In an exclusive interview with ETEnergyWorld, Sanjay Aggarwal, Managing Director of Fortum India shares a perspective on the company’s growth plans and the challenges being faced by developers in the Indian renewable energy sector.
New Delhi: Finland-based energy company Fortum is working aggressively to implement its plan to i nvest up to Euro 400 million in India. The domestic renewable energy sector is facing some headwinds but the long-term outlook is bullish, Sanjay Aggarwal, Managing Director of Fortum India and the Global Head for Solar Power at Fortum, tells Sudheer Pal Singh in an exclusive interview. Edited excerpts..
How does Fortum view the renewable energy market and what has been its key focus areas?
Globally, Fortum has been operating in the CO2-free space. We have a lot of hydro, gas and nuclear power capacities back in our traditional home markets– across Finland, Sweden, Norway, Russia etc. Entering into solar was a first step towards entering the renewable energy segment. We publicly declared in 2016 that we would invest between Euro 200 million and Euro 400 million in India in the solar power sector. Before that, we had bought a small operating plant to understand the technology and learn. Once we acquired necessary competencies, we went on to construct our own 10 MW plant in MP. We subsequently bid for Bhadla power plant in Rajasthan and Pavagada project in Karnataka. We wanted to see the construction cycle of the bigger plants too. We have an appetite of taking around 200-250 MW capacity projects every year. Of course, it has to meet our internal criteria of returns. We have so far focused specifically on solar plants within the solar parks where the counter parties are SECI or NTPC. Now we are open to look at states which have better credit ratings. In some states, we would be willing to look beyond solar parks and beyond SECI and NTPC as well.
Why the preference for solar parks?
This is because we are aware and have faced issues relating to land acquisition and power evacuation. In a solar park these issues are seemingly well taken care of. But I must admit that projects within solar parks, too, have their issues with respect to land and evacuation. But overall, the challenges are lesser in a solar park.
What is the status of the Euro 400 million plan and what is your view on the investment sentiment in the sector?
In terms of investments, I would not like to talk about specific numbers but our ambition and vision is clear. Along with our financial partners, we should be able to do around 200-250 MW per year. We would be happy with that level of growth. We bid only for projects in the solar parks and we have been successful and going forward we would continue to bid. Going forward, we are willing to look at projects outside the solar parks too. We believe, in the solar sector, a lot of consolidation will happen within the market but finally it would be the utilities and the Pension Funds who would rule the roost. I do not think anybody else would have the appetite for bond like lower returns. In the past, people have made decent amount of returns. With module prices hardening, taxes and duties environment being uncertain, risk adjusted returns have come down. In the past, nobody was pricing in risk as the ensuing euphoria around renewables wrongly assumed that there are no risks and with favorable winds like softening of module prices in the past, it seemed that music would not stop. But it had to and it has now.
The Eco Survey 2017-18 says tariffs have gone down to a level where projects can be unviable. What is your view?
We should not draw too many conclusions from some lower tariffs. This is because different developers and investors are at different stages of growth in terms of how much capital they have or are chasing. In case of large portfolios, one can still play with couple of hundreds of Mw capacity projects. But if one has to build a business consisting of projects which are in single digit equity returns, then the viability is low. Sustainable businesses cannot be built on such low returns. We would be setting ourselves for failures if we presume that that is the way to do this business. It would be wrong on my part to comment on whether the tariff-related calls taken by developers are unreasonable. If you are very optimistic, you might land up with high single digit IRRs. And if some risks materialize, you will be in lower single digit IRR. So, from a project specific perspective, one has to see if a pooled weighted IRR across the platform moves the needle. For some, I am sure that it does not, so that is fine by them. But on a holistic basis, you cannot have a business which is perpetually in high to low single digit IRRs. That is not a business worth doing on a standalone basis. So, one cannot make a theory out of certain tariffs observed in the past.
The Economic Survey says that it may be the time for rollback of some subsidies and incentives in the renewable energy sector. What is your view?
