Investment Opportunity in Renewable Energy

Mobility Energy and Transportation

16 May 2024

In this edition we delve into the investment perspective of renewable energy (RE) in India, exploring the various facets that make it an attractive proposition for investors. The prospect of investing in renewable energy is driven by favourable government policies, ambitious targets, technological advancements, and growing electricity demand. Renewable energy also offers a safeguard.

Energy sector in India

India's developing population, rapid urbanization, and industrial expansion drive a significant surge in electricity demand (Exhibit 1). With a focus on economic growth and improving living standards, the demand for reliable and sustainable energy sources continues to grow, creating a compelling case for investment in renewable energy.

Renewable energy technologies, including wind, solar, and hybrid systems, are increasingly crucial in meeting India's power demand. Over the past few years, thermal power generation (from fossil fuels) has only grown at a CAGR of 5%, with an increasing proportion of inefficient older plants, whereas renewable energy has grown at a CAGR of 19% (Exhibit 2). Renewable energy technologies not only reduce dependence on fossil fuels but also offer sustainable solutions to address environmental concerns.

Market drivers and trends for the renewable energy sector

Government policies: The Indian government has proactively promoted renewable energy adoption through various policy initiatives and targets such as:
- National Wind Solar Hybrid and Offshore Wind Energy Policies aim to incentivize investment in renewable energy projects and accelerate capacity addition
- A collaborative approach between the government and private sector has successfully de-bottlenecked major challenges in execution, paving the way for ease of doing business
Declining costs: Rapid technological advancements, coupled with economies of scale, have led to a significant decline in the cost of renewable energy generation, making it increasingly competitive with conventional sources like coal.
- Solar and wind power: The cost of wind and solar has fallen from INR 17/kWh and INR 12/kWh to INR 4/kWh and INR 2.3/kWh respectively from 2010 to 2023
- One of the lowest solar tariff rates has been recorded in India (Gujarat Urja Vikas Nigam Limited auction for 500 MW of solar projects set a new record low tariff of INR1.99/kWh).
Investment and financing: Increasing investments from both domestic and international sources, along with innovative financing mechanisms such as:
- Green bonds: These bonds are financial instruments designed to fund environmentally friendly projects
- Infrastructure funds: Infrastructure bonds are debt securities issued to finance long-term projects like roads and bridges
- Other investments are driving growth in the renewable energy sector

Cost of implementation

Investment in renewable energy technologies involves two key cost considerations, i.e. levelized cost of electricity (LCOE) and overall capital expenditure (CAPEX). While initial CAPEX may be higher for renewable energy projects, the long-term LCOE tends to be competitive due to the renewable nature of the power as compared to conventional sources.

In recent years, the cost of renewable energy technologies has declined rapidly. Solar PV, for instance, has seen a remarkable decrease in costs due to improvements in manufacturing processes, increased efficiency of solar panels, and declining installation expenses. Since 2010, there has been a 64%, 69%, and 82% reduction in the cost of residential, commercial rooftop, and utility-scale PV systems, respectively. Similarly, the cost of wind power has also decreased as turbine technology has advanced, leading to higher energy yields and reduced operational and maintenance costs. In 2021, the average cost of installing wind turbines was US$ 1500/kW, representing a significant decrease of over 40% compared to the highest point in 2010.

Over the last 15-20 years, interest rates have decreased in most developed economies. If India were to achieve developed status, it would likely experience a similar trend in benchmark interest rates. Consequently, this would result in higher internal rates of return (IRRs) for infrastructure projects funded through debt, making them more appealing to lenders.

Sources of funding
Renewable energy projects are financed through equity and debt sources. Usually project developers finance their projects with a mix of equity and debt, with most projects having a 70:30 debt-to-equity ratio.

Debt financing
Debt financing can be broken down into domestic and international sources. Domestic sources include banks, non-banking financial companies (NBFCs), and bonds. While, international sources include foreign banks, development finance institutions (DFIs), and investment funds (Exhibit 4).

