Various initiatives taken by the government in 2018 have paved the way for greater opportunities for investments in the energy and infrastructure sector in India. This update summarises some of the key developments in the past year and gives a brief overview of what can be expected in 2019.
THE YEAR THAT WAS
The year 2018 was an eventful year for the Indian energy and infrastructure sector. While imposition of duties and policy uncertainty caused a slowdown in the renewable energy sector and resulted in significant decline in auction activities, we saw an all-time high budgetary allocation coupled with a policy push by the government for the infrastructure sector including roads, airports and electric vehicles.
MAJOR DEVELOPMENTS IN 2018
1. Renewable Power
The Government of India (GoI) has a target of growing its renewable energy (RE) capacity to 175 GW by 2022, from about 75 GW currently. India has successfully introduced competitive bidding under the National Solar Mission (NSM) in the solar sector, which has resulted in a rapid increase in installed solar power capacity by 2.6 GW in 2014 to 24 GW in November 2018 and similar 12 GW of solar power projects are in various stages of construction.
2018 also saw a surge in new tenders. However, actual project allocations were few because of multiple instances of tender cancellations, policy uncertainty due to imposition of safeguard duty on the imported solar modules and implementation of Goods and Services Tax. These are potentially dangerous trends and unless corrected immediately could deliver a serious blow to the government's stated ambition for the sector.
On the bidding front, notification of solar and wind bidding guidelines was a positive development, addressing some of the key concerns for the sector relating to off-taker credit profile, grid curtailment and termination payments. The Ministry of New and Renewable Energy (MNRE) also announced a new RE rollout plan entailing 91 GW of new solar and wind project tenders by March 2020. This is an ambitious attempt by the new MNRE administration to address private sector concerns on slowing project pipeline and lack of a clear roadmap.
The GoI also introduced the National Off-Shore Wind Policy and the National Wind Solar Hybrid Policy to further augment the role of wind power in the electricity sector in India. The auction of the first ever wind solar hybrid project concluded successfully and the GoI set targets of 5 GW by 2022 and 30 GW by 2030 for off-shore wind power projects. However, if tender awards don't progress, there is a likelihood that much needed foreign capital may dwindle.
There was significant interest in the roads sector in 2018 with the Hybrid Annuity Model (HAM) and the first phase of Toll Operate Transfer (TOT) bid resulting in huge success for National Highways Authority of India (NHAI). However, the second round of TOT bid did not have a similar start and depending on its success in 2019 could limit NHAI's ability to further monetize assets, unless there is a change in the underlying model.
With investors looking at various opportunities arising from potential stressed assets, there has been a resurgence of M&A activity in the roads sector which could see some major consolidation.
3. Electric Vehicles
The Government of India has identified a technology shift from internal combustion engine to electric vehicles (EVs) for the transport sector as one of the most important tools to address key issues of energy security and air pollution in the country.
Last year witnessed an important policy push in favour of EVs. This spurred various initiatives by the central and state governments to encourage private and public-sector investments in technology, infrastructure, and business models (piloted or deployed) in the EVs segment. Andhra Pradesh, Karnataka, Maharashtra and Telangana have already introduced official policies on EVs. All the various state centric EV policies outline special incentives and concessions to attract investments in EV manufacturing, capacity battery manufacturing and assembling capacity, and the development of charging and swapping infrastructure for EVs in the state. Several states such as Maharashtra, Karnataka, Madhya Pradesh, Punjab, Andhra Pradesh and Gujarat have also introduced a new electricity tariff category for EV.
In 2018, the EV sector received considerable support from the central government. Phase II of the FAME India Scheme (Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India) was introduced providing incentives for hybrid and electric vehicles.
Development of a robust charging infrastructure is widely considered a key requirement for large-scale transition to EV. To address this issue, the Ministry of Power (MoP) has issued guidelines and clarifications to enable faster adoption of EVs, promote an affordable tariff rate, and support the development of EV charging business throughout the country.