I think every industry goes through these phases. Around a decade back, tariffs for thermal plants went down even sub-Re 1 and there was a sense of euphoria and all sorts of logic were spun around. And we all know stressed situation of several thermal assets. Similarly, there was a huge euphoria in hydro plants as well. Developers paid excessive premium apart from obligation of supplying free power, all seemed so nice and perfect at that time and of course all sorts of logics were bandied around and now things are very different. Every other developer is struggling with either court cases or partially built and stranded projects with huge cost and time overruns and nil visibility of viability. I think in the long run, the market would find its own feet. There would be casualties as we go along. It is difficult to speculate that in projects wherein IRRs are in single digits, whether those projects can ever be funded on a non-recourse basis.
I think the renewable energy sector is struggling with several issues and uncertainty. For example, today, there is uncertainty on what is the customs duty. With respect to safeguards duty, one hears voices that projects which have been bid before the duty comes into play would be exempted. But I do not hear the same voices with respect to the issue of customs duty. Also, the proposed Anti-Dumping Duty is an issue. In this atmosphere of uncertainty, it is very difficult to take a call. An aggressive entrepreneur might take a call despite this uncertainty on safeguards duty but in all fairness, in a reverse bidding, at least all the situations should be certain. Otherwise, the sector would suffer at some point of time. If you are working on very optimistic single digit IRRs, may be you are hoping that it might improve to lower double digit IRR. But if any issue comes up, it would come down.
The Director General of Safeguards (DGS) has proposed imposing a 70 per cent safeguards duty. There is a view it would be too high. What is your view?
I am sure the government would look at the merits and demerits of the duty and its quantum. In my view, under no circumstances should a developer get impacted by this. When the projects were bid out, it was not known that this safeguard duty would come up. The WTO has its own rules with respect to safeguards duty which deal with whether the domestic industry has got impacted and whether there have been excessive imports. We need to see what the domestic industry is producing and what the quality standards are. On an overall basis, one should think about what is the objective of this duty — whether the objective is to have a reasonable tariff or to increase domestic manufacturing irrespective of the costs involved. Every country has its geographic advantages and disadvantages. I think much more effort should go into doing an interest subvention scheme – just as it was done for textiles – to promote and handhold the domestic industry. Duties like safeguards and anti-dumping have never worked in the past. It goes without saying that if the duty is fixed at 70 per cent, the tariff will go up. But I am sure there is a mechanism to holistically evaluate the situation on a clear parity basis. For example, there are many types of modules which are not even manufactured in India. If the objective is to promote domestic industry, slapping these duties may or may not work.
Fortum is also focusing on electric vehicles. What is the strategy for India?
Globally, Norway has maximum per capita electric vehicles in the world and the largest network of charging infrastructure too. We are setting up these in Sweden and Finland as well. We feel that it is only a matter of time before EVs become a reality in India as well. That is the way to go and infrastructure will play a key role. We do not manufacture charging stations. We manage the cloud network which is responsible for making sure that various charging stations talk to each other. And sharing of data occurs on aspects like how much charging a battery requires. We have decided that we will set up around 150 pilot charging stations in India. Two of these have already been set up in Delhi. We are looking at various cities and we have a MoU with Nagpur Municipality as well. So, we feel that business-wise this is another leg of us. Finally, our involvement would be in the cloud technology related to EVs but to begin with, we are willing to go down the path of investing in setting up the charging infrastructure.
What is your assessment of this year’s budget as far as the renewable energy sector is concerned?
We continue to view India as a strategic investment for us. The renewable sector is rapidly growing and this year’s budget has some important announcements with respect to the solar power industry. The first is to buy surplus solar power generated by farmers in solar parks. Once the roadblocks are addressed in both policy and infrastructure, there is likely to be much more uptake of solar rooftops. In addition, the government has streamlined the capital allocation towards creating solar parks and associated infrastructure for the sector. These are all signs that the Indian solar power industry is likely to grow and create more jobs with expansion of this sector.