SBI (public bank), Axis Bank (private bank), Deutsche Bank, Standard Chartered, MUFG Bank, Japan Bank for International Cooperation (foreign banks), Sumitomo Mitsui Banking Cooperation and German Investment Cooperation (DEG) (NBFCs) have financed the Indian RE projects for developers such as ACME, Avaada, Serentica, Greenko, etc. post-December 2022 (Exhibit 5).

Equity financing

Equity financing is done in various ways like public listing, private listing, selling individual operational projects, etc. The different projects have different IRRs to meet the market needs (Exhibit 6).

A total of US$ 7B+ deals across 15+ target companies have been done after December 2022 (Exhibit 7).

ion through PE/VC investments and mergers & acquisitions.

India's healthcare landscape is witnessing an unprecedented transformation. Beyond the established metros, Tier 2 and Tier 3 cities are fuelling a new surge in healthcare demand.

Drivers of healthcare delivery in Tier 2+ cities

Healthcare delivery in Tier 2+ cities of India is an evolving landscape that plays a crucial role in addressing the healthcare needs of a significant portion of the population and will be instrumental in improving the healthcare facilities in India.

1. Demographics as a catalyst for change

Projections indicate that Tier 2+ cities are expected to house an additional 40M+ people by FY27. Moreover, the population growth rate in Tier 3 cities is expected to surpass the national average, with a growth rate of 2.6% compared to the country's average of 0.7%. This demographic shift is pushing corporate chains to invest in healthcare facilities in under-penetrated Tier 2+ cities. These investments will not only contribute to the overall improvement of healthcare infrastructure but also align with the goal of fostering equitable healthcare access across diverse geographical regions in India. Exhibit 2 gives a snapshot of the expansion plan of hospital chains in the Tier 2+ cities of India.

2. Bridging healthcare disparities

Approximately 30% of hospital beds and 50% of healthcare facilities are situated in rural areas, which account for around 67% of the total population in India. The rural regions exhibit a concerning doctor-to-patient ratio of approximately 1:25,000, significantly below the World Health Organization's recommended ratio of 1:1000. Hence, there is a compelling demand for an inclusive healthcare delivery approach in Tier 2+ cities that ensures security, affordability, sustainability, and efficiency.
In addition to this, these cities offer distinct advantages, such as low healthcare penetration, reduced competition, and lower operational costs in areas like real estate, labor salaries, and other expenses when compared to metropolitan areas. Over recent years, there has been a notable increase in per capita income in these regions. Furthermore, these cities serve as central hubs, allowing them to address the healthcare needs of nearby villages and towns.

3. Favourable government policies

Government initiatives aimed at fostering healthcare infrastructure and services in Tier 2+ cities are propelling growth in the sector. Recent developments include the establishment of six new AIIMS facilities in Tier 2 cities, equipping public healthcare facilities with cutting-edge technologies such as digital healthcare and telemedicine, and the implementation of the National Ambulance Service under the National Health Mission, providing free transportation to health facilities. Initiatives like Public-Private Partnerships, Ayushman Bharat, Ayush Mission, and Pradhan Mantri Swathya Suraksha Yojna are instrumental in encouraging investment and fostering the development of healthcare facilities in Tier 2+ cities. Exhibit 3 provides a snapshot of key government policy initiatives and schemes. Moreover, the government has heightened viability gap funding (VGF) limits for healthcare from 20% to 30%, aiming to promote the development of hospitals and healthcare centers under the Public-Private Partnership (PPP) model.

4. Technological advancements in the healthcare industry

In response to challenges posed by limited resources, inadequate infrastructure, escalating healthcare costs, and insufficient health education and awareness in these cities, healthcare providers are increasingly leveraging technological advancements.

