign currency unlike for instance, the textile industry which can take a loan in foreign currency as they would ultimately be exporting to other countries and there is a natural hedge. Power is a commodity which is sold within the country, as a result, there is no natural hedge.
Till recently, the swap cost for converting the loan currency into Indian rupees was 8 per cent per annum. So, if one borrows from the International Finance Corporation at Libor (0.5%) plus 200 bp, the total rate (2.5% + 8%) comes to 10.5 per cent. On the other hand, in India, the borrowing happens on the base rate, which is around 10.25 per cent. Hence, it does not make sense to borrow from an international organisation at a rate which is higher than domestic cost. Fortunately, the swap cost is going down to nearly 6-6.5 per cent depending upon the period of borrowing. If the swap is for one year, the rate is low, and as the duration goes up, not just the rate goes up but the availability also declines.
Recently, Prime Minister Narendra Modi mentioned that leading countries of the world should collaborate with India in undertaking research to ensure that storage of solar energy can be done at affordable rates. Further, if renewable energy sector can be put in the priority sector list, banks will be induced to lend more to the sector and the cost of borrowing will also come down. In addition, lending to green bonds could also be encouraged, which will open new avenues for banks and financial institutions who are active in this space.
Although there are enough business opportunities in the power and energy sector, the investment level till the middle of the 12th Five Year Plan has been nowhere near the target. What are the reasons and is there a financing model that you could suggest?
Since the interest rate is the most crucial aspect for a private developer, they would prefer to have it in single digit so that their cost is reduced. At the backdrop of climate change and sustainability issues, a lot of work is being done in the renewables space. However, even today, the US, UK and Europe are dependent on subsidies. We need a scenario where there are no subsidies, and renewables become competitive vis-a-vis thermal power generation. The issue with solar is that power can be generated only during the day, while thermal is an ongoing process. The need of the hour is to have affordable storage technology. Recently, Prime Minister Narendra Modi mentioned that leading countries of the world should collaborate with India
in undertaking research to ensure that storage of solar energy can be done at affordable rates.
Further, if renewable energy sector can be put in the priority sector list, banks will be induced to lend more to the sector and the cost of borrowing will also come down. In addition, lending to green bonds could also be encouraged, which will open new avenues for banks and financial institutions who are active in this space.
Kindly share your views on Budget 2015-16 announcements pertaining to the renewable energy sector.
The budget has substantially increased the renewable energy (RE) target to 1,75,000 MW by 2022 and it reinforces the resolve of the government to push for clean and green energy. A key positive for the renewable energy is the tax-pass through status considered for Alternate Investment Funds. A large portion of equity investment in RE is expected to come from private equity capital which is sourced from global markets. These clarifications are expected to provide further impetus to private equity inflows in the sector. Tax free bonds, which have been suggested for roads, railways and irrigation sector could have been considered for power sector as well. This could have helped bring down cost of funds for institutions funding power sector projects. With increase in service tax from 12.36 to 14 per cent, the cost of third party operation and maintenance for power projects (including for renewable energy projects) may increase marginally and this may prompt project developers to go for in house operation and maintenance. Overall, the Budget is quite positive for companies like PTC India Financial Services, which are primarily engaged in financing of renewable projects and a lot more projects are expected to come up in the renewable sector over the next few years.