The ambitious target of generating 160 GW of renewable energy by 2022 comes as good news for the sector, says Sumant Sinha, Chairman and CEO of ReNew Power. Speaking to CNBC-TV18, he said that the production needs to be increased by around 7 times to achieve this target and ReNew expects more capital from its existing investors and plans to raise more money from new investors or through public market if required to meet the goal.
Below is the verbatim transcript of Sumant Sinha’s interview with Nisha Poddar on CNBC-TV18.
Q: It has been a long journey for you. I have known you as an investment banker, then CFO of some big companies and now you are the owner of a power company. Which one has been most exciting for you?
A: They all had their own areas of interest for the time that I was doing them. However, clearly by farther most satisfying and rewarding has been my current stand at Renew Power because it is something that I started and I have seen it grown out to this point and that has really been a very rewarding exercise.
Q: You have some big announcement to make that is now 1 gigawatts of renewable energy capacity that your company has managed to get. What are the target levels going forward and how big are you on renewable energy when it comes to India. Of course government has been putting a lot of weight on this particular space as well?
A: The good news is that the government has set a very ambitious target for the sector. That target is 160 gigawatts to be achieved by 2022 from the current number of 35 gigawatts. Which means we have to add about a 125 gigawatts in the next six years which is about 20 gigawatts every year from a current base level of may be around 3-4 gigawatts. We have to really up our game by almost 6 to 7 times of where we are right now. That is really what makes a sector such an exciting sector to be in because the government is already behind it, cost have come down to a point where both wind and solar are pretty competitive now with the conventional side. Therefore there is no real constraint to growth. The only real constraint is the ability for us to execute. Therefore we need to build our capability as rapidly as possible.
Q: What is your target for next five year?
A: If I look at our capacity add so far we have, since we started off maintained a market share of about 10 percent of all new capacity in wind. In solar also if you look at all the allocations that have happened so far since we started over the last three years we pretty much been able to maintain a 10 percent market share in that as well. So, our desire really would be that over the next 6 or 7 years we maintain the market share that we are at right now which is about a 10th of the market. If we can do that and if the government does succeed in adding 120 gigawatts of new capacity then you can do the maths, the opportunity space is very large. So, that is really what we would like to try to achieve.
Q: Where will you get the money to grow? Is IPO on the horizon because many of the power producer’s especially solar power producers have been looking at IPO as well?
A: This is a very capital intensive sector. The good news is that for every five megawatts you set up that allows you to do one more megawatt every year. So, as you keep adding more capacity you have more cash flow to keep funding and fuelling more capacity add. If you look at us right now we raised closed to Rs 4,000 crore of equity from variety of equity investors which are really marquee names and have been willing to back us up for support our growth so far. So going forward there are multiple ways for us to raise more equity capital. Our existing investors can give us more capital. We can raise it from new investors or at some point perhaps you can look at the public markets as well.
Q: You won’t like to dilute your own equity? You are already on a minority?
A: No, I think that one has to be a pragmatic about it. Idea is to build a large company, to build a really good company. As long as the pie keeps growing I think one should not be fussy so much about the absolute percentage that one has. One should be really focused on the absolute value creation. As I said the exciting thing really is to build a large good sustainable company that operates on a really good space. That is where the reward comes from.
Q: You are really not answering the IPO question, is that on the horizon at least in the next year or so?
A: I would say that we will definitely consider it very seriously. I think that our board certainly, we have had discussions and as we look at our fund raising plans we have sufficient equity right now to fund our entire pipeline of 2.4 gigawatts as well which we will probably construct by the beginning of next year sometime. So, certainly after that we will need to raise more capital. Now whether that comes from a private source or a public source is something that we will take a decision on in the next few months time. Certainly that is an area that we are discussing fairly extensively right now.
Q: Looking at the sector on the whole do you think that Budget has done enough for the sector to give that added impetus and how are investors now looking at it?
