Renewable energy is a key asset for green capital in India, and its current merger and acquisition (M&A) landscape is undergoing a paradigm shift. The regulatory environment is changing fast, with the government aggressively pressing for the rollout of 500 gigawatts of non-fossil fuel capacity by 2030, resulting in a dramatic shift in investors' priorities. Early stage, ready to build (RTB) assets, or projects that had reliable land and initial grid connectivity approvals, but hadn't begun construction, were the primary financial institutions and private equity funds that were being pursued. This approach enabled investors to achieve ‘first-mover' benefits and to rapidly develop gigantic capacity pipelines. But a new set of tight regulations on network access has created significant project execution risks that have spurred a rush to redeploy capital from speculative projects to operating and commissioned clean energy resources. 

The impetus for this market change came from the key reforms of the regulations concerning access to transmission infrastructure. These regulations stipulate that the original corporate applicant that applied for the grid connection must keep a majority stake for at least two years after the project is placed into commercial operation. The policy is specifically aimed at ending "connectivity banking" – a speculative trading activity in which the intermediary developer trades in valuable and limited electricity infrastructural capacity before the readiness of the project, after getting the electricity grid rights and then selling them to the final operators. Policymakers have done an effective job of reducing “speculative trading” by linking the price of energy grid transmission rights to the physical construction of the project and a multi-decade holding period for transmission rights, while also permanently restructuring energy products' pricing, risk characteristics and timing. 

This has caused growth of early-stage, ready-to-build portfolios to slow down and the valuation of de-risked assets to rise. These projects are already producing power and/or are about to go on the verge of commercial production and are now in a class with major premium valuations, as they circumvent the regulation hurdle of transfer of connectivity. While there has been such a significant shift in investor preference, the total capital inflows into India's green economy are still very strong. The total value of institutional deals in the domestic renewable segment grew to a staggering 2 billion dollars from 378 million dollars in the prior annual cycle. But underneath the surface of this headline growth, there is a clear polarisation, with funding levels for capital going into well-established and proven assets, and a significant reduction in funding for the early capital development stage. 

This basic shift in market sentiment is leading to particular challenges for smaller independent power producers (IPPs) and local developers. Traditionally, these smaller companies have been dependent on a capital-recycling principle in which they purchased land, waded through government paperwork, negotiated the grid, built their initial pipeline, and then made money from that successful project to invest in the next one. The days where institutional buyers wanted to acquire the entire project special purpose vehicle (SPV) — let alone any before it is commissioned — are long over. These smaller developers are under serious liquidity pressure, as institutional buyers today are overwhelmingly focused on acquiring an entire project special purpose vehicle (SPV) solely after it is commissioned. This funding crunch is likely to spur further merger activity in an industry where smaller companies that are short of capital will be forced to form alliances with or sell their assets in distress to larger, independent and well-capitalised power companies. 

The flexible developers are looking at other business models to ensure transactions continue in this maturing market. Some are opting to restructure their divestment schedules with deals that feature majority voting control with the legal majority in the early operational phase, before the final equity transfer after commissioning. In an international context, however, the new regulatory environment requires sophisticated processes for due diligence to be undertaken by both international investors and infrastructure funds, well beyond the standard "financial audit". Operational excellence, physical project delivery, and sustaining that asset are the things that matter most in India's efforts to go green. Navigating the complex regulatory environment and ensuring stable grid transmission lines are set to be the key limiting factors in the path to success in the clean energy transition.