India has been witnessing a sluggish demand growth for power amidst COVID-19. It has affected both thermal as well as renewable energy (RE) sector. While thermal sector (coal) plant load factor (PLF) is coming down continuously amidst no new generation building up, renewable energy held its ground through several government measures despite no new appetite shown by the distribution companies. The pipeline is constantly building up for renewable energy assets through new bidding by SECI (Solar Energy Corporation of India) and NTPC (National Thermal Power Corporation). The policy push to support renewable energy by providing it the most run status helps in building momentum for the investors.

There are enough indications that RE will be the major power generation driver of the country. NTPC has a plan to have a portfolio of 40GW RE addition by 2032. With no new coal capacity addition in its portfolio, it is aiming at acquiring RE assets in the country. Adani and Tata power that is currently having around 3GW operational RE portfolio are looking at further extensions to their renewable capacity.

While the sector is promising, promoters are finding it difficult to raise fresh capital for new projects. Overleveraging in renewable energy leads to stress in the sector. While NBFC funding is drying up, banks are reluctant to provide fresh capital due to NPA worries. To deleverage, promoters are now seeking alternative routes to tap capital from global equity investors, long-term funds such as pension funds, insurance funds who are willing to invest in the RE sector in India. In this context, infrastructure investment trusts (InVITs) are becoming an attractive investment vehicle for them.

What are InVITs and why are they required?
InVITs are investment vehicles/trusts where in promoters of the InVITs are required to pledge their operational projects with stable cash flows. Investors would be required to invest in the new asset class that would provide them a yield over a long-term period, usually over the life cycle of the project. Investors could be pension funds, insurance funds, global institutional investors, high net worth investors, banks, mutual funds and even, retail consumers in case of public placement of the InVITs.

InVITS as a concept is for long-term infrastructure projects and, thus, suitable for investors who are looking for continuous yields for a long time. The long-term risk-free capital is called patient capital. Generally, in investment decisions, retail investors are comparing yield in InVITs with yield from government bonds, corporate bonds and fixed investment instruments. InVITs are liquid in nature as these can be listed in stock exchanges and traded. In this case, it is termed as pubic placement of InVITs. Otherwise, it can be offered to selected large institutional buyers, funding agencies, banks and can be termed as private placements of InVITs.

As far as risk is concerned, while bonds are categorized into low risk and low return instruments, InVITs falls under low risk and medium returns category and is good for risk-averse investors. Generally, retail investors would look for investments that are medium risk and high returns category, mostly like mutual funds. Thus, mutual funds are preferred choice for the retail investors.

In InVITs, returns are linked to the performance of the underlying infrastructure assets and, thus, operating risk is high in such asset category. However, there is no construction risk as majority of the assets (minimum of 80% of the total assets) are operational in nature. The good thing is that a certain yield is guaranteed as these projects have long-term contracts with counter parties.

In case of renewable energy assets in the country, many project promoters’ capital is locked for a longer-term duration in this kind of projects; hence, there is little legroom available for them to invest in fresh projects. In addition, the projects are highly leveraged and so, there is little scope of raising fresh debts from the market. Recently, Tata Power has declared that it will be coming up with first RE InVITs in the country and will deleverage its debts in a phased manner. While this is a welcome step, it remains to be seen how investors would react to such an InVIT, given that renewable energy sector has its own positives and negatives and grappled with myriad of challenges.

Issues associated with renewable energy projects
While the idea sounds good for an InVIT for RE operational projects, the sector has some inherent risks apart from the operational risks of individual projects that will be a part of the InVIT’s risk portfolio. Also, the ability of the promoters to add new projects to grow the InVIT portfolio of operational projects is also a major challenge.

The RE sector in India also faces with various other issues that need a critical evaluation of the sector for any investment decision. Currently, the gap of marginal cost of power between RE and thermal has reduced drastically and RE enjoys a cost advantage. But, it is still not a reliable source of power due to its intermittent nature and cannot provide for the base load. The RE projects are thriving in India due to friendly regulations like must-run status for the plants, several exemptions in tax and duties, funding support from the government, offtake assurance through central agencies like SECI and many other push factors.

It has its downsides too. For instances, RE projects are facing payment issues in Andhra Pradesh as the state demands a price revision for already executed PPAs with the developers. This kind of situation creates an uncertainty to the future of RE projects and dent investors’ confidence. These kind of political and regulatory risks do not augur well for the investment in the RE sector. While there is a healthy pipeline of RE projects in the country, the transmission system to evacuate this power is not matching with the pace of the RE generation in the country. This also creates a sense of fear in the mind of the investors. Another concern is related to the financial condition of the counter parties as the debt burden of distribution utilities hover around Rs 4.5 lakh crores. [See: https://www.livemint.com/industry/energy/states-power-discoms-debts-to-hit-all-time-high-of-rs-4-5-trillion-crisil-11591353169133.html] Most of the equipment and parts are sourced from the Chinese vendors, thus there is always a concern about the quality and performance of the equipment, coupled with anti-Chinese sentiments in the country.

What is in store for retail investors?
While these projects are good for institutional investors and foreign long-term funds such as Canada pension funds and high net worth individuals, retail investors will take a cautious approach while investing long term in these kind of instruments. Firstly, there is very less knowledge and information available about InVITS in India and the experience was not that good with other InVITs. Drawing parallel to other InVITS, retail investors may restrain themselves to take a bet on RE InVITS. However, in last two to three years, InVITS have performed well in other sector, specifically in the transmission sector like Indigrid InVIT. Taking a clue from this success, private promoters would certainly look for more InVITs in various sectors. No doubt, there is a huge scope to make the investors aware about such investment vehicles to attract retail investment into the sector.

There is some good news for the retail investors from the financial regulator. SEBI has lowered the unit lot size from Rs 10 lakh to Rs 1 lakh for InVITS. This would help channel more retail investors to put their money in these long-term assets with medium yield for them. With SEBI’s new guidelines  [See: https://www.livemint.com/market/stock-market-news/sebi-puts-in-place-guidelines-for-listed-reit-invit-on-rights-issue-11579279976284.html] for proper disclosure on related-party transactions, valuation, financial details, review of credit rating and grievance redress mechanism in the placement document (similar to an IPO disclosure), retail investors would be more assured about transparency in these instruments. This would create dissemination of lot of important information that would help investors take an informed decision by the buyers.

Way forward
Overall, it is good sign for the financial system of the country. After the proposed InVIT initiative by Tata Power for its RE assets, a public sector utility such as NTPC is also mulling a JV  (See: https://www.financialexpress.com/industry/ntpc-mulls-jv-with-niif-to-set-up-renewable-invit-alliance-likely-for-power-distribution-business-too/2152101/) with NIIF (National Investment and Infrastructure Fund) to set up an InVIT for its operational and pipeline of RE assets.  It would be great for banks’ liquidity if InVITs can attract private investments that would help reduce bank debts on time. Within a certain time of the projects operation, banks could get its money back and will be ready further to redeploy this funds in other projects so that investment cycle will carry on without any concerns. The freed up capital can be used for other project thus creating a cycle of funding infrastructure development. With more and more sectors looking for capital, this can be a game change for infrastructure development in India, most certainly with the RE sector.

Tripathy is Senior Fellow, CUTS Institute for Regulation and Competition, and PhD scholar from RGIPT, Jais, UP.