Foreign investors increasingly see sunset in thermal power

The boom in India's renewable energy sector, particularly solar power, is attracting investors from abroad — at the cost of companies involved in coal or coal-based energy.

The world's largest sovereign wealth fund, the Norwegian state's Government Pension Fund Global (GPFG), valued at a little over $900 billion, continues to divest from companies involved in the production of coal or coal-based energy. In April 2016, the fund announced it was excluding seven Indian companies from its portfolio. That included government-owned Coal India and private power generators Reliance Power and Tata Power beside state giant NTPC.

A report by the Institute for Energy Economics & Financial Analysis (IEEFA) says the list of Indian companies excluded has expanded since this March, with 10 more out. GPFG is one of the largest foreign investors in India. Its divestment screening approach is now being followed by other major global investors like AXA Investment Management and the Japanese government's Pension Investment Fund.

Tim Buckley, lead author of the report, attributes this trend to the increasing stranded asset risk of thermal power projects and the greater and more sustainable investment return profiles of renewable infrastructure projects. However, PFG has also taken into account the massive externalities of thermal power, particularly coal. As coal's externalities are increasingly priced in, thermal power is not going to be competitive with the deflationary forces of renewable energy, he feels.

Last month, BlackRock Investments month highlighted what it felt was the terminal decline of coal power and the rising stranded asset risk. BlackRock manages $5 trillion. "When the global financial industry giants move and point-blank say coal is dead, forward-looking corporates, investors and governments should take absolute note, position themselves to avoid stranded asset risks and avail the massive opportunities that also emerge as a result," Buckley stated.

The waning appeal of coal-based generation projects has brought gains for the renewables. Aside from Japan's SoftBank which has committed an investment of $20 billion, Goldman Sachs, JP Morgan, Morgan Stanley Infrastructure Partners and Macquarie Group also count as major committed investors.

Foreign electricity utilities are also active in the Indian renewables space, including Engie and EDF of France and Enel of Italy. Dutch asset manager APG, and Canada's largest pension funds' managers are also participating in Indian renewable infrastructure transactions, including Canada Pension Plan Investment Board.

IEEFA believes a majority of the $200-300 bn likely to be invested in India's renewable capacity additions over the coming decade will be supported by foreign capital.

Global development banks have also been increasingly active in funding renewable energy-supporting infras, such as solar industrial parks and grid development programmes, with significant new investments in India. By, among others, the World Bank, Asian Development Bank, European Investment Bank and Germany's KfW. Last month, the Asian Infrastructure Investment Bank made its first Indian development loan, $160 million, for grid infrastructure to support the 'Andhra Pradesh - 24x7 Power for All' project.