Some noteworthy technological trends driving healthcare delivery in Tier 2+ cities include:

Telemedicine and remote healthcare: In Tier 2+ cities, where access to specialized healthcare is limited, telemedicine allows patients to consult with doctors and specialists remotely.
Health Information Systems and Electronic Health Records (EHR): The adoption of Health Information Systems and EHRs is improving the management of patient data and healthcare workflows.
Point-Of-Care diagnostics: These devices are particularly beneficial in areas where access to diagnostic labs may be limited. Point-Of-Care diagnostics enable quicker test results, facilitating timely medical interventions.
AI in healthcare: In Tier 2+ cities, where there is a shortage of specialized healthcare professionals, AI can assist in the interpretation of medical images, provide decision support, and contribute to more accurate diagnoses.
Remote monitoring and wearable devices: In Tier 2+ cities, these technologies enable healthcare providers to remotely monitor patients with chronic conditions, promoting proactive healthcare management.
Local language health chatbots: Language-appropriate chatbots can bridge the communication gap, making healthcare information more accessible to individuals who may not be fluent in English or Hindi.

5. Increasing demand for quality healthcare and specialized services

The growing awareness of the significance of healthcare and wellness, propelled by factors such as heightened levels of education and exposure, is contributing to the burgeoning trend of healthcare delivery in Tier 2+ cities. Specialized medical services, including cardiology, oncology, and orthopedics, are attracting patients away from metropolitan areas, as individuals can now access a diverse range of healthcare services without the need to undertake extensive travel. There is a substantial demand for surgical interventions in Tier 2+ cities, with approximately 64% of total surgeries including 76% of those performed in government hospital already being conducted in these locations. Disease patterns are also undergoing transformation in Tier 2+ cities due to lifestyle modifications, leading to an uptick in non-communicable diseases (NCDs) such as diabetes and cardiovascular conditions. Consequently, hospitals in these areas have a unique opportunity to address this heightened demand by offering efficient and affordable healthcare services.
In conclusion, demographic shifts, growing urbanization, favorable government policies, long-standing healthcare disparities, and demand for specialized services pose an upward trend in healthcare delivery in Tier 2+ cities.

Key impediments in expanding healthcare delivery in Tier 2+ cities

While India's Tier 2 and Tier 3 cities present a compelling growth opportunity for the healthcare sector, navigating this emerging landscape isn't without its obstacles. Significant hurdles related to skilled workforce, infrastructure, financial dynamics, and logistical challenges must be addressed to effectively deliver quality healthcare in these markets.

Limited resources: Significant shortage of doctors, nurses, and other healthcare professionals in Tier 2+ cities. It is estimated that 70% of the population has no access to specialists or critical care because 80% of specialists live in urban areas.
Lack of necessary infrastructure: Inadequate transportation, water, and power supply can affect the seamless operation of healthcare facilities. Over and above, the infrastructure in small towns and rural areas is not developed enough to support the maintenance of medical equipment, leading to frequent breakdowns.
Limited availability of medical equipment: Limited availability of medical equipment in Tier 2+ cities has adversely affected the quality of healthcare services and resulted in an inadequate response to medical emergencies.
Financial constraints: Medical device manufacturers need to consider the cost sensitivity of the market in Tier 2+ cities. Developing cost-effective solutions without compromising quality is a challenge. While the varying ability of the population to afford healthcare services poses challenges, it also highlights the potential for developing innovative, cost-effective healthcare solutions that established players can tap into.
Logistical challenges: Poor logistics and transportation infrastructure can impede the timely delivery of medical supplies and equipment. Developing efficient supply chain management systems is essential to overcoming logistical challenges.

How can hospitals leverage the opportunity?

