Q: You commissioned projects totalling 800 megawatts in 2020. How was 2020 for you?
2020 has been quite remarkable. On the renewable side, we had Solar Energy Corporation of India (SECI)-2 and 3, two big wind projects, which had been partly commissioned before Covid-19, but they both had substantial commissioning left. Both were commissioned in 2020. We got a significant amount of support from all our business partners, also from our own team. Industry has been slow in executing SECI projects, we are the only ones to finish our projects. The second thing that happened through the year was that we took our entire portfolio monitoring and remote operations online. It was not easy; we have about close to 1,000 wind turbines spread across India. We got real time data feed, typically on about 200 parameters per turbine. The data came to central servers and then 24×7 we are monitoring them, identifying issues, and doing predictive maintenance. We had been working on this system through 2018-19 but it came into its own in 2020. So, the second thing is a big digital shift.
The third thing that happened for us this year was we got back onto the growth path. We consciously took a little bit of a step off the accelerator on growth because we had won these 800 megawatts of SECI first thing has to be to deliver these rather than just accumulating more and not delivering. So, having delivered these now we are back in the game. We picked up 400 megawatts in this SECI.
Q: Your bids for Rs 2 a unit for the Rajasthan solar project was rather aggressive. What gave you the comfort to bid at the rates given that module prices are rising?
I think we did catch a few people by surprise. But we never compromise on returns or compromise on risk. We were confident with our bids. I think the interesting thing is that after us, there have been 2-3 bids that have been lower than that. I can’t get too much into the mathematics behind the bid; it’s highly competitive. Directionally, there are three-four things special about this. Firstly, it’s in Rajasthan so it offers the best radiation, compared to other states. Secondly, land prices are lower in Rajasthan. Thirdly, this is a STU (state transmission utility)-connected bid and did not have many of the charges that were part of the ISTS (interstate transmission system) connected bids. So, the connectivity charges to connect to the substation are lower than what they are to connect to a PGCIL substation. That itself brings down the tariff by 14-15 paise. Also, tax rates are lower from before.
Q: Just as one started to think that a sense of rationality has started coming into the bids for solar power, we again see aggressive bids coming in. What is the trend going to be in bidding?
You’re very right. But the larger game is the game of rationality. My sense is that we are either at the bottom or pretty close to the bottom now, in terms of tariffs on solar power. In the next three-four years, we expect tariffs to rise. If you look at the wind site, the original equipment manufacturers have got into very difficult financial positions, so they have increased prices.
On solar, custom duty is being introduced to protect the local manufacturer. Then the benefits from the waiver of interstate transmission system (ISTS) charges will be only for projects commissioned before June 2023. If you account for 18 months of project implementation, then projects awarded after December 2021 will not get the benefit. If you factor in delays in some projects, then projects awarded even in June 2021 may not get the benefit. So that means we’re almost at the end of ISTS as far as new projects are concerned today. If ISTS benefit goes, it’s unclear what the impact would be, but it would certainly add somewhere between Rs 1- Rs 3. Wind people are moving towards more sustainable pricing, and we are looking at a very different pricing regime in solar power.
Q: You said that the company’s focus was to execute the 800 mw that you were building, but now you want to add more. So, what is the strategy now?
We are certainly on the growth path. We will be looking forward to participating in more bids. We are already strong in wind, so while we will continue to bid for wind, we will focus more on solar now. We will rebalance towards solar. There are many assets available for acquisitions, we’re keeping an eye on that. We are looking at assets that can add scale.
We have 2.1 gigawatts of renewable energy capacity, of which 1.7 gw is operational and 400 mw is under construction. Besides that, we have 2.6 gw of thermal capacity. So, we have a portfolio of 4.7 gw, including projects under execution. We are actually not giving out a target right now, but we are certainly going to actively participate in the opportunities.
