The slump in New York-listed Azure Power’s stock value has cast a pall over strategy of state-owned investors who have sunk million in the Indian renewables sector.
Azure Power’s price hit a peak of US$48.39 in January 2021, but at the close of the trading on the NYSE today it was trading at US$3.55 – its value is down 69% over the period of just one month. The collapse in share value is worrying for Canadian public pension funds OMERS and CDPQ, which have stakes of 21.4% and 53.4% in the company.
The producer has been rocked by a whistleblower complaint over “potential procedural irregularities and misconduct by certain employees” in May, a delay in its company's annual report, and the sudden departure of CEO Harsh Shah after just two months in the post. The company’s own investigation revealed into the complaint found non-adherence to safety and quality standards and “evidence of the manipulation of project data and information by certain employees”.
In relation to Azure's Power Purchase Agreements (PPAs) for its 2.33GW of projects, it announced that two Public Interest Litigations have been filed in the High Court of Andhra Pradesh, challenging various aspects of the manufacturing tender and seeking to quash the Andhra Pradesh Regulator's approval for procurement of capacity.
Azure Power’s problems highlight the governance and regulatory weaknesses of the Indian market, which is regarded as a major target for sovereign investors from Canada, Singapore and Abu Dhabi. Global SWF estimates that SOIs have invested around US$5 billion into India’s renewables energy sector, a third of which comes from GIC with CDPQ contributing 22% and the Abu Dhabi Investment Authority (ADIA) 19%.
Progress in increasing renewables in India is currently lagging government targets due to bottlenecks in the electricity grid and a lack of power purchase agreements. On top of these challenges is the government’s efforts to boost local manufacturing of solar power equipment through the imposition of customs tariffs, which risks dampening investor interest due to possible higher costs. Covid-19 merely added to the problems facing the sector, with disruption to supply chains and travel as well as slower consumption growth. Global SWF previously highlighted the problem of outstanding payments to solar power generation companies by cash-strapped distribution companies in India, which is eroding foreign investor confidence in the sector and could potentially hit the earnings of foreign state-owned investors.
Yet, SOIs appear undaunted, regarding the potential returns from the South Asian market goliath as justifying the risks. India plans to install 450GW of renewable energy capacity by 2030 and is hungry for inward investment, relying heavily on the patient capital of global sovereign wealth funds and public pension funds. Currently, renewable generation is at least 160GW, suggesting an average of more than 40GW needs to be added every year to reach the end-decade target.
India’s government has also committed the country to net zero emissions by 2070. With a population of 1.38 billion and growing, India is the world’s fourth biggest emitter after China, the US and the European Union. Yet, it has some of the lowest per capita carbon dioxide emissions, at 1.9 tonnes per person in 2019 compared with 5.5 tonnes in the UK and 16 tonnes in the US. Keeping per capita emissions low while growing the economy will require low carbon alternatives to massively scale up.
In the past week, CPP Investments was cited as one of 13 bidders for a minority stake in the green energy unit of India's largest utility, NTPC. The transaction is expected to exceed US$250 million and will see the spin-off of the green energy unit as a separate India-listed entity, according to Reuters.
The bid follows CPP Investments’ announcement in May that it is set to ramp up investments in Indian renewables. It already possesses a sizeable minority stake in ReNew Power which it boosted in February after buying part of Goldman Sach’s share in the solar and wind generator. Conscious of both rewards and risks of investment in India, CPP Investments is seeking partnerships and investments in funds to enable it to share risk and intelligence with experienced market players and choose assets that best meet its risk/reward profile. The Canadian fund says that altogether it has invested C$12 billion (US$9 billion) in India and “the country is core to our global, long-term investment strategy.” In February, the public pension fund committed itself to achieving net zero by 2050 by “increasing investment in green and transition assets to at least C$130 billion by 2030 and building on our decarbonization investment approach.”
Other funds agree with the Canadians on the importance of Indian renewables growth. Azure Power’s local renewables peer Greenko, which is majority owned by Singapore’s GIC with ADIA a minority shareholder, signed pacts in May with Adani Green Energy and Aurobindo Realty & Infrastructure to invest US$16 billion in renewable projects in the southern state of Andhra Pradesh (AP). Adani Green Energy will stump up US$7.7 billion in a 3.7GW pumped hydro storage project and 10GW solar power project. The remaining US$8 billion will come from the other two partners.
Sovereign investors already price in India’s challenging business environment, but the skills base, growth potential and the political impetus behind solar and wind energy make the South Asian behemoth to important to ignore. Azure Power’s difficulties are setbacks that will serve as a lesson, rather than deter investment. Investors will pay even closer attention to governance issues to avoid a similar hit to the value of their Indian assets.