Leveraging the rise of healthcare delivery in Tier 2 cities in India presents a significant opportunity for hospitals to expand their reach and impact. Strategies include:

Affordable healthcare packages
- Design pricing models that are affordable for the local population, considering the economic demographics of Tier 2+ cities
- Offer health insurance packages or collaborate with insurance providers to make healthcare more financially accessible to a broader segment of the population
Local adaptation
- Tailor service mix, delivery models, and patient communication to unique needs and preferences in Tier 2+ cities, while ensuring a quality baseline
Technology integration
- Implement digital health technologies to enhance patient care, such as telemedicine, electronic health records (EHRs), and remote monitoring
- Utilize mobile apps and online platforms for appointment scheduling, prescription refills, and health information dissemination
Partnerships and collaborations
- Collaborate with local clinics, diagnostic centers, and pharmacies to create an integrated healthcare ecosystem
- Partner with government health initiatives and NGOs to extend healthcare services to underserved communities
Human capital development
- Focus on initiatives for attracting, training, and upskilling the healthcare workforce suited to Tier 2+ settings, including task-shifting and remote support

To effectively capitalize on this opportunity, hospitals must embrace innovative, low-cost models tailored to the nuances of the Tier 2+ cities. The diverse business models exemplify the adaptability and innovation necessary for hospitals to thrive in Tier 2+ cities, ensuring accessibility and affordability while meeting the unique healthcare needs of these communities. Exhibit 7 gives a detailed snapshot of the business models that can be leveraged to capitalize on the rising opportunity in Tier 2+ cities.

Opportunities for other stakeholders in the healthcare industry

The growth of hospitals in Tier 2+ cities in India has the potential to create substantial opportunities for various stakeholders in the healthcare industry, including diagnostic service providers, medical device manufacturers, and pharmaceutical companies.

Diagnostic service providers:

Affordability and accessibility: Diagnostic labs can offer cost-effective testing options without compromising on quality to cater to the price-sensitive segment. Establishing collection centers in easily accessible locations within Tier 2+ cities and mobile collection units to reach surrounding remote areas can help unlock the potential.
Partnerships and collaborations: Companies can partner with local hospitals and clinics to offer diagnostic services. They can also work with government health departments to participate in public health programs and screenings, enhancing brand visibility and credibility.
Customized service offerings: Developing lower-priced test packages tailored for the local population, such as comprehensive health check-ups, along with home collection services, can provide a competitive edge while enhancing convenience and customer satisfaction.

Medical device manufacturers:

Market expansion: The growing number of hospitals in Tier 2+ cities expands the market for medical devices. Manufacturers can tailor their products to meet the specific needs and affordability constraints of these cities.
Technology adoption: As healthcare facilities in these cities upgrade and modernize, there is an opportunity for medical device manufacturers to provide advanced and innovative technologies, such as telemedicine tools and point-of-care devices.

Pharmaceutical companies:

Increased drug demand: With the rise of healthcare facilities, there will be an increased demand for pharmaceutical products. This includes both generic and specialized drugs for various medical conditions.
Clinical trials and research: The growth of hospitals in Tier 2+ cities provide opportunities for pharmaceutical companies to conduct clinical trials and research studies, contributing to the overall advancement of medical knowledge.

At Praxis Global Alliance, we are committed to helping healthcare organizations navigate this new landscape. We believe that with the right strategies and technologies, healthcare delivery in Tier 2+ cities can become a mainstay, offering patients a more convenient, personalized, and effective healthcare experience.

In one of our recent engagements, we assisted a multi-specialty hospital chain in expanding healthcare services in Tier 2 cities in Uttar Pradesh (UP). Our comprehensive approach involved conducting an in-depth micro-market analysis encompassing key cities such as Lucknow, Kanpur, Gorakhpur, and Varanasi. This analysis, rooted in meticulous research, included extensive interviews with healthcare experts and doctors, coupled with a robust patient survey involving over a thousand respondents. Our goal was to unravel behavior patterns, preferences, and gather detailed feedback about various competitors in these markets. Furthermore, we benchmarked competitors, evaluating their performance on parameters such as clinical excellence, service offerings, and pricing.

We successfully provided the client with a detailed micro-market analysis and an assessment of market attractiveness to judge the market entry opportunity. Additionally, the insights helped the client understand its market positioning vis-à-vis its competitors across various parameters in each city and identify areas for improvement.