Financial Investments in the Energy Sector

 

Financial Investments in the Energy Sector

 

Power is one of the critical infrastructure sectors in India, which has witnessed considerable investment over the last few years. The total installed capacity as of December 2018 is 350 GW, of which 64% is generated through thermal power. The remaining power is generated through renewable sources (21%), hydro (13%), and nuclear (2%). Between 2000 and 2018, the sector received FDI worth approximately $ 22 bn, which constituted 5.3% of the total inflows into the country. 

Returns from BSE Power and BSE Sensex (April 2014 - April 2019)

Data Chart
Source: Bombay Stock Exchange


In 2015, the Central Government launched the Ujwal Discom Assurance Yojana (UDAY) to improve the financial condition of state-owned power distribution companies. Under the scheme, state governments were encouraged to take over 75% of the debt owned by power distribution companies over a period of two years. As a consequence, the financial situation of the distribution companies improved; the demand for power increased; there was a reduction in stressed assets, and more funds became available for capital investment.  

In May 2017, in the backdrop of mounting NPAs across various sectors (including power), the government empowered the RBI to direct banks to initiate recovery proceedings under the Insolvency and Bankruptcy Code. The Code allows for time-bound recovery of dues from creditors who have defaulted on repayment. As a result, stressed power companies were pushed into resolution leading to a consolidation within the sector.

The government also launched various schemes such as the Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY) and Saubhagya, which seek to ensure universal electrification. Under the DDUGJY, 100% of the unelectrified villages in the country were declared electrified in April 2018.  

Overall, the power generation capacity in the country grew annually by 5.7% between 2009-10 and 2017-18. As a result of this increase and other steps, the energy deficit in the country reduced from 4.2% in 2013-14 to 0.6% in 2018-19 (based on provisional figures available until February 2019). Similarly, the peak deficit reduced from 4.5% to 0.8% during the same time period. With bright prospects, the sector has seen increased activity in investments, mergers, and acquisition. Table 1 below shows key deals and acquisitions that have taken place in the sector over the last few years.

Table 1: Key deals and acquisitions in the Power Sector

Table

Source: India Brand Equity Foundation (IBEF)


Looking forward, India is gradually shifting focus towards renewable energy with a target of generating 175 GW of power from renewable sources by 2022. Of this, 100 GW will be generated from solar, 60 GW from wind, 10 GW from bio-power, and 5GW from small hydro-power. In furtherance of this objective, India along with France has also launched the International Solar Alliance. The platform seeks to promote cooperation among solar-rich countries to better harness solar energy. India, with its growing energy needs, is at an advantageous position, since it receives sunshine for the most part of the year.

By 2040, electricity consumption in India is expected to increase to 15,280 TWh, indicating a huge potential for investment. The global investor sentiment can be seen in India being ranked third in the Renewable Energy Country Attractiveness Index, released by EY, ahead of countries such as Germany, France, Australia, and Argentina. The emphasis on renewable energy is evident in key investments – the Greenko group acquired Orange Renewable from Singapore’s AT Capital Group for $ 850 mn in 2018. The Asian Development Bank invested close to $ 100 mn in two Indian companies during 2018. Various other firms from countries such as Singapore (AIRRO Singapore Pte Ltd), Japan (ORIX Corporation), Netherlands (ENEL Green Power Development B.V.), and Germany (DEG) cumulatively invested close to $ 150 mn in the renewable energy sector.  

The growing demand for energy and increased participation of private players, both domestic and foreign, offers great potential for investors to enter the sector. The increasing activity in the sector, especially the mergers, acquisitions, and entry of new players, indicates the interest being expressed by various stakeholders. With India’s ambitious renewable energy generation targets, the sector holds tremendous potential for private investors.