Guest blog: The Indian renewables market offers “unlimited potential” to US companies

Guest blog: The Indian renewables market offers “unlimited potential” to US companies

Project Development intern Dorje Wulf shares his thoughts on the opportunities available to American companies in the growing Indian renewable energy market.

As India and the US are beginning to forge an increasingly strong political alliance, bilateral trade and investments are growing fast. Most notably, US-based infrastructure and renewable energy related investment and sales in India are gaining momentum. Being the third largest source of foreign direct investments (FDI) already, the US will play an important role in addressing India’s infrastructure and energy needs.

  • Despite slowing growth, bilateral trade is expected to hit a record $100bn this year
  • A huge energy deficit made India the world’s fastest growing market for renewables in 2011
  • India seeks to raise $1 trillion for infrastructure projects by 2017
  • US investors are looking for commercially driven renewables projects in emerging markets
  • The US Ex-Im Bank is one of the most important lenders to renewables projects in India
  • Exciting business opportunities open up for US companies, as several bilateral cooperation agreements and cheap financing meet a huge demand for foreign cleantech and know-how

In the course of realigning its foreign policies, the United States relationships with
developing economies such as China and India have undergone incisive changes. But while
the relationship between the US and China is somewhat contradictive and complex, India is
evolving as a strategic ally of the US. Moreover, compared to China’s mainly closed-shop-
economy, India’s relatively open market offers a higher comfort level to American
companies.Accordingly, there is a consensus among American and Indian politicians that the
relationship between the two countries will be one of the defining partnerships of the
21stcentury. In 2010, an agreement for fostering this partnership with regard to areas such
as education, science and high-technology, civil nuclear energy, defense and security, trade
and economic cooperation, health, clean energies and climate change was signed. The
business sector seems to share this consensus as, despite slowing economic growth in both
countries, bilateral trade in goods and services has grown significantly. It is expected to
reach a record $100bn this year, which means that trade will have quadrupled since 2000.So
far, India’s main export items to the US are textiles, precious stones and metals as well as
pharmaceutical products. In return, precious stones and metals, machinery, fuels as well as
optical instruments and equipment have dominated US exports to India in 2011. These
exports are currently growing by 17% a year. However, we expect this composition to change
soon in favor of more infrastructure and energy related exports. India’s energy and
infrastructure requirements are immense, while the US is home to many experienced and
internationally renowned companies in these segments.

Source: Indo-American Chamber of Commerce

In terms of mergers and acquisitions (M&A) by US companies in India, the focus was on IT, manufacturing and healthcare deals last year. As a hint to what is yet to come, the most significant year-over-year increase in M&A transactions was accounted for by infrastructure-related investments. This is in line with India’s official plans to raise USD 1 trillion of funds for infrastructure projects by 2017. Half of these funds are supposed to come from the private sector of which USD 310 billion is expected to target the energy sector. Taking into account India’s strong commitment for renewable energies (RE), the majority of these energy-related funds are likely to go into solar, wind and other renewable projects.

Source: Indo-American Chamber of Commerce

This is a huge opportunity for US investors, as the cost of debt in India is high and foreign funds are desperately needed in order for India to meet its infrastructure goals. In fact, the US is already the third most important source of FDI in India. Especially in the field of renewables this trend will continue for two reasons: firstly, after the expiry of the 1603 Investment Tax Credit (ITC) cash grant program for solar projects, American renewables investors will increasingly look for commercially driven markets such as India. The ITC allowed investors to offset 30 percent of a solar power plant’s cost through tax credits, which reduced project costs significantly. Currently, there are many policy uncertainties in the US. The Indian market, on the other hand, is close to grid parity due to high grid electricity prices and low supply security (and high diesel backup costs). Secondly, India’s huge energy deficit (which is projected to reach 100 TWh by 2017) as well as plummeting component prices generate a demand that has already made India the world’s fastest growing market for renewable energies in 2011. Strategic infrastructure and sustainability investors will not be able to ignore the Indian market during the years to come.

Anticipating this potential of the renewables market in India, both governments have signed bilateral agreements to foster cooperation. In 2009, the US helped India to establish its National Environment Protection Authority (NEPA) and the US-India Partnership to Advance Clean Energy (PACE) was signed. In 2010, the Agreement for Cooperation on a Joint Clean Energy Research and Development Center (JCERDC), which will be funded by USD 25m from the US Department of Energy, followed suit. The focus areas of this project will be solar energy, new biofuels as well as energy efficient buildings. In addition, US government bodies are involved in providing cheap financing to renewable energy projects in India. Their export oriented policies are usually structured in such a way that only projects employing US products and/or expertise are being supported. The Overseas Private Investment Corporation (OPIC) approved USD 250m for infrastructure and renewable energy lending so far this year. At the same time, the Export-Import Bank of the US (Ex-Im) is extremely active and has become one of the most important lenders for solar projects in India. Stating their dedication to India, a high Ex-Im official recently called India an economy with unlimited potential.

US companies can leverage this unlimited potential by making use of their competitive technologies. With increasing project investments, a huge market demand and public export financing measures in place, American firms should have more than enough motivation to become active in India. The current bottlenecks for renewables in India are financing, experience and a sufficiently large manufacturing base to meet demand all of which can be addressed by US companies. However, the Indian market is complex as well as challenging and needs to be approached strategically. Such a strategy needs to be well-thought-out and tailor-made for the Indian market idiosyncrasies.

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