A: One has to look at the totality of what the government is doing and what they have done so far for the sector is quite incredible. I am a realist at hard so I don’t use large words or words like this without it happening. If you look at what the government has done the target for the national solar mission was 28,000 megawatts by 2022. This government has up that target for solar by 5 times. Not only have they changed their target but they also working very actively to achieve those targets. If you look at the fact that since October- November of last year they have already auctioned of about 5 gigawatts of total solar capacity and there is another 5 gigawatts that is on the table to get auctioned which means that they would have reached that 20 gigawatt target literally by 2017 in terms of actual commissioned capacity. So, they are on pace at a gigawatt of new auctions every month to help us get to that target and there is whole rooftop space which is another exciting area for which there is a fairly extensive target as well which will also hopefully add to this new capacity addition. I am fairly hopeful therefore this target will be met. So, the government is not just coming out of the target is also doing whatever they can do to implement it. Now in the Budget the one important thing that the government did is that they increased a cess on coal from Rs 200 a tonne to Rs 400a tonne. Now that means they will collect closed to Rs 25,000-30,000 crore every year to fund now clean environment projects, not just energy but the environment.
Q: So, that makes you more competitive now?
A: It does, so they have a lot of money that is coming in to support the sector in a variety of different ways. All of that money or at least half of that money if it comes into the sector can go a long way actually helping us at this capacity.
Q: You spoke about the auction process now tell me they have been various reports on how aggressive the auction process has been. Will it be now feasible to make enough margins with this kind of aggression seen in an auction process?
A: That is great question; this is something that we debate in the industry at all points in time. We debate with the government as well. The government has set upon the path of going after auctions because they believe that is most transparent and fair view of allocating capacity and that is a policy decision that they have taken. So, there is no getting around that at this point in time. So, the ball really comes to the court of the industry. In the industry of course there are multiple players. Unfortunately, some of the players have chosen to be super aggressive. In doing so they have bid numbers that really don’t give you any compensation for the risk that you are taking. There are multiple risks, there are risks around execution; there are risk around foreign exchange, there are risk about interest rates, there are risk in the future about equipment performance about evacuation problems and so on, receivables problem. So, those risks at these tariffs are not getting compensated to the developers. So, therefore I think there has to be some way for tariffs to either stabilise while capital cost go down that will then create a little bit of buffer for the margins. So, something like that needs to happen or tariff need to go up by little bit and I am not talking it at about 50.00 paisa or 75.00 paisa unit. I am talking about 15-20 paisa a unit. I think even if that happens they will be sufficient compensation for developers for doing lot of the work they are doing and for taking the risk that they are taking. Keep in mind what is very critical in this sector is that if you want to hit another 1,25,000 megawatts of capacity in renewals and wind and solar we need close to USD 130-140 billion of new capital to come in. Which means we need at least USD 30-40 billion of equity capital; and that equity capital will only come to the sector if there are attractive returns to be made, otherwise that capital has many other possible homes.
Q: Are you saying that profitability could be a risky factor at this point especially with the aggressive bid process because we have seen the same thing in the conventional source of energy?
A: That is a real worry, I think that if you look at the bids that have happened in the last few months some of those bids certainly have been too aggressive and we have to now see whether those projects get build, whether the people who have funded those projects make any kind of returns or not. I should also tell you that there are a lot of assets that are now at this point available for the sale in the secondary market. So, a lot of the people who have bid these assets to begin with are now turning around with the view to selling them or getting equity participation in them. There are separately entire portfolios of solar assets as well available for sale. So, the amount of supply of projects in the secondary market is increasing at a rapid pace. That is not good for the primary market.
Q: Are you taking advantage of that?
A: We would like to provided that people, that the sellers have rational expectations about what kind of value to get. Once that rationalisation comes in and that realism comes in then you will probably start seeing a lot more deals happening. Today what we are struggling for is to find proper long-term capital to come into the sector. The reason you are seeing so many assets for sale is because we don’t have adequate amount of long-term capital in the sector, dedicated capital. That is my concern that if you don’t give proper returns you will not have that capital coming in and if you don’t have it coming in these targets will not get fulfilled. Now the government’s counter point to that which is partly valid is that look if we have more supply projects and list provider of doing projects than automatically tariffs will go up. That is something that we have to see. We have certainly seen tariffs go down now let us see if tariffs begin to go back up or not. If they do how do policy makers truly react to it. Are they going to be as sanguine about high tariffs as they have said or not?