Attractive Growth Prospects Boosts Renewables Outlook
The picture that emerges from BMI 's new r enewables Risk/Reward Ratings (RRRs) for India is relatively strong, with an overall score of 67.7 awarded. This score is reflective of the attractiveness of India's renewables market, which has thus far been extremely successful at attracting private investment into the sector, due to its strong growth prospects and well-established renewables sectors. However, a number of risks remain pertinent, such as a lack of coherent policy at the national level, and the opaque legal system within India.
As part of BMI's Renewables service, we have developed new renewables RRRs, which consider a thorough and all-encompassing range of factors that affect the investment climate in the renewables sector in different ways. The methodology behind the ratings system draws on both industry and country specific rewards and risks, from the country's renewables policy, policy continuity and the growth prospects of the non-hydro renewables sector to corruption levels, GDP and population growth. We have also strengthened this analytical tool by integrating aspects of our Infrastructure Project Finance ratings, in order to gauge the risks to both raising financing and repayment of project loans over the course of a project's life.
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|India Renewables Risk/Reward Ratings (Score Out Of 100)|
India's industry rewards score stands at 76.8, the highest of any of the ratings, and boosting the rewards side of the matrix considerably. India's strongest suits in the industry rewards segment are the market's size - in terms of both non-hydro renewable capacity and generation. Similarly, the country scores well in terms of five-year growth across these indicators. Offsetting these factors are low scores for non-hydro generation contribution, which is primarily due to the sheer size of India's power sector and the low capacity factor of solar and wind power (the two technologies of choice for the Indian government).
Boosting the score for country rewards is the high level of growth in five-year GDP per capita and in real GDP. Despite our Country Risk team's recent downgrading of India's long-term growth forecast - real GDP growth for India is expected to reach 6.8% per annum between 2012 and 2021 (previously 7.5%) - India's growth is still robust. Additionally, the country's population is expected to reach 1401mn by 2021, further increasing the score. Dampening the overall country rewards score (59.6) is the country's poor inflation outlook.
The industry risk profile is somewhat more unattractive, with the lowest score across the board of 45.8. India scores around mid-table for the transparency of the tendering process, liberalisation and for financing of renewable energy projects, however the government's renewables policy and subsidy programme let the score down. Although the country has a relatively well-established energy policy, which includes ambitious targets for renewable energy, there is a distinct lack of coherent policy at the national level, which will no doubt hinder future growth prospects for the industry. Furthermore, instability regarding the country's subsidy policy, including India's Feed-in-Tariff programme, has deterred investment and threatens project viability.
External risk and policy continuity helps lift the country's score for country risks (60.4), and it fares well in terms of short-term political stability. Scores are less impressive for corruption. Additionally, we highlight that the opaque and bureaucratic legal system in India greatly complicates the development of new projects. For instance, existing land laws in the country make land acquisition a lengthy and arduous process, leading to higher costs and slower project development. An inconsistent regulatory environment in India further threatens project success.