4. Urban Infrastructure-Water and Waste Management
The National Mission for Clean Ganga (NMCG) is the flagship program of the GoI for creating comprehensive infrastructure to treat domestic and industrial water waste and supporting the development of a long-term river basin management plan for the river Ganga. Under this program, the GoI has introduced the hybrid annuity public-private partnership (PPP) model, wherein the investments required to create the necessary treatment and sewerage infrastructure, and maintenance costs for the first 5 years is to be shared between central and state governments on a 70:30 basis while targeting eventual revenue generation. The government in 2018 awarded work to the private sector for construction and maintenance of sewerage treatment plants in three major cities- Varanasi, Haridwar and Mathura. These three projects are the first of their kind hybrid annuity PPP projects in sewerage treatment in India.
The hybrid annuity PPP model has a high potential for replication in other states in India and has significantly increased investor confidence in the Clean Ganges program and in NMCG. We expect NMCG to replicate the hybrid annuity PPP model in 11 more cities in 2019.
5. Oil and Gas
To increase domestic hydrocarbon output and attract private players in exploration and production, the GoI has introduced the Hydrocarbon Exploration and Licensing Policy (HELP) in March 2016. This policy advocates a shift from profit sharing contracts to a revenue sharing formula. Through its open acreage licensing policy (OALP), HELP allows interested companies to select blocks or areas after studying the available seismic data. In October 2018, the Government successfully signed exploration and production contracts with six companies for all 55 blocks that were on offer in the first round under OALP.
After the successful conclusion of first round of OALP in 2018, the GoI will launch OALP's second round and offer fourteen blocks under OALP. This, along with the 59-discovered oil and gas fields under Discovered Small Field (DSF) Bid Round II, offers numerous investment opportunities in the sector. National Oil Corporations (NOCs) will continue to look overseas for procuring much needed energy resources to further strengthen energy security in the country.
6. Airport and Aviation
As per the International Air Transport Association (IATA), India is set to become the third largest aviation market by 2025, after the US and China. The GoI has launched a regional connectivity scheme named UDAN to help the aviation market penetrate consumer base in underserved markets in tier 2 and tier 3 cities. The scheme provides for viability gap funding in the form of subsidies and support to domestic carriers.
Encouraged by the initial response from the industry, the GoI now plans a similar scheme for connecting Indian cities with those in ASEAN countries. Both domestic and international carriers, designated by Indian and ASEAN countries, are eligible to participate in this scheme subject to the provisions of the bilateral air service agreement. On the ASEAN routes, the GoI has proposed to provide financial support for one year and for a limited number of seats.
Airport privatization is also an important development in the aviation space. Under this program the GoI initiated a bidding process to lease out six airports i.e. Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram and Mangaluru for operation, management and development under the public-private partnership model. This round of privatisation is a departure from the first round of airport privatisation undertaken more than a decade ago as the Airport Authority of India (AAI) is offering a concession period of 50 years to the winning bidder, instead of 30 years offered in the earlier round. The winning bid will be decided based on the highest monthly per-passenger fee to AAI, again a departure from the controversial revenue-sharing model that AAI adopted in existing privatized airports.
The year ahead holds promise for the energy and infrastructure sector as the GoI pushes for reforms aimed at giving faster approvals for stalled projects, providing easy access to funds and attracting overseas investors.
Following several initiatives in the energy and infrastructure sectors, 2019 should witness a spurt in deals across roads and renewables sector. A large number of strategic investors and new entrants such as pension funds, utilities and infrastructure focused funds have announced plans to invest in India's roads and renewable energy projects. M&A and consolidation activities will remain strong in 2019 for the roads and highways sector in India. Deal activity in the roads sector should improve due to the low risk operating assets available, including projects under the TOT model.
Further, the Engineering, Procurement and Construction (EPC) model will bring opportunities for the construction industry as a majority of project allotment is expected to occur under this model, given the tepid response from industry to undertake PPP projects.
2019 will also be a critical year for the EVs sector in India, as the GoI is pushing for more environmental policies through National Clean Air Program to mitigate against rising pollution levels.