This is the third phase of Sembcorp in India. The first phase was the entry in 2010-15, when we first set up thermal capacity and set up the renewable energy company. In the second phase, between 2015-2020, we have been focusing on creating systems, building organization and scaling up on the opportunities that we came into. We also developed our own operation and maintenance business.
Q: What would be the capacity addition in the growth phase? What would be the investment?
We haven’t announced anything yet. If you look at Sembcorp globally, it recently spun out its marine business, which was about half of the asset base. The company has become a very focused energy and urban solutions company, so there’s really very little restriction for us. The capacity addition restrictions will come from the opportunity in the market, rather than from our ability or willingness to grow. Before the restructuring, India was about 25% of the global asset base. Post restructuring, India accounts for nearly half of the asset base. We are the largest solar power developer in Singapore, with 300 mw under development, we are moving ahead quite fast in Vietnam, we also have renewables business in China. All of these will grow. As a global company, it gives us the advantage of knowing what’s going on around the world and prioritizing one geography depending on the opportunities it offers at the time. There’s no doubt that India remains one of the most attractive renewable markets despite being one of the toughest markets.
Q: You have been looking at acquisitions proposals for the last few years, but you haven’t gone ahead with any deals. What are you looking for?
We have done acquisitions in India; we acquired a thermal asset and we entered renewables initially through M&A. Two things matter– valuations and capability. When the combination of the two is right, we, we will look at it. Our focus will be on renewables. We are a 2 gw and something very small will not make sense. We feel that we have built the capabilities in India, so we don’t have to pay a premium to grow. It will not be an M&A at any cost. There are no major capability gaps, it will be about scale.
In the past we have added 300-400 mw every year organically, we will certainly be looking at more than that now. I can’t commit a number right now, but two things are clear– we are not desperate for acquisitions, and the commitment to scale up in India continues. Will we be at a multiple of size, relative to where we are today in the next three to five years? Yes. We are not looking at incremental growth but a fairly ambitious growth.
Q: What about your operational assets? Any plans on monetizing that?
We are examining it right now. If we can find financial investors with a lower cost of capital, who want to participate in those assets, we are open to that. We are examining all options–InvIt and traditional structures– but it’s too early. We don’t feel we have the right scale for an IPO right now. We had filed for the listing of the combined entity three years ago, but at the time it seems the market wasn’t ready for that. Since then, investors’ interest has changed very significantly towards sustainability stocks. So, at some point in the future, we would want to get listed.
Q: There are still issues with discoms. Some are dragging their feet on signing pacts while others delaying payments. What is your overall assessment? And what are the big challenges that you think we need to focus on?
The transition from being largely conventional fossil fuel-based to a large renewable base is tough. There will be problems at every stage. But the question is what is the mindset and willingness of the government to sort out these problems? We are now entering a new phase in renewable energy development in the country and we have seen a lot of government support. The proposed changes to the electricity Act are a very important part of it. There are some very good measures proposed in this act. Some of the measures that were proposed earlier could not come through and the current amendment has fewer measures, but they are good measures. The delicensing of distribution will introduce competition, which will in many cases succeed very well. The other thing is the tariff policy that we are looking forward to for cost-reflective tariffs. Third step is regarding payment delays; a very good step was taken in August 2019 on letter of credit and it worked well till Covid hit. Had it not been for the kind of support that the central government and the state governments have given by working together on the liquidity package for the power sector, the power sector would have been shut down by now.
I think the other big remaining set of problems is really in two areas– one is to make sure that there’s enough transmission capacity and access to global capital, both debt and capital. It’s the right time to take steps to ensure availability of long-term debt.
Q: The government has announced the much-anticipated custom duty on solar equipment. How much of an increase in project cost could this lead to? What will be the impact on tariff?
As modules are a major component of the project cost, the custom duty will have a sizable impact on the cost of solar projects in future. Though a broad range of factors affect tariff, this move can potentially lead to an increase of 50 to 55 paise per unit.