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Greening the grid with power-packed mergers and acquisitions
December, 20th 2017

It can be a pure-play `make-in-India' story in the making. Ever since the US has decided to pull out of the historic Paris Accord on Climate Change, the weather for the renewable sector in the country is turning out to be exciting. The reasons are many. The new and renewable vertical is all set to add new colour to the India growth story going forward.

Geographically, the country has the longest coastal line and shining sun over a terrain of a sub-continental size. If properly harnessed and connected to the national grid, renewable energy could solve the country's long-spell of power outages and slash its import bill to a sizable extent by relying less on shipping in fossil fuels - be it crude or coal.

A host of regulatory tailwinds add sheen to the country's `make in India' renewable narrative. For starters, the Ministry of New and Renewable Energy has firmed the National Solar Mission with an ambitious target of deploying 20,000 MW of grid-connected solar power by 2022.

Further, the government has revised the target of grid-connected Solar Power Projects from 20,000 MW to 1,00,000 MW by the year 2021-22 under the National Solar Mission. Together these initiatives will create an enabling policy framework to make India a global leader in solar energy.

The government has also put the wind into the sail of wind power generation under the National Wind Resource Assessment programme. Ministry, through National Institute of Wind Energy, Chennai and 794 dedicated Wind Monitoring Stations (WMS), has pegged the potential for wind power generation at about 1,02,788 MW. To cut a long story short, the sun and the wind together will trigger a tectonic shift in the domestic energy vertical. The grid-connected wind power capacity has jumped by 5.5 GW in 2016-17, while solar capacity reached scorching heights of 370 per cent in the past three years.

There is a binary to the renewable energy story that has been playing out. It can make the country the low cost manufacturing hub for the world, breathing a new lease of life to power clunker sectors like cement and steel, the core growth drivers of the economy despite their cyclical nature. Solar power tariff is slowly coming down and hit a low of Rs 2.44 per unit, while wind power tariff receded to Rs 3.46 per unit. These are major positives for industry since high energy cost are often cited as major drag on industrial revival and lower capacity utilization.

But a major headwind that has been blowing against the not-so-fashionable renewable energy space was the acute fund crunch. But, this to a greater extent was resolved by the entry of `green bonds' that primed the cash flow by environmentally responsible funds or environmental, social and governance (ESG) aligned investors into the sector. Market regulator Securities and Exchange Board of India (SEBI) also gave a thumps up to the Green Bonds, or the debt papers being issued for raising funds from capital market for investment in the renewable energy space by allowing the firms to list Green Bonds in the trading platform to inject liquidity and give an easy exit option for investors.

Already, a host of firms investing in the renewable energy space have raised money from the market by issuing Green Bonds, though, it is yet to become in vogue with local investment community. But, going forward, with the bonds turning out to be the new green shoots in the capital market by delivering an above average return compared to similar instruments, investment funds and high net-worth individuals (HNIs) are expected to lap up the Green Bonds going forward. Already companies like Greenko, IDBI Bank, Axis Bank, NTPC and many others have raised truckloads of money by issuing Green Bonds from the market with many more renewable firms waiting on their wings to tap the market.

With a brighter map for the future growth laid out with no episodes casting a shadow over the sector, the renewable energy space is fast becoming the green shoot with investors' evincing keen interest in parking their funds in the business. As a natural corollary, growing up in size and scale through arranged marriages and alliances have becoming the order of the day. While some firms operating in the space have already tied the knots, many others are in the look-out for potential suitors to live happily ever after.

This rising M&A activity in the renewable space was a direct offshoot of changing scale, maturity and investor class. The sector has seen substantial thematic mergers and acquisitions. The sector has been fast evolving and three distinct themes are discernible from the on-going spate of M&A activities in the renewable space - strategic investment by domestic players in third party assets, consolidation and global utilities and funds evincing keen interest in the domestic renewable firms which are up and running.

For instance, Tata Power's bulge bracket investment in 30MW wind asset of Indorama, the Hinduja's picking up stake in the 22 MW solar asset of Fonroche, IDFC's investments in 45 MW solar assets of Punj Lloyd and 24 MW wind assets of Jindal steel are a few key inflexion points in renewable sector with domestic firms being the prime movers.

On similar lines, Sembcorp investment in Green Infra and Enel Green Power putting money in the BLP energy are proofs for global funds growing appetite for getting a pie in the evolving Indian renewable space. When it comes to consolidation to enhance scale, Tata Power-Welspun Renewable deal and Leap Green taking over Inox Renewables 200 MW portfolios are a case